Posts Tagged ‘Inflation’

Fed official says low unemployment is dangerous

September 29, 2014

Richard Fisher, president of the Federal Reserve Bank of Dallas, said it may be necessary to raise interest rates if the unemployment rate falls below 6.1 percent because low unemployment could lead to higher wages.

Crowded Michigan Unemployment OfficeFisher pointed out that in Texas, wages are rising faster than the rate of inflation.

To me, that is a good thing, not a bad thing.  Why interfere with the law of supply and demand?  The only reason that I can think of is that it might decrease the market value of financial assets.

I am reminded of Karl Marx’s claim that “a reserve army of the unemployed” is necessary to the functioning of capitalism.

I believe in the value of self-discipline, education and the willingness to work.  But anybody who preaches these values ought to be able to show that there is a payoff, and that the payoff is available to everyone, not just the exceptionally talented and the exceptionally lucky.

If the economic system is set up so that at least 6.1 percent of the work force is unemployed at all times, then there is no way to rise out of that 6.1 percent without knocking somebody else down into it.

LINKS

Fed’s Fisher: wages rise when joblessness falls below 6.1 percent by Reuters (via Tom the Dancing Bug).

‘Poor people don’t plan long term.  We’ll just get our hearts broken’ by Linda Tirado for The Guardian.  Somewhat long, but well worth reading.

Obama’s Long Battle to Cut Social Security Benefits by Eric Zuesse for Washington’s Blog (via Mike the Mad Biologist).  The President’s goals are not what his supporters think they are.

Gold as a hedge against inflation

March 28, 2014
GoldPriceSince_1791_2013

Double click to enlarge.

Source: http://visualizingeconomics.com/

Hat tip to http://www.ritholtz.com/blog/

The money illusion

February 18, 2014

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When I was in high school (around 1950), an income of $5,000 a year was considered barely enough to get by on, $10,000 a Cyear was good money and $50,000 a year was great wealth.

So when college graduates who get $50,000-a-year jobs and still complain, their elders tend to be unsympathetic.  This is what the great economist John Maynard Keynes called “money illusion.”

As Kevin Drum of Mother Jones pointed out, $50,000 a year today is equivalent to $18,000 a year in 1980 and $6,000 a year in 1960 in terms of what the money can buy.

When inflation is low, as it is now, it is natural to think of it as nonexistent, but this is a mistake.  Even an inflation rate of 2 to 3 percent a year can erode income (and savings) more than you might think because of compounding.  You don’t subtract $2 to $3 from $100 every year, you subtract 2 to 3 percentage points of each year’s lower sum.  Inflation is like compound interest, except in reverse.

LINKS

Compound inflation is probably higher than you think by Kevin Drum for Mother Jones.

The wage is too damn low by Duncan Black, aka Atrios, on his Eschaton web log.

Why you should always adjust for inflation

February 18, 2014

household-income-monthly-median-growth-since-2000

This chart shows why no economic statistic is valid unless an adjustment is made to allow for the effects of inflation.

If you just look at income in terms of dollars, the American middle class has not done all that badly in the 21st century.

If you look at what those dollars will buy (setting aside the question of whether the CPI underestimates the true cost of living), the figures tell a different story.

For the context of the chart, click on Rising Inequality: Recovery Driven Almost Entirely by the Rich by “Gaius Publius” for the Center for Media and Democracy

Is the recession the fault of people like me?

July 10, 2012

Why hasn’t the government of the United States done more to end the recession?  According to an economist named Steve Randy Waldman, it is my fault—or rather the fault of people like me, old retired people who’ve saved their money and don’t want anything to happen that would affect the value of our savings.

We are in a depression, but not because we don’t know how to remedy the problem. We are in a depression because it is our revealed preference, as a polity, not to remedy the problem. We are choosing continued depression because we prefer it to the alternatives. … …

But the preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer.  Their overwhelming priority is to protect the purchasing power of incumbent creditors.  That’s it.  That’s everything.  All other considerations are secondary.  These preferences are reflected in what the polities do, how they behave.  They swoop in with incredible speed and force to bail out the financial sectors in which creditors are invested, trampling over prior norms and laws as necessary.  The same preferences are reflected in what the polities omit to do.  They do not pursue monetary policy with sufficient force to ensure expenditure growth even at risk of inflation.  They do not purse fiscal policy with sufficient force to ensure employment even at risk of inflation. They remain forever vigilant that neither monetary ease nor fiscal profligacy engender inflation.  The tepid policy experiments that are occasionally embarked upon they sabotage at the very first hint of inflation.  The purchasing power of holders of nominal debt must not be put at risk.  That is the overriding preference, in context of which observed behavior is rational.

via interfluidity.

I don’t see it.  I am fortune enough to have savings, which I have invested conservatively, and I don’t think that either the federal government or Wall Street is acting in my financial interest.  If it were, I would be able to earn interest on my bank account or my money market fund.  No, the U.S. government, the German government and the international financial institutions are operating in the interests of the big banks and investment firms.  They are acting to preserve the value of their assets, not my savings.

True, many Tea Party members are in my economic class, and they are much more worried about inflation and government debt than they are about unemployment and public services.  But the Tea Party rank and file don’t run things.  The average Tea Party supporter is as opposed to the Wall Street bailouts as I am.

True, economic policy is tilted toward averting inflation, which isn’t a serious problem at present, rather than bringing down unemployment, which is.  I think that reflects the policies which serve the interests of financial institutions, whose priority is to maintain the value of currencies and financial assets, and over the interests of the producers of tangible goods and services, whose priority is to maintain the level economic activity.

I don’t think governments should intentionally adopt a policy of inflation, but I do think they need to recognize that inflation is not the main concern right now.  Right now continued recession, with the strong possibility of another financial markets crash, is a greater threat to my savings than inflation is.

Click on Depression is a choice for Steve Randy Waldman’s full comment.

Paul vs. Paul on banking and debt

May 8, 2012

Last week Bloomberg News hosted this interesting debate between libertarian Rep. Ron Paul of Texas, currently seeking the Republican nomination for President, and liberal Paul Krugman, the Nobel Prize-winning economist and New York Times columnist, on central banking, deficit spending and inflation.  You could watch two important public figures, both independent thinkers who are beholden to nobody, debate what they honestly think about an important public issue.  That is something I fear will be a rarity in this Presidential election year.

Ron Paul wants to phase out the Federal Reserve System.   He correctly pointed out that without the existence of a semi-government agency with authority to buy government bonds and create money, it would be very difficult and maybe impossible for the government to finance either the current endless wars or the welfare state, which he is equally against.

The problem is that without a Federal Reserve, decisions about interest rates and money supply would be made not by an impersonal mechanism, but by powerful individuals such as J. Pierpont Morgan, who would not be accountable to the public.  Or you would have a chaotic system, like that which existed in the United States during the decades leading up to the Civil War, when wave of bank failures were frequent, and depositors lost their money.   Ron Paul would like to go back to that era or, alternatively, to return to the gold standard.  The problem is that impersonal mechanisms are just as fallible as individual people.   There is no magic of the market, or magic anything else–just a choice among imperfect systems.

While Ron Paul focused on deficit spending, debt and inflation, Paul Krugman focused on employment and economic growth.  I think Krugman had the right priority.  The U.S. government dealt with the enormous debt left over from World War Two, not by paying down the debt but by generating strong economic growth so that the debt became proportionately less in relation to the overall economy.

Krugman is a Keynesian, which means that while he favors a balanced budget and tight money in normal times, he thinks that deficit spending and easy money are warranted in a serious recession, as a means of getting money into circulation so that people will start spending and investing again.   The problem with that is that it doesn’t seem to be working.  I think the reason is that the current recession is more than part of the normal economic cycle.  It is a crisis resulting from decades of running the U.S. economy on debt rather than production.  When people have more money in their pockets, they don’t necessarily spend it, they use it to pay off their mortgages, installment loans and credit card balances.  And the big banks, as Ron Paul said, are content to borrow money from the Federal Reserve at 1 percent interest and lend it back to the government at 3 percent interest.   That does nothing to help the real economy.

I don’t believe in spending money for the sake of getting money into circulation, but I think the government should refrain from cutting back on basic services and that this is a good time to invest in infrastructure repairs, scientific research, job training and other measures to maintain our country’s productivity.  Ron Paul said, perhaps in jest, that it would have been better for the Federal Reserve to give relief to mortgage-holders (perhaps by refinancing their loans?) than to relieve the banks.  Certaintly this would have done more for economic recovery.

Click on Economics Throw-Down! Krugman vs. Ron Paul on Bloomberg TV — Helicopters, Gold and More for highlights.

Click on David Henderson on Paul vs. Paul for a conservative economist’s summary of the debate.

Click on Ron Paul Flunks History for comment on David Frum’s Daily Beast web log.

Click on Ron Paul vs. Paul Krugman: the Bloody Aftermath for discussion of the issues by Reason magazine’s Brian Doherty.

Click on Krugman Says Fed ‘Reckless’ to Allow High Jobless Rate for a Bloomberg News followup to the debate.

Hat tip to Joshua Chacon.

Why isn’t inflation running hog-wild?

March 28, 2011

Double click to enlarge

My friend Bill sent out the following e-mail:

During the 1970s we suffered a dramatic rise in inflation.  Whip Inflation Now was President Ford’s response and Nixon had  earlier ordered a freeze on price increases.  I remember complaining to a local store that increased the price of Simlac, a baby milk formula.  The result was they pulled Similac from their store and so I had to get the formula somewhere else where I didn’t know what the price was last week.   At the time I remembered being told that this inflation was a result of Johnson not choosing between guns and butter.  In other words we spent on defense and on discretionary items during the Vietnam War and that led to the inflation of the 70s.  Doing both caused inflation.  But the same conditions seemed to exist  from 2001-2008 with little inflation.  Now, I am hearing that inflation can be expected because there is too much money being created by the Fed.  Too much money in the system.  Yet, I thought classic inflation was caused by too much money chasing too few goods or because of the classic guns vs. butter cause.  Are we really facing a time when we have too few goods available for us?  The price increases in food and energy are not due to too little food or energy but multiple causes: speculation, droughts, increased industrialization in China and other former 3rd world countries.
I struggled through Econ 101 and 102 and now I find a good indicator of why I struggled.  Could someone smarter than me explain the seeming contradictions I have noted above?

I don’t claim to be smarter than Bill, nor am I a professional economist, but I do have a rough idea of what economists think about this subject.  Economists define inflation as an increase of the amount of money relative to the increase in the amount of goods.  The definition is my 1958 Webster’s is “an increase in the volume of money and credit relative to available goods resulting in a substantial and continuing rise in the general price level.” My newer dictionary’s definition is “an increase in the amount of currency in circulation, resulting in a relatively sharp and sudden fall in its value and rise in prices.”

According to this, the hangover from the Vietnam war and the 1970s oil price shocks wouldn’t have caused inflation if the Federal Reserve System hadn’t increased the supply of money to accommodate the extra costs.  If the money supply hadn’t expanded, then the Vietnam war spending and the oil price increases would have had to be offset by a fall in the price of something else or by the elimination of some product or service – which probably would have caused a recession.

The amount of money in circulation is determined by the Federal Reserve Board.  The Fed creates money out of thin air and puts it into circulation by buying government bonds; it contracts the money supply by selling bonds and making the money that’s paid for them disappear. Currency and coins are a small and important part of the money supply.

By the end of the 1970s, inflation was so out of hand that the Federal Reserve Board decided to clamp down on the money supply, even though its members knew a recession would result.  Throughout the tenures of Federal Reserve chairs Paul Volcker (1979-1987) and Alan Greenspan (1987-2006), the Fed gave priority to controlling inflation over promoting economic growth and creating jobs.

Economic conditions made this easier than it might otherwise have been.  The weakening of organized labor eliminated the wage-price spiral of the 1950s and 1960s.   Competition from overseas producers kept manufacturing wages and prices down, as did the shift from a goods-producing to services-producing economy.  An unfavorable balance of trade normally would result in a depreciation of a nation’s currency and higher prices, but the U.S. has been shielded from this by the fact that the dollar is (so far) the world’s reserve currency. Stagnation in wages and job growth lessened both the push of costs and the pull of demand.

But since the current recession began, the Federal Reserve Board under the leadership of chairman Ben Bernanke has been increasing the money supply in an effort to pump up the economy.  The question is why this has neither increased inflation nor stimulated the economy.  I think the reason is that for the money supply to affect the economy, it is not only necessary for the Fed to issue new money, but for the money to circulate.  This doesn’t seem to be happening.  Instead the newly-created money is being squirreled away by the big banks or used to pay down their  debt.

There’s another possible explanation, which is that inflation is actually more than the rise in the Consumer Price Index indicates.  The method of calculating the CPI has been changed a number of times since 1982, all in the direction of making inflation seem less than before.  Certainly the cost of food, gasoline and other necessities is up much more than 1.9 percent over last year.

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Reagan, Carter and the Great Inflation

February 21, 2011

I grew up in the 1940s and came of age in the 1950s.  My economic behavior and attitudes were shaped by my parents’ memories of the Great Depression of the 1930s.

My guess is that the behavior and attitudes of most Americans younger than 50s is the Great Inflation of the 1970s, when the Consumer Price Index rose more than 10 percent almost every year, peaking out at 15 percent in 1980.

Inflation turned all the rules of rational behavior upside down.  People who saved their money saw the value of their savings dwindle down to nearly nothing (the stock market was virtually flat during that decade) while those who borrowed money and spent it were the prudent ones.

Paul Volcker

President Nixon stopped inflation temporarily by imposing wage and price controls, but this did not get at the root of the problem.  President Gerald Ford tried an ineffective voluntary program called WIN – Whip Inflation Now.  President Jimmy Carter appointed Paul Volcker at chair of the Federal Reserve Board, and Volcker acted to stop inflation in the only way he knew how – by choking off the growth of the U.S. money supply.  Volcker’s action choked off the availability of credit.  Many small businesses, which depend on credit, went broke.

A recession began in which unemployment went into double digits. President Carter supported Volcker.  He did not try to reverse the Federal Reserve’s policies, nor did he distance himself, even though this cost him whatever chance he may have had to be re-elected.  President Reagan did the same, even though the recession put his re-election at risk.

On this question both Carter and Reagan were patriots who did what they thought was necessary for the public good even when it was to their political disadvantage.

The recession came to an end, and the CPI has been low ever since.  This was a good achievement, but as in other Reagan administration policies, it generated bad memes.  One meme is that you can act in the interests of bankers against workers and small-business owners and not pay a political price.  Another is that fighting inflation, even when inflation is as low as it is now, is the overriding goal to which economic growth, employment and everything else must be subordinated.  Legislation is now pending before the House of Representatives to change the charter of the Federal Reserve from the dual mission of promoting low inflation and economic growth to low inflation only.

Click on Stagflation wiki for the Wikipedia article on 1970s inflation and how economists explain it.Click on The Inflation of the 1970s for a 1995 presentation by Brad DeLong, an economist of the faculty of the University of California at Berkeley. DeLong thought one possible cause of the Great Inflation was simply that decision-makers were slow to give priority to inflation-fighting. Another was the failure of the Johnson and Nixon administrations to raise taxes to pay for the Vietnam war. A third explanation is the oil price shocks of 1973 and 1979 combined with similar less-publicized price shocks for other commodities.Political writer Kevin P. Phillips pointed out in 2008 that the formula for calculating the Consumer Price Index was changed under the administrations of Presidents Kennedy, Johnson, Nixon, Reagan, George H.W. Bush and Clinton. All the changes made the rate of inflation seem lower. This diminishes Reagan's achievement, but he was no worse than many of his predecessors and successors, and nobody who remembers that era doubts the important victory over inflation.Click on Numbers racket for Phillips' 2008 article in Harpers about manipulation of economic statistics.

The above charts on changing methods of calculating inflation are based on information from a consulting economist named John Willliams.  Click on Shadow Government Statistics for his web site.

Click on Carter, Reagan and the Misery Index for more about the Great Inflation.

Click on The Reagan Years for a menu of links to statistical information compiled by Steve Kangas on the Reagan era’s economic policies.  [Added 2/25/11]

Inflation through the ages

November 17, 2010

These charts are from a clipping of a Wall Street Journal reprint of an article in Forbes magazine’s March 1, 1975, issue.  I saved the article because I thought it was so interesting, and I still think it is interesting.

The price index was compiled by an Oxford economic historian named E.H. Phelps Brown from records of prices of food, cloth and fuel in Oxford, England, over the centuries.  It shows that inflation is not a normal state of affairs.  Prices have fluctuated around a base level except during two periods of history, the 16th century and the 20th century.

Phelps Brown also compiled a record of wages in both money terms and real terms – not just what a carpenter at Oxford was paid, but what he could buy with his wages.  The record showed that, in modern times, wages go down as well as up.  During the 16th century, the wages of an Oxford carpenter doubled in terms of pennies, but fell by two-thirds in terms of what he could buy.  It was not until 1880 that Oxford carpenters regained the lost ground.

Click on Measuring Worth for the U.S. Consumer Price Index starting in 1774 and continuing into the present.  In 2009, the CPI dropped for the first time since 1949 and is expected to fall again this year.

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