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Tuesday, January 22, 2013

Inflation Is Good!

Posted by on Tue, Jan 22, 2013 at 3:36 PM

I'm old enough to remember when it was Japan that was destined to challenge the US for economic dominance. Last couple decades, not so much:

The Bank of Japan announced on Tuesday its most determined effort yet to end years of economic stagnation, saying it would switch to an open-ended commitment to buying assets next year and doubling its inflation target to 2 percent.

Hear that? Not enough inflation can be bad!

Despite all our allegedly inflationary deficit spending, the US inflation rate for 2012 was only 1.7 percent. If I were benevolent dictator, I'd print some money and spend it rebuilding crumbling infrastructure and educating our children. And if that bumped up the inflation rate a point or so, no biggie.


Comments (16) RSS

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It is good to some extent only.…
Posted by Nave on March 26, 2013 at 11:04 PM · Report this
DavidG 15
@14 If your debt has an interest rate of 15%, then 6% inflation just decreased your rate to 9%. 2% inflation would leave you with 13%. Did the inflation make your debt go away? No, but it helped a lot more than waiting around for society to ban interest.
Posted by DavidG on January 23, 2013 at 3:31 PM · Report this
@13 Again though, it comes down to the details. If there is 6% inflation, and your debt has an interest rate of 15%, inflation isn't making your debt go away. Could we come together as a society and say that interest-baring loans are immoral and should be banned as an alternative? Sure many societies have throughout history. Could we universally forgive all debts? Of course, it's another thing that's commonly happened throughout history.

I think it's far more important to express that debt is not a moral obligation for the poor and middle class, when it's been incorporated into our society as the only way to gain access to things like college education and housing. That's extortion.
Posted by Tent_Liberation_Army on January 23, 2013 at 1:32 PM · Report this
Inflation is good if you have debt. Most of us have debt.

The critique of inflation is that wages don't keep pace with it. Well, they don't move in lockstep, to be sure, but they catch up as prices catch up. Yeah, even in high unemployment periods.

Inflation goes up, prices go up. Wages don't go up, so there is a lag, but as higher-price sales come in, more money comes in, and wages will tend to go up.

But your debts? They *don't* go up. If you owe $100 on Monday, and Tuesday inflation is 10%, you still owe $100 on Tuesday, not $110. But if you had been able to buy an asset worth $100 on Monday, it would be worth $110 on Tuesday. You could then pay off that $100 and have $10 extra. In terms of Monday dollars your $100 debt on Tuesday is about $91.

This is a gross oversimplification, but it is the fundamental mechanism of inflation on debt.

Not convinced? Let's consider the alternative. Let's say instead of inflation, we see DEflation. That means prices come down. Wages will come down, too. But that debt is still $100. Let's say before the deflation you earned $10/hour. That means it would take 10 hours of work to pay off that $100 debt. But after 10% deflation, you earn $9/hour. That means you now need over 11 hours of work to pay it off. In terms of pre-deflation money, that $100 debt is really about $110. If you had bought an asset worth $100 before the deflation, it would now only be worth $90, meaning you'd now need an extra $10 to pay off the debt by selling the asset. If you'd paid it off before deflation, you'd have saved $10 (or about $9 in pre-deflation money).

At the beginning of the recession, the US dollar was experiencing deflation. Fed economists spin this as "a strong dollar." But strong dollars only benefit those with net positive dollars. Those with net negative dollars (i.e. in some kind of debt -- credit cards, mortgages, student loans, whatever) end up in worse shape.

The rich don't like inflation because it weakens their existing hoards. Of course, that encourages them to make even more, and that is done via investments and ventures. Just like high top tier tax rates... but I digress.
Posted by K on January 23, 2013 at 9:19 AM · Report this
This sort of thinking is as inadequately reductionist as free market fundamentalism. Let's ask deeper questions that lead to more informed opinions on issues like this:
-What specific policies are being enacted to encourage inflation?
-Who benefits from them?
-What is the nature of this growth that inflationary policies are said to encourage?

...just as a start. I'm sure we could come up with a system that is just, equitable, and creates decent living standards based on inflationary or non-inflationary economic models. It's a bit of red herring, in my opinion.
Posted by Tent_Liberation_Army on January 23, 2013 at 7:58 AM · Report this
You can't rebuild crumbling infrastructure with an NBA arena in the way, and also sucking up the bonding capacity.
Posted by hmmmmm on January 22, 2013 at 11:14 PM · Report this
Westlake, son! 10
Yes, a weak dollar fiscal policy will lift equities. But is that a good thing?
Posted by Westlake, son! on January 22, 2013 at 10:01 PM · Report this
dirac 9
@8 Waaahmbulance needed. Jesus. "of which we minimized via some monetary inflation." Yeah, by reinflating the MBS bubble to the tune of several trillion real dollars and many more in leverage. All at the worst bargain conceivable to the US taxpayer. Oh, and no solution to the underlying problem.
Posted by dirac on January 22, 2013 at 7:18 PM · Report this
@7 Tell that to people who own houses or stocks.

We just went through a period of massive asset price deflation the effects of which we minimized via some monetary inflation.

Posted by giffy on January 22, 2013 at 6:01 PM · Report this
dirac 7
@5 I just want to note that we already have asset inflation thanks to Uncle Ben. The Stag part is thanks to Congress and the Administration. Will be much worse after the tax increases and spending cuts (the deficit reduction fairy) the President seems hell-bent on getting.
Posted by dirac on January 22, 2013 at 5:26 PM · Report this

Yeah, but if wages exceed goods inflation it's better because then people can also pay for everything easier.

And you can use as your shield the pensioners argument, but really those guys can just have their social security raised (another form of "wage").

The US just has too many financial dowagers who earned their bucks too long ago for things that don't matter any more and if we just keep inflating they'll keep on coasting until God knows when.

Not that that hasn't been the plan of Democrat schemers and their assorted henchmen and lackeys from the get go who trample the great majority of the people all the while shedding crocodile tears of do-goodism.

Posted by Supreme Ruler Of The Universe http://_ on January 22, 2013 at 5:18 PM · Report this
dirac 5
Stagflation is worse people. We are following Japan right to 2 or 3 lost decades. We could afford deficit bspending because employment is really less than 90%. Once we had growth and full employment then we can use monetary or fiscal policy to put the brakes on ever so gently. But no, we'll repeat the well-documented mistakes of the BoJ and stay in this liquidity trap and austerity plan.
Posted by dirac on January 22, 2013 at 5:16 PM · Report this
GlennFleishman 4
If wages kept pace with inflation, then a little inflation is good for people who owe money. Mortgages are worth less and less in current dollars as long as inflation was low when you got the mortgage and higher when you're paying it off. Inflation (as long as it as translates into interest rates on CDs, bonds, and savings accounts) also means older people invested in cash, such as from the sale of a house, can avoid tapping capital to pay bills.

We're used to some extreme swings of inflation in the U.S. and remember the Carter-era super-high inflation (for a modern developed nation). Inflation harms those who have income that's not inflation-pegged, which is true for some pensions and other benefits, or for whom cost-of-living increases in payouts don't match actual inflation and costs of living!

Posted by GlennFleishman on January 22, 2013 at 5:08 PM · Report this
Horrible approach...simple inflation disproportionately raises the value of existing financial instruments, and leaves workers in the dust.

However, I have no problem with wage inflation...which raises the boats that need raising.
Posted by Supreme Ruler Of The Universe http://_ on January 22, 2013 at 4:21 PM · Report this
Goldensteinemberg, encouraging inflation?

By the way, Japan has been trying this for 15 years and failed so far so destroying the wealth of the middle class through inflation may not be the smartest idea.
Posted by Weimar Republic on January 22, 2013 at 4:16 PM · Report this
Will in Seattle 1
Man, if that were true, then China would have shifted from 10-12 pct GDP growth and an overheated economy down to a project 5-7 pct GDP growth rate, also partially as a result of "invisible" trade wars with Japan, Vietnam, and a couple of other nations.

And still be on line to put more R&D and infrastructure investment than the US.

We're Number Two! We're Number Two!

(oh. wait.)
Posted by Will in Seattle on January 22, 2013 at 3:41 PM · Report this

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