Tuesday, May 8, 2012

John Carney — Do We Need Inflation to Cure the Economy?

How do we inflate our way out of these problems without a credit expansion that will only make them worse? It seems to me that the only way out would be inflationary spending. That is, direct money creation by the Treasury Department to spend on government programs unfunded by debt or taxes.
Read it at CNBC NetNet
Do We Need Inflation to Cure the Economy?
by John Carney | Senior Editor

John seems to think that government spending to provide the space for increased non-government saving desire and to close the output gap would be "inflationary spending." Why? 

It seems that term "inflationary" is being used so loosely as to be misleading. In the loose use, all spending is inflationary. If so, then "inflationary" is redundant and can be eliminated using the rule of parsimony. It's really significance is rhetorical rather than descriptive, i.e., normative in that is based on moralizing.

By definition money saved is not money spent, and closing the output gap means bring more existing capacity on line in order to meet rising demand. Inflation doesn't kick in until effective demand is rising faster than the economy can expand to meet it. Where's the problem so many idle resources, like millions of workers idle, notional demand high, and too little money in the system to fund effective demand, deleveraging, and rebuilding drawn down savings. And lack a rebuilding of consumer balance sheets and increasing workers incomes, consumer lending, a primary economic driver, continue to lag.

9 comments:

Anonymous said...

Yeah, he's reverting to his Austrian roots here - all government money creation is by definition "inflation" in Austian terms. Also, they seem incapable of believing that government enterprise ever produces real goods and services.

wh10 said...

This is from August 2011...

mike norman said...

"Fiscal stimulus, bailouts, and typical monetary policy won't work." -John Carney

That's obviously his opinion, because the FACT is, fiscal stimulus DID work and it WILL work if employed again.

mike norman said...

Dogma (def.) Stating opinion as if it were fact.

PeterP said...

Why not "fund" it by borrowing anyway? After the Treasury has spent, the reserves sit in the banking sector. You can "borrow" them back, why not? (not that it would make any difference).

Tom Hickey said...

@ wh10

Oops. Came up on RSS feed today.

John Carney said...

Tom

This is old and I'm not sure why it came up in your RSS feed. Probably some kind of technical glitch on our end.

Anyway, I'm glad you posted it anyway. It's still as relevant today as it was last summer.

Let me be clear here: I am using "inflationary" in the Austrian sense. Dan is absolutely right. From an Austrian perspective, inflation is not about price increases but monetary expansion. I still talk in this way, trying to differentiate between "rising prices" and "price inflation" on the one hand, and "monetary expansion" on the other.

It's a shame that this causes so much confusion. I think, having re-read this, "expansionary spending" would probably have been a clearer way of putting it.

John Carney said...

Mike,

I'd say that spending as "stimulus" in the classic "prime the pump" style you learn in school didn't and doesn't work. But government spending can--and did--fill in for falling private sector demand.

Tom Hickey said...

@ John Carney

"Anyway, I'm glad you posted it anyway. It's still as relevant today as it was last summer."

When I read it I thought is was timely.

"I am using "inflationary" in the Austrian sense."

"Inflation" is a term like "money." It's ambiguos in denotation and charged in connotation.

Probably better to follow the dictum: "Say what you mean and mean what you say."

It seems to me that a lot of the argumentation is talking past each other otherwise.

But as you know, i appreciate what you are doing, and it is moving the ball forward, which is good for everyone in the world.

While disagreeing over some things, let's emphasize where we agree, and have fun, too.