Thursday, June 14, 2012

Even "money printing" is not inflationary!

Every one of the Austrian, hard money, gold bugs,' debt freaks,' arguments are being decimated left and right.

Yesterday I showed you how there has been NO correlation between the rise in Federal debt and interest rates. A couple of weeks ago I showed how the dollar has gone UP since the Fed embarked on all its extraordinary monetary measures, which added several trillion in new reserves.
Now take a look at this.

Here's REAL money printing--the Federal debt--which increased by 2000% since 1980. THAT'S money printing! And look at what the Consumer Price Index...IT WENT DOWN!
















Yet the Debt Doomsday, money printing freaks will still stick to their wrong arguments.

44 comments:

Matt Franko said...

Irrefutable facts Mike.

Wait till these morons start to raise interest rates to "slow the economy down".... the economy will skyrocket!

Resp,

Unforgiven said...

Just drop those nasty banking regulations. Dimon and the crew will use the Kleptoral Balances approach to soak up the extra money and save the 99% from their inflationary ways.

John Carney said...

Let me just point out that for Austrians there is no question that growing the supply of money is inflationary. This is tautological because of the way Austrian economics defines inflation as inflation of the money supply.

This creates confusion because virtually everyone else uses inflation to mean a general increase in prices. Austrians do not believe that money growth necessarily leads to a rising CPI.

So your graph here doesn't really do much to undermine the Austrian point of view. In fact, it supports it.

TheArmoTrader said...

Perfect timing on the post. Roger Mitchell just literally posted a blog post on this as well: http://rodgermmitchell.wordpress.com/2012/06/14/why-not-increase-federal-deficit-spending-heres-why/

Mike Norman said...

For Austrians, inflation is loss of purchasing power due to money printing. And the dollar has not lost purchasing power.

Matt Franko said...

"Austrian economics defines inflation as inflation of the money supply."

OMG.

Bob Roddis said...

1. I’ve said many many many times that slowly rising prices resulting from money dilution in the face of a massive reality-based price deflation should be considered evidence of significant price inflation. I correctly foresaw a lack of hyper-inflation in the short run after 2008 because so many over-priced assets would experience a price collapse. Price inflation is a secondary effect of fiat funny-money dilution. The primary effect of “money printing via keystrokes” is the distortion of the price, investment and capital structure due to the impairment of economic calculation, especially as to long-term and complex projects. MMTers "recoil" from thinking about economic calculation.

BTW, this chart shows a year-to-year rate of change in price inflation, but changes vis-à-vis earlier years is actually geometric.

2. Since deficits and artificially low interest rates induce poverty, there are going to be fewer ways to make real profits in the market when rates are artificially low. Thus, the best and safest “Investment” will appear to be government debt. Since investors have no alternatives with the real market having been destroyed by the government, the government can charge low rates for its debt.

There’s my Austrian analysis. Mr. Norman clearly has no familiarity with even basic Austrian School concepts.

3. If prices would have naturally fallen but were artificially propped up with fiat funny-money dilution, then there not only has been a loss of purchasing power but a theft of purchasing power from average people holding existing money transferred to those holding the now price-inflated asset. The whole point of the Keynesian/MMT/fiat system is to steal and shift wealth and purchasing power without the victims knowing what hit them and without due process of law. It represents a true collapse of civilization.

Anonymous said...

So Austrians core belief is that increasing the supply of money actually increases the amount of money in circulation?

Someone needed to write that down?

I find it hard to believe that you said that.

Matt Franko said...

John,

Then have we had a lot of inflation:

http://research.stlouisfed.org/fred2/series/EXCRESNS

Looks like a large increase here....

Rsp,

PS (Prices of things collapsed)

Anonymous said...

"slowly rising prices resulting from money dilution in the face of a massive reality-based price deflation should be considered evidence of significant price inflation."

What does this even mean? Its like a slight of hand. You make up a scenario to justify reality.

You need to quantify deflation. And no the drop in housing prices is not deflation.

Anonymous said...

why doesn't everyone just call an increase in money creation "monetary inflation" and an increase in prices "price inflation"?

Then we could say simple things like, "there was a very large monetary inflation but only a small price inflation?".

It makes more sense than having to say austrian things like "there was a very large inflation but only a small price inflation".

??

Bob Roddis said...

Then we could say simple things like, "there was a very large monetary inflation but only a small price inflation?".

That is generally how Austrians would describe things. It is Keynesians, "progressives" and MMTers that play the game of Whac-a-Mole with definitions.

If the housing price collapse is not "deflation", then what should we call it?

I just listened to Martenson interview Steve Keen who claims that banks create loans out of thin air and that this process pumped up asset prices and unpayable debt. That sounds like me. Do we agree on that? Or not? If not, why not?

money4nothingchicks4free said...

the Austrian term really confuses people. If you say there is going to be inflation, then everyone thinks It is price inflation. No one cares about the "monetary inflation" if there is no price inflation. I don't think Austrians themselves use the term this way. When Petyer Schiff is talking about hyperinflation, is he talking about "monetary hyperinflation"? Who cares really what these bicycle theorists think? Bob Murphy showed their colors again by comparing government with company.

DAB said...

@ BOB

Bob you have to use y over y in order to see if there was any rate increase due to increased debt. Obviously if the two lines diverge as they do then it is very easy to see the lack of relationship. In fact NOT using yoy is a common way to hide that there is no relationship.

Also if the relationship is "geometric" then you would not have yoy declining as it does.

Unless the geometric relationship you're pointing to is that the more we increase spending the less effect it has on prices. If that's the case we should spend until inflation reverses.

Tom Hickey said...

Anonymous: "why doesn't everyone just call an increase in money creation "monetary inflation" and an increase in prices "price inflation"?"

Why don't we just stop using inflation" since it is an ambiguous term that is loaded with a strongly negative connotation, and just say exactly what we mean?

Oh right, then we'd have to actually know what we mean and are describing in terms of a representational model.

Tom Hickey said...

Bob: "I just listened to Martenson interview Steve Keen who claims that banks create loans out of thin air and that this process pumped up asset prices and unpayable debt. That sounds like me. Do we agree on that? Or not? If not, why not?"

We agree. Keen is a Minskian, and Minsky was a student of Schumpeter, who actually studied with real live Austrians. Through Minsky especially, PKE agrees with some of Austrian thinking about credit and debt. But where Austrians see malinvestment, Minsky sees Ponzi finance.

There is also agreement over creative destruction, only PKE believes that malinvestment is continually being liquidated in markets, whereas some Austrians favor allowing liquidation in contractions.

PeterP said...

In all fairness the graph is wrong - it shows the *rate of change* of prices with the *size* of the debt. Either plot the two rates of change or the two values, so prices vs debt - then there would be comovement.

RyanVMarkov said...

@ Bob Roddis

"I just listened to Martenson interview Steve Keen who claims that banks create loans out of thin air..."

I just want to add to Steve Keen's statement that banks can create loans out of thin air so long as their capital allows them to do that. And their financial capital is a product of previous government deficits.

DAB said...

@PeterP

Typically yoy vs yoy is the way RMM presents this and there is still no relationship.

Anyway, in this case that isn't necessary because it is clear that the debt increase has been practically exponential which only further undermines the case of any relationship between the two.

Crossover said...

I insist in asking why dont you use debt/gdp instead of debt in absolute numbers.I understand the point that an increase in money supply is not by definition inflationary but you cant prove this on this graph.If you use debt/gdp instead then you can definitely prove it since the money supply grew faster than the economy and still no inflation.

Anonymous said...

"their financial capital is a product of previous government deficits"


Not sure about that.

"capital" isn't just stocks of "government money" is it?

Anonymous said...

*financial capital

y said...

John Carney - it depends on which branch of the austrian school you're talking about.

Rothbard defined 'inflation' as an increase in the quantity of money.

Mises defined inflation as an increase in the quantity of money not offset by an equivalent increase in the demand for money.

y said...

Bob's (austrian) "economic calculation" argument depends upon the assumption that "free markets" always allocate resources in the best way possible - and that left to their own devices "free markets" would create the best monetary/financial system possible.

Thus, the argument goes, any and all "interference" in "free markets" by government necessarily creates negative "distortions" which screw everything up and lead to worse outcomes than would otherwise be the case.

Bob has yet to provide any evidence or substantive argument for why this assumption is correct.

One only has to do the slightest bit of research to realise that it is, in fact, utterly bogus.

In the real world, both government and markets have important economic roles to play.

Bob refuses to acknowledge this point or even make the mental effort needed to understand it, which probably means that years from now he'll still be screaming "economic calculation you Leninist bastard!" at anyone who disagrees with his fundamentalist, cultish beliefs.

As I said a while back, rational arguments simply bounce off Roddis' brain.

Anonymous said...

"If the housing price collapse is not "deflation", then what should we call it?"

A correction in a market sector. Had nothing to due with the amount of money being created but by the means the way it was created; fraudulently.

The monetary system is blind to fraud it does not detect or discern a good loan from a bad loan. That is the banks role. The banks created the ponzi scheme and sold it to the public.

RyanVMarkov said...

@ Anonyms
"Capital" is whatever legally needed to be owned so you can operate a bank, isn't it?

Trixie said...

"Austrian economics defines inflation as inflation of the money supply."

#CommenceRecoiling

Leverage said...

You print a million and keep it in a vault (reserves), that does not mean shit.

Austrian think that money will always find it's way into the exchange of good at some point. This ain't completely true, as most financial capital goes works to multiply the number of liabilities in the system.

What actually happens is that increasing the amount of liabilities puts an inflationary pressure on the system, creating income channels thanks to financial rents and costs.

That's why I would only partially agree with Matt statement in the comments. That would only happen if the government increases 'money printing' (spending) to accommodate these rent channels. Most probably, according to history, it would, as we know government is always accommodative to the private sector rent and saving desires (it shouldn't though, in some cases, ie. real estate income channels).

A colliding interest rate hike with contracting deficit spending would set up the situation for a perfect storm of deflationary collapse right now. As we know, barely enough money is being created to serve interests as it is right now, if you increase costs people would have to sell even more assets to meet obligations, liquidation means falling prices, negative equities and less consumption, etc.

Greg said...

Bob

I have a question for you? Maybe Ive asked you before (if so I apologize because I forgot your answer) but I just want to know if you think that inflation, as you define it, has a negative affect on our living standards?

Additionally, do you buy the idea that our dollar has lost 98% of its purchasing power since 1913 and do you think that fact is something we should be angry with?

Dan Kervick said...

So your graph here doesn't really do much to undermine the Austrian point of view. In fact, it supports it.

No, it doesn't. Not even given the silly Austrian habit of using "inflation" to refer to an increase in the quantity of money. Neither curve on the graph shows the quantity of money.

Bob Roddis said...

I have a question for you? Maybe Ive asked you before (if so I apologize because I forgot your answer) but I just want to know if you think that inflation, as you define it, has a negative affect [effect?] on our living standards?

Absolutely. The first thing the elite did with their new Federal Reserve toy was to fund the US entry into WWI with it. The whole point of Keynesian-style monetary policy is to steal purchasing power without the victims knowing what hit them and leaving them with no legal recourse regarding such theft. Further, money dilution distorts the price system and thus the investment and capital structure impairing calculation, especially of long term and complex projects. A Fed-induced bubble caused the Great Depression which, together with the hatreds and misallocations of WWI, lead to WWII, which was funded by funny money. Etc….. Wars cause impoverishment as do depressions.

Additionally, do you buy the idea that our dollar has lost 98% of its purchasing power since 1913 and do you think that fact is something we should be angry with?

Little thefts occur all of the time but then prices and wages tend to reallocate. My substantive analysis was stated above. I don’t think there is a basis for saying we are 98% poorer than we would have been and no one actually says that other than Keynesians trying to smear an argument that they are too dumb to understand.

John Carney wrote:

MMTers do not seem to fully appreciate the problems of ignorance and calculation that inform Austrian economics. They seem to recoil at even thinking about them because of the implications for the limits of political action.

http://tinyurl.com/7sycbey

Trixie said...

Bob Roddis: My substantive analysis was stated above.

Bob, you had me at "funny money". But you lost me at...And then? THEN? Then "...the book was RED..." Speaking of Abba Lerner.

Look, MMR (who is attracting people like you) has angry mobs wandering around "somewhere in the middle of Kansas" looking for UMKC students holding Buckaroos. All 30 of them. Go help them out before they get too bored.

FREEDOM!

Anonymous said...

It's not possible to argue with fundamentalist imbeciles like Bob Roddis.

He'll keep repeating his idiotic nonsense no matter what any one says.

Anonymous said...

"money dilution distorts the price system"

I absolutely love this comment. It makes no sense and yet is held up like a scientific law.

Please describe to us the natural state of the "price system".

Tom Hickey said...

Anonymous, "Please describe to us the natural state of the "price system"."

Even I can do that. One day, Robinson and Friday get tired of bartering fish and coconuts and decide to use lumps of gold they dig out of the ground as the numeraire.

miller B said...

Even I can do that. One day, Robinson and Friday get tired of bartering fish and coconuts and decide to use lumps of gold they dig out of the ground as the numeraire.

so if we dug up gold and silver is that price distortion?

Tom Hickey said...

"so if we dug up gold and silver is that price distortion?"

We know the answer to that historically. Whenever large amounts of gold were introduced by either discovery or conquest, there was growth (increased production) along inflation (price distortion) that affected the economies of the time unequally wrt distribution. There were winners and losers.

Would the answer be to have a fixed amount of the numeraire? No, because that would inhibit growth and be deflationary. That's historical, too. When the supply of the numeraire, e.g., gold, was relatively fixed due lack of introduction of new stocks from discovery or conquest, then economies were pretty much stuck where they were or dependent on an expansion of credit. Remember William Jennings Bryan's "Cross of Gold" speech? against the bankers that wanted a gold standard and refused to introduce bimetalism even though the farmers and workers were getting crushed?

vimothy said...

In no sense does the Federal debt series measure "money printing"; thus, it cannot prove anything about the effect of money printing on inflation.

DAB said...

@vimothy

Federal debt under our current law is the amount of "money Printing" that you are scared of. No way around that...

paul said...

In no sense does the Federal debt series measure "money printing"

What???

vimothy said...

Whether I'm scared of it or not, Federal debt doesn't represent any sort of money printing.

paul said...

"Federal debt doesn't represent any sort of money printing."

What does it represent?

Bob Roddis said...

Now, let’s discuss the apparent perception that the world is not suffering from inflation. At least for now. We think it is valid to point out that so far, the substantial (let’s say above the explicit 2% target) increase in prices has been seen in assets, rather than in final good and services. This, for those of us within the Austrian School of Economics, makes perfect sense, since it is precisely this school that maintains that the expansion of money supply is not neutral. It begins affecting one sector and then spills over to the next.

http://sibileau.com/martin/2012/05/07/the-path-from-asset-inflation-to-generalized-inflation/

http://sibileau.com/martin/wp-content/uploads/2012/05/April-14-20091.jpg

Tom Hickey said...

We think it is valid to point out that so far, the substantial (let’s say above the explicit 2% target) increase in prices has been seen in assets, rather than in final good and services. This, for those of us within the Austrian School of Economics, makes perfect sense, since it is precisely this school that maintains that the expansion of money supply is not neutral. It begins affecting one sector and then spills over to the next.

PKE tells a similar story but the causation is a bit different, and not as oriented toward the money supply as the causative factor. PKE holds that the money supply is endogenous and not controlled exogenously, e.g., through monetary policy.

According to PKE/MMT, Minsky's analysis that central bank activity in rate setting leads first to changes in asset prices and investment, since these are most sensitive to interest rates and comprise a large portion of the economy. Generally speaking, lower rates leads to asset price appreciation by lowering the cost of borrowing on margin, thereby affecting financial markets, and lower rates also lower the cost of mortgage financing, affecting the housing sector. Those who are in a position to borrow to increase assets through leverage are the first to profit. This leads to an increase in the wealth effect that increases effective demand and eventually increasing goods price level. Consumer goods price level increasing lowers the real wage and demand for wage increases to offset leads to inflation in the technical sense of a continuous increase in the price level including the price of a unit of labor.

Then the cb raises rates, making the cost of working capital more costly, as well as raising mortgage rates correspondingly. The later depresses investment in housing, one of the largest factors in the economy because of knock-on effects in related markets. The former raises wages in effect because most firms finance payroll by drawing on credit lines for working capital. This increase in labor cost compresses price margin if firms cannot pass along the increase, and finally when firms in aggregate decide to throw in the towel due to margin compression and buildup of unplanned inventory, they layoff workers, which increases the buffer stock of unemployed and reduces wage pressure.

This is what the ordinary business cycle looks like. However, there are also financial cycles, the last stage of which is Ponzi finance, and the collapse due to unsustainable debt leads to debt-deflation and economic depression instead of inflation. That's what happened in 2008 and is still working itself out.

So in the view of PKE the money supply narrative needs to be unpacked in terms of transmission mechanisms affecting effective demand and conditions relating to supply. The largest segment of "the money supply" is comprised of M2 and M3, which are endogenous.

While interest rate setting has an influence on the cost of credit, it is not determinative in any predictive fashion. People do not necessarily seek more credit when rates are low, like now, and raising interest rates doesn't choke credit quickly (Volcker's monetary policy required jacking rates into double digits).