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The Economic Ignorance of the Modern Right


August1991

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Tame Canadian inflation in August and weak wholesale sales data for July both show there is no real pressure on the Bank of Canada to start raising interest rates from near-record lows, analysts said on Friday.
G&M

Meanwhile, our money supply (however measured) has increased by 30% to 50% over the past four years. (Statscan)

IOW, the Bank of Canada has printed tons of new cash in the past few years and inflation is still non-existent.

(I won't even bother to post links to US data but I feel confident that they would support my argument.)

Then again, why not:

At the close of business on Tuesday, the debt of the federal government exceeded $15 trillion for the first time--with the largest single owner of the publicly held portion of that debt being the Federal Reserve.
16 Nov 2011

IOW, the US Fed has printed trillions of new dollars, given them to Obama and he spent them. Yet, what is the US inflation rate?

In the 12 months ended in September, prices rose 2 percent, the report showed.
Bloomberg

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The meme of the North American Right (to pick a few examples: Harper, Steyn, Krauthammer, NRO, SDA, Coyne. Terence Corcoran, even me etc) would have us believe that printing too much money leads to inflation, and having too much government debt leads to oblivion. (In general, I suspect that the North American Right believes government can do little good, and it certainly can't deliver "free lunches".)

Well, it's been four years now of printing mad money, and there's still no inflation.

Edited by August1991
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The meme of the North American Right (to pick a few examples: Harper, Steyn, Krauthammer, NRO, SDA, Coyne. Terence Corcoran, even me etc) would have us believe that printing too much money leads to inflation, and having too much government debt leads to oblivion.
Well these theories have been proven true over and over again in many different countries. If you think something has changed then you need to explain what and support it with data.

If I had to guess I would say that it is largely due to the following:

1) Free trade has keep wage expectations low.

2) A lot of the money is being saved rather than spent.

Both are a consequence of policies advocated by the right which makes your condemnation of the right rather silly.

Edited by TimG
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Well these theories have been proven true over and over again in many different countries. If you think something has changed then you need to explain what and support it with data.
Proven true? In the long, long, long term, you may be right.

But in the past four years ("long term" for most people), you are wrong; and the Right has been critically Wrong.

To quote Keynes:

"But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again."
Edited by August1991
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But in the past four years, the Right has been Wrong.
Where is your evidence supporting your conclusion? It is quite possible the lack of inflation is entirely because people have confidence in the commitment of central banks to control inflation - a commitment that only exists because of people on the "right" who insisted that the central banks be given political independence and a mandate to control inflation. Edited by TimG
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It is quite possible the lack of inflation is entirely because people have confidence in the commitment of central banks to control inflation - a commitment that only exists because of people on the "right" who insisted that the central banks be given political independence and a mandate to control inflation.

Huh? TimG, are hundreds of millions of smart people so naive to believe the Central Bank - for four years?

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No, clearly something else is happening.

A central bank (the US Fed) prints trillions of new dollars, gives them to a politician (Obama) who then spends the new money - and yet there is no inflation. Even four years later.

Is this a new paradigm?

Edited by August1991
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Huh? TimG, are hundreds of millions of smart people so naive to believe the Central Bank - for four years?
Why would anyone change their opinion as long as inflation in under control? The only people you realize how much money the banks have been printing are geeks who look into this stuff.
A central bank (the US Fed) prints trillions of new dollars, gives them to a politician (Obama) who then spends the new money - and yet there is no inflation. Even four years later.
What makes you think the effect is instantaneous?

The fact is the law of supply and demand is irrefutable. If the supply of dollars exceeds demand the price must go down. If the price has not gone down that is because the demand still exceeds the supply. Eventually, that will change. It is as inevitable as the sun rising in the east.

Edited by TimG
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What makes you think the effect is instantaneous?
It's been four years.

TimG, for the past four years or so, general inflation in Canada and the US has been non existent: true, gas is more expensive but then, TVs and computers are cheaper - overall, zero or close to zero. Inflation is non-existent. In general, prices are not changing.

And yet we (Canada/US) have tons of more cash money.

The fact is the law of supply and demand is irrefutable. If the supply of dollars exceeds demand the price must go down. If the price has not gone down that is because the demand still exceeds the supply. Eventually, that will change. It is as inevitable as the sun rising in the east.
And if everyone rushes to the lifeboats, according to you, the boat will find its natural balance.

I too believe in gravity and magnetism. But when it is a question of human forces, I am more sceptical.

Edited by August1991
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It's been four years.
http://www.frbsf.org...ary/affect.html

Why are the lags so hard to predict?

Similarly, the effect of a policy action on the economy also depends on what people and firms outside the financial sector think the Fed action means for inflation in the future. If people believe that a tightening of policy means the Fed is determined to keep inflation under control, they'll immediately expect low inflation in the future, so they're likely to ask for smaller wage and price increases, and this will help achieve low inflation. But if people aren't convinced that the Fed is going to contain inflation, they're likely to ask for bigger wage and price increases, and that means that inflation is likely to rise. In this case, the only way to bring inflation down is to tighten so much and for so long that there are significant losses in employment and output.

I personally believe the only way to unwind the debt crisis in the developed would will be with printing money and inflation if necessary. But that does not mean we should discard everything we have learned about the dangerous effects of government debt. Edited by TimG
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August, you sound like you would really like to understand the situation.

The fact is that the government has indeed printed lots of money. So where is the inflation? Inflation is, of course, an increase in the money supply, An increase in the general price level is a symptom of an increase in the money supply.

So where is the increase in the general price level?

You will notice that the reserves of banks have increased, and basically, that is where the new money sits. It isn't until the new money hits the streets that inflation sets in. Right now it is in Bank reserves.

Time is the variable. Also, the welfare rolls in America have gone over the trillion dollar level and that cash will show up in the economy. Gas prices may be the first indication of inflation since oil is tied so closely to the dollar.

The American economy is set for high inflation.

Because you see lower prices for hi tech items doesn't mean there isn't inflation. Inflation has to do with a general increase in prices. The hi tech industry is only one sector of the economy - not the general economy.

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The American economy is set for high inflation.
Set for high inflation? WTF?

The US Fed has printed trillions of dollars, given the new cash to Obama and he spent them. The US federal government owes trillions.

And yet, four years on, there is no inflation.

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"Set for high inflation?" Pliny, all things considered, four years on, I think that you need a better paradigm.

August, you sound like you would really like to understand the situation.
To be frank, I do. Edited by August1991
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Set for high inflation? WTF?

The US Fed has printed trillions of dollars, given the new cash to Obama and he spent them. The US federal government owes trillions.

And yet, four years on, there is no inflation.

----

"Set for high inflation?" Pliny, all things considered, four years on, I think that you need a better paradigm.

To be frank, I do.

Actually America right now is being destroyed from within. It could be described as economic terrorism in my view.

Economic ignorance is expressed in gasps of pleasure and relief that the unemployment rate is below 8% and the economy is on the mend.

Or the auto industry has been saved and we are on the road to recovery. Neither of which is probably true let alone signs of recovery. they mightbe a sign of recovery if government was not propping up the figures with taxpayer money.

It only makes sense that, production remaining the same, adding money to the economy will increase the general price level and reducing money in the economy will decrease the general price level.

A lot of money, I don't know how much but in the trillions, disappeared in the sub-prime collapse. Housing prices resultingly collapsed when that money disappeared. All the initial money injected into the economy in the TARP (Troubled Asset Relief Program), about 860 billion dollars, went to GM, Solyndra and Banks, and a lot went outside the country to China, Finland and other areas. That money was soaked up pretty fast but isn't on Main Street where the economy actually exists.

QE 1 and 2 kept things from failing, or in reality from correcting itself, when prices and wages should have fallen further so all that money is propping up prices. Soon, especially now with QE3 in effect, prices will begin to rise. New money goes to the monied interests first. The government, Wall Street banks, etc. then it arrives on Main Street and in the general economy. Of course, if the Fed stops feeding money into the economy, the whole thing will collapse again. They can't possibly continue because if they do hyper-inflation will eventually set in. They are in a box that will eventually fold in on itself either way.

.

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There IS inflation! The whole premise here is wrong.

How much gas can a dollar buy compared to ten years ago?

How much food can a dollar buy compared to ten years ago?

How much college tuition can a dollar buy compared to ten years ago?

How much electricity can a dollar buy compared to ten years ago?

How much house?

How much dental care?

How much medical care?

They simply hide the inflation buy including cheap imports in the core CPI, and excluding things like gas and food.

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TimG, for the past four years or so, general inflation in Canada and the US has been non existent: true, gas is more expensive but then, TVs and computers are cheaper - overall, zero or close to zero. Inflation is non-existent. In general, prices are not changing.

Its more than just gas. Theres way more inflation then the current CPI suggests. And inflation is a personal phenomenon. If you spend a large ammount of money on things like TV's and computers then sure... youre purchasing power might be pretty stable. But if you spend all your money on a house, fuel, electricity, medical care, and dental care, then you are already getting hit by inflation HARD. 8% or there abouts. And thats why people feel so squeezed.

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There IS inflation! The whole premise here is wrong.

How much gas can a dollar buy compared to ten years ago?

How much food can a dollar buy compared to ten years ago?

How much college tuition can a dollar buy compared to ten years ago?

How much electricity can a dollar buy compared to ten years ago?

How much house?

How much dental care?

How much medical care?

They simply hide the inflation buy including cheap imports in the core CPI, and excluding things like gas and food.

I think what August and TimG are saying is that with all the monetary pumping being done by the Fed in the last four years there should be a very noticeable inflation rate bordering on, if not actual, hyper-inflation.

Checking back ten years ago is probably the best way of seeing inflation. I agree that the whole premise of there being zero inflation is wrong.

Those with COLA in their contracts don't notice inflation as much of a problem. They can maintain their lifestyle. Those on a fixed income will notice it.

The market is trying to move downward in a corrective direction. Government, which cannot withstand non-growth or a shrinking economy because of its built in budgetary expansion policies(mostly dealing with their own created inflation), will generally run a deficit in its never-shrinking budget during these periods and attempt to stimulate the economy with loose monetary policies.

In the current atmosphere of economic uncertainty people are choosing to try and save rather than spend and consume. Government is just trying to get them to spend and consume to grow the economy so it can maintain its revenue stream. Obama's solution to government's budget problems seems to be to tax the rich or redistribute wealth whatever way he can, creating even more economic uncertainty. Spending is the biggest problem of government.

Edited by Pliny
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I think what August and TimG are saying is that with all the monetary pumping being done by the Fed in the last four years there should be a very noticeable inflation rate bordering on, if not actual, hyper-inflation.

I dont see why there should be hyper inflation. The US is somewhat protected from inflation by global demand for the greenback, and a large share of its currency is not even in its own economy. Someone mentioned tarp as being a large injection of real money, but thats a drop in the bucket compared to the 16 TRILLION dollars that was distributed by the federal reserve to banks around the world.

You wont see hyper-inflation until/unless theres a significant trend away from holding greenbacks globally.

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It seems to me that the part where increasing money supply causes inflation is a result of increasing aggregate demand. But if all this money that's being created doesn't actually wind up in the hands of consumers, there's no increase in aggregate demand, and nothing to drive inflation.

So the relevant question to ask in trying to figure out why increasing the money supply hasn't caused much inflation is, who is holding this new money, and what are they doing with it?

-k

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It seems to me that the part where increasing money supply causes inflation is a result of increasing aggregate demand. But if all this money that's being created doesn't actually wind up in the hands of consumers, there's no increase in aggregate demand, and nothing to drive inflation.

So the relevant question to ask in trying to figure out why increasing the money supply hasn't caused much inflation is, who is holding this new money, and what are they doing with it?

-k

Precious metals, commodities for the time being. Some goes to emerging markets which is a far more efficient way of bettering their situation than govt foreign aid. Other than that it's pretty much a freeze given uncertain conditions in the macro-economy.

If there's one thing worse than oppressive govt regulations that go to far it's the threat of oppressive govt regulations that go to far.

In Canada we are seeing the effects of the increased money supply through sky high house prices, energy, food, etc.

Part of me used to smile when the USA announced QE1 and 2 because the price of commodities I sell took off. Just because Tvs and computers don't cost very mich anymore doesn't mean other things haven't increased. That along with a nation of 300 million people trying to square away their debt doesn't help inflation either. They're not using borrowed money to buy crap anymore, thheyre using their paychecks to pay off their debt.

To put it simply. The USA is hungover and the powers that be are trying to end the hangover by the "hair off the dog" method of providing more "alcohol" so that e party can get started again. Essentially, the powers that be want the American people to be on a nonstop bender than having a few social drinks.

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So the relevant question to ask in trying to figure out why increasing the money supply hasn't caused much inflation is, who is holding this new money, and what are they doing with it?
That is a question I would like the answer to as well. My guess is a lot of the money is sitting in the bank accounts of corporations. This is not necessarily a bad thing since the lack of inflation reduces the need for governments to engage in rapid budget cuts which can often make the problem worse. On the other hand, it leads others to believe that there is no need for austerity measures at all.
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So the relevant question to ask in trying to figure out why increasing the money supply hasn't caused much inflation is, who is holding this new money, and what are they doing with it?

Well first of all like I said before it HAS caused a lot of inflation, especially for lower and middle income households.

Having said that theres three main reasons why inflation does not change in lock step with the relationship between the size of the economy and the size of the money supply...

The first one has already been talked about... Not all national currency enters a national economy. It might get spent somewhere else, or it might get saved, or it might be used to pay down debt (in which case it ceases to exist).

The second is the way is the way that governments actually raise money. They definately create a lot of money through the factional reserve multiplier, and a bit at the mint, and bunch more buy authorizing the treasury to purchase securities. But they ALSO sell all kinds of different bills, notes and bonds. And unlike a bank loan, or QE... selling a bond does not directly create new money, but it is a "promise" to come up with dollars in the future so it ammounts to the same thing. But since each of those treasuries instruments matures over specific ammount of time (anywhere between 1 day and 50 years) you can see why that has a smoothing effect.

And the last one is the international banking system itself. Like I said before when they finally audited the federal reserve in the US they found out that they had transfered 16 trillion dollars to other banks around the world. The point being that money is getting whizzed around so fast inside the banking system and in such large ammounts, that its hard to tie a national currency to its economy anymore. Hell... its totally possibly that our government could grow the money supply by 20% in a single year but we would actually see DEFLATION if a whole bunch of money was spent somewhere else.

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While it is true a lot of American money travels internationally it will contribute to inflation wherever it is. If it is being saved it isn't circulating in the economy. If it is located in a foreign economy that economy will see inflation.

It is an increase in the money supply in the general economy that creates inflation which is, a general rise in the price level of an economy. The money has to be in the economy to get inflation. It doesn't create inflation parked in the bank or invested in savings bonds.

As dre points out there is indeed inflation occurring. Why it isn't occurring faster is because stimulus money is being parked in some degree but inflation is greater than it appears because with no consumer demand the general price level should be dropping and it isn't.

Who is holding the new money? The Chinese hold over a trillion in American debt, and look at the reserves of banks. Mitt Romney has a few million in Swiss bank accounts (ha,ha). Notice the rich just seem to be getting richer. CEOs with hundred million dollar salaries and severance packages. The money is trickling into Main Street but it may reach flood levels anytime because if anything inflation is a vortex that encourages spending now rather than later which explains the reasoning behind the "stimulus". It isn't working as well as expected because of uncertainty in the Obama administration, re taxation, healthcare costs, etc which is not conducive to economic growth. The two counter each other.

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  • 2 weeks later...
So the relevant question to ask in trying to figure out why increasing the money supply hasn't caused much inflation is, who is holding this new money, and what are they doing with it?

-k

This is the, uh, $64,000 question.

In short, since 2008, Americans are "deleveraging". They are paying debts and increasing bank balances. Some have even cut up their credit cards and are only using cash.

As John Maynard Keynes would say, many people have retreated into holding cash. And Bernanke has wisely made this new cash available to them.

Imagine if Bernanke, fearful of inflation, had not printed the new cash in 2008. It would have been 1929 redux.

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The modern Right seems to think that printing money is bad, and government debt is bad. And yet, sometimes it's not.

Edited by August1991
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The modern Right seems to think that printing money is bad, and government debt is bad. And yet, sometimes it's not.

Most economists think you are correct. Printing money stabilizes the economy and government debt is irrelevant.

I don't think economics is left or right. There are fundamentals to an economy that one way or another eventually correct themselves, and those fundamentals ignored or kept distorted by any government, left or right, will in due time collapse the economy. Our society is at the bread and circuses stage of its cycle. We can continue into the end cycle or re-incorporate those fundamentals to escape the vortex.

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Most economists think you are correct. Printing money stabilizes the economy and government debt is irrelevant.

I don't think economics is left or right. There are fundamentals to an economy that one way or another eventually correct themselves, and those fundamentals ignored or kept distorted by any government, left or right, will in due time collapse the economy. Our society is at the bread and circuses stage of its cycle. We can continue into the end cycle or re-incorporate those fundamentals to escape the vortex.

That remains to be seen. The debt/money system has proven way more resilient than any of its critics believed it would and theres a huge political commitment to it. Furthermore, nobody is going to see down and come up with any sort of planned transition. Nobody even has the power to change it. Its banks that control the global monetary system and they are absolutely thrilled with the status quo. When all is said and done, they will own every bit of money and real property on earth.

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That remains to be seen. The debt/money system has proven way more resilient than any of its critics believed it would and theres a huge political commitment to it. Furthermore, nobody is going to see down and come up with any sort of planned transition. Nobody even has the power to change it. Its banks that control the global monetary system and they are absolutely thrilled with the status quo. When all is said and done, they will own every bit of money and real property on earth.

History is just repeating itself. A fiat paper system with government owning the printing press will not last past one generation.

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