Sunday, December 19, 2010

Santa Claus and money share a common trait...

They aren't real.

Yesterday I mentioned the fact that money is toilet paper with pictures of dead people on it. Santa Claus is fiction. So is the notion that money has actual value. No. Money has no intrinsic value other than as butt paper. What has real value is what you *buy* with money -- the food and housing and clothing and transportation and other nice things like this computer that make your life better. Which is why money which is stuffing your mattress essentially doesn’t exist as far as the economy is concerned — if it’s not being used to buy something, it’s not doing what money was designed to do, which was to allow an economy to operate in a more efficient way than barter (where the chain of barters needed to, say, build a PC, would be so outrageously long as to be basically impossible).

So anyhow, as I've pointed out, we're in monetary deflation right now -- fewer dollars circulating in the economy. And I’ll tell you a little secret: Without inflation, CAPITALISM DOES NOT WORK, because money turns into mattress stuffing and the economy is starved of the tokens (“money”) it needs to do the trades needed to build stuff.. And right now, capitalism is the most efficient way we know of to create wealth (that is, actual *stuff*, like cars and solar panels and power windmills and such, not toilet paper with pictures of dead people), and this wealth (*stuff*) makes our life a whole lot easier than it was 100 years ago.

So anyhow, inflation says, “if you keep this money under your mattress, it will lose value.” So people don’t. They invest it in stuff, or in businesses to make stuff, or otherwise use it for economic activity that in general makes life a lot more pleasant for us than it was for our great-great-great grandparents. So now you know why inflation is necessary for capitalism to work, and why, if the Federal Reserve was to purchase the entire next issue of U.S. Treasuries in order to print money, I wouldn't have the slightest qualm about it. The entire U.S. deficit is only 6% of GDP, so if *every* Treasury over the next year was purchased by the Federal Reserve, we'd have 6% inflation. We've had 6% inflation in the past. It didn't destroy the nation. And besides, nobody is suggesting that the Fed monetize the *entire* Federal debt, just that it's possible if necessary. "Deficit hawks" are dodo birds. Just sayin'.

- Badtux the Capitalist Penguin


  1. I'm taking a hard look at deficits and inflation. I had a post up, but one of my charts had a pretty serious flaw, so I took it down when I discovered it. It's late and I'm too tired to get it back up tonight.

    Anyway, I'd be very surprised if a deficit at 6% of GDP led to even 3% inflation - and that with a delay of about 3 years. Current year effect is likely to be nil. Might not lead to any inflation at all, even with a lag, but that statement is speculative.

    From the 50's to the 80's, deficits led to inflation 3 yrs later at about 1.7% of CPI for each 1% of deficit/GDP, but with lots of data scatter, and lousy correlation. From '81 through 2006, the resulting inflation boost has been about 0.16% CPI increase per 1% of deficit, 3 yrs later.

    Obviously, I can't do a three year lag for years after 2006, but in '09 there was a big deficit and negative CPI, which sort of screws the pattern.

    Now we are in actual or near deflation, and the M1 multiplier is DOA. I think we are in a realm where deficits might not lead to any inflation.

    The map of the economy has different regions, each having different characteristics that require different approaches (a la Keynes, frex.) I'm convinced that before and after about 1980, the post WW II era is divided into two distinctly different realms: an expansion phase followed by the great stagnation. M1 multiplier has been sagging since the mid 80's, before it fell down in '08 and couldn't get up.

    The problem with libertarians and Austerians is not that they are absolutely wrong, but they are right within a certain realm, and they let that make them think they are right in all realms - because they refuse to recognize different realms.

    Hence, they end up exploring the jungle in parkas and snow shoes. They forget that Keynes didn't overturn classical economics (his big mistake, IMHO) he expanded it, the way Einstein expanded Newonian mechanics.

    Sorry for rambling on so. it's late, I'm tired, and this is a bit of an epiphany.


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  3. Indeed, we're in an output gap situation right now, so price inflation caused by printing money simply isn't going to happen. If more money actually starts circulating (as vs. disappearing under mattresses), what's going to happen is that it's going to buy product created by currently-unutilized production capacity, and increase production. You can't have price inflation until you take the slack out of the economy i.e. are at full employment again.

    Keynes 101. Which applies *only* when there are slack resources in the economy. Once you hit structural unemployment (i.e., unemployment caused by normal things like your employer going out of business, or because of lack of skills), *then* you're in Austrian territory. But we're not there right now.

    BTW, your insight about Austrians taking something that works for one specific case and believing it applies for all cases is one that I've made before. It's too late at night for me to remember where I did so, though...

  4. Bill Vickrey's Fallacy#4 of 15:
    Inflation is called the "cruelest tax." The perception seems to be that if only prices would stop rising, one's income would go further, disregarding the consequences for income.

    Current reality: The tax element in anticipated inflation in terms of gain to the government and loss to the holders of currency and government securities, is limited to the reduction in the value in real terms of non-interest-bearing currency, (equivalent to the increase in the interest rate saving on the no-interest loan, as compared to what it would have been with no inflation), plus the gain from the increment of inflation over what was anticipated at the time the interest rate on the outstanding debt was established. On the other hand, a reduction in the rate of inflation below that previously anticipated would result in a windfall subsidy to holders of long-term government debt and a corresponding increase in the real impact of the debt on the fisc.

    In previous regimes where regulations forbade the crediting of interest on demand deposits, the seigniorage profit on these balances, reflecting the loss to depositors in purchasing power, that would be enhanced by inflation would accrue to banks, with competition inducing some pass-through to customers in terms of uncharged-for services. In an economy where most transactions are in terms of credit card and bank accounts with respect to which interest may be charged or credited, the burden will be trivial for most individuals, limited to loss of interest on currency outstanding. Most of the gain to the government will be derived from those using large quantities of currency for tax evasion or the carrying on of illicit activity. plus burdens on those few who keep cash under the mattress of in cookie jars.

    The main difficulty with inflation, indeed, is not with the effects of inflation itself, but the unemployment produced by inappropriate attempts to control the inflation. Actually, unanticipated acceleration of inflation can reduce the real deficit relative to the nominal deficit by reducing the real value of the outstanding long-term debt. If a policy of limiting the nominal budget deficit is persisted in, this is likely to result in continued excessive unemployment due to reduction in effective demand. The answer is not to decrease the nominal deficit to check inflation by increased unemployment, but rather to increase the nominal deficit to maintain the real deficit, controlling inflation, if necessary, by direct means that do not involve increased unemployment.

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