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In Fed and Out, Many Now Think Inflation Helps

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Re: In Fed and Out, Many Now Think Inflation Helps

#201

Post by Mikeb85 »

nostrademons wrote: post #137
lsc wrote: post #94

Earlier quoted context omitted.

Why is this down-voted? Higher inflation has historically been considered a populist idea. The idea being that the poor had fixed-interest rate debt, and if you have fixed-interest debt, inflation is very good for you (and deflation is brutal) I mean, there are counter arguments, but the idea that inflation favors the poor has been the standard, conventional wisdom for as long as I am aware, and this discussion has b…

It's the standard, conventional wisdom, but it also misses some subtlety that Warren Buffett's tried to bring up a few time in Berkshire Hathaway annual reports: Inflation isn't distributed equally. When the money supply rises, firms in strong bargaining positions with few substitutes are in the best place to raise prices, because their customers can't readily switch to competitors. So basically, Google will come out…

> So it's only partially true that the poor benefit from inflation. They'll benefit from cheaper debt payments and possibly higher employment. But they're unlikely to see much of the added money supply in wages, and they're going to take it in the chin on prices.

Maybe in the short run, but over the long-run historical numbers don't support this assertion. Even at the lower income levels wages have historically tracked inflation, or even slightly outpaced it...

Economics is an inexact science (since markets are such fluid, dynamic things - and I don't mean stock markets), and it never assumes that individuals and firms will always make the correct decisions to take advantage of economic policy. However it is able to measure the overall benefits and downsides that economic policy has on a population at large, over the long run...

Re: In Fed and Out, Many Now Think Inflation Helps

#202

Post by mistermann »

bermanoid wrote: post #161
mistermann wrote: post #98

Earlier quoted context omitted.

You can make models all day, and I think it should be done in the pursuit of knowledge, but to imply these models can accurately predict behavior is a bit naive IMHO. Economics in a globally integrated economy are of similar complexity as weather, if not worse. Keynesians have been driving the bus for quite some time now, if they have it all figured out as many seem to imply, why do so many things (deficits and debt…

Austrians, for the most part, make no testable predictions. They essentially reject math as a tool, and insist that unless you implement their preferred systems 100%, then they won't work at all, and then explain all observed failures by claiming that it would have worked better if things had been pushed further. Even if they're on to something, they don't give the unconvinced very much to work with. Most of their ar…

I'd suggest any unwillingness to make specific mathematically testable predictions is correct acknowledgement that the field is too complicated to do so. As I've said, you can make a model and tweak it by picking and choosing inputs until you can make it successfully back test with historic data, but any comprehensive correctness is likely tenuous if not specious.

Having a complex model that appears correct but is actually wrong is quite dangerous. Observe long term charts (debt, debt to gdp, etc) in various countries throughout the world. We're told by economists and the federal reserve in very serious tones using large words and complex models that everything is all figured out, but the charts continue to get worse. Even during the glorious Clinton years of supposed robust surpluses, debt increased every year. Hindsight being 20/20, we now know we were just in a bubble.

Austrians speak in broad principles rather than specific mathematical formulas, and in my opinion, their broad (vague) predictions of what will happen if you do are far closer to honest reality than any other camp.

Re: In Fed and Out, Many Now Think Inflation Helps

#203

Post by Mikeb85 »

jayfuerstenberg wrote: post #84
Mikeb85 wrote: post #69

Earlier quoted context omitted.

And oil prices have gone up just as much. Once upon a time oil was a dollar a barrel... Come on, inflation increases the value of all commodities, gold, silver, oil, corn, wheat, etc... It's not like gold is special.

Gold is special. It's easier to carry than a barrel of oil, and stays fresher longer than a bunch of corn or wheat. That's why gold tends to get used as money over and over in history. But you're right about one thing... inflation increases the value of real assets. Or to put it better, the value of real things doesn't change (a loaf of bread is a loaf of bread) but the value of the dollar weakens in regards to it wi…

> [EDIT: I should mention that inflation isn't the sole reason it takes more money to buy gold than 20 years ago. There are of course some other factors.]

Alot of other factors. Like the fact that gold is widely used in electronic circuits, and not just for bling now. This of course will increase demand for it, beyond its use as a 'hard' currency...

>Bringing us back to the beginning of the argument that inflation steals the purchasing power of people.

It does, but wages have historically followed inflation, as historic data shows, leaving the average person no worse off (unless their only asset is a pile of cash under their mattress...).

Re: In Fed and Out, Many Now Think Inflation Helps

#204

Post by eli_gottlieb »

jswinghammer wrote: post #198
eli_gottlieb wrote: post #194

Earlier quoted context omitted.

Which is a problem of politics, not economics. There's a broad agreement that the bank bailouts should not have happened across most of the actual political spectrum. Only the vulgar neoliberals serving the interests of the capitalist class in government actually want to print money as bailout loans to banks, and yet Austrian "economists" and their Believers pretend that's the only alternative to a deflationary gold…

Evidence suggests that it they are correct but the part you are missing is that the whole point of the system is to bail out the large banks when their bets go bad. All in the name of the people. Whoever they ever are.

Which system?

Re: In Fed and Out, Many Now Think Inflation Helps

#205

Post by eli_gottlieb »

jswinghammer wrote: post #197
eli_gottlieb wrote: post #191

Earlier quoted context omitted.

>In a free market prices generally fall. If we take the far-right Austrian definition of "free market" (meaning: a market in which the only functions of government are property and contract enforcement) then we have zero empirical evidence for much anything about free markets. They've never existed. Further, we don't even have solid evidence that hypothetical markets of that kind would be Pareto-optimal. They serve l…

19th century America is close enough and the results astounded the entire world.

19th century America was a rabid, rampant employer of slavery, indentured servitude, and debt peonage. And when it comes to it, 20th century America was far more impressive.

Re: In Fed and Out, Many Now Think Inflation Helps

#206

Post by ra »

nhaehnle wrote: post #170
ra wrote: post #59

Earlier quoted context omitted.

My (layman's) understanding of it is that central banks seek to keep inflation within a target range; in Australia this is between 2 and 3 percent [1]. The primary tool to manage inflation is interest rates, however interest rate movements also have other effects, positive and negative, so it's not as simple as turning on a tap. It's important not to let inflation get too high because that makes new investment unattr…

For your last point, I do wonder. How does high inflation make investment unattractive? It should do the opposite, since holding cash is very unattractive under high inflation. As to the cost of living going up: in nominal terms, sure. But it depends on the type of inflation. Usually wages grow to keep up with inflation, so in the end, it's a wash. I'm sure there are costs associated with extremely high inflation, e.…

Well, simply put, we don't live in a single economic regime.

If inflation is much higher in one country than another, then exports from the country with lower inflation will be more competitive on the global market.

Inflation also alters consumer behaviour.

If inflation is very high people tend to buy goods way in advance for fear of further price increases. This "bringing forward" of consumer spending means less will be consumed in the months ahead.

The general uncertainty created by very high inflation undermines business confidence and reduces investment. Basically, you're money is better off in another country where inflation is lower.

Re: In Fed and Out, Many Now Think Inflation Helps

#207

Post by enoch_r »

7Figures2Commas wrote: post #100
enoch_r wrote: post #53

Absolutely no discussion of inflation is complete without recognition of the fact that inflation and inflation expectations are at historically low levels [1] right now. Economists aren't arguing that we should inflate our way out of debt--they are arguing that we should return to the historical norm. Of course, it's possible that these economists are secretly just pushing inflation as the "hidden tax" we're all up i…

Here's a question: how many "professional" economists sounded the alarm about the last bubble?

Economics is not about predicting the movements of asset prices. In fact, the unpredictability of asset prices is one of the more fundamental findings of economics. Criticizing economics for not identifying a bubble is a little like complaining that physicists haven't built us a faster-than-light spaceship.

Re: In Fed and Out, Many Now Think Inflation Helps

#208

Post by kriro »

cotsuka wrote: post #60
enoch_r wrote: post #53

Absolutely no discussion of inflation is complete without recognition of the fact that inflation and inflation expectations are at historically low levels [1] right now. Economists aren't arguing that we should inflate our way out of debt--they are arguing that we should return to the historical norm. Of course, it's possible that these economists are secretly just pushing inflation as the "hidden tax" we're all up i…

Austrian school not holding much weight with academics is like wondering why creationism doesn't hold much weight with academics. Lots of things can be explained with creationism, but it doesn't mean it's right. Many Austrian economists rail against the use of quantitative models and such. But without them, how can you measure the efficacy of your policies? Faith that the policy works... But most academics like to be…

Austrians distinguish between theory and "history" and Hayek has argued that you can at best make "trend predictions" due to the uncertainty of the world.

I do not understand why there seem to be no Austrian quantitative models and the like as part of the "history" (bad name as it includes both application of theory towards historical periods and predictions). Predicting the future is an entrepreneurial act in the Austrian sense and if the Austrian model is good/better one would expect better predictions from someone working from these foundations.

I agree that there's quite a few laymen and not all that many pure Austrian theorists (and the few that exist seem to be working in management science and the like not in economics).

I'm not sure what defines a proper science in the science theoretical sense these days but if you take something like Lakatos (which is basically what I'm roughly comfortable with don't know about newer developments) I'm not sure mainstream and Austrian economics would differ all that much (probably both non-science by his criteria)

The most tilting thing about Austrians in general (and I'd certainly say I sympathize with their core ideas alas I don't have enough time to investigate properly) is that they attack "mainstream economics" based on a view that is pretty far removed from current mainstream economics. Most are stuck at thinking "ZOMG Keynes" at least I haven't met all that many that knew what a DSGE model is for example.

Re: In Fed and Out, Many Now Think Inflation Helps

#209

Post by mbesto »

eli_gottlieb wrote: post #184
mbesto wrote: post #183

Earlier quoted context omitted.

> When trained and educated economists think something is bullshit economics, we should consider it to probably be bullshit. On the other hand, well-trained and educated economists could perhaps be incentivized to call something bullshit for reasons outside of academia. Like let's say, hmmm, I don't know, for personal gain?

Let's imagine what happens in a world where Austrian Economics is true, but economists are lying to the rest of us for personal gain. First prediction: the economists will tell us that Austrian economics is wrong, but then use the Austrian theories they secretly know are actually true to invest their own assets. Anyone got an economist's portfolio to look at?

http://en.wikipedia.org/wiki/Glenn_Hubbard_(economist)#Insid...

http://www.youtube.com/watch?v=CaXNqGgIc-g

It's also worth noting that economics is arguably a pseudo-science, as the theories themselves cannot be reproduced independently by external parties. So it's really hard to argue whether Austrian economics is "right" or "wrong".

Re: In Fed and Out, Many Now Think Inflation Helps

#210

Post by nhaehnle »

ra wrote: post #206
nhaehnle wrote: post #170

Earlier quoted context omitted.

For your last point, I do wonder. How does high inflation make investment unattractive? It should do the opposite, since holding cash is very unattractive under high inflation. As to the cost of living going up: in nominal terms, sure. But it depends on the type of inflation. Usually wages grow to keep up with inflation, so in the end, it's a wash. I'm sure there are costs associated with extremely high inflation, e.…

Well, simply put, we don't live in a single economic regime. If inflation is much higher in one country than another, then exports from the country with lower inflation will be more competitive on the global market. Inflation also alters consumer behaviour. If inflation is very high people tend to buy goods way in advance for fear of further price increases. This "bringing forward" of consumer spending means less wil…

If inflation is much higher in one country than another, then exports from the country with lower inflation will be more competitive on the global market.

Depends on what the inflation actually does. For global trade, it's only relative prices that matter. If relative prices did not change in the inflation, the exchange rate would adjust and that's all that would happen. This is because exchange markets react much faster (orders of magnitude) than export/import markets.

If the inflation reduces the real wages of workers in the country, then high inflation actually means that the country's exports will become more competitive. (But the workers in that country might not like it... so much for the benefits of "competitiveness").

As to the question about international investments, let me put the caveat that most of what people talk in that arena is nonsense. That said, even accepting some of the rather absurd premises: it is still a question of relative prices. If you have 0% inflation domestically, but also 0% interest, then perhaps you may want to put that money in an account abroad where you have 5% inflation but get 8% interest.

Again, it is not the high inflation itself that makes investment unattractive. Volatile inflation is another beast, but stable and high inflation has so far not been shown to be a problem.

Also note that in your last paragraph, you simply rephrased your original claim without giving an argument.

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