Wednesday, October 29, 2008

They never retire

In the last few days I have been browsing many UK newspapers, and I keep seeing quotes all over the place such as the following (I am sure you have seen them too):

"No serious economist is worried anymore about inflation."
"The problem is deflation, not inflation."
"We need to reflate, rather than worry about inflation."
This is despite growing inflation, and the Austrian analysis (which predicted this crash in detail), that if we keep going as we are, with ever-decreasing interest rates, increased government borrowing, and increased government spending on white elephant projects, then inflation or stagflation, or possibly hyper-inflation, is a dead certainty, even in the heart of a depression.

I'm going to nail my colours to this. Come back in three years time to make me eat my own hair if it ain't so. Though I am only an armchair economist, so what do I know?

What is a much more interesting question, however, is what all of these "serious" (i.e. Keynesian) economists will do, if they are wrong, and inflation becomes a real monstrous problem. Will they resign their fat lucrative positions within the heart of the exploitative class?

To ask the question is to know the answer, for we know exactly what they will do. They will invent a bodyguard of plausible excuses as to why they were right all along, and keep taking their salaries, thus proving Rothbard's Law that nobody ever retires. No matter how wrong.

Let the battle commence. Set your alarms for three years time.


Anonymous said...

Do you really think inflation is a threat? Most commenators seem to think not. Yes the money supply is being increased but isn't this being counteracted by the increasing reluctance of lenders to lend? In technical jargon I think this is a fall in the velocity of circulation. As long as this continues then there is no inflationary pressure is there?

Could you briefly sumnmarise what you think are the discrete stages we will go thru to take us from this sort of deflationary position (by which I mean what I have described above) to one of inflation? By all means refer me to a book but I'd find it useful to know what the main bullet points are and read any text you refer to in that context.

Obviously leave it if you are too busy.

Jack Maturin said...

Anonymous, you post a very interesting comment, which deserves a decent answer. Essentially the problem is one of non-productive consumption. What governments are doing at the moment is creating money out of thin air and using this counterfeit money to prop up their own spending. This means that they are consuming without producing. This non-productive consumption, paid for from money out of thin air, is what is going to increase the length of this recession. The more they do it, the longer will be the recession. But what about inflation? Unfortunately, I can't get to any kind of answer in anything shorter than that below. But it should only take 5 minutes or so to read. I don't think anything like this can be resolved to a few bullet points, but here goes.

The essential problem is that it is not price inflation/deflation which is the real problem. Prices of things go up and down all of the time, and the market copes. The problem is one of making bad economic decisions, which waste scarce resources at worst, or make use of them inefficiently, at best. Increasing money inflation is the root cause of people making bad economic decisions, because their judgement is so thoroughly clouded due to an inability to weigh things up accurately, because of the continually changing value of the money in which they are doing their calculations.

Normally in the productive market, a baker produces loaves, and then sells them for money. With this money he then buys flour from the miller, sweets from the sweetshop owner, etc, to continue this cycle of productive consumption.

To keep this answer short, we need to do a little role play. Imagine a serene city on the isolated world of Altaria where everybody is producing and consuming in harmony, like this baker, using money as a medium of exchange. What is the money? Well, obviously I would prefer gold, but I need a paper money to work through the second part of this story. So let's imagine that when each Altairian is born, a shrink-wrapped box of monopoly appears through a wormhole, by their mother's bedside. Each Altairian baby is given this as a birth day gift, and for the rest of their life they are allowed to use the paper money within to act as a medium of exchange.

If we then define inflation as the increase in the money supply, we have a general background inflation rate of 1 box of monopoly paper money, per new Altairian coming into the world. Obviously, when each Altairian dies, the money they acquired on birth still stays in circulation, but the continual increase of production efficiency in this purely anarcho-capitalist society prevents this relatively tiny monetary inflation being any sort of problem.

Yes, we've had to jump through a few hoops to get to a paper money supply, when a commodity money would be much preferable, but just to finish this situation off, Altairians are brought up to consider the copying of this worthless paper monopoly money, the most mortal of sins.

And then one day an evil man is born. Let's call him Gordon. He copies money in his basement, late at night, and then spends it on consumption items. He is not producing. Fortunately, the Altairian economy is able to carry Gordon along in the same way that a rhinocerous can carry one flea.

Some of the cleverer people also spot that this Gordon is always generous, always smiling, and has lots of friends. Nobody can quite tell what it is he is doing for society, but whatever it is must be useful because he seems to be generating an awful lot of cash. (Alas, the Altairians are a bit stupid here - after centuries of nobody ever counterfeiting, they have long since lost their distrust of suddenly wealthy people).

One night Gordon tells a close friend, George, of the dark secret. Unfortunately, George does not renounce Gordon and broadcast his criminality to the world. Instead, he shakes off the Altairian cultural revulsion of crooks and starts copying Gordon's habit of copying monopoly money in his basement. Soon a whole network of Gordons and Georges are doing this. They soon become the wealthiest and most powerful group of Altairians. They also hold secret meetings to coordinate their activities. Soon, this group of counterfeiters is swamping the Altairian economy with their non-productive consumption. The rhinocerous is now carrying a million fleas.

The productively consuming Altairians also need to solve a growing mystery. Although they seem to be much wealthier than before, because of all this extra money, their money doesn't seem to stretch so far when actually buying goods. With their "extra" wealth, at first, they invested in more luxury goods production, such as tulip bulbs production, as they thought the market would bear it. People snapped up these goods, especially people like George and Gordon, but then the luxury goods markets started failing, because the price of basic commodities such as loaves and sweets, also started shooting up. Fortunately, there were enough Georges and Gordons around, at first, to keep buying the luxuries, so things were okay for a few years.

But now, just the basics to keep you alive take up 100% of most people's ever-growing incomes, so the investment in luxury goods production is not being sustained, even by all the Georges and Gordons. That is, for the first time in Altairian history, we experience an economic crash. Most people working in the luxury goods markets are out of a job with no income, pushing down the wages of everybody else as they compete for work in the more basic goods markets, and everybody is feeling the pinch. Prices collapse and deflate. Everyone hoards what they can, because the general feeling is that the Altairians are being visited upon by the wrath of God, and nobody knows what to expect next.

The luxury goods markets slow down rapidly. Many are liquidated and wiped out. That is, all of the plant and machinery is cannibalized and used to supplement the basic goods industries. Yes, there is a huge amount of waste in this process, many people are broken financially, and the economy has gone backwards in an enormous way to pay for this waste, but once most of the luxury goods factories have been liquidated, the economy begins to grow again. Slowly at first, but gradually with more pace. Yes, prices are much higher now than they were formerly, because of the huge number of extra monopoly money notes floating about, but things get sorted out. At least partially. However, they don't get fully sorted out because the Altairians listen to an idea from George and Gordon.

They announce to the world, just after the crash, that they will try to maintain some of the markets in luxury goods by increasing their spending in these areas. Everyone breathes a sigh of relief. So the Altairians do not fully liquidate the luxury goods markets, but keep a small remnant going funded by the spending of George and Gordon. Unfortunately, because this is entirely funded by non-productive consumption, fed by basement counterfeiting. This continual drain acts as a brake on economic recovery, and it takes years for the Altairians to get over it, because they encounter a phenomenon which one of them brands as stagflation.

After an initial price crash, when people rein in their spending horns, eventually a basic minimum level of spending is reached. This is the minimum level of spending at which people need to consume in order to stay alive. Yes, it's much lower than previously in the boom times, but it is a level at which the market cannot drop without people dying off in droves. Unfortunately, because of George and Gordon continually printing extra money through this period, basic commodities start to rise in price even though the economy is on the floor. Yes, it is not hyper-inflation, because George and Gordon and careful not to overdo it, but as long as they keep their printing presses running, and a remnant of the wasteful luxury goods markets keep going, a constant level of background price inflation keeps surprising everyone, leading to rising unemployment as workers demand pay rises to match this inflation, thereby leading them to get sacked because profits keep being destroyed by the ongoing waste of George and Gordon. We have reached the stagflation event horizon.

A few bullet points:

=> Inflation should be defined as monetary inflation, not price inflation

=> Even if we use price inflation as the yardstick, monetary pumping by central bank counterfeiting entities will still produce uncomfortable price inflation figures (a.k.a. stagflation)

=> How? By continually fooling people into continuing to make bad economic decisions

=> These bad economic decisions are wasteful of scarce resources, therefore the economy does not grow

=> The economy reaches a low stable point, due to monetary pumping and the problem of non-productive consumption

=> At this point price inflation starts increasing, because monetary pumping is still going on

=> This process will continue until enough non-productive consumption, caused by monetary pumping, is removed to enable the economy to grow (eg. the rise of Margaret Thatcher, Ronald Reagan, et al, at the end of the 1970s stagflation period).

A series of short articles and books on the subject:

Do we need more of Keynes now? =>

What You Should Know About Inflation =>

Inflation Deflation Red-flation Blue-flation = >

Defining Inflation =>

The Specter of Stagflation =>

Every other article written by Frank Shostak =>

Man, Economy, and State (Rothbard) =>

Anonymous said...

This is briliiant. Thank you very much. Now I have a bit of reading to do ....

Jack Maturin said...

For a much better description of the problem, you might also want to try the first few sections of Uncle Murray's "America's Great Depression". This is perhaps the most succinct description ever written of the Austrian business cycle theory, with answers provided to all of the usual Keynesian quesions. The PDF is here: