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Source link: http://archive.mises.org/16817/the-great-myth-of-the-inflation-cure/

The Great Myth of the Inflation Cure

May 6, 2011 by

Chicago economics professor Casey B. Mulligan believes what the economy needs right now is a little inflation in all the right places to make things better. FULL ARTICLE by Doug French

{ 14 comments }

Gilbert W. Chapman May 6, 2011 at 10:20 am

Thank you for a really excellent essay, Mr. French.

You’ve redeemed yourself (in my eyes) after your piece on the “Atlas Shrugged” movie ! ! !

Walt D. May 6, 2011 at 11:15 am

Perhaps we need to give President Obama a Mulligan? :-) (Golf Joke)

Shay May 6, 2011 at 12:28 pm

The Chicago economist then writes that the Federal Reserve is charged with limiting inflation, “which it can do over the long run by limiting the supply of money and similar assets in the hands of the public.”

The very term “supply of money” he uses is misleading, as money isn’t a consumable. Cutting off this “supply” wouldn’t cause people to run out of money.

Stephen May 6, 2011 at 1:49 pm

This argument always puzzles me: “Mulligan writes that people complain about rising prices, but forget that their wages are going up at the same time, so consumer purchasing power is unharmed.” If it were true that new money gets distributed evenly, what would be the point of inflating the money supply?

Daniel May 8, 2011 at 9:13 am

I find this amusing. Marxists tend to be bedfellows when it comes to using inflation to cheat the working man while attempting to fool him that his wages are higher, which is really funny because that’s what they accuse the “capitalists” of doing.

Gilbert W. Chapman May 6, 2011 at 2:35 pm

Stephen & Shay ~

At one time, back in the seventies, I had the same question(s) that you have. To paraphrase what F.A. Hayek said to me:

Long term deflation will probably never happen because even though fewer dollars buy the same amount of goods, the masses will never accept it because, “They will feel poorer.”

On the other hand, even when more dollars buy less, the public will feel richer because they have a greater amount of money in their pocket.

Unfortunately governments don’t look at it that way, or in any sane way. By increasing the money supply, initially people are unaffected, until inflation starts to really take off, and their wages (which are always the last thing to rise) fall behind. Perhaps an example is in order.

Let’s say you earn $100.00 per week, and bread goes from $1.00 per loaf up to $1.05 per loaf. because the supply of money has increased, and more dollars are chasing the same amount of goods. For the most part, that increase of five cents per loaf won’t hurt you much. But as time goes by, that $1.05 loaf of bread will go to $1.25 per loaf, as well as the prices on a number of other goods you buy, i.e. gasoline. Meanwhile, you are still earning $100.00 per week, and you are starting to hurt because wages increases always lag.

An excellent example of this phenomena was the housing bubble. While wages remained almost stagnant, housing prices skyrocketed because the government insisted that everyone should own a house, and for awhile (particularly in California) houses weren’t being built fast enough (because of absurd environmental and zoning regulations. Banks, because of government regulations, loaned mortgage money with virtually no down payment, and thereby increased, almost overnight, the demand for single family homes, causing prices to escalate at an unsustainable rate. For years, house prices in most areas went up by 3 or 4 per cent. Then, almost overnight, housing prices went up a 10 to 25 percent rate, with no increases in wages for the ‘little people’.

Now I know my explanation may not be perfect, but I suspect you guys will get my point.

But . . . have no fear . . . the rise in the price of gold from from $300 per ounce to $1,500 during the past few years indicates a compounding annual rate of nearly 12%. If, in fact, gold runs the course as housing did, we have a bubble that will eventually pop. If in fact the idiots in Washington, D.C. have installed an inflationary spiral, then those who feel gold will go to $5,000+++ will be rewarded.

As the philosopher, Albert Camus said, “We live in an absurd world.”

HL May 6, 2011 at 3:10 pm

One gets the impression that in Mulligan’s ivory-tower world, Ben Bernanke creates money like Picasso painted a picture. After careful contemplation, staring at the canvass (economy), Ben dabs his brush into his palette, and then, calmly and carefully, applies the proper color and amount of paint (money), a gentle stroke, in just the right spot.

You nailed it. Thanks, Mr. French.

Bogart May 6, 2011 at 4:31 pm

Absent the work of Rothbard, Hayek and Mises on malinvestments, these “economists” fail in that they are working with the seen: Higher Prices, Higher Wages, Higher Government Spending, Lower Savings and missing the unseen effects: Indirect Theft of Wealth and Savings through Reduced Purchasing Power, Deploying Savings to Riskier Assets, Increased Bankruptcies, Increased Foreclosures, etc.

And the worst effect is the Indirect Theft of Wealth. This amounts to a sick tax on the poor who spend higher percentages of their incomes on inflation sensitive things like fuel, food and clothing. Similarly this theft reduces the value of savings. Without savings all businesses suffer. This is the reason why lower money values does not seem to stem the increases in imports.

But the point I hate most is the authors statement that because Social Security increases with wages, well old folks on fixed incomes are fine? Older folks are the ones with the most savings in the safest assets. Ergo these are the people who get robbed the most, or worse these folks have to invest these savings in riskier assets to keep the current levels of income.

F. Beard May 7, 2011 at 4:47 pm

What the economy needs is a bailout of the entire US population with debt-free fiat along with abolition of the government enforced counterfeiting cartel, the banking system.

John May 7, 2011 at 7:55 pm

“Students learn from the likes of University of Chicago economics professor Casey B. Mulligan, who believes what the economy needs right now is a little inflation in all the right places to make things better”

And that’s endemic in today’s acedemia. No wonder our policies are so screwed

Saildog May 8, 2011 at 3:09 am

We are all agreed that inflation, the outward sign of lax money policy is a bad thing. But what happens if your economy has been run so badly that you are broke? The US faces essentially 2 choices: It can default or it can inflate. The normal response to too much debt is to stop borrowing and to pay it back. But that option isn’t open to the US. Being broke means not being able to pay your debts and that is the situation the US is in now. Default or inflate? If that was the only choice and I was BB I would inflate.

nate-m May 8, 2011 at 4:56 am

The US faces essentially 2 choices: It can default or it can inflate.

Bankruptcy would be better then inflate. Both ways lead to economic disaster, but the first means that credit dives immediately so that the borrowing will stop and they will be forced to actually do a budget. The inflation just means that the cost interest rates for new borrowing will adjust to take inflation ito account and our new debt will just be as expensive as always.

If that was the only choice and I was BB I would inflate.

All inflation is is just a sneaky tax. They dilute the value of money to make interest cheaper and while that is going on value is being sucked out of the economy.

Why is one of your options not to just raise the taxes on every American by 20%? The damage it does is essentially the same.

F. Beard May 8, 2011 at 3:49 am

The US faces essentially 2 choices: It can default or it can inflate. Saildog

There is a third option based on justice:

1) Set reserve requirements to 100% to put the banks out of the counterfeiting business. This by itself would be massively deflationary as existing loans were paid off but continue to 2) please:

2) Send every American adult, savers and borrowers alike, a large and equal check of debt-free full legal tender fiat, United States Notes.

The government backed banking cartel has victimized the entire population with phony money (so-called “credit”). The entire population should thus be bailed out.

economics9698 May 8, 2011 at 1:01 pm

Typical economic crap.

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