Two recent CNBC articles by John Carney (Errors of Inflation Hawks, Part II and The Errors of Inflation Hawks, Part III) pay significant attention to a recent Libertarian Papers article by Vijay Boyapati, “Why Credit Deflation Is More Likely than Mass Inflation: An Austrian Overview of the Inflation Versus Deflation Debate.” (FYI: Vijay’s article is also included in the print and eBook versions of the journal, in Vol. 2, Part 2. For a recent criticism of Boyapati, see the just-published Libertarian Papers article, “The Causes of Price Inflation & Deflation: Fundamental Economic Principles the Deflationists Have Ignored.”)
Carney writes:
There’s a lot of history to back up the inflation hawks’ argument that the federal government’s rapidly rising debt level will in lead to hyperinflation. But—ahem—it’s different this time.
In many of the historical instances of runaway inflation, monetary policy was controlled by politicians. They were able to accomplish political goals—monetizing debt, transferring wealth from savers—by politically manipulating monetary policy.
An important article by Vijay Boyapati published in Libertarian Papers last year, however, argues that things have changed. The politicians no longer control monetary policy—the bankers do.
Boyapati is not some crony for the Federal Reserve. He is a former Google engineer who started Operation Live Free or Die in 2007, a grassroots organization to help Ron Paul’s 2008 presidential campaign.
Since 2009 he has devoted himself to studying the Austrian School of Economics.
Here’s how he explains the difference in the monetary policy favored by bankers and that favored by politicians.
The key difference between the motivation of the banking class and the political class, which is hinted at by Rothbard, is that the former prefers a monetary policy that allows them to profit from the economic activity of the population in a subtle and insidious manner. A policy of open inflation conducted by the political class is the path to hyperinflation, the breakdown of the division of labor, and the destruction of the monetary system itself.
Unlike the political class, the banking class is savvy enough to recognize policies that will lead to mass inflation and the death of the monetary system from which it parasitically profits.
In the paper, which you can read in full here, he explains the result of this difference.
While the Federal Reserve has the theoretical power to force the resumption in credit expansion by monetizing enough public debt that the losses from the housing bust were wiped away, it is unlikely to do so. The Fed was created for the benefit of the banking class and while it remains under the control of that class it will not pursue a policy that would lead to a breakdown in the monetary system from which the banking class profits.
However, the Fed is also unlikely to allow an untrammeled deflation to run its full course, given the risk of political unrest that might arise. Therefore, the Federal Reserve’s most likely course of action is to keep the mortgage market, in which most of the losses are concentrated, in a sort of stasis, where losses are acknowledged slowly over time. Such a policy, which might well be called “controlled deflation,” would lead to a prolonged period of high unemployment and slow growth, as capital was only slowly reallocated to satisfy consumer preferences. Further, the insufficient or barely sufficient creation of new credit to make up for debt paid down, or defaulted on, would cause a low growth in aggregate prices, which might occasionally become negative. Not until the losses of the housing boom are fully cleared—which might takes years under a policy of controlled deflation—should we expect an inflationary credit expansion and a significant rise in prices.
In other words, people betting that we’re in for hyperinflation—or even just non-hyper, but elevated inflation—are probably wrong. They just don’t understand the power dynamics behind our monetary regime.
This coverage, incidentally, helps to show some advantages of the Libertarian Papers model–online, streamlined, faster to publication, widely and freely accessible. Boyapati submitted his article to me for consideration just a few weeks before we published it in December–because of our approach we were able to have it peer reviewed and ready for publication in a very short time, which was important because the paper, though scholarly, was on a timely topic.
{ 15 comments }
Which makes you wonder what the Fed did wrong during Stagflation.
And through hand-waving was born the expectations-augmented-Phillips Curve.
“There’s a lot of history to back up the inflation hawks’ argument that the federal government’s rapidly rising debt level will in lead to hyperinflation. But—ahem—it’s different this time.”
Carney needs to read “This Time is Different: 800 Years of Financial Folly” by Reihnart and Rogoff. The book is outstanding! In every financial crisis for the past 300 years the elite said “This time is different!”
But when the guv borrows more than he can pay, he has to default, either outright default, restructuring or inflation.
Vijay Boyapati comes across as yet another delusional paranoid. That Vijay Boyapati threw over working as a GOOGLE engineer to devote himself to study the Austrian School of neo-classical economics sounds like someone who becomes an ascetic and then who joins an ashram.
Vijay Boyapati seems typical of those claiming to be of the “Austrian School” when he refers to the banking “class” and political “class”. The use of class in those ways displays continual acceptance, use and reinforcement of socialist rhetoric.
I believe he actually uses classic liberal exploitation theory, which delineates class between tax-payers and tax-eaters.
I haven’t read it yet so I could be wrong.
….so does that imply that Hoppe is not an Austrian either?
He uses the exact same terminology in his essays.
if you believe banksters are not a class,you havent tried thinking enough
I’ve read that paper and it makes the mistake of trying to differentiate between monetary inflation and price inflation. The existence of price inflation can be debated, but it really does not matter. Damage has already been done with monetary inflation, and that is what we should be speaking up about. People are completely ignorant to the damage that it has already done.
Bingo. The damage is already done. The symptoms of the disease are what’s being controlled by the ‘medicine’ being prescribed by the fed. It is a matter of time before we run out of medicine, and then the full effects of the disease will be felt.
I fear that day.
I believe that we need to talk about timing here. The lack of a price discovery mechanism means that we could have mass inflation even if the Fed was doing what it thought was correct. Of course, this would be followed by credit deflation as the Fed tried to reign in the inflation by severely contracting the supply of money. We can tell that hyper-inflation is on the way because prices of commodities are at the levels we were seeing at the height of the last boom and the economy is nowhere near recovered. Imagine how fast prices would rise if we had 6-7% GDP growth as we saw in the months after the recession of the early 80s.
“General” prices not going up is not evidence of the absence of inflation. Inflation is best described as the increase in prices from last year to this for any individual product had new money not been printed at all. Inflation is present if prices didn’t go down as much as they should have.
Inflation and deflation is just a component of a price increase or decrease, not THE price increase or decrease. There isn’t any evidence that we haven’t had nasty inflation or had any kind of deflation.
Vijay’s politicians vs bankers argument is addressed in this post.
His argument presumes that the bankers can maintain control. They can not, they have no choice, it is literally inflate or die. Keep in mind that the free market never chose the US dollar as a currency. By creating legal tender laws, taxing in this currency, and keeping people in debt with this currency … it creates pressure for people to use the currency. Without keeping people in debt, without expanding the debt, the Federal Reserve is doomed and the gig is up, and they know it.
i have to agree with David.C. the bankster elite too cant keep up with the central planning shindig for long.their gig will up sooner than later and it will have to via increase of prices of real goods and services and deflation of financial assets/real estate etc.
I can’t resist the urge to go spelling-nazi here. The phrase “rein in inflation” comes from a little-known practice today, that of reining in ( slowing down ) a horse. “Reign” is completely incorrect in this context.
A correct usage of “reign in” would be followed by a location – a man may reign in his own castle.
Comments on this entry are closed.