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Source link: http://archive.mises.org/18807/right-no-politics-here/

Right, no politics here!

October 25, 2011 by

For what it’s worth, I think the Fed should continue its efforts to stimulate our moribund economy; unemployment is clearly a bigger threat than inflation. But I worry when politicians get involved. Lawmakers need to ensure that Fed actions promote the public welfare… History shows independent central banks do a much better job of controlling inflation than those that give in to political pressures. When the Fed caved into LBJ’s desire for loose money in the 1960s, it set the stage for a decade of high inflation. ~ Donald Marron, CSM


David Clayton October 25, 2011 at 2:45 pm

How hard is it to put something like this on a logarithmic scale? Here’s a hint: it takes one click.


Also, quite interesting that Nixon and Arthur Burns get a pass in the linked narrative.

integral October 25, 2011 at 3:49 pm

What’s the point of putting it on a logarithmic scale?

Giovanni P October 26, 2011 at 4:34 am

Putting it on logarithmic scale makes perfect sense, even from an austrian point of view.
Also, the graph is still awesome.

Anthony October 25, 2011 at 4:08 pm

If you think that anyone here likes Nixon you should read a little more…

Also the linked text was there for ironic purposes. Jeffery believes that there should not be a central bank, and so was pointing out that even an independent central bank won’t control inflation.

Finally, seconding integral above, why is a logarithmic scale more appropriate?

Nile BP October 25, 2011 at 4:55 pm

Probable reason: because logarithmic scaling smooths out great fluctuations. In other words, it hides the extent and obviousness of the inflationary insanity by making it look like a constant-rate expansion, not a parabolic one.
Official reason: it illustrates the fact that a 100 billion increase in a 1 trillion monetary aggregate has “the same effect” as a 1 billion increase in a 10 billion aggregate.
That’s what I understand, anyway.

George-Michael October 25, 2011 at 8:53 pm

Prior to logarithms being taken, the slope of the line represents the observed change in the dependent variable, in this case, as a function of time. When a logarithmic scale is used, the slope represents the percentage change in the dependent variable instead.

David Clayton October 25, 2011 at 10:05 pm

A series that grows over time at a constant rate will grow parabolically on a linear scale, while a logarithmic scale will display a line with a constant slope. A linear scale will make it appear that growth is increasing at an ever-increasing rate, when it’s not.

In other words, on a linear scale, equivalent growth rates in earlier and later periods will appear equivalent, where on a linear scale growth in the latter period will appear higher relative to the earlier period.

In this case, M1 growth has been faster over the last 3 years than in recent history, but not as much faster as the linear graph would have you believe.

Rory Carmichael October 25, 2011 at 5:18 pm

I get that people here commonly define inflation as an increase in the supply of money regardless of the effect on prices, but I think it’s worth mentioning that the size of the supply of money is rather dramatically different than the price level right now.

For instance, here’re indexed values for the monetary supply and the CPI for all urban customers and all items.

Note the distinct lack of price increases to go along with the recent expansion of the money supply The CPI is basically continuing trend, even as M1 skyrockets. Also note that it’s usually the money supply that changes its trend to come back in line with CPI, rather than the other way around.

Juraj October 25, 2011 at 5:35 pm

With regards to CPI, as Mises put it in Human Action:

The pretentious solemnity which statisticians and statistical bureaus display in computing indexes of purchasing power and cost of living is out of place. These index numbers are at best rather crude and inaccurate illustrations of changes which have occurred. In periods of slow alterations in the relation between the supply of and the demand for money they do not convey any information at all. In periods of inflation and consequently of sharp price changes they provide a rough image of events which every individual experiences in his daily life

Note that if we define inflation as increase in money supply (or fiduciary media), we do not equal the increase of money supply to the same increase in prices. It’s a little bit more complicated than that.

Money supply fell? I must have been sick that day.

Paradoxically, in the present system, paying down debt collapses money supply so the State must inflate at all costs.

Rory Carmichael October 25, 2011 at 5:49 pm

I know that no one here is pretending that money supply is supposed to be in lock step with price levels, but certainly there’s a sense that they should be proportional, or why else would we be worried about increasing the money supply?

The fact that they aren’t– in the recent data — should be a reason to think about what is different now.

Mises says that the index numbers are, in periods of inflation, a rough image of events individuals experience in their daily lives. I’d say the CPI numbers look a lot closer to my experience of cost of living changes since the start of the recession than the M1 numbers. So, by Mises own argument M1 is spectacularly useless?

“Money supply fell? I must have been sick that day.”
Because clearly you have a direct line of insight into the supply of money. Certainly your intuitions about it are better than the actual recorded data of the people directly manipulating the supply of money…

“Paradoxically, in the present system, paying down debt collapses money supply so the State must inflate at all costs.”
I agree that inflation reduces the real burden of debt, and the US, being heavily indebted, benefits from that. You seem to be saying that the State’s interest is reversed in this… that they must avoid paying down debt in order to maintain a large money supply because… because why?

feudalredux October 25, 2011 at 11:34 pm

It’s worth pointing out that this obsession with not-rising-fast-enough prices obscures the fact that inflationary money printing a.k.a. counterfeiting achieves a direct redistribution of wealth to the politically connected.

In other words, inflation is the enabling mechanism for the fascist government to direct resources towards its own whims and fancies.

So, people can complain all they like about inflation not showing up in stupid graphs of their choice. How about considering the counterfactual? Where would prices have been without the bailouts?

Robert Fellner October 26, 2011 at 12:22 am

“I know that no one here is pretending that money supply is supposed to be in lock step with price levels, but certainly there’s a sense that they should be proportional, or why else would we be worried about increasing the money supply? ”

This is a very good question. The artificial expansion of the money supply has many pernicious effects. One reason why an inflationary monetary policy can be harmful, even if the price level indicators aren’t showing excessively high levels of price inflation, is that it distorts the mechanism of prices. That is to say, prices send signals about relative scarcity, consumers valuation, and so forth. As the money supply increases, the resultant rise in prices does not affect all goods uniformly. It is a fact that some goods experience a rise in price more rapidly than others. In addition to the obvious illegitimate wealth redistribution effect this has (as the price of ones’ costs rise more quickly than the price of his product), another devastating effect is the distortion of the aforementioned vital function of prices.

Misallocation of resources occur when capitalists incorrectly interpret the rise of price in certain goods as meaning what it normally would mean (increased valuation from consumers), when it is simply an upwards readjustment of the price of certain goods due to the increased money supply.

This can lead towards significant errors in the production process resulting in much waste and inefficiencies. If continued long enough it results in the boom/bust cycle that the Austrian School, and Mises in particular, explains so eloquently.

Timm October 26, 2011 at 6:58 am

Two things: I second “feudalredux” statement about the need to consider where prices would have been without the monetary inflation. I’d venture to guess much lower and and much nearer market clearing price levels.

Also, one needs to look at how the CPI is actually calculated before they begin to utilize it as some sort of reference. It’s an awful contraption which is altered by politicians quite frequently. I would look more towards John Williams “alternate CPI” as a better frame of reference. Also, he has a few free articles on his website that go into detail about all the different ways the CPI has been deliberately manipulated to artificially “lower” the CPI.

David Clayton October 26, 2011 at 11:36 am

This particular John Williams is a hack. For reference, see my: http://voxrationalis.wordpress.com/2011/05/15/the-absurdity-of-shadowstats-inflation-estimates/.

Artisan October 27, 2011 at 5:34 am

I see your point, or that of voxrationalis: Williams seems paranoid. Cpi evolution over 10 years is roughly right when it comes to cars or milk. But you make his claim sound too harmless I believe.

CPI is not accurate for the price of energy, gold of course, or houses as a matter of fact. In that case you can just say they are “bubbles” created by “policies”… OK, so whats the “right” “ponderation” of them items in the equation?
I keep in mind that valuation of things is ultimately subjective. What’s the use of saying that the price increase of gasoline is offset by that of the milk? What agency knows how much milk (raw milk preferably) I drink? What good doctor takes the temperature of all his patients in the hospital and then assumes a “slight fever” in average?

Timm October 27, 2011 at 8:10 am

I see what you’re saying about Williams. I’ve ran some of his “alternate” CPI calculations and they are a bit extreme. My point was more to say that the government has a vested interest in understating inflation and they are the ones who calculate CPI and they indeed have altered the way they calculate CPI on many occasions. It’s not a perfect reference. Maybe reality is somewhere between Williams CPI and the official CPI.

David Clayton October 27, 2011 at 2:13 pm

I think most serious criticism of CPI-U is that it OVERstates inflation. Lots of folks prefer the GDP deflators in EROP table B-7.

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