That video made me feel like I was watching something from Stalin’s Soviet Union. This video post is interesting when looking at what Greg Mankiw had this to say on his blog today. http://gregmankiw.blogspot.com/

“The abandonment of “price stability” would be the modern equivalent of Roosevelt’s abandoning the gold standard. Of all the things that Roosevelt did to get the economy out of the Depression, jettisoning the gold standard was the most successful. Today, monetary policy is not fettered by gold but by fear of inflation. Perhaps it is time is get over that fear, at least for a while. As Jim Tobin said in an earlier era, there are worst things than inflation, and we have them.”

I guess some propoganda, or maybe just mistaken philosophy, never gets old.

Wow…watched this in a state of disbelief.

I know this kind of nonsense propaganda falls easily under the heading of “batshit crazy”, but I hope some of the smart people who hang out here will provide an easy to understand explanation of WHY this is so fallacious.

I think I’m still too dazed from the first series of charts…

Forgot to acknowledge the asinine, grating, attempts at humor and the revisionist casting of the civil war as a macro-economic showcase. Our generation has many more inflationary periods to illustrate the wonder that is debasement of currency.

Mark,

You noted:

“And note that the movie expressly noted the means by which inflation discourages savings by robbing the creditor.”

Absolutely. And of course, the short celebrates the process by which the lender is cheated by inflation the favors the debtor! The bias is somehow always in favor of inflationary outcomes and easier debt burdens (over deflation) when society and the government happen to be wracked with debt.

You also pointed out the insanity of using the Civil War period as a economic good times.

That is just one of the many things about this clip that I found so shocking. I guess the producers of this film short were able to count on the audience’s total lack of reference to a very notable period of destruction, strife, goods shortages, and greenback dollar-fueled inflation?

Inflation=prosperity! Imagine those fabulously wealthy Zimbabweans today, look what hyperinflation has done for them–more beer! And, who can believe they put this out after the German hyperinflation of the 1920s? Einmal bier, bitte!

By the beard of Zeus! Brilliant!

Deflation is prosperity! Imagine a farming village where gold coins are the currency but there’s so few of them that people barter goods than give up an extremely high value coin which can virtually never go down in value. If there’s the dreaded scenario of someone who lends $10,000 then gets hit with inflation and is repaid with $1,000 in real terms amounts to stealing then why some poor bugger borrowing $1,000, gets hit with deflation and the lender gets his $1,000 but is repaid $10,000 in real terms not stealing?

The idyllic monetary system should be ‘non-flation’ with neither side getting a free ride. Or alternatively, gold coinage would only be better than paper money if deflation could start up gold mines and inflation shut them down. But if we have essentially hit ‘Peak Gold’ then return to gold in actuality mean large ongoing deflation and gold coins would cease to be currency as people would use them as collector coins (in the same way I haven’t heard of anyone itching for platinum coinage currency) and prefer use, say, silver coinage, if it is easier to mine.

Mankiw: “Of all the things that Roosevelt did to get the economy out of the Depression, jettisoning the gold standard was the most successful.”

It’s strange to see an economic professor extolling the virtues of theft.

One of the dirty little secrets of inflationists is that they do it primarily to lower real wages. Of course, they won’t tell anyone that because it would make the policy unpopular. But that has been the chief means of defeating union wage increases over the past century.

…except that unionists aren’t silly, and like creditors, once the realization hits that rising prices are a lasting phenomenon, aggressively wind up their demands in a catch-up tactic. inflation does de-fang minimum wage laws, but it’s still a dishonest way of going about it.

I think the problem is not inflation or deflation per se. The problem is when you have the government enforcing inflation or deflation. There is also the possibility for inflation or deflation to occur in a free-market economy (e.g.: through the discovery of new gold mines if the currency is backed by gold, in which case we have an inflation, or through a more efficient production technique for all industries, in which case we have a deflation). The problem is when you have the government trying to enforce one or the other. What we have today is why government-sponsored inflation is a disaster. On the other hand, a government-sponsored deflation would prevent production as it would make more sense to keep accumulation savings rather than spending, discouraging business from producing. However, in case of a free banking, especially in a 100%-reserve free banking, inflation would to give way to deflation and vice-versa, which would make the purchasing power of the money more or less stable. But then again, there is always the possibility we have a limited deflationary tendency since new products and services would come into existence.

Jim,

Lets say I’m a mugger and that’s all I can do. I mug you so I now have committed offense against you. Would it be appropriate for me mug someone else to rectify my offense against you?

Glen

Is the FED a burgaler then, stealing from one,and then another ? Is that the business cycle ?

I’m also wondering if there is one person in the U.S.
who hasn’t borrowed money in the last few years.

I realize a lot of those loans were for “stuff” but some were for investment,personaly I bought rental units,so the risk I was encouraged to take with lower intrest rates,is now threatened by deflating assets.
how is one ever to assess risk ?

Glen: “…risk analysis is pretty much BS…”

You’re right! Check out this interview with Bill Janeway, an expert in risk analysis: “New Hope for Financial Economics: Interview with Bill Janeway” over at the institutionalriskanalytics.com web site. He sounds very Austrian in his approach to risk.

Jim,

What Glen was arguing is that the Fed artificially lowered interest rates below the market level which sent false signals to borrowers that there was a greater supply of credit available when there really wasn’t. As money appeared ‘cheap,’ more people took out loans and a lot of this money went into investments that should never have gotten off the ground, in other words, there has been a massive misallocation of resources.

When the Fed started to raise interest rates, suddenly these investments that were profitable at a low interest rate are no longer profitable at a higher interest rate.

This artificial lowering and raising of the interest rate and its effect on the economy gave “rise to false expectations of future cash flows.”

So it’s not that people do not do any risk assessment, but rather that the Fed and the government’s intervention has distorted price signals and the proper allocation of resources in the economy making it very difficult to conduct a credible risk assessment of future events.

I hope that clears it up a little bit!

I love it: “You probably don’t understand inflation, so I can speak freely.” In other words “I can say anything and you’ll believe it because you won’t understand it.”

to dirk:
gdp is a keynesian yardstick, and so gives rise to erroneous conclusions.
see george reisman’s piece – http://mises.org/daily/2878

“People who are saving up for a house instead of buying one on credit, only to find that the value of their savings are falling while at the same time the price of the house they want is rising. People who find that their pay is not rising nearly as fast as inflation.”

And what of a sudden burst of deflation? The saver’s savings have gained purchasing power but what of his pay? Employers either lowered pay according to the rate of deflation or laid workers off (shades of the minimum wage issue?) If the saver got a pay cut then the house price would be lower but his chances to continue to save are lessened to the same degree making it just as hard to save. Or he got laid off he now has to use his savings to until he can find a new job depleting his chances of saving for a house.

Heck! Deflation is also a tool for the rich – they are the ones who can delay purchases for the longest and have far more idle money.

Dirk,

WWII left the rest of the industrial world in shambles. Is it surprising that we would see greater growth. There have been many other changes besides this.

The point of the Fed was never to “increase growth” and there is no credible theory that would link it’s actions to increased growth. Correlation is not causation. Do you think the Fed is responsible for global warming?

The purpose of the Fed was to stablize prices and in that regard it is a complete and utter failure.

Reason being is that it didn’t address the systemic problem that causes the business cycle, fractional reserve banking. In fact it has exacerbated the problem.

Gil,

BTW, “The Skeptical Optimist” has blocked me from posting comments at his site. Presumably because he couldn’t handle the arguments I was making.

Gil wrote “But if we have essentially hit ‘Peak Gold’ then return to gold in actuality mean large ongoing deflation and gold coins would cease to be currency as people would use them as collector coins (in the same way I haven’t heard of anyone itching for platinum coinage currency) and prefer use, say, silver coinage, if it is easier to mine” and Pat wrote “There is also the possibility for inflation or deflation to occur in a free-market economy (e.g.: through the discovery of new gold mines if the currency is backed by gold, in which case we have an inflation, or through a more efficient production technique for all industries, in which case we have a deflation)”.

That’s true in most markets, and it would be true immediately after going back onto a bullion standard, but it’s not quite what happens once one is underway. Severin got most of the rest of it, with his “As to your other point about the rich delaying purchases, there is really no problem. If they horde money in a mattress waiting for a bout of deflation and then make purchases because of the lower prices, they add money back into the system and that will stop the deflationary cycle. If their money was invested, it was out in the purchasing world already (either as a loan, or in stocks, etc).” His second sentence is true too, but unfortunately it means that when that happens there is nothing in reserve to respond to market conditions; the first sentence matters more for that.

The thing is, precisely the fact that bullion is a practical thing to store means that there will be stocks of it out there in private possession. These stabilise everything through Pigou’s Real Balance Effect. The tendency for gold to be collected, that Gil mentioned, is actually the effect operating to build up private stocks at the beginning of a bullion standard before anyone has very much collected together; it’s not what happens once everything is going properly. Also, once everything is going properly, there is much less scope for Pat’s fears to make much difference, because new bullion sources or shortfalls would be damped out by the amounts moving in and out of private saving in response to typical prices (plus, of course, opening up new sources or cutting back on old ones also produce negative feedback by responding to prices measured in bullion – which is another way of looking at bullion prices measured in other goods and services). It’s rather like the way the Bell helicopter system makes helicopters more controllable by evening out responses, even though it doesn’t provide any totally independent framework for that.

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