I do not agree at all with modern Keynesians who lacked the restraint of Keynes.? Deficits are supposed to be temporary not structural.? Loose monetary policy is supposed to be temporary, not lingering.
Many policies can “work” when governments have the capacity to take on more debt without harm.? We are past that point now.? Additional debt builds up a larger problem, that will result in a greater crisis later.
There is no escape.? There will be a crisis.? Do you want a smaller crisis sooner, or a bigger crisis later?? The actions of our government say, “A bigger crisis later, much bigger and later if possible.”
Much of the inflationary pressure we face today is from two sources:
- Loose monetary policy globally
- Increased demand for food and energy globally.
We’re a one-world economy, sort of, so demand from growing middle classes in developing countries affects our prices.? But they also deflate our wages as they compete with us for transferable work.
Thus stagflation.? Our economy does not grow because we have taken on too much debt.? Consult Reinhart and Rogoff, but beyond that, know that overindebted consumers and small businesses are anemic in economic terms.
Now toss into the mix the idea that the Fed won’t raise rates for two years.? Inflation has risen over the last several years, what will they do if it rises further?? I see inflation rising from here, but not real growth.
This is one reason why I think Ben Bernanke is an intelligent idiot.? Intelligent?? Of course, he can speak about many things in economics and it satisfies many.? Idiot?? Well, he is not a critic of his discipline.? I would be far more gentle if he were not granted so much power.? After all, I don’t care much about what sideline loonies like Paul Krugman think.? What, do people read the New York Times?? How obscurantist.? Newspapers are the past.
If you are not a critic of neoclassical economics, particularly after the 2008 crash, you aren’t thinking.? The models did not consider the the effects of a big buildup in debt across the economy. They were debt-neutral, which was a big mistake.
Debt affects the incentives of people and makes them more timid.? They don’t want to go broke, and that is far more likely in an indebted economy, where the debts are layered, and the government does not want to take on more costs because they are too indebted already.
Those following simple Keynesian models get things wrong when borrowing parties are overindebted, because every debt involves a promise to pay that other parties rely on.? Overindebted entities do not buy or borrow freely, because they would endanger their rickety solvency.
Let me boil it down to simple ideas:
- The world is growing, perhaps more slowly but more rapidly than the US.? That forces inflation up.
- There are many people in the world competing against US laborers, forcing wages down.
- Developed markets like the US have borrowed too much, and have punk demand as a result.? They can’t borrow as much to buy more.
That’s our economy now.? We face rising prices for consumption, turgid asset prices at best, and the debt burden holds us back.
“Inflation has risen over the last several years, what will they do if it rises further? I see inflation rising from here, but not real growth.”
Do you have any evidence for either assertion above? Firstly, by what measure has “inflation risen over the last several years”? Using data available at the Cleveland Fed site, I am showing that inflation has averaged about 2.4% over the past 10 yrs, and that has not changed much in the last couple years. (I will readily concede that CPI data is probably not the best measure, as I believe inflation/deflation is really a function of money supply. But just curious what measure you are looking at. Incidentally, if one uses money supply to assess the situation, things look extremely deflationary.) Secondly, if the main reasons you are citing for “seeing inflation rising from here” are the ones you cite later in your post, I would disagree strongly for the following reasons –
“Let me boil it down to simple ideas:
The world is growing, perhaps more slowly but more rapidly than the US. That forces inflation up.”
This conclusion is intellectually sloppy. Inflation is only forced up if worldwide money supply outpaces worldwide productive capacity. The money supply has been contracting violently in recent years.
“There are many people in the world competing against US laborers, forcing wages down.”
This is profoundly deflationary.
“Developed markets like the US have borrowed too much, and have punk demand as a result. They can?t borrow as much to buy more.”
This is true, and is also profoundly deflationary. While the private sector undergoes needed deleveraging, the public sector has taken up some of the slack (but not nearly enough to prevent deflationary market forces from eventually manifesting themselves fully).
I can tell you follow Steve Keen. Behold the age of deleveraging.
I do not in general read Steve Keen. What few times I have read him, I have agreed.
Finance became overleveraged and risky, causing the great meltdown. Govts stepped in and reflated finance who is now hoarding cash or not lending due to lack of demand. Govts are now burdened with debt. I keep trying to figure out what happens next. Who props up the govts when they meltdown? What is the endgame here? And how do I make $$ or not lose $$ in this environment? It feels like unchartered territory but I would be loathe to say this time is different. It’s not, I guess, I just don’t see where we go next. Global industrial slowdown? China and the rest of the east, along with SoAm and Afr carry on without USA & Eur? The end of capitalism, or is that corptocracy? Dog and cats living together?
I would like to weigh in on WSm’s comments.
Mike Shedlock discusses the definition of inflation a lot in his writing, and it seems to me that David and wsm have that definitional problem. It appears to me [correct me if wrong David] that David is using the intuitive and popular definition of rising prices, whereas wsm is using mish’s notion of inflation as a function of demand for credit.
So without a definitional agreement, I believe you can both be right [or wrong as the case may be].
WSM–I don’t think you strengthen your case by using 10 year inflation data from any Fed source. I am not sure of a lot of things in finance after 25 years, but I am sure that the government CPI data is poorly constructed, poorly collected, and utterly manipulated. Inflation was absurdly understated from 2004-2007, overstated in 2009-10, and who knows about now?
I couldn’t agree more with David’s harsh words for neoclassical and Keynesian economics. I have called Bernanke and Greenspan idiots for years, and sadly, America will suffer for years because of their hubris.
Barry R. did a good blogpost history of how the Fed got into this box a couple of days ago, you will enjoy it.
@ microcap
As I EXPLICITLY outline in my original comments, the CPI is definitely not my preferred measure of inflation/deflation. I agree with you that it is flawed.
However, from your comments, I cannot tell whether you agree with David that inflation (perhaps a lot of it) is imminent, or if you agree with me that inflation is not a credible threat within the confines of our current economic reality, or if you were simply ranting about the failure of the Fed and mainstream economists (nothing wrong with that!).
What your comments did NOT do was dissuade me any way from the conviction that the best course of action currently is to position one’s investments for a much higher probability of deflation than inflation.
If someone were to present a shred of evidence to the contrary, I would certainly reconsider. But I have not seen such a fact-based argument anywhere (I suspect this is because data and facts do not support such a position).
Thanks for the response, you did make that clear.
I always say that you can have perfect forecasts of many macroeconomic variables and still not know what investment decisions to make as market reactions can be counterintuitive.
This year is a perfect example. For instance, on 1/1/11, who would have predicted that Treasuries and Gold would be two of the very best performers? Many predicted one or the other, but I don’t anyone who predicted both simultaneously! And yet, here we are.
So I might lean to you both being right as I alluded to. Poor Fed policy has clearly led to commodity increases and gold speculation [so David is right], and just as clearly the economy is floundering and there is no credit demand [so you are right too.]
They didn’t think stagflation was possible in the 70’s, so maybe the shock this decade is inflation and deflation at the same time.
No one ever said this was easy.