Worried About Inflation? Don’t Be.
By Justin Gardner | Related entries in Economy, MoneyWhy?
Because wages are going down, down, down…
Basically, people won’t be spending more if they’re earning less.
So don’t worry about inflation…yet.
(h/t: NY Times)
This entry was posted on Friday, July 3rd, 2009 and is filed under Economy, Money. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
July 3rd, 2009 at 9:01 am
Not too mention the money the fed and treasury department dumped into the banks and trading houses to save them from themselves is either a) being repaid, or b) sitting in a vault to buttress the bottom lines of over-leveraged entities.
Be careful thier Justin, you’ve made yourself a target now.
It doesn’t matter that inflation is caused by too much money in circulation, and their is no money circulating.
The inflation bogey man trotted out by the right which uses corporate price gouging as their “proof” of inflation is reminiscent of the early to mid 1930s.
They were wrong then, they are wrong now–but that won’t stop them from trotting out the same old arguments.
July 3rd, 2009 at 9:30 am
A proper understanding of “inflation” is that the supply of dollars has increased (inflated) more quickly than what we produce. Which it has. Consistently and progressively over time. All those extra dollars have gone overseas and the new ones from the latest round of gov’t overspending will go there too.
Inflation will get ugly if and when the overseas holders of American debt fully realize our intent to pay back that debt with an inflated supply of devalued dollars. Inflation, if and when it comes, will be due to external forces, not domestic ones. Like banks hoarding dollars, for instance. Hoarding dollars is just dumb right now.
Our government routinely under-reports inflation, and the media basically goes along with it because so few of them really understand or care about economics. That sounds quite paranoid, doesn’t it? So I’ll issue a challenge to all folks of moderate means who keep budgets and track expenses. Identify the various portions of your budget that represent substantial costs : housing; energy; food; clothes, and so on. Then calculate how much these costs have gone up over time. I can guarantee it will be more than the meager annualized amounts Uncle Sam reports.
Over the past several years, we have been regularly treated to inflation reports which re-assure us that “core” inflation is quite moderate and no cause for concern. Core inflation, we are reluctantly informed, leaves out fluctuations in “volatile” sectors like food and energy.
And there’s a short-term wisdom to that. If we included food and energy, the monthly inflation rates would be all over the place. right? But what about over the longer term? Suppose you are of moderate means…you spend all or just about all of your monthly income on your household’s expenses, and that doesn’t include much or any discretionary spending on luxury items. Food, clothes and energy (gas for your car, fuel to heat your home, electricity) are a substantial portion of your monthly expenses.
Prices of various “volatile” items do indeed go up and down. But if there is a longer term trend where they go upward, and these items are things we use in substantial amounts on a regular basis, then it’s not rational to exclude them from our measurement of price trends, now is it?
They will be spending more if the cost of non-luxury imported goods goes up…for one reason, because the dollar’s value continues to decline. But for other reasons as well. The phenomenon you identify above, wage deflation, is real. But the most likely result of it is NOT that inflation won’t happen. It’s that the American standard of living is going to decline.
As Americans spend less, this will help to blunt the effects of our inflation of the dollar supply. But as this dynamic continues, consumer spending will cease to be a powerful price driver.
So your advice (don’t worry about inflation yet) is bad. Even if we aren’t seeing more price increases right now beyond those we all saw when oil last spiked (and which, let’s face it were way more painful than gov’t reports suggested), now is in fact a SPLENDID time to worry about inflation. Because maybe you can do something about it.
July 3rd, 2009 at 10:45 am
gerryf, there, not their. Sorry, I couldn’t help myself. I proofread documents for my wife, the English teacher too often.
July 3rd, 2009 at 10:59 am
You are correct Jim, thank you for the catch. I KNOW the correct answer, but my fingers rarely do. Someday I will actuall type these things in a word processor and transfer it over. I also cannot spell maintainen…maintenenc……mainta…..maintenance!
July 3rd, 2009 at 12:54 pm
It is sort of like saying, I’ve been smoking all these cigarettes but I don’t have any cancer…yet. So don’t worry, keep bailing out institutions with printed money from the fed, continue “quantitative easing,” keep smoking those cigarettes Obama.
July 4th, 2009 at 10:25 am
So how did your theory of inflation work out for us during the 70’s, when soaring unemployment should have led to deflation, Justin? Or for that matter, during the 80’s, when rapidly falling unemployment should have led to massive inflation, according to the apostles of the Phillips Curve? Just askin’. :-)
The idea that the Phillips Curve concept is some sort of reliable constant has been pretty thoroughly debunked. Another case of attractively simplistic conventional wisdom proving wrong. [See Atkeson and Ohanian, 2001; Stock and Watson, 2008]
M1 is up 14%+ for the last 12 months, M2 a touch over 8%. That suggests the “pump-priming” under both admins is indeed reaching consumers and businesses, but is not translating into new spending and investment at this time. Instead, people and businesses are holding their own cash reserves. When they start spending that money….