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Forum Post: krugman on inflation

Posted 9 years ago on Sept. 6, 2014, 7:40 a.m. EST by flip (7101)
This content is user submitted and not an official statement

One thing is clear: Like so much else these days, monetary policy has become very much a partisan issue. It’s not just that talk of dollar debasement comes pretty much exclusively from the right of the political spectrum; inflation paranoia has, to a remarkable extent, become a matter of conservative political correctness, so that even economists who should know better have joined in the chorus. So we can focus the question further: Why do people on the right hate monetary expansion, even when it’s desperately needed?

One answer is the power of truthiness — Stephen Colbert’s justly famed term for things that aren’t true, but feel true to some people. “The Fed is printing money, printing money leads to inflation, and inflation is always a bad thing” is a triply untrue statement, but it feels true to a lot of people. And, yes, a tendency to prefer truthiness to more complicated truth is and pretty much always has been associated with political conservatism, and this tendency is especially strong in an era when leading politicians get their monetary theory from Ayn Rand novels.

Another answer is class interest. Inflation helps debtors and hurts creditors, deflation does the reverse. And the wealthy are much more likely than workers and the poor to be creditors, to have money in the bank and bonds in their portfolio rather than mortgages and credit-card balances outstanding. Back in the Gilded Age, the elite mobilized en masse to defeat William Jennings Bryan, who threatened to take the United States off the gold standard; campaign spending as a percentage of G.D.P. was far higher in 1896 than in any presidential election before or since

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[-] 1 points by MattHolck0 (3867) 9 years ago

campaign spending as a percentage of G.D.P. was far higher in 1896 than in any presidential election before or since

[-] 0 points by flip (7101) 9 years ago

that was surprising to me

[-] 1 points by MattHolck0 (3867) 9 years ago

1893 - Redlands Power House - the first commercial installation of 3 phase AC power, 40 hz. 1895 - Folsom Power House - The first installation of modern AC power in the USA: 3 Phase AC at 60 Hz. 1895 - Westinghouse builds the power system for the Adams Power Station at Niagara Falls. Benjamin Garver Lamme is the principal engineer of the operation. General Electric builds the 25 mile power transmission system from the Niagara power house to Buffalo, NY which is made operational in 1896.

http://edisontechcenter.org/AC-PowerHistory.html

[-] 1 points by MattHolck0 (3867) 9 years ago

1870s and 1880s: Strikes break out against railroads and the Pullman Palace Car Company. Corporations hire Pinkerton guards to break up the strikes. Nonetheless, much violence occurs in the strikes. Many people were killed, buildings and rolling stock were burned, and reports of rioting shocked middle-class Americans.

http://en.wikipedia.org/wiki/Timeline_of_United_States_railway_history

[-] 0 points by flip (7101) 9 years ago

I know that story pretty well. Didn't know the spending part

[-] 1 points by grapes (5232) 9 years ago

Who is the biggest debtor in the whole world? What is their interest?

The undermining of trust can have catastrophic consequences far beyond the matter at hand. Currency inflation can gum up the machinery of the economy once too much frothiness exists to render the numbers meaningless. Not knowing the state of the economy makes it impossible to steer and sure enough we ALL end up in the ditch.

[-] 0 points by flip (7101) 9 years ago

as we have seen with the bank bailout and the fed qe program we can create money out of nothing - fiat currency. that is a good thing. since we do not need china or anyone else to buy our bonds if we choose to go that route. now what we cannot create is steel and oil etc out of nothing - those are the things of real wealth. you are confusing real wealth and money. also governments are not like households or businesses - governments can print money - you cannot!

[-] 1 points by grapes (5232) 9 years ago

You actually did "print money" with your mortgage. The federal government tried to print its way out of the oil shocks because it was the big debtor. You got the benefit of having your interest lined up with the printer of money who had no payback requirements.

I am of the opinion that the majority of the Americans would not want to relive the economic conditions of the 1970's and 1980's. I consider the arbitrary re-partitioning of wealth through currency degradation repugnant, no less than confiscation of properties and land by totalitarian regimes.

[-] 1 points by MattHolck0 (3867) 9 years ago

money needs to be circulated through the population

[-] -2 points by flip (7101) 9 years ago

i think you might read krugman more carefully. he is absolutely correct that this is a class issue. a few moments of thought would show that deflation helps wealth holders and hurts debtors - think about how you mortgage looks as your house decreases in value and prices of everything goes down. your mortgage gets more and more expensive while your house is worth less and less. yes inflation redistributes wealth - from the wealthy to the middle class and beyond. that is why they hate it so much. deflation does the opposite

[-] 1 points by grapes (5232) 9 years ago

Okay, let us all welcome inflation then. We should all welcome general increases of prices of most things. Everything costing more and more is a sign of progress!

[-] 0 points by flip (7101) 9 years ago

that is what we have had for a long time and we are richer now than in 1910 - no? if inflation were so bad how could that happen. you seem not to want to address the basic question - it is a simple idea - inflation is good for debtors and deflation is good for the rich

[-] 1 points by grapes (5232) 9 years ago

Ahhh! You really want me to tear this scab up, huh?

All right, the richest are the greatest debtors. When I discussed indebtedness with foreigners, they could not believe at first that the U.S. owed the most in the whole world. Now let us see why the U.S. has been generating inflation for such a long time. Are people smart enough to see why?

Okay, the debts owed by the U.S. is denominated in U.S. dollars. The more the dollars are devalued, the less value the U.S. has to return. Since the U.S. owns the printing press for U.S. dollars, print we did and print we will. I squirmed every time I heard the sentence uttered, "A strong dollar is in the national interest of the U.S." How many times have you heard that coming from the mouths of our Secretaries of the Treasury, huh? Okay, lying IS a job requirement for the office of the Secretary of the U.S. Treasury but have you seen the expressions on their faces when they uttered the sentence?

Lying for some is still hard to hide even after much practice.

The richest own businesses that usually owe a bundle. The leverage improves the rates of return but they had better be positive because negative rates are magnified, too. Deflation is bad for businesses, ergo the rich get richer when inflation is persistently made present. The delicate trick is to fool the poorer folk that inflation is good. Germany has better economy without the persistent inflation of the U.S. In fact, many countries already have middle classes that are better off than the middle class of the U.S. Inflation reduces real incomes of the working class. Repeat that for a few decades and here we are.

[-] 1 points by flip (7101) 9 years ago

read alan watts again - you missed the obvious point. try this and see if you can find where the thinking is incorrect -"If money must be gold or silver or nickel, the expansion and distribution of vast wealth in the form of wheat, poultry; cotton; vegetables, butter; wine, fish, or coffee must wait upon the discovery of

new gold mines before it can proceed. This obviously ludicrous predicament has, heretofore, been circumvented by increasing the national debt a roundabout piece of semantic obscurantism by which a nation issues itself credit or purchasing power based; not on holdings in precious metals; but on real wealth in the form of products and materials and mechanical energy. Because national debts far exceed anyone's reserves of gold or silver; it is generally supposed that a country with a large national debt is spending beyond its income and is well on the road to poverty and ruin no matter how enormous its supplies of energy and material resources. This is the basic confusion between symbol and reality, here involving the bad magic of the word "debt," which is understood as in the phrase "going into debt." But national debt should properly be called national credit. By issuing national (or general) credit; a given population gives itself purchasing power, a method of distribution for its actual goods and services, which are far more valuable than any amount of precious metal. Mind you, I write of these things as a simple philosopher and not as a financial or economic expert bristling with facts and figures. But the role of the philosopher is to look at such matters from the standpoint of the child in Hans Andersen's tale of The Emperor's New: Clothes.

[-] 1 points by grapes (5232) 9 years ago

Oh, if you caught my drift, I fear not the taking on of more national debt, I fear the sudden disruption of the servicing of it and what that can lead to. If you dig into my comments far back enough, I never thought once that the U.S. national debt would ever be repaid. It will eventually be repudiated.

[-] 1 points by MattHolck0 (3867) 9 years ago

I live on the beach

and as you can imagine business front property demands a high rent

but we see business all the time that are not busy yet stay open

My friends notes this makes no sense under the capitalist supply and demand laws.

I think it is because we don't live under such laws but property laws

those that own the property can have a store

commerce is not as important as to whether they can afford the rent

the money comes from outside our (capitalist?) system

[-] 1 points by grapes (5232) 9 years ago

It may be the zoning laws at play at your place. Residential properties may be subject to rent control but not business properties. The store that does not do much business can still qualify the property as for business purpose and evades rent control.

[-] 1 points by MattHolck0 (3867) 9 years ago

my thoughts are not so articulate on this yet

up the river

our shopping malls are full of upscale stores no one goes into

yet these stay open

[-] 1 points by grapes (5232) 9 years ago

Analyze, synthesize, and you will see. Seek and you will find. In God's light, we see light.

[-] 1 points by grapes (5232) 9 years ago

I reread the metaphor of the inches. It occurs to me that since the oil shocks of the 1970s, the U.S. has been warping the "inches" in building its house. Is it any wonder that our house has turned out so crooked and leaky that the (Non-)Federal (No-)Reserve had to step in multiple times to shore it up lest it collapses.

The foundation on which debts or credits are built on is trust in the form of the belief in the store of value in the U.S. dollar. Once that is gone en masse, the magical trick ends. In economics, there is the law of diminishing returns. In probability and statistics, there is the law of large numbers. The U.S. can keep on risking but one of these days financial calamity will hit with real physical consequences. The cliff edge is probably lower than Japan's over 200% GDP because the U.S. national debts have far more foreign funding.

[-] 1 points by flip (7101) 9 years ago

if you google - stephanie kelton italy you can get the whole piece from her. very helpful in understanding how the world works - here is enough to help you see - "“A sovereign government defines the money of account. A sovereign government imposes taxes, fees, and other obligations to be paid to be paid to the state. A sovereign government decides what it will accept in payment to itself. And sovereign government chooses how it will make its own payments to others. Most governments in the world today choose their own unique money of account. And they issue their own unique currency. One nation, one money, is the rule in almost every corner of the world today. U.S. dollars, bills and coins. Mexican pesos, bills and coins. British pounds, notes and coins. Most governments also require that taxes be paid in a currency that the state has the exclusive power to issue. These currencies are sovereign money.

(c. 8:50) “As long as the state has the power to enforce its tax laws, the people will need the government’s money. The currency will have value. People will work to sell things—goods and services—to the government in order to get government money. Whatever the government accepts in payment to itself becomes the ultimate, ‘definitive,’ money in the economy. It is the only way to settle a debt. You must use government money. We can imagine in any economy a hierarchy of money. But not all money is created equal. The most acceptable money sits at the top of the pyramid. Those are the IOUs that everyone accepts and everyone must accept. Those are the IOUs that are ultimately needed to pay our debts. Those are the government’s IOUs. The rest of us can go in debt, issue IOUs, but our debt is not as good as government debt. It’s not as acceptable. It can’t be used to pay for things.

(c. 10:25) “In the U.S., the hierarchy looks like this: The government’s IOU—the United States dollar—sits at the top of the pyramid. It is a fiat currency. The United States government is the monopoly issuer of the U.S. dollar—the only entity on the planet that can legally create the currency. The U.S. government taxes in dollars. It spends in dollars. And it controls its own currency. Why is this important? What are the benefits of issuing your own currency? They are extraordinary.

(c. 11:19) “The government, when it issues its own currency, and goes into debt in that currency can always pay its debt, can never go broke, can never run out of money. It can afford anything that is for sale in that currency. It doesn’t need to borrow its own currency. And it can set its own interest rate. It does not have to pay what markets want. It does not become a victim to speculation, to bond vigilantes. It has additional policy space. It can do things for its economy and for its people that a government that does not have a sovereign currency cannot do.

[-] 1 points by grapes (5232) 9 years ago

There is a problem with the U.S. dollar being sovereign currency. The U.S. despite being nearly an island between the two biggest oceans is one of the most connected countries in the world. There is no guarantee that the U.S. can project its sovereign power overseas. It can still be hampered once it leaves its borders.

[-] -1 points by flip (7101) 9 years ago

since nobody else can print dollars it is a sovereign currency - aside from stephanie i would suggest m hudson on the subject.

[-] 1 points by grapes (5232) 9 years ago

The U.S. is not self sufficient in some areas so it cannot just go bankrupt without domestic repercussions.

[-] 2 points by MattHolck0 (3867) 9 years ago

we could use some domestic repercussions

[-] 0 points by grapes (5232) 9 years ago

Be very careful about what you wish for. For some mysterious reasons, wishes are often granted.

[-] -1 points by MattHolck0 (3867) 9 years ago

enough of the vague threats

[-] 0 points by flip (7101) 9 years ago

yes they are all elitists - don't you realize who you sound like? from the "eastern front" to putin is "reckless" to crying about debt and inflation - you are sounding the alarm of the neocons and elite economists - i am surprised you don't know that. watch the news and see who is saying those same things.

[-] 1 points by grapes (5232) 9 years ago

I seldom care about whether someone is elitist or not. You brought up Harvard so I can mention Princeton. The truth is that elitists are just as prone to being wrong in cutting edge or inherently murky matters. Sigmund Freud's idea about experience (probably not the childhood sexual type) affecting present behavior makes sense. One's opinions on murky matters often say more about oneself than the matters at hand.

If I happened to sound like the elitists, I have probably been influenced by my experience.

[-] 0 points by flip (7101) 9 years ago

You don't get it do you? Still stuck with those Harvard economists

[-] 1 points by grapes (5232) 9 years ago

Harvard vs. Princeton economists? Do you have some kind of Ivy envy? Which Harvard economists am I stuck with?

In my opinion, Harvard or Princeton matters not - they are all elitist, aren't they?

[-] 0 points by flip (7101) 9 years ago

Correct. There is no correlation between real wealth and monetary wealth. Do you want to be the guy on the titanic with $10,000 in your pocket or the guy with the place in the lifeboat? Do you want to have the well full of water on your backyard or a gold mine during a drought. You cannot eat dollars

[-] 1 points by grapes (5232) 9 years ago

Where there is no trust in the currency, there is no market for the currency to be used in so I emphasized the foundation of trust for currencies.

[-] -1 points by flip (7101) 9 years ago

You forgot my comment about taxes!! You have to pay taxes in whatever the govt decides

[-] 1 points by grapes (5232) 9 years ago

If the state becomes a pariah state, it may become impossible to get foreign reserve no matter what its government decides for taxes.

[-] -1 points by flip (7101) 9 years ago

ok i give up - you do not want to address the misunderstanding that alan watts makes soooooo obvious. hey look out - the russians are coming - the russians are coming

[-] 1 points by grapes (5232) 9 years ago

That there is no necessary correlation of monetary wealth with real wealth?

[-] 1 points by MattHolck0 (3867) 9 years ago

this is a russia nato thing

Ukraine does not exist

[-] 1 points by MattHolck0 (3867) 9 years ago

the bigger the money debt grows

the more control those that hold the strings gain

[-] 1 points by MattHolck0 (3867) 9 years ago

+1 ...

[-] -2 points by flip (7101) 9 years ago

thanks - i think

[-] 1 points by MattHolck0 (3867) 9 years ago

I had to add ... because the filter thought the +1 was a bump

welcome

[-] 1 points by grapes (5232) 9 years ago

I have been around long enough to have lived through inflationary times and high interest rates and unemployment rates. They make recent times feel like minor discomforts. I never want to go through that experience again.

You, perhaps too young to be around or shouldering responsibilities in the 1970's and 1980's, may not know that the federal government generates both inflation and deflation. Strictly speaking it does NOT print money but it sells bonds nonetheless. I suspect that the process of how money is created out of thin air escapes the attention spans of the majority of Americans so pedagogical first approximation had to suffice.

Yes, on inflation through currency production I am absolutely Germanic - been there, done that!

[-] 1 points by MattHolck0 (3867) 9 years ago

as large sums of money are held by banks/individuals |

can't they increase inflation by flooding a market

if they choose

[-] 1 points by grapes (5232) 9 years ago

Yes, the chance of their flooding the markets like a tsunami is remote but it would be very ugly indeed. I am actually more concerned about far smaller waves of inflation pushing us into stagflation. If inflation causes investors to demand higher interest rates, the interest payment of the U.S. will increase.

Let us say interest rates on our national debt of $17 trillions go up by 100 basis points or 1%. The interest payment increases by $170 billions, NOT a small sum. Either the U.S. tries to borrow that through even higher interest rates or embark on "austerity" or do both. The huge amount involved guarantees that it will have detrimental effects on everyone. A house of cards can fall by being hit with small waves of inflation.

[-] 1 points by MattHolck0 (3867) 9 years ago

the rich have the option to spend more than the populace can if they choose

[-] -1 points by flip (7101) 9 years ago

i think that this is the biggest issue facing our country right now. i suggest you read hudson or stephanie kelton on the subject. krugman is exactly right that this is a class issue. i am 64 years old. i was working through out that period. my life was never better. i raised my rates every year. my house increased in value and my mortgage decreased. so we have a different experience of that time. my business did very well in those days. lots of middle class people had money for tennis lessons (my business). then came reagan and volker and it all changed. since the 1980's fewer and fewer people have money to spend on frivolous things like tennis lessons. read some real history about the "german" experience of inflation and let me know how hitler got the money to rearm??

[-] 1 points by grapes (5232) 9 years ago

Yes, I really should not even trouble myself with this matter at all. It won't be in my hands anyway and people have to learn it themselves because we are just dust in the wind.

[-] 0 points by flip (7101) 9 years ago

while it is true that we are dust in the wind we can and have influenced our government to do the right thing in the past. it all starts with education so i believe we should educate ourselves on this issue

[-] 1 points by MattHolck0 (3867) 9 years ago

we should not need instructions to govern ourselves

[-] -1 points by flip (7101) 9 years ago

not sure what you mean but education is different from instruction. in order to govern ourselves we need to be well informed not miseducated as we are now on too many issues - money is just one important one. as far as governing ourselves goes we have a long way to go. i suggest we start with small achievable goals

[-] -2 points by flip (7101) 9 years ago

read the alan watts comment that i just put up and let me know what you think

[-] 1 points by grapes (5232) 9 years ago

Nazi Germany could rearm without much gold or hard currencies because it controlled the Ruhr valley's resources.

I am not sure about the U.S. doing the same because the U.S. had already outsourced so much of its industrial capacity. If the U.S. government did not bail out GM, the U.S. could not even make battle tanks. Note what has happened recently on the Eastern Front in Europe. We will be needing many tanks. Without the Chinese making our flags and insignia, we cannot even fight a war with the proper insignia complying with the Geneva Conventions.

In any case, having the U.S. emulate Nazi Germany is a bad bad idea.

[-] 0 points by flip (7101) 9 years ago

you just made my point it seems. we will not need battle tanks - not sure what you are thinking about an eastern front but there is a simple diplomatic settlement to that issue. what we need are the resources for alternative energy and the infrastructure for the coming decades. nobody is suggesting that we emulate the nazis

[-] 1 points by grapes (5232) 9 years ago

We will see to that - yes, a diplomatic solution of many battle tanks rolling to the Eastern Front in Europe will work magical diplomacy indeed. We will make Hitler envious of our Blitzpolitik, far superior to his Blitzkrieg.

You and I had discussion and disagreements before regarding the Eastern Front in Europe. You should take a close look at what had transpired there since then.

Inflation propelled the German nation towards Nazism. The U.S. is not immune. We do not even have the Beethoven and Gauss that German culture had.

[-] 0 points by flip (7101) 9 years ago

i am sure you meant to say hyper inflation propelled the german nation. and we did discuss ukraine - we now have a BI lateral cease fire not the unilateral one kiev tried to impose. you seem to be stuck in a time warp - the eastern front was 70 years ago - obama and the noecons are also

[-] 1 points by grapes (5232) 9 years ago

If Russia becomes a member of NATO, I will agree that the Eastern Front in Europe has disappeared.

The nation which owns the currency press has propensity to use it for discharging debt obligations.

[-] -1 points by flip (7101) 9 years ago

you seem to be fighting the last war - are you and old general? we have bigger problems now and the russians are not coming anymore. not the vietnamese or chinese or cubans. we need to grow up and look at the world differently or we are all doomed

[-] 1 points by grapes (5232) 9 years ago

History seems fractal to me because of the deja vu moments that I had experienced. Name the bigger problems. I see Russia colliding with NATO countries as a very big problem in terms of its potential consequences. If things go badly, many of us will be doomed by that conflict.

[-] 1 points by flip (7101) 9 years ago

yes you are right but nato is advancing eastward and russia is sitting still so who is causing trouble here?

[-] -2 points by grapes (5232) 9 years ago

Russia was playing tricks in countries all around its periphery. That is disconcerting at the very least.

[-] 1 points by MattHolck0 (3867) 9 years ago

russia has no year round seaport to reach further

[-] 1 points by grapes (5232) 9 years ago

Russia/Estonia have friction over abduction.

Estonia is a NATO member state.

[-] 1 points by MattHolck0 (3867) 9 years ago

and NATO is the new bomb squad

New Airstrike Terror Offensive

[-] 0 points by flip (7101) 9 years ago

I do not agree and the facts are on my side. You read too much mainstream media

[-] 1 points by MattHolck0 (3867) 9 years ago

Israel does not have stalkholm syndrome

[-] 0 points by flip (7101) 9 years ago

a little help from alan watts on the confusion of money and wealth - "Let me illustrate this point and, at the same time, explain the major obstacle to sane technological progress, by dwelling on the fundamental confusion between money and wealth, Remember the Great Depression of the Thirties? One day there was a flourishing consumer economy, with everyone on the up-and-up; and the next, unemployment, poverty, and bread lines, What happened? The physical resources of the country the brain, brawn, and raw materials were in no way depleted, but there was a sudden absence of money, a so-called financial slump.

Complex reasons for this kind of disaster can be elaborated at length by experts on banking and high finance who cannot see the forest for the trees, But it was just as if someone had come to work on building a house and, on the morning of the Depression, the boss had said, "Sorry, baby, but we can't build today. No inches." "Whaddya mean, no inches? We got wood, We got metal. We even got tape measures.' "Yeah, but you don't understand business. We been using too many inches and there's just no more to go around."

A few years later, people were saying that Germany couldn't possibly equip a vast army and wage a war, because it didn't have enough gold. What wasn't understood then, and still isn't really understood today, is that the reality of money is of the same type as the reality of centimeters, grams, hours, or lines of longitude. Money is a way of measuring wealth but is not wealth in itself. A chest of gold coins or a fat wallet of bills is of no use whatsoever to a wrecked sailor alone on a raft He needs real wealth, in the form of a fishing rod, a compass, an outboard motor with gas, and a female companion.