Does Inflation Make Any Sense?

(I’m not going to attribute all of the ideas below to the places I learned them, mostly because I don’t have time to find all the links)

Inflation is a theme for me at the moment. I’m writing this to think through how it works.

So there’s money out there. In terms of the stock of money, I’m not sure it’s possible for there to be ‘too much’ at any point in time, but there can be too little.  Krugman’s retelling of the babysitting co-op explains this very well. Do read it.

Ok, if some critical mass of people worries about having too little money, that’s bad.

But that’s not very satisfying. What is ‘critical mass’ and what is ‘too little’?

And honestly? I don’t think anybody can answer those questions rigorously.

There are two candidates for instances when we’ve passed that threshold: the Great Depression and the Great Recession.

The orthodox view today is that policy makers collectively* missed the first one and so literally caused the Great Depression. I quote Ben Bernanke (to Milton Friedman):

Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.

The irony is astonishing. Obviously it’s harder than it looks.

And I think that’s because the Fed isn’t run by an economist, it’s run by a committee. It’s probably a committee the largely reflects the consensus view of economists, but what if that consensus is non-existent? Inaction. And that spells disaster when the money supply is too tight.

And here’s a real head-spinner, google “deflation trade” and you get this:

The deflation trade is a rising US dollar, rising gold prices, rising treasuries, and falling equity markets.

Anyway, when people think of inflation problems, they don’t think of the Great Depression, they think of the hyper-inflation experienced in some places and the far less scary 70s and 80s in the US.

So what the hell is persistently high inflation? Well, you get from having less money to having more by adding some.

So what happens if everyone suddenly has twice as much money? They’ll probably spend it prices will be bid up.

Ok, so now drop the ‘suddenly’ part. How does the government actually pull this off?


I’m going to take a break here and go read some Nick Rowe.

*By collectively, I mean what their actions did, as opposed to their mouths (or pens) said.

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