Stagflation or Hyperinflation?

laffer-monetarybase

Hattip to Ed Morrissey at Hot Air .  Economist Arthur Laffer, he of the Laffer Curve, sounds the tocsin regarding the incredible expanision of the money supply.

“But as bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences. We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s.

About eight months ago, starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base — which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash — by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position.

The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 (see chart nearby). It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless. The currency-in-circulation component of the monetary base — which prior to the expansion had comprised 95% of the monetary base — has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. Yikes!”
It will be a medium miracle if we get through this without a bad bout of inflation.  What type of inflation?  Garden variety inflation or hyperinflation a la Weimar Germany?   My bet currently is 10 to 12% inflation in a year combined with a stagnant economy.  Stagflation, a truly ugly part of the Seventies, right down there with disco and leisure suits, is going to make a return I suspect.  However, right now the inept powers-that-be in Washington are redlining the economy, so I really wouldn’t be that surprised to see hyperinflation take off if we get unlucky and if the Obama administration learns nothing from the current fiasco this year.    Keep those wheelbarrows handy for future shopping expeditions, just in case.

75 Responses to Stagflation or Hyperinflation?

  • Blackadder says:

    I think that significant inflation is a realistic possibility and have made some investment decisions to take account of that fact. I’m less confident than I used to be, however, that we will see any serious inflation.

  • Mike Petrik says:

    I agree with Blackladder. Recessionary times introduce deflationary presssures that can greatly intensify the severity of a recession. In fact, that is largely what happened in the 1930s. Milton Friedman and other so-called monetarists have long pointed out that the Fed’s failure to counter the deflationary pressures by keeping a stable money supply (in a deflationary environment the maintenance of a stable money supply requires undertaking actions that in normal times would greatly increase money supply, i.e., be inflationary) via liberalized bank lending practices was what made what should have been an ordinary contraction into the prolonged Great Depression. Of course, economists agree that there is no perfect measure of money suppply (with velocity of money being a related issue), so how much to prime the pump is always a matter of imperfect judgment. Bernanke is rightly being aggressive, knowing that deflationary risks are generally worse than inflationary risks. That by no means suggests that he is estimating correctly; it is possible that inflation will ensue. But I don’t fault him for his prudential judgments on this score.
    I am more worried about the production of structural deficits. Keynes is certainly correct that fiscal policy can counteract economic contractions via the multiplier effect. The problem is timing. History indicates that the intended effects of fiscal stimulus often occur only after the economy has already started to recover, and then operates as a drag on that recovery by virtue of the government borrowing crowding out private borrowers and thereby increasing the cost of investment capital. And if such deficits are structural rather than a one-time shot in the arm the drag can be more than temporary. Well see.

  • Donald, your armchair economic analysis is embarrassing. Yes, of course inflation is a risk. But right now, there is no evidence of inflation on the horizon. There are a number of ways to gauge inflation expectations, the best being the breakeven inflation rates derived from TIPs — this is what financial markets think rates will be in the future. Right now, the 10-year breakeven rate is around 2 percent. That’s not high. But it has risen from zero and deflation risks fade. You can also look at long bond yields — while they have risen lately, they are still at spectacularly low levels, which suggests low growth and low inflation in the future.

    Bernanke is doing the right thing. Yes, its never been done before, but Bernanke — in his own research — has thought about these things long before he had his current job. You are aware of the zero bound and why unconventional quantitative and credit easing are needed, right?

    As for your stagflation theory– do you understand what you are saying? The 1970s stagflation resulted from an adverse supply shock, leading to less growth and higher inflation. What we have to today is a major negative demand shock, which leads to lower growth and lower inflation — and we have that. What would likely drive higher inflation in the future? Well, a rebound in growth before the Fed has had time to unwind liquidity.

    You’ve also ben harping a lot about the deficit, failing to acknowledge that the high deficit today is nearly all the result of the economy plus the inheritance of Bush. See the numbers in this post: http://vox-nova.com/2009/06/10/blame-bush-and-the-recession/. You may agree or disagree with the efficacy of the stimulus, but it’s not a main driver of the deficit. You might want to focus your attention instead on the big one – the fact that military spending accounts for almost a quarter of the federal budget and that the Iraq war will cost about $3 trillion, far exceeding anything Obama will spend. Welcome back to the reality-based community, Donald, the Bush years are over.

  • Donald R. McClarey says:

    Thank you Tony for bringing Ms. Rosy Scenario to the combox. I stand by my prediction of stagflation, unless Obama manages to ignite hyper-inflation with his inane fiscal policies.

  • Donald R. McClarey says:

    Oh, and Tony, although I think Bush deserves a huge amount of blame for the Bailout Swindle of 2008, even the New York Times realizes that blaming Bush as a tactic to avert criticism of the Obama policies on the economy has just about reached its shelf life.

    http://www.nytimes.com/2009/06/12/us/politics/12memo.html?_r=2&ref=todayspaper

    Your guy got elected last year and it’s his economy now. I believe his policies have made a bad situation much worse. Time will tell. Ultimately however, he will will be the one to take the credit or the blame.

  • MM,

    I think the thing the analysis you are linking to is missing is how much Obama had racked up in increasing the deficit in just one year. One can point to the likely overall cost of Iraq over the course of the 8+ total years we’ll be spending on it, but Obama has put through some very hefty price tags in just one year, which leaves one to wonder what it will look like by the time he’s done ending health care as we know it and such.

    Obama pushed through even more “tax cuts” (balanced by an increase on the rich that will do little when the incomes of the rich are going down a great deal) and a 1 Trillion+ “stimulus” package which amounted to a retroactive partisan wish list. So far, the cost per year of having Obama is much higher than of having Bush — and Bush himself spent like a drunken sailor. Your argument would be reassuring if we could be assured that Obama would resign after a year in office, but as things stand, not so much.

  • Donald R. McClarey says:

    After the last year BA, I am somewhat sceptical as to the predictive ability of the markets, but your point is well taken that there is a division of opinion as to whether a bout of inflation is inevitable, and how much will result if we do experience it. Here is a good article by Paul Kasriel of Northern Trust as to why he sees inflation in our future.

    http://web-xp2a-pws.ntrs.com/content//media/attachment/data/econ_research/0906/document/ec060109.pdf

  • Darwin,

    Actually, that’s not true at all. First, Leonhart’s numbers (attributing only 7 percent of the fiscal worsening to Obama’s stimulus) is from 2009-12. He points out that extending the analysis a few years beyond this makes Obama look only a tiny bit worse.

    Others have argued that Leonhart is even overstating Obama’s contribution. AS Jonathan Chait points out, an analysis by the Center on Budget and Policy Priorities thinks that the deficit under Obama will actually be $900 billion than under current policies (a standard fiscal policy benchmark).

    People who simply look at the deficit often fail to distinguish cyclical and structural factors, and within nstructural factors, dynamics from pre-existing programs. Let me give you an example from the UK, which is even more extreme. In a year, the deficit jumped from about 6 perent to over 12 percent of GDP. Of that, Brown’s fiscal stimulus accounts for 1.5 percent, the rest is the economy. It’s not so serious in the US (the UK relied a lot more onm sensitive asset-based taxes), but you had the downturn right as Bush’s previous measures (Iraq, tax cuts etc) were having a large dynamic impact.

    And by the way, nobody has yet answered by question: would you be willing to cut the deficit by cutting spending on the item that accounts for almost a quarter of spending, the single largest, discretionary spending porgram — the military? I would. Can we achieve common ground here?

  • Donald R. McClarey says:

    Tony when you have something more of substance to say about this post, get back to me. I can understand however why people who have all their political hopes and fortunes tied in with this current administration might be a wee bit touchy right now, with a plurality of the public in some polls calling for the cancellation of the rest of the stimulus,
    http://www.rasmussenreports.com/public_content/business/economic_stimulus_package/45_say_cancel_rest_of_stimulus_spending, and only 26% of the public supporting the GM bailout, http://www.rasmussenreports.com/public_content/business/auto_industry/26_applaud_gm_bailout_but_17_favor_boycott, it might be a longer four years than was originally thought for those who signed on for Hope and Change. Feel free to relieve stress whenever you wish by coming over here and venting.

  • Donald R. McClarey says:

    Ah, some substance while I was responding to your earlier post. You want to slash spending on the military Tony? What a surprise. Tell you what. You help organize a movement to slash spending on the military and I’ll continue my efforts to get the Republicans in Congress to slash useless domestic spending and to trim military spending by closing useless bases and unnecessary weapon systems, both of which are not wanted by the Pentagon but are wanted by politicians eager to protect jobs in their districts, and maybe something will be accomplished. Question: what domestic spending, if any, would you be willing to have cut? Additional question, since you want socialized health care, how in the world can you pretend to have any concern about government spending?

  • S.B. says:

    Guys, unlike Vox Nova, your blog is doing a good job keeping commenters from flat-out lying about other people. Thus, just as you delete iafrate’s juvenile obscenities, you should delete MM’s insane remark above. Arguing with someone in a comments section is simply not “stalking.”

  • Donald R. McClarey says:

    Agreed SB. I’ve deleted both Morning’s Minion’s comment and your response. Morning’s Minion proffered no evidence to support his contention, and, in any event, his contention was not germane to the discussion.

  • S.B. says:

    Thanks! That was really weird. Outside of a couple of emails literally a year ago, I’ve had absolutely nothing to do with MM in any way outside of blog comment boxes.

  • Actually, that’s not true at all. First, Leonhart’s numbers (attributing only 7 percent of the fiscal worsening to Obama’s stimulus) is from 2009-12. He points out that extending the analysis a few years beyond this makes Obama look only a tiny bit worse.

    I’m aware if that — my point is rather that this only takes one year of Obama’s decisions, and extrapolates the impact out over four years. If one had taken Bush’s 2001 decisions and extrapolated them out over four years, it wouldn’t have looked very bad either.

    Now, if your assumption is that Obama won’t be making additional decisions that will widen the deficit in the future, that is perhaps legitimate. But it doesn’t seem assured by any extent.

    And by the way, nobody has yet answered by question: would you be willing to cut the deficit by cutting spending on the item that accounts for almost a quarter of spending, the single largest, discretionary spending porgram — the military? I would. Can we achieve common ground here?

    Well, first off, like any responsible adult (including the candidate you supported) I think it would be grossly irresponsible, indeed inhumane and immoral, for the US to pull out of Iraq and Afghanistan so quickly that unnecessary chaos and bloodshed resulted. As I recall, the Vatican has made much the same observation.

    As for how unreasonable it is for the US to spend roughly 20% of it’s budget on the military — I tend to think it’s a pretty small price to pay for most of the rest of the world agreeing to step out of the military business. A disproportionate share of world military spending is one of the plights of a hegemonic power. So I do not, of course, think that slashing US military expenditures the level of Germany or Italy would be a good thing for the world as a whole. But there is certainly money that’s wasted in the overall military budget, and I’d have no problem at all slashing that. Weren’t you the one who was so scornful of cutting “pork” as a means of helping the budget, though?

  • I note that Darwin is the only one addressing the argument. Sorry, Donald, but petulence is no substitute for knowledge. As I have shown, you don’t know what you are talking about. Take your stagflation argument — if we get inflation (unexpected inflation, because it is not priced in), it is because the rebound will have caught everybody by surprise. And that’s not exactly a bad thing. You don’t seem to know the difference between demand and supply shocks — that’s pretty basic, my friend.

    And the reason why I keep mentioning military spending is because (i) you seem to think spending iof far too high, leading to fiscal sustainability problem; (b) the military accounts for 20-25 percent of total spending and so is an obvious point to cut. There’s also that little thing about Christians seeking to turn swords into ploughshares.

  • Darwin:

    Obama supports reinstituting PAYGO, which means that any spending increase or tax cut would have to be financed by a tax hike or spending cut. That’s pretty good budget discipline (if only Bush had not thrown it out the window). But the real point of my comment here is to challenge Donald’s ridculous assertion that Obama’s decisions are behind the deficit number we see today.

    On the military issue, your answer basically says you place a very high value on this mind of spending. Well, I place a very high value on universal health care, on education, on income support for families. We all have our priorities — when so-called budget hawks like Donald seek to cut spending, what they really want to do is cut the spending they don’t like. So let’s be honest here. I would merely conclude by offering the point that spending on healthcare and education is more in tune withe gospel values, and with Catholic social teaching, than is such large spending on the military.

  • Donald R. McClarey says:

    “Sorry, Donald, but petulence is no substitute for knowledge.”

    Indeed, Tony and yet you keep posting here anyway.
    Get a grip on yourself. The man you helped to elect to office is bankrupting the nation. His ludicrous appeal for paygo is akin to the man in Lincoln’s story who slays his mother and father and then throws himself on the mercy of the court as a poor orphan. Of course it is a complete sham.

    http://online.wsj.com/article/SB124467627264104053.html

    In a few months only the true believers like you will be able to swallow the idea that Obama’s mad spending has done the nation any good.

  • TomSVDP says:

    Minion never got back on the question of the Mexico City Policy, Reagan and Bush at least asserted it, Obama and Clinton reversed it. I guess he/she took leave on the issue, doesn’t leave much room to act high and mighty. Reversing Mexico City policy is really shameful stuff, exporting funds for abortions overseas from some guy who has the Birth Certificate issue which I admit could be from extremists, still, it doesn’t change the fact, that many of his personal records are not for the general public to see including his long certificate of birth. What hypocrisy, what callousness. http://abcnews.go.com/Politics/International/story?id=6716958&page=1 ABC news story. Seems she/he took a leave of absence on that one. That’s not to mention all of the other issues in this area like the Born Again Infant Protection Act.

    Not much room for the fancy words, petulance as far as I can see. Why take such a point of view serious in the first place, as if this person feels the rights to criticize others? Consider the source.

    I don’t mean that to be stern or offensive to anyone. There is no other way to put it when we are seeing how humane Obamanomics is supposed to be with money for healthcare, education and all that lala happy story. If my tone is serious, I would gladly tone it down.

  • Obama supports reinstituting PAYGO, which means that any spending increase or tax cut would have to be financed by a tax hike or spending cut.

    Well, first off, promises are one thing, actions are another. Thus far what we have to judge Obama on is a massive stimulus package — most of which hasn’t even gone out the door and thus isn’t even “stimulating” the economy yet. And we have a budget no smaller than Bush’s most modest. Frankly, with that foundation, even if he doesn’t raise spending even higher without tax increases, that’s very little help. I agree with you that Bush’s spending was out of control, but that means one has to cut it down directly, not freeze the status quo with PAYGO.

    On the military issue, your answer basically says you place a very high value on this mind of spending. Well, I place a very high value on universal health care, on education, on income support for families. We all have our priorities — when so-called budget hawks like Donald seek to cut spending, what they really want to do is cut the spending they don’t like. So let’s be honest here. I would merely conclude by offering the point that spending on healthcare and education is more in tune withe gospel values, and with Catholic social teaching, than is such large spending on the military.

    You’re certainly entitled to your opinion, but thus far the track record of US military spending keeping the rest of the world fairly demilitarized is pretty good. Did you figure that the common good was better served in the first half of this century when US military spending was fairly small (though still a major percentage of the national budget — we just spent much less overall)? As I say, I’m all in favor of cutting military spending where it’s not actually conducive to the common good — but I tend to consider relative world peace to be conducive to the common good. And to be blunt — keeping Europe fairly demilitarized seems fairly essential to that goal.

    However, I would imagine that there are some things we could agree on on the number one area of spending: entitlements. Would you join me in supporting means testing for Social Security such that social security pay outs are phased out for people with higher incomes up to a max income (say, around 60k, very nice for a stage in life when you should own your home outright) above which no Social Security benefits at all would be paid out?

    Would you join me in supporting means testing medicare such that people with income over 40k pay for some of it and those over 60k pay for all of it? (I know you’re enthusiastic about MediCare’s cost savings, so clearly that would be a good deal for everyone.)

    Would you join me in supporting an end to farm subsidies?

    I’m sure there’s lots we can agree on without turning the world back into a powder keg.

  • Darwin:

    You still have not refuted the basic point that esimates of Obama’s contribution to the budget deficits how (depending on the assumptions used) either a tiny increase, or a vast improvement over the no-policy-change scenario. I think that’s pretty good fiscal discipline, especially in the midst of a recession where procylical fiscal tightening is exactly the wrong medicine. People seem simply to not understand the difference between overall and cyclically-adjusted budgets.

    And as for the stimulus not working, well, I’m not sure about that. Remember where we stand. In the last quarter of 2008, we came close to financial market meltdown. And first quarter GDP numbers were unaminously awful, big negative numbers from the US to Europe to Asia. But, now, the worst seems to have passed. Financial market stress is dramatically lower — look at LIBOR-OIS spreads and other indicators. Forward-looking indicators are turning up. Confidence is returning. Deflation risks seem to have passed. I think one reason for this is the huge fiscal and monetary stimulus in the system, not just here, but all over the world.

  • On Darwin’s other points: I don’t buy the American exceptionalist argument about keeping the world safe. WW2 is a long time ago. Since then we’ve have Mossadeq, Lumumba, Vietnam, the dictators in Latin America, nuclear weapons spreading, right to up Iraq and torture.

    Social security? That’s barely a problem! A little tinkering with the social security contribution can fix it. So I’m not quite sure I understand your proposal — whie social security has a big redistributive element (and should have), if you do what you propose, the social contract would end. Then again, that’s what many people want.

    Medicare is a problem. It’s costs are rising at an astronomical level, but what people don’t tell you is that private health care costs are rising faster. From that perspective, medicare is a good deal — relatively of course, as it wil still become unsustainable down the road. You can’t fix medicare wuitrhout fixing the entire health care system — and you know my views on that!

    Ending farm subscidies? In a heartbeat!

  • You still have not refuted the basic point that esimates of Obama’s contribution to the budget deficits how (depending on the assumptions used) either a tiny increase, or a vast improvement over the no-policy-change scenario.

    Actually, that’s pretty easy. Bush had not proposed anything nearly on the level of a 1.3 trillion dollar stimulus bill. If for some reason we’d had another term of Bush rather than a change in administration this year, total spending would almost certainly have been lower than it has been. As for whether the stimulus worked — I agree with you that things are starting to turn around, but I don’t see how one can lay that on Obama’s mat when most of the stimulus currently remains unspent. Really, the only thing that Obama has to recommend him at this point is that he hasn’t got around to enacting most of his agenda yet — other than the retroactive wish list bonanza of the stimulus, that is.

    I don’t buy the American exceptionalist argument about keeping the world safe. WW2 is a long time ago. Since then we’ve have Mossadeq, Lumumba, Vietnam, the dictators in Latin America, nuclear weapons spreading, right to up Iraq and torture.

    To be clear: It’s got nothing to do with American exceptionalism per se — other than to the extent that America happens to be better situated to be a hegemonic power than most of the other major powers on the world stage at the moment (for instance, because it doesn’t have regional enemies near it that would see it as a threat to see the US reach hegemonic levels of power.) Rather, it’s that I think having a hegemonic power which is not bent on conquest is much more conducive to world peace and well being than having a number of roughly balanced world powers. This difference is fairly clear if one looks at the difference between the last sixty years (even with occasional regional flair ups like Korea, Vietnam and Iraq) and the previous 150.

    Social security? That’s barely a problem! A little tinkering with the social security contribution can fix it. So I’m not quite sure I understand your proposal — whie social security has a big redistributive element (and should have), if you do what you propose, the social contract would end. Then again, that’s what many people want.

    The problem? Well, there’s “hardly a problem” with military spending either, if it’s function that you’re complaining about. But if you want to go after the largest areas of the budget, the real target is entitlements, which gives you two big targets.

    Social contract? Come now, my dear Rousseau, few people think of Social Security as a retirement account at this point. Everyone knows its a welfare program for the old, which for reasons passing understanding pays out even to the rich. If people want to save, they get an IRA or 401k. If saving money is truly of interest to you, you should have no problem with ending the charade that Social Security is anything other than a safety net program, and be happy to turn it into something which gives preferential option only to the poor.

  • S.B. says:

    So MM finally does realize, contra his post on Bartels a year ago, that much of what happens economically during a President’s 4 or 8 years in office is affected (if not determined) by a previous President.

    As I said in that thread — and it looks remarkably prescient, if I say so myself:

    Look at it this way: In 2009 or 2010, the US economy may experience a serious recession, as lots of people are predicting. This may be due to a thousand different factors — the collapse of the housing bubble, the price of oil, the collapse of the American honeybee population (driving up the price of food), decisions by foreign investors, etc., etc., etc.

    If such a recession does happen, it will be fundamentally stupid (for the same reasons that Rodrik and MM are fundamentally stupid here) to say, “Obama is President; therefore Democrats cause recessions.” I certainly wouldn’t say such an idiotic thing, and I’d eagerly condemn any Republican who did.

  • S.B. says:

    And as for the stimulus not working, well, I’m not sure about that. Remember where we stand. In the last quarter of 2008, we came close to financial market meltdown. And first quarter GDP numbers were unaminously awful, big negative numbers from the US to Europe to Asia. But, now, the worst seems to have passed.

    Given that the overwhelming majority of the stimulus money hasn’t and won’t be spent until the next couple of years, this is quite a magical effect. Just pass a bill without doing anything yet, and everything gets better.

    If the claim is that the economic movers are just inspired by the thought of all that money being spent two years from now, why can’t we just pass a bill that pretends to spend borrowed money in 2010 and 2011, but then just secretly waits to see whether it’s actually necessary at that point?

  • Matt McDonald says:

    While projected spending can stimulate the private economy when vendors ramp up, the spending in this stimulus is primarily in the public sector (teachers, entitlement programs etc.), not in the private sector (infrastructure). Until those new public jobs come on line there is no new jobs (as evidenced by the unemployment numbers).

    No, whatever is going on in the economy is not from stimulus.

  • S.B. says:

    By the way, MM, shouldn’t you take a break from defending Obama for a moment, and saunter over to VN to amend your comments: 1) accusing a Jewish guy of not being “Catholic” enough, and 2) falsely accusing Joseph Bottum of “idolizing Ronald Reagan” and engaging in “Reagan worship”?

    Number 1 is was a jaw-hits-the-floor moment. Of course, Calvinists (I here refer to actual Calvinists, i.e., followers of John Calvin) have quite a better record of toleration towards Jews than the Catholic Church did up till just recently (for reasons that can be traced to John Calvin himself). Thus, perhaps you think it’s too Calvinist that First Things even lets a Jewish guy near the place.

  • John Henry says:

    S.B.,

    This isn’t my thread, but is it really necessary to comment here on another thread on an unrelated topic on another blog? (btw, I am sympathetic to your criticisms of the other post, I just don’t think it’s helpful to bring it up here.)

  • I didn’t ban you from any of mys posts, SB, but I do try to ignore you. 10 percent of the time you say something interesting, while the other 90 percent consists in a barrage of harassment, over months and even years, off topic or on topic. And I want to respect John Henry’s wishes (this is his turf, not mine), but I will point out that discerning right from wrong is what the natural law is all about, and Jews are no different from Catholics is this regard.

    Well, SB, I guess this is one of the 10 percent of posts, because your link to Justin Wolfers (a really good economist) does manage to shed some light on the issue. For me, the key is the level of inflation expectations — from an unbelievably low 0.9 percent to 2.25 percent. If financial markets expect inflation of 2.25 percent in 10 years, then we really don’t have much to worry about. Of course, the speed of the correction could be an issue. I’ll repeat the point from earlier — if inflation gets out of control, it will most likely come from a recovery that comes sooner and stronger than most people now anticpate, before the Fed has a chance to properly drain excess liquidity from the system.

    I would also draw attention to Paul Krugman today, as he discusses this very topic:

    “On one side, the inflation worriers are harassing the Fed. The latest example: Arthur Laffer, he of the curve, warns that the Fed’s policies will cause devastating inflation. He recommends, among other things, possibly raising banks’ reserve requirements, which happens to be exactly what the Fed did in 1936 and 1937 — a move that none other than Milton Friedman condemned as helping to strangle economic recovery.

    What about the claim that the Fed is risking inflation? It isn’t. Mr. Laffer seems panicked by a rapid rise in the monetary base, the sum of currency in circulation and the reserves of banks. But a rising monetary base isn’t inflationary when you’re in a liquidity trap. America’s monetary base doubled between 1929 and 1939; prices fell 19 percent. Japan’s monetary base rose 85 percent between 1997 and 2003; deflation continued apace.”

    I would point out that Krugman was one of the first people to correct diagnose Japan in the 1990s.

  • Krugman on the stimulus:

    “And Republicans, providing a bit of comic relief, are saying that the stimulus has failed, because the enabling legislation was passed four months ago — wow, four whole months! — yet unemployment is still rising. This suggests an interesting comparison with the economic record of Ronald Reagan, whose 1981 tax cut was followed by no less than 16 months of rising unemployment.

    Well then, what about all that government borrowing? All it’s doing is offsetting a plunge in private borrowing — total borrowing is down, not up. Indeed, if the government weren’t running a big deficit right now, the economy would probably be well on its way to a full-fledged depression.

    Oh, and investors’ growing confidence that we’ll manage to avoid a full-fledged depression — not the pressure of government borrowing — explains the recent rise in long-term interest rates. These rates, by the way, are still low by historical standards. They’re just not as low as they were at the peak of the panic, earlier this year.”

    Sensible, as always. I guess one can make the point that the effectiveness of the stimulus has yet to be seen, and that monetary policy alone might be enough to do the job. That’s a valid point, but I’m with Krugman on the pessimism. There’s another point that he doesn’t raise — we have seen other cases where the stimulus really worked, especially in countries with various constraints on monetary policy. In China, for example, domestic demand is booming, and has already outweighed the collapsing exports, and this can be traced to the fiscal stimulus delivered through infrastructure projects. China was faster off the mark than was the US on that one.

  • Matt McDonald says:

    fiscal stimulus delivered through infrastructure projects.

    If only that was what we had done. Our “spendulus” was just a big expansion of the federal government.

  • S.B. says:

    I didn’t ban you from any of mys posts, SB, but I do try to ignore you. 10 percent of the time you say something interesting, while the other 90 percent consists in a barrage of harassment, over months and even years, off topic or on topic.

    From what I was told, Henry banned me from all posts, for what reason only he knows.

    Your 90% figure is surely an exaggeration . . . perhaps you have in mind the fact that I have occasionally (not 90% of the time) referred back to an old instance of dishonesty or inanity that had never been corrected (e.g., your old post doing a simple regression on abortion and poverty as if this proved a causal relationship, or Gerald Campbell’s defense of the “pro-choice position” as normatively “justified by subsidiarity”). And what’s wrong with this? You seem to be aware that it’s fair game to criticize people for things that happened before this morning, as shown by the fact that you yourself refer back to your old posts all the time, i.e., on Joseph Bottum or Michael Novak or whoever.

  • Blackadder says:

    Krugman is fairly persuasive on the inflation issue. On the stimulus less so. Obama’s economic team said that unemployment would peak at 9% in 2010 if the stimulus bill wasn’t passed, and that it would stay below 8% with the stimulus. Krugman himself worried back in January that people would call the stimulus a failure if unemployment reached 8.1% by year’s end. Well, we’re still less than halfway through 2009 and unemployment is already at 9.4%.

    Of course, one can always say that people were being overly optimistic back in January (though it’s hard for me to even write that sentence with a straight face). But if we grant that we’re basically granting there’s no way to ever prove that the stimulus was a failure. No matter how bad things get, you can always say that they would have been worse without the stimulus.

  • Blackadder says:

    perhaps you have in mind the fact that I have occasionally (not 90% of the time) referred back to an old instance of dishonesty or inanity that had never been corrected (e.g., your old post doing a simple regression on abortion and poverty as if this proved a causal relationship, or Gerald Campbell’s defense of the “pro-choice position” as normatively “justified by subsidiarity”). And what’s wrong with this?

    It gets old.

  • S.B. says:

    Well, it gets old that certain bloggers do anything to justify and defend such dissent. If they had said, a year ago, “Oh, that’s obviously not what subsidiarity is about, Gerald is wrong,” the subject would have been dropped then and there.

    It also gets old that those same bloggers always want to be Inquisitors sitting in judge of everyone else’s orthodoxy for saying the wrong thing about capitalism, health care, or some other much less clear-cut issue.

    And in any event, it is an absolute falsehood for anyone to suggest that “90%” of my comments are in that vein. Just not true.

  • And pretending that right-wing liberalism (free markets, big government in military affairs, small government in everythinge else, individualism, nationalism etc.) is really conservatism also gets old! Sorry, couldn’t resist that, but no more!

  • And pretending that right-wing liberalism (free markets, big government in military affairs, small government in everythinge else, individualism, nationalism etc.) is really conservatism also gets old!

    That’s right. By golly, in the good old days there were never any problems with nationalism. And did soveriegns spend a significant portion of their budgets on their militaries? No, no. Back in those days it was all technocratic social programs from dawn till dusk. It was just when these bloody liberals came along (freemasons all of them, I tell you) that people started cutting out all the generous lord-to-serf benefit plans like universal health care and pouring all their resources into capitalism and militarism instead. Back to good old days is what I say, what ho!

  • S.B. says:

    Why would it be “taking the bait” to agree that the Catholic doctrine of subsidiarity does not in fact require or even imply the pro-choice position? It’s such a simple and indisputable truth. Indeed, you have it within your power to avoid further criticism, and even to win plaudits for courageously abandoning the intellectually corrupt “no enemies to the left” principle, by simply saying “yes, that’s right.”

    But you won’t do it. Odd.

    Well, I won’t mention it again. Gets “old,” you see. At least not until you once again take the Inquisitor role regarding economic issues that are much less binding and clear-cut than this. Then, much as I might try to restrain myself, I might just mention the fact that you don’t object to dissent except where as you see an occasion for beating up on your political enemies.

  • Art Deco says:

    I think the difficulty the Federal Reserve faces is that the propensity of people to hold cash balances has been quite unstable in recent months and for that reason no one has a good handle on the likely effects of the recent expansion in the monetary base on prices over the next few years.

    One might also note that a ‘liquidity trap’ is a theoretical construct and economists dispute whether it is a real-world phenomena. It has been a long time, but as I recall, the ineffectuality of monetary policy in a supposed liquidity trap is a function of the interchangeability of cash for the usual sort of securities the central bankers will purchase in order to expand the monetary base. Critics of the notion of a real-world liquidity trap contend that if the Federal Reserve purchases a security with a significantly positive interest rate, the conditions of the trap do not obtain. The Federal Reserve has in fact been doing this in recent months. (I think implicit in other critiques is that public demand for real balances is never totally elastic, which it is in the theoretical liquidity trap).

    We can look it up, but as I recall, Japan had stable, not declining, prices during the period running from 1989 through 2002. Dr. Krugman also fails to note that the price level in the United States increased considerably after March 1933 (and after the dollar was taken off the gold standard). The deflation was entirely concentrated in the period running from September 1929 to March 1933, when monetary policy was quite conventional.

    It ought be noted that economists with little time for Dr. Krugman’s macroeconomic nostrums (e.g. Casey Mulligan of the University of Chicago) argue that inflation would be beneficial to the American economy by vitiating the real value of our overhang of mortgage debt. Of course, it it provokes a currency crisis….

  • Art Deco says:

    The 1970s stagflation resulted from an adverse supply shock, leading to less growth and higher inflation.

    It has been years, but as I recall, econometric studies of the inflation experienced during the period running from 1973 to 1981 attribute only small portions of it to exogenous shocks in commodity markets; it was ultimately a monetary phenomenon.

  • Yes — policymakers in the 1970s made the mistake of treating a negative supply shock as a negative demand shock and thus loosening monetary policy. All you get in this scenario is higher inflation (there are some technical distinctions between the short-term and the long-term, and how inflationary expectations become embedded in the system, but that’s the jist of it).

  • OK, SB, for the last time. I’ll probably regret this. Of course subsidiarity cannot be invoked to justify the “pro-choice position”. As you phrase it, that statement is almost absurd in its fallacy. I said as you phrase it — I’m not in the game of talking about what a third party (who is not here to defend himself) did or did not mean.

    But what do you mean by the pro-choice position? There are many shades that you gloss over. There is the argument that abortion is a right, something good, or at least morally neutral. That is a wicked opinion.

    On the other end of the spectrum are those who claim it is murder, and seek appropriate penalties. Well, it is indeed murder in the natural law, but that does not mean it gets treated as murder in positive law — I do not believe any jurisdiction has ever treated it as such. So one argument that it should not be permitted by law, but that the penalties would be trivial or even non-existent (this was the South Dakota proposal).

    Moving further along the spectrum, there is the position that since getting the required legal protection is impossible unless we change the culture, we should seek to reduce abortion by other means, all the while seeking the change the culture. I am personally sympathetic to this position, and the Declation on Procured Abortion lists that as the most important objective. Note this does not mean any support for the laws in question, and it does not make one “pro-choice”.

    As I’ve said a million times with these kinds of attacks, the real problem is not any deviation from Church teaching, it’s deviation from “Republicath orthodoxy”. Tactics are elevated to the point of principle. It’s a little ironic, since the Roe-centered position is indeed based on subsidiarity – that the federal courts are not the place for these decisions to be made.

    I wish you would bring your same zeal to those who actively dissent on other areas of Catholic moral teaching, including those who support torture and unjust war — and to people who share blogs or publications with them. Go for it.

  • Donald R. McClarey says:

    I am on vacation this week with my family and my blogging opportunities are somewhat limited as a result. Good to see that this thread is still running strong.

    Tony, I’m sure you can explain how your voting for a pro-abort for President ties in with this section of the catechism:

    “2273 The inalienable right to life of every innocent human individual is a constitutive element of a civil society and its legislation:

    “The inalienable rights of the person must be recognized and respected by civil society and the political authority. These human rights depend neither on single individuals nor on parents; nor do they represent a concession made by society and the state; they belong to human nature and are inherent in the person by virtue of the creative act from which the person took his origin. Among such fundamental rights one should mention in this regard every human being’s right to life and physical integrity from the moment of conception until death.”80

    “The moment a positive law deprives a category of human beings of the protection which civil legislation ought to accord them, the state is denying the equality of all before the law. When the state does not place its power at the service of the rights of each citizen, and in particular of the more vulnerable, the very foundations of a state based on law are undermined. . . . As a consequence of the respect and protection which must be ensured for the unborn child from the moment of conception, the law must provide appropriate penal sanctions for every deliberate violation of the child’s rights.”81

    I would have much more respect for you Tony if you would simply admit the obvious. You are a committed Leftist. You voted for Obama because you want him to transform this nation into a clone of a European socialist state. As to the fight against abortion, that is low enough on your list of political priorities that a politician being a complete pro-abort would never cause you to vote against him or her on that basis alone. All the “Republicath” blather in your comment above and in endless other comments and posts you have made over the years can’t conceal these facts that any one with any familiarity with your internet writings will grasp.

  • paul zummo says:

    I wish you would bring your same zeal to those who actively dissent on other areas of Catholic moral teaching,

    You are undeniably one of the most hypocritical individuals I have ever encountered. You share a blog with people who dissent openly on matters of Church teaching on matters such as abortion, homosexuality, and female ordination, and you have the temerity to criticize anyone else about the manner in which they challenge others who dissent from Church teaching.

    As your comment indicates the fact of the matter is you don’t give a damn about abortion. It is an inconvenient distraction away from the glories of your one true Church – the Democratic party.

  • Matt McDonald says:

    the real problem is not any deviation from Church teaching, it’s deviation from “Republicath orthodoxy”. Tactics are elevated to the point of principle.

    these kinds of statements crack me up. The principle is clearly enunciated by the magisterium, as Donald has cited.

  • Donald, I am in the tradition of European Christian Democrats, who recognized well the problems of both collectivism and individualism. I support the social market state, which conforms to Catholic social teaching. I’m a Pius XI-style socialist. You on the other hand, are an American liberal individualist.

    And on the life issue, I oppose abortion and euthansia, but I also oppose war and guns and violence in popular culture. You claim to care about abortion and yet you ingest an economic philosopy that flies directly against the injunction in the Declaration on Procured Abortion to takle first and foremost the underlying causes of abortion. You claim to be pro-life and I see you every day glorifying war.

  • Matt McDonald says:

    MM,

    Freudian slip?

    That should read “Pius XI-style corporatist” not “socialist”.

    bet you wish you could take that one back, eh?

    Declaration on Procured Abortion to takle first and foremost the underlying causes of abortion

    Actually, I think it says that first and formost, the laws of a nation must respect the unborn. Nevertheless, it does NOT say that we must accept your worldview that the root cause is free market capitalism.

  • S.B. says:

    Moving further along the spectrum, there is the position that since getting the required legal protection is impossible unless we change the culture, we should seek to reduce abortion by other means, all the while seeking the change the culture. I am personally sympathetic to this position, and the Declation on Procured Abortion lists that as the most important objective. Note this does not mean any support for the laws in question, and it does not make one “pro-choice”.

    Since you mention torture later:

    The required legal prohibition on torture is impossible unless we change the culture (I’m quite confident that there are many fewer Americans who oppose waterboarding a couple of top al Qaeda members than who oppose abortion). Thus, we should seek to reduce torture by other means, all the while seeking to change the culture.

    Personally, my best plan for accomplishing that objective is this: Campaign and agitate for a presidential candidate who openly brags about his support for torture, and who, as a quite charismatic fellow, can be sure to win over converts to his views.

    How will this accomplish my asserted end of changing the culture, you ask? Well, now: my candidate will be so successful in fighting terrorism that he will ultimately reduce the societal NEED for torture. Voila, the culture will change, just like that.

    I leave it to the reader to guess whether such an argument is believable or sincere.

  • Donald R. McClarey says:

    I have never glorified war Tony. I have celebrated courage, faith and decency demonstrated by men fighting in war, as the Church has throughout the centuries.

  • Dale Price says:

    And don’t forget two more critical points:

    1. The charismatic candidate has never even hinted that he is personally opposed to torture or suggested that it is a tragedy even when “necessary”; and

    2. the campaigns’s own torture partisans, when talking with anti-torture advocates, are quick to emphasize that they have no desire to reduce the *number* of acts of torture, but simply to reduce the *need* for it. Anything that suggests torture itself is an illegitimate act is right out.

  • You clearly know more than I do about these people, Paul. I think what you say is rubbish, but again, I’m not going to speak about third parties who are not here to defend themselves. But this much I will say: you share blogs with dissenters on the death penalty (the author of this post himself). You share blogs with people who support unjust war and the recent war crimes committed by Israel. And do you want to take responsibility for all the opinions of your new friends at First Things? I wouldn’t go pointing fingers when the culture of death is right at your doorstep.

    But hold on: I’m merely drawing a comparison with the rhetoric of those who point to selective dissent. I actually think the whole “guilt by association” game is rather pointless, and more than a little stupid — of course you are not responsible for any of these opinions I listed above. What I want is some consistency, and I will keep pointing out the lack of consistency.

    Me a Democrat? Funny, coming from the guy whose underlying philosophy is the hodge-podge set of beliefs that thinks it is somehow related to “conservatism”, something that is unique to the latter-day American Republican party!! If you want me to choose between two parties, neither of which has an anthropology aligned with the Catholic worldview, then I certainly pick the one that is not completely and utterly insane.

    One more thing: you guys discuss Republican tactics and politics as insiders, as “we”. I can assure you, I do not feel such affinity for the Democrats. There is no “we”. And yet I am held up as a partisan in your circles!! I can also assure you that if I did write from such an insider perspective, you people would be the first to go on the offensive, showing yet again the clear existence of double standards.

  • I know you are all smart enough to understand the distinction between when the acting moral agent is the government versus when the acting moral agent is a private person. But don’t let that fine distinction spoil your fun! Good night!

  • Dale Price says:

    I know you are all smart enough to understand the distinction between when the acting moral agent is the government versus when the acting moral agent is a private person. But don’t let that fine distinction spoil your fun! Good night!

    When danger reared its ugly head/
    Sir Robin bravely turned and fled/
    Brave brave brave brave Sir Robin…

    As an aside, I’d never pegged you for a libertarian, but that’s as dogmatic an argument for limited government and unrestrained personal liberty as I’ve seen in some time.

  • Blackadder says:

    you guys discuss Republican tactics and politics as insiders, as “we”. I can assure you, I do not feel such affinity for the Democrats.

    You realize that this is not how you come across, right?

  • paul zummo says:

    But this much I will say: you share blogs with dissenters on the death penalty

    I know that in your pretend world the Catholic Church holds an absolutely prohibitionist stance on the death penalty, but the fact of the matter is, Tony, that it is not a sign of dissent to support the death penalty.

    You share blogs with people who support unjust war and the recent war crimes committed by Israel.

    Absolute rubbish that once again shows more about your penchant for hyperbolic comments that simply caricature your opponents’ thoughts.

    And yet I am held up as a partisan in your circles!!

    Gee, Tony, why could that be? It couldn’t possibly have to do with the fact that you rarely ever criticize the Democratic party or the leftists who make up the lion’s share of its membership? And in the rare times that you kind of subtly criticize the party you quickly point out that the GOP is worse? Nah, couldn’t be.

    If one goes through my archives you will see quite a few posts that are extremely critical of the GOP. In fact, there are probably periods where a significant majority of my political posts are ones excoriating Republicans. The same cannot be said of you. That is why you are singled out for the rabid partisan that you are.

  • John Henry says:

    I do not feel such affinity for the Democrats. There is no “we”. And yet I am held up as a partisan in your circles!!

    The relevant question isn’t whether you ‘feel’ such affinity; it’s whether your writing is partisan. And the answer to that question is yes, and occasionally in ways that imo substantially weaken your credibility.

    By the way, it is gracious of you to respond to the criticisms in this forum MM (even if all of your responses have not been similarly gracious).

  • S.B. says:

    I know you are all smart enough to understand the distinction between when the acting moral agent is the government versus when the acting moral agent is a private person. But don’t let that fine distinction spoil your fun

    Why is that distinction all that relevant? The moral culpability of the government agents is different, yes, but that isn’t the issue. The issue is whether it’s legitimate to say that your approach to fighting an evil is to vote for a guy who is actively campaigning on behalf of that evil. And in any event, it still remains the case that most people aren’t that upset over smacking criminals and terrorists around. So until we change the culture to really oppose torture, the best way to prevent torture will be to elect someone who works at reducing the need for torture, by capturing as many al Qaeda terrorists as possible.

  • TomSVDP says:

    Seemingly, people keep on forgetting that many of the Democrats favored an invasion of Iraq as well. Getting Blair on to our side delayed the invasion. We have the satellite photography of trucks transporting something to Syria previous to the invasion. They say, Al Qaeda had no connection to Saddam, but why have they been in Iraq en masse once we got there? And years and years of sanctions previously took their toll on the Iraqui people, said on these forums before implemented in part during the Clinton administration.

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