Rule by inflation

When John Maynard Keynes called for the "euthanasia of the rentier," he meant that the government's monetary authorities should hold the rate of interest low enough to where people who earn money from lending no longer would be willing to lend. Thus, the "rentier" would disappear from the scene.

Paul Krugman is repeating that call, and now claims that it is that evil "rentier" that is dragging down the economy. If only the authorities were willing to listen to him and have more inflation; if and only then would people be able to find jobs and the economy would hum along nicely:

While the ostensible reasons for inflicting pain keep changing, however, the policy prescriptions of the Pain Caucus all have one thing in common: They protect the interests of creditors, no matter the cost. Deficit spending could put the unemployed to work — but it might hurt the interests of existing bondholders. More aggressive action by the Fed could help boost us out of this slump — in fact, even Republican economists have argued that a bit of inflation might be exactly what the doctor ordered — but deflation, not inflation, serves the interests of creditors. And, of course, there’s fierce opposition to anything smacking of debt relief.

Looking at the Fed's balance sheet post TARP, one hardly can say that the Fed has not been "aggressive" in trying to spread more dollars throughout the world. However, I suspect that when Krugman calls for the Fed to be "more aggressive," he means the Fed finding a way to purchase short-term Treasuries directly, as opposed to buying them on the secondary market. (The original Federal Reserve Act prohibits the Fed from such direct purchases, although given that Washington no longer has to abide by the same laws that govern the rest of us, I am sure Ben Bernanke can find a way around such pesky requirements.)

Krugman's call for more inflation is based upon his belief that inflation benefits low-income people and hurts the wealthy. Thus, the reason that inflation is not higher is due to unwarranted lobbying by the rich, who are benefiting at the expense of the rest of us.

Now, when the main financial crisis hit in 2008, I argued (contra Krugman) that not only would bailouts retard any recovery, as they would prevent or postpone liquidation of bad assets, but also would increase the political strength of the very people who had driven the economy over the cliff. Krugman now thinks that the people on Wall Street have too much political influence, but he fails to see the connection between the bailouts and their political strength.

I will go even further. Krugman is absolutely wrong on inflation, in that the people most hurt by it are NOT the rich, but rather the small savers and people on fixed incomes. (Krugman claims that people on SS and other fixed incomes would not be hurt because SS is indexed to inflation.)

Here is the problem, and it demonstrates that Keynesians (once again) really have no concept of money and see it only as a "quantity variable." Yet, what actually happens with a burst of inflation?

As Henry Hazlitt points out in his excellent Economics in One Lesson, inflation creates a "mirage" of prosperity at the beginning, but in the end is like the "Dead Sea fruit that turns to dust and ashes in its mouth." A new bout of inflation does not raise all prices and incomes at the same time. Instead, those who receive the new money first receive the benefits, while those at the back of the line (small savers and, yes, people on fixed incomes, even those incomes indexed to inflation) bear the costs. Murray Rothbard writes:

Inflation, then, confers no general social benefit; instead, it redistributes the wealth in favor of the first-comers and at the expense of the laggards in the race. And inflation is, in effect, a race--to see who can get the new money earliest. The latecomers--the ones stuck with the loss--are often called the "fixed income groups." Ministers, teachers, people on salaries, lag notoriously behind other groups in acquiring the new money. Particular sufferers will be those depending on fixed money contracts--contracts made in the days before the inflationary rise in prices. Life insurance beneficiaries and annuitants, retired persons living off pensions, landlords with long term leases, bondholders and other creditors, those holding cash, all will bear the brunt of the inflation. They will be the ones who are "taxed."

He continues:

Inflation has other disastrous effects. It distorts that keystone of our economy: business calculation. Since prices do not all change uniformly and at the same speed, it becomes very difficult for business to separate the lasting from the transitional, and gauge truly the demands of consumers or the cost of their operations. For example, accounting practice enters the "cost" of an asset at the amount the business has paid for it. But if inflation intervenes, the cost of replacing the asset when it wears out will be far greater than that recorded on the books. As a result, business accounting will seriously overstate their profits during inflation--and may even consume capital while presumably increasing their investments.

In Krugman's Keynesian world, however, none of that matters. If anything, businesses are parasites and government, by creating "new money," also creates wealth. That really is the "New Economics" in a single sentence.