As I have commented before, a number of economists and commentators (and not just Austrians) have been loose with making predictions of hyperinflation, yet we don't see that happening in the real world. However, at the same time, we cannot ignore the fact that prices of a lot of things are going up -- and not just the price of gold, Krugman's "barbaric relic" comments notwithstanding. (Yeah, I know that line came from Keynes, but Krugman used it this week, too.)
In a blog post today, Krugman once again gloats about inflation, or the lack thereof, but then goes off on a weird tangent, talking about "grocery inflation." Now, I cannot recall in any of my grad classes there being a term called "grocery inflation," and being that the average grocery store has thousands of items, with some going up in price and other things not.
Nonetheless, especially in the aftermath of the voyage of the QE2, we have seen prices of commodities go up and, no, I believe Krugman is wrong when he goes off on the "commodity prices are volatile" tangent. No doubt, Krugman dismisses the run-up in gold and silver prices (not to mention oil, which is getting close to $90 a barrel in my last check.)
There also are some other issues here, and one has to remember that when Krugman and I speak of inflation, it is as though we were speaking different languages. Krugman's approach is purely macro-speak, with inflation being the measure of a particular index, i.e., the Consumer Price Index (CPI), the GDP Deflator, or something similar. (That is where he gets "grocery inflation," I guess.)
Austrians are more fundamental when it comes to inflation. To us, inflation is a situation in which the value of money falls relative to the goods for which it is used to purchase. In other words, inflation to us is a monetary phenomenon, not a price phenomenon. Instead, increases in prices reflect inflation (the loss of value of money), as when money loses value relative to other goods, more money then is needed to fulfill transactions.
Now, according to Keynesians, this is foolish, since to them, money is nothing more than a quantity variable. They may have an inkling of why money exists in the first place, but they are much more interested in aggregate variables, and certainly not anything that might smack of a marginal utility theory of money.
That being said, I will once again invoke the hated (by Keynesians) Say's Law to point out that while money facilitates trade, it is not by itself wealth, only a measure of wealth. Money is subject to the laws of economics, even if Paul Krugman doesn't believe it.
Now, there is no doubt that the U.S. Dollar is losing ground overseas, and if we really were in a period of deflation, as Krugman claims, then the dollar would be gaining strength, not losing it. (Deflation occurs when the value of money relative to goods it is used to purchase increases, and that clearly is not happening.) We are seeing asset prices such as housing fall, but those prices need to fall because they were out of kilter with everything else.
(Yes, that means people like me who are homeowners and probably swimming in negative equity have to live with it. The bank gets my house payment every month, and I just consider it to be something akin to a rent payment. I don't like it, but that is the way it is.)
I want to come back to this whole "deflation" issue soon enough, but now want to deal with how new money comes into our economic system. Remember, the Fed mostly has piled up new reserves in banks, raising (actually, spiking) the monetary base. However, a monetary base in the form of bank reserves is a lot different than new money actually floating about in the economy.
When we think of hyperinflation, we think of places like Weimar Germany in 1923 or Argentina and Bolivia in the 1970s and 1980s, or Chile during Allende's three-year rule from 1970 to 1973. In Chile's case the government seized a number of private businesses, mines, and factories, and then directly printed money to pay the workers. (More "proof" that government is not "revenue-constrained," I guess.)
When the government seized the factories, it tripled the wages of workers, but the political organizing and other moves actually lowered workplace productivity. At the same time, the government threw up new tariffs and trade barriers, so people soon were awash in money, but little else.
During that period when inflation got to about 1,000 percent, people got out of money if they could, using items like tobacco, auto parts, and other hard goods that they could use to barter. In Bolivia, where there were (and are) a large number of state-owned enterprises, workers in the mid-1980s would be paid twice a day. They would rush to the streets and trade their money with tourists for dollars or other hard currencies, and then the tourists quickly would spend the money.
That is very, very difficult to happen in our economy. Even during the last big inflation of the late 1970s and early 1980s, the new money came in through the bank lending process. Government workers were not paid with newly-printed dollars, nor did they rush out into the streets to trade for pesos.
What happens at a time when businesses are not borrowing for long-term projects, as is the case today? This is what Milton Friedman called "pushing on a string," or what Paul Krugman calls a "liquidity trap."
Is there a way for the current situation to bust into hyperinflation? Obviously, I certainly hope not, as I and my family would go down like everyone else. Certainly, one can see the problems that would arise if the Fed were to directly purchase large amounts of U.S. Treasuries on the primary market to finance the government's borrowing, as it would not take long to see how this transmission device would inject a lot of new money into the economy and certainly would result in much higher prices over time.
There is one more issue, and that is the claims by Krugman that we are falling into "deflation." Frankly, I don't see it. Prices for consumer goods, not to mention food and other commodities, are going up, not down. Yes, the value of those assets that were highly-inflated during the bubble are going down, but that is a good thing (even if my own house is included in this "good thing"). I use that term not because it makes everyone happy, but rather because factor prices need to get into balance, and the government's "stimulus," bailouts, and attempts to build a "recovery" by pouring money into "green energy" are only making the situation worse.
No, we are not about to burst into the holocaust of inflation as we saw in Latin America or recently Zimbabwe, but neither are we falling into deflation as Krugman says. Instead, we are going to muddle along until someone in power learns that one cannot subsidize an economy into prosperity.