Yes, Inflation is our Savior

One of Paul Krugman's repeated themes in his columns and blog posts is that inflation is a wonderful thing, and apparently we never can have enough of it. Inflation wipes out debt, transfer wealth from creditors to debtors, and makes all of us feel rich.

Hyperinflation? No problem. It might make things inconvenient for a while, but it really doesn't do any damage. The only damage comes if we stop inflating and even have the dreaded and evil deflation.

In a recent blog post, "It's Always 1923," Krugman once again accuses others of rewriting history. This is rich from the guy who wants us to believe that all of the major deregulatory initiatives of 30+ years ago were the product of Ronald Reagan, despite the fact that many of the major initiatives already had passed or were in the hopper before Reagan even won the 1980 presidential election. (As I have said many times before, Krugman wants us to believe that Jimmy Carter and Ted Kennedy were conservative Republicans.)

While praising a recent piece by David Glasner that praises (What else?) "easy money," Krugman writes about the famous German hyperinflation of 1923:

...the 1923 hyperinflation didn’t bring Hitler to power; it was the Brüning deflation and depression. Hard money and a gold standard obsession, not excessive money printing, was the proximate disaster.

Technically, he is correct. Hitler came to power nine years after the hyperinflation during the Great Depression (which hit Germany very hard). However, one gets the sense that Krugman does not take that inflation very seriously, and that any policy other than "easy money" will bring an economy to ruin.

That should not surprise anyone, given Krugman's constant drum-beating for more inflation today. While extolling the government's own inflation index, Krugman wants us to believe that only the rich are inconvenienced by inflation, and that the rest of us are better off because of it.

What he does not say is that most middle and lower-economic class Americans have not seen increases in their incomes in years, but the prices they have had to pay for food, gasoline, and other commodity-based goods have gone up substantially. (Of course, Krugman has claimed that THOSE price increases have nothing to do with the massive money-printing operation at the Fed, and that they are due entirely to the fact that commodity prices are "volatile" -- his words.)

Furthermore, he is in a quandary when he praises inflation. If inflation does no economic damage -- other than to supposedly transfer wealth from rich to poor and middle-class people, something that Henry Hazlitt pointed out decades ago is simply not true -- then hyperinflation also would be a good thing. In Wonderland, there is no such thing as inflation distorting structure of production or encouraging lines of production that are unsustainable.

In fact, in Wonderland, inflation does the opposite: it encourages more capital formation and investment in everything, since it supposedly increases "demand," and "aggregate demand" is the key to prosperity. If that be the case, then we have discovered the secret for Haiti to become more prosperous: print money and lots of it.

Keynesians are not free to claim here that Haiti's problems lie elsewhere, since they have debunked any arguments that say capital formation and production structures don't matter. All that matters is demand, so if Haiti's government wants to print "demand," it should do so and then investors will flock to Haiti to build more things, given the "demand" for goods, all courtesy of the printing press.

Hazlitt made a very good analogy when he wrote that inflation is like the "Dead Sea Fruit," which "turns to ashes" when one puts it in one's mouth. I'm not surprised that yet another economics faculty member at Princeton has praised that economic wonderdrug, inflation.

Yeah, I Kind of Agree With Krugman Here

Last March on my other blog (just before the Tonya Craft case basically took over its subject matter), I had a post on recent statements by James K. Galbraith. Professor Galbraith took umbrage and made a post, which I was glad to see him do.

His point was this: We don't have to worry about the government going bankrupt as long as it has legal control over what is called "money." Thus, government always will pay its bills because it can print the currency by which the bondholders receive payment. Thus, the size of deficits does not matter because government cannot (by definition) go bankrupt.

Obviously, if one stops to think about what Galbraith claims, it is almost mind-boggling. However, keep in mind that, like his late father, he is partial to socialism and even the more virulent forms of communism, in which governments used murder and imprisonment to try to force people into behavior that they otherwise would not want to follow. In other words, like John Kenneth Galbraith, James Galbraith believes that governments can do what they want as long as (1) they have a printing press and monopoly over money, and (2) they employ whatever coercive methods they wish.

Now, in his criticism of Galbraith today, Paul Krugman does not go as far as I do, but I do find myself in agreement with much of what he writes. First, Krugman outlines Galbraith's position fairly and accurately, so if you wish to get a good interpretation, read Krugman's post.

Second, he creates a mathematical model that reminds me of some of the things I saw in grad school (and is easy to follow) in which he sets up a scenario in which the government runs up against its limits of borrowing (what can be borrowed by others who have a "surplus" to lend). What he concludes is that at some point, the rate of inflation takes off into the empty space of hyperinflation.

How might that play out in our system? At some point, the Federal Reserve becomes the primary purchaser of U.S. debt (as opposed to its current role of purchasing debt in the secondary market), so government is directly spending newly-printed dollars which quickly move through the economy (as velocity increases). In fact, I think that if there is a weakness in this model (and any model which simply acts on the pure quantity of money theory has fundamental weaknesses in explaining economic behavior on behalf of individuals), it is the assumption that velocity (V) remains constant throughout.

One of the characteristics of a hyperinflation is the quickening of velocity -- how quickly money changes hands in an economy. The other thing -- and Krugman accurately mentions this -- is that people will get out of money altogether and use substitutes that either hold or increase in value (relative to money).

My sense is that Galbraith believes that government simply can "crack down" and force people to accept money (On pain of death, if need be?). Krugman does not go that far, but he is a True Believer in coercion, at least "progressive" style.

Nonetheless, Krugman's point here is well-taken, and I would agree that there is the danger of hyperinflation, given the government's path. Galbraith argues that government can exercise its powers to the point where people are forced to use the government's money, while Krugman simply says that we are not near any point of hyperinflation, given that the current Consumer Price Index is pointed downward.

There is much more I would like to say here, but I wanted to point out that when I believe Krugman is at least partially right, I will give him credit.