"Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth."

–John Maynard Keynes
The Economic Consequences of the Peace, 1919. pp. 235-248.

The quote above is the classic Keynes statement on inflation and the activities of central banks.

Was he right? Is the impact of Fed largesse improving wealth and smoothed business cycles, or are we seeing a taking of citizenry wealth, with well defined winners and losers?

What say ye?

Category: Currency, Federal Reserve, Inflation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

65 Responses to “Open thread: Inflation & the Fed”

  1. JJL says:

    With the FED cutting rates, shouldn’t loan rates go down? I think we will not see a bottom in any market anywhere when a site like this exists:

    http://www.prosper.com

    Stange site name. Call me crazy but soliciting to borrow money on the internet at rates well over 15% does not seem like a way to prosper to me!

  2. Doug says:

    While inflation seems like a cruel hidden tax, it also is actually a boon to debtors in some ways. If you bought a house in 1965 for $40,000 on a 30 year note, how nice would it have been to be able to pay it off in 1980 dollars. So while inflation definitely favors the asset owning class, it also favors the debtor class and disfavors the creditor class. Presumably, labor owns an asset of a kind, whose value will inflate along with other assets.

  3. m3 says:

    are we seeing a taking of citizenry wealth, with well defined winners and losers?

    definitely.

    i heard an interview with george bush sr.’s assistant secretary of HUD, and was later nominated to be a fed governor, who stated unequivocally that this is the case.

    i urge everyone to take a LISTEN.

  4. David says:

    Barry- “Let every eye negotiate for itself and trust no agent.”
    William Shakespeare

    Trust your own eyes, there is high inflation and its going to get worse, also, trust no agent that includes the Federal Reserve and the media.

  5. 12th percentile says:

    Who is this Keynes? And does he have a blog?

  6. Marcus Aurelius says:

    We are going to try to inflate our way out of the housing debacle. After all, a $750,000 house isn’t all that when the average wage is $250K/yr.

    But it won’t work. Wages will trail price increases, stimulus (via inflationary manipulations) will not “trickle down” to the average American in time to help (or at all, for that matter), and it will place us at a distinct disadvantage – by virtue of our lack of virtue – in the global marketplace we were so eager to establish.

    In the end, the winners and loosers will remain who and what they were (with new winners and loosers introduced into the system in the same proportions over time, and as a result of population growth). The difference being that the current gradation from one extreme to the other (the middle class), will be diminished to a fraction of its traditional size – those displaced will join the ranks of the loosers.

    On the other hand, there’s a very good chance we will simply crash and burn. In that case, who cares if Keynes was right or wrong – it’s every man for himself.

  7. KirkH says:

    I think they just have some geeks on staff informing them that the deflation associated with plasma TVs and computers is eventually going to infect the rest of the economy given accelerating technological change.

    Inflation is higher than they say but not as high as it should be given the green rain. My guess is that the end of this credit bubble will be nasty because the Fed was simply delaying (and maybe amplifying) the consequences of the inevitable shift.

  8. Lyon says:

    “With the FED cutting rates, shouldn’t loan rates go down? I think we will not see a bottom in any market anywhere when a site like this exists:”

    ARM’s will go down. And you will definitely live a life of depravity….

  9. Will T says:

    “While inflation seems like a cruel hidden tax, it also is actually a boon to debtors in some ways.”

    It is a one-time boon to debtors. It will affect the nation’s reputation. If we take steps to debase our currency, it will take that much more to reestablish that trust. This is why creditors will eventually demand more in interest if they feel they are not being compensated enough for the currency risk, raising borrowing costs for those that are not recipients of the ‘boon’.

    For most people there is no such thing as a free lunch. Those who look for that lunch will die poor.

  10. UrbanDigs says:

    JJL – “With the FED cutting rates, shouldn’t loan rates go down?”

    Well, you must keep in mind that there has been a disconnect between 10YR bond yields and loan rates given the current credit crunch. Risk has been repriced, especially MORTGAGE RISK!

    With secondary markets seized up, loan originators cant sell their assets as easily to free up new capital. Plus with housing slowdown, anything but excellent credit is a very high risk; and that demands a higher rate.

    That is why you dont see as much a correlation between fed easing, 10 yr bond yield falling and lending rates since this new world of risk began in early AUG!

    As long as credit markets are in distress, lending rates will behave independently of past indicators; i.e. 10YR bond yields which used to be a great indicator to near term loan rates moves.

    Fed easing arguably doesn’t have the same umph as it did before this mess began! I think fed action is beging targeted as a cushion to any future economic slowdown that the fed obviously expects.

    All at the expense of price stability and inflation.

  11. edhopper says:

    Ever since the Reagan Presidency, the right wing has been systematically trying to destroy the middle class in this country which grew after WWII, and place most of the wealth in the hands of the rich and super rich.
    They have done a very good job and might succeed.

  12. BG says:

    take a peek at what has and is happening in Venezuala and then answer the inflation question. Contrast to Brazil where sound monetary policy has revived the economy.

    Can this happen in the good ole USA? Will our strong millitary keep the dollar from a total crash and burn? Scary to say it is anybody’s guess IMO!

  13. blam says:

    Consider the devastating effect of inflation on fixed income pensioners.

    The really stinking part of what has been going on is that the Fed induced, or at least supported, bubble economy destroyed the incentive to save by traditional fixed income methods. Investors either risked their savings in the markets, on housing, or housing related AAA junk bonds or have lost their shirts on the miserly interest income.

    Yes, I would say that nominal and asset inflation and the falling dollar have creamed the conservative investor in favor of the speculator and financier.

  14. Brendan says:

    Thank you Marcus Aurelius for saving me some typing. You pretty much nailed my thinking on the situation!

  15. shrek says:

    Yes, and the biggest lie of all is asset prices not being factored into inflation. Cheap money and credit can pump up anything it just happened to pump stocks and houses the last ten years because low priced labor was available all over the world.

    A wage price hike spiral in the US would be perfect right now, but because of global labor arbitrage it is is far more difficult. The misery index is going to climb.

  16. shrek says:

    Yes, and the biggest lie of all is asset prices not being factored into inflation. Cheap money and credit can pump up anything it just happened to pump stocks and houses the last ten years because low priced labor was available all over the world.

    A wage price hike spiral in the US would be perfect right now, but because of global labor arbitrage it is is far more difficult. The misery index is going to climb.

  17. rickrude says:

    here we go with the glass half full stuff again…… concentrate on the positives…
    oil and gold and base metals stocks had a great day today.

    Let Bernanke do what he is forced to do.

    Let me watch my resource portfolio grow with china.

    I am an optimist.

  18. sanjosie says:

    The state of the art of the “inflation tool” has been advanced greatly since Keynes statement in 1919. Government statistics hide inflation from view in the political discourse. Creative accounting (aka hedonistic adjustments) both furthers the molding of the numbers presented with the imprimatur of “statistics” and of misdirecting attention away from the effects of inflation to purported benefits. The application of mathematics from the hard sciences to the soft field of economics creates an illusion of scientifism. This further removes the real issue (inflation)from public discourse by couching discussion in an inaccessible vernacular of model based economics. Moreover it introduces the conceit, that criticism can only be made by those with a model.

  19. Bob A says:

    Who said this? “I call you my base”

    Just keep the rich people happy eh?

  20. Will T says:

    Ok, let me correct myself. Here is a non-politically correct, cynical, and simplistic explanation of why there is a long-term beneficial effect of inflation.

    Divide the country into two groups: those that produce and those who don’t. The producers are characterized as those in the labor force. The non-producers are no longer in the labor force and thus do not produce anything anymore, but voted themselves Social Security and Medicare benefits before they exited the labor force.

    These non-producers, who rely on Social Security and Medicare, continue to consume oxygen, food, gasoline, medical care, and generally those things that have been rising in price lately. They compete with producers for these products and divert capital from more productive uses. This acts as a drag on the economy…..paying people to sit around and consume, but not work, all day.

    Since COLAs do not keep pace with prices (inflation ex-inflation), the ability of non-producers to act as a drag on the economy gets inflated away. Politicians won’t cut benefits but inflation will.

    My family and I expect to step up to the plate and care for my aging parents and grandparents when this happens, so I’m not some cold-hearted person.

  21. dhar says:

    This quote from Keynes couldn’t surmize our capitalist society. Or should I say that there is capitalism for the unions and middle class, but socialism bordering on communism for the upper class….

    Department of energy..(XOM) Department of finance (GS, and C)..etc…We work for the new Communist regime..and it is the Fortune 500….

    I know I sound a little dramatic but when ever credit is loosened it almost never helps the people it is directed to help.

    After the rate cut…Indian and Chineese markets have hitten all time highs, and hedge funds, and momo funds have made a few stocks even more expensive then they should be.

  22. donna says:

    What about those non-producers in the financial market, Will? Can’t see that they’re contributing anything either….

    And are you going to step up for those families that can’t afford to pay for their parents and grandparents? You sound a bit cold-hearted to me, anyway….

  23. milty friedman says:

    Hey, in the long run we are all dead anyway.

  24. Hedgefundanalyst says:

    The Fed is not creating inflation in the United States (yet). The Fed is exporting inflation to other nations. Looser monetary policy is driving up the price of commodities and other input goods. Since we don’t make anything here and China produces widgets which can be replicated to any other lowest cost producer, who the heck cares?

    The U.S. monetary authorities have a free pass in creating money given to them by the Asians, Middle Easteners, etc. And they sure are using it!

    If there is one thing an American is good at, it’s shaking your head with one hand and picking your pocket in another.

    Gold is rising because it is a) illiquid and b) there is indeed way more inflation outside the U.S. than in it.

    If there truly is the inflation y’all speak of IN THE U.S.A., the long-bond, TIPS, etc. need to reflect it.

  25. Brian B. says:

    Will,

    I’ll stand by you… you are going to take care of your family, something we all should do. I still dont know why the government entiltiment programs have become so pervasive that we all ‘expect’ the government to take care of us… (btw, its not really the government, its people that have worked hard and taken risks and have reaped the rewards from which). Donna if you want to take care of the family that cant afford to, thats great and I am not saying I wouldn’t help out either, but it sure would be nice if it was voluntary and not just taken from me.

  26. Will T says:

    “What about those non-producers in the financial market…?”

    Some of us produce garbage, some take it out. The garbage people in the financial markets will eventually reap what they sow, so I’m not particularly worried about it.

    The world is not fair and never will be.

  27. mdy says:

    Was he right? Is the impact of Fed largesse improving wealth and smoothed business cycles, or are we seeing a taking of citizenry wealth, with well defined winners and losers?

    The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

    This is the whole point of command — not free market — capitalism like we have in the United States.

    I think Keynes was right, but he wasn’t creative enough to see that you didn’t have to reallocate wealth to the richest by something as clumsy and slow as monetary policy. Why not just rewrite the tax code into essentially being a huge giveaway to the richest 0.1% of society? And then why not flood the market with enough excess capital dollars so leveraged buyout organizations — I mean hedge funds — can swoop in and gobble everything up, so there are no mom and pops left, so it’s only multinationals running the show and everyone owes $500,000 to the bank on a $250,000 house?

    Why not do both at the same time?

  28. ari5000 says:

    non-producers are a drag on the economy?

    Because they don’t produce but mainly consume?

    So if we got rid of all the old people the economy would be better?

    Tell that to everyone employed by major pharma, hospitals, cruise ships, casinos, long term care… on and on and on.

  29. Paul Jones says:

    Inflation is a bane to virtue and a boon to vice.

  30. Rich Lather says:

    The emerging emergency inside the beltway is entitlement containment with regard to the upcoming boomer retirement.

    If the Fed is trying to inflate away the real-estate bubble as Marcus Aurelius said, they will be shooting themselves in the foot by boiling off more of the wealth socked away by the boomer generation, thereby making more dependent on the SS dole. At 50-65, most of the BB generation have got their money invested in the “safety” of bonds, or at least they would if they follow their company’s 401k management’s advice.

    Is it a right-wing conspiracy as some posters suggest? Sure. Why not.

  31. F says:

    Brian B.,

    From a research paper produced by NBER:

    One of the most striking trends in elderly well-being in the twentieth century was the
    dramatic decline in income poverty among the elderly. The official poverty rate of those 65 years and older was 35 percent in 1960, more than twice that of the non-elderly (those 18-64), and had fallen to 10 percent by 1995, below that for the non-elderly. Smolensky, Danziger and Gottschalk (1988) found similar steep declines in elderly poverty back to 1939. This poverty reduction exceeded that for any other group in society.

    Increases in Social Security generosity over time are strongly negatively associated
    with changes in poverty.

  32. F says:

    In other words, SS works and it works well. The only possible objection you could have is that you don’t want to pay for it.

    The way most people rationalize this is by pretending that there is no such thing as luck and everyone gets exactly what they deserve. The people who usually believe such a transparently false statement are those who have a lot and believe they deserve it.

  33. wally says:

    If it wasn’t deliberate the Fed wouldn’t lie about it as it has with the repeated statements, unaccompanied by action, about inflating being out of the ‘comfort zone’. The comfort zone is what you knowingly accept. The Fed has knowingly accepted severe inflation in recent years while cowing to pressure from cronies, rather than from citizens.

  34. Brian B. says:

    F,

    if you mean I dont want to pay for the greatest Ponzi scheme ever, ooppss I mean SS. then yes you would be right. I would rather pay into my own account. I might be mistaken but SS was intended to be a last resort safety net, not how it is used now as the main retirement account for many people. and as to luck…. of course I believe in it… I have been quite lucky in my life, but that luck would never of been possible if I wasn’t applying myself and working hard at the same time. I have a sister who had the same upbringing as myself and NEVER applied herself, she has 3 kids and has sucked off the government for the last 20 years… And yes I have tried to help many times, even raising her 3 children for 4 years when she walked away. F, I have been very broke and somewhat well to do at different times in my life. I just dont beleive that taking from someone else better off than myself and giving it to me is fair.

  35. Sheldon Timberlane says:

    First the middle class will be thinned like
    the Greenland glaciers into a razor’s edge
    of ice, but unlike the glaciers’s demise, we
    won’t see it happening in real time because
    of credit, the Happy Camper name for usury.

    With usurous interest rates approved at up
    to 38.6%, it won’t be very long until the
    middle class is gone entirely and a class of
    perma-debtors replaces it, moving the razor
    edge like a guillotine down through future
    generations of inherit-debtors.

    It’s the return of the global aristocracy,
    which, after all, is the true Neo paradise.
    A private Heaven on earth, for all eternity.

    Soon it’s no longer who you know, it’s whose
    family you are born to, like the Montagues
    and the Capulets, on steroids, until it’s
    whose education, commission and estate you
    receive, Mountbatten’s versus MacStiofain’s,
    and the end of the American Republic.

    In two generations, the Neo’s have taken US
    backwards, down through the 50′s, through
    the 30′s, to the brink of a Neo Dark Ages.

    Bring out your dead!

  36. Marcus Aurelius says:

    here we go with the glass half full stuff again…… concentrate on the positives…
    oil and gold and base metals stocks had a great day today.

    Let Bernanke do what he is forced to do.

    Let me watch my resource portfolio grow with china.

    I am an optimist.

    Posted by: rickrude | Oct 29, 2007 8:33:28 PM

    ______________________________

    Hi! I’m a realist, and a bit of a pragmatist!

  37. Stuart says:

    It’s a tired argument comparing items that are rising in price vs those falling. I get in debates on whether my cost of living is increasing or decrease, it’s a rather ridiculously argument by the way as the reality is, in aggregate I am paying considerably more to cover my expenses now than several years ago with no material change in lifestyle. I am tired of people pointing out that Plasma TVs have fallen, computer prices have fallen and a whole sort of other items that I might purchase once every 5 years. The simple fact is, I don’t buy a plasma TV every week. But I do buy groceries and gasoline every week, pay the utilities, insurance, medical/dental premiums, taxi, even haircuts every month, and those are all rising. The simple fact is the vast majority of items I ROUTINELY spend money on every week or month are increasing in cost. Economists in this debate need to stop offseting 95% of my purchases by naming of items that I might buy every several years.

  38. Marcus Aurelius says:

    The simple fact is the vast majority of items I ROUTINELY spend money on every week or month are increasing in cost. Economists in this debate need to stop offseting 95% of my purchases by naming of items that I might buy every several years.

    Posted by: Stuart | Oct 29, 2007 10:05:53 PM

    _____________________

    And, in many cases, the big ticket, once-in-five-years purchases are bought on credit.

    Tangentially, I remember when you couldn’t buy food with a credit card.

  39. Winston Munn says:

    No discussion of inflation can occur without a definition of currency; currency is nothing more than an exchangeable unit of representation; that which it represents is toil; those who hold control of the money supply then control the value of labor.

    Because money represents labor, it is a commodity in the sense that a labor pool is a commodity, and is thus driven by the law of supply and demand; expansion of the money supply beyond demand in essence expands the labor pool via the effect of increased supply (currency=labor; increased currency=increased labor) – this is the real supply-side economics at work.

    The straw man argument of a wage-price spiral is a fallacy. It only occurs long after the inflationary binge. The only thing that can truly drive wages higher is an imbalance of supply-demand, i.e., a contraction of the money supply or an decrease in the labor force.

    Inflation cheapens the value of labor thereby benefiting capatalists who rely on labor for profits.

    The Fed sets a target of 1-2% inflation as a buffer against deflation – but why not have a deflationary target of 1-2%?

    Mainly, a slight amount of deflation would empower the proletariat at the cost capatalists’ power.

    At its root, the control of money, which is the control of labor, is ultimately about who holds power.

    I’ll give you a hint as to who that is – it sure as hell ain’t We the people….

  40. Rich Lather says:

    Stuart,

    If economists are using Moore’s law influenced technology as a metric for inflation, we’re all screwed.

    And, F, I wasn’t stating that SS was a bad thing, but it is a factor for the long-term outlook for domestic economics. The first BB filed for SS last week. First a trickle, then a flood.

    The inevitability of the problem was recognized by the Clinton camp, but largely ignored by Bush & Co., who, off camera, pine for the pre-new deal days. The thinking is, to end a bad deal is to make it insolvent. I’m sure Jeb! 2012 will find a way for you to swallow that and feel good about yourself.

  41. Mike M says:

    Study Austrian Economics. Monetary inflation is inflation. Price inflation is the result of monetary inflation. The Fed and the banking system are the only cause of long run inflation, period. With a fixed money supply, prices would fall over time. This would result in a higher standard of living for everyone. Of course, today we have the opposite. Almost everyone gets poorer in real terms over time. Keynes is one of the intelligentsia who helped put us in the current state of affairs.

  42. Rich Lather says:

    Wow, Barry, inflation causes people to raise their mice in angst…and if an insurrection is imminent, Munn is leading the charge.

    can we double-click our way out of this?

  43. Marcus Aurelius says:

    Posted by: Winston Munn | Oct 29, 2007 10:41:52 PM
    Posted by: Mike M | Oct 29, 2007 10:47:07 PM

    _________________________________

    Everything y’all said is true, and would be precise, if it weren’t for credit. In the first instance, inflation might cheapen the value of labor, but when the laborer owes his soul to the company store, he is owned by the company. There is no greater position of weakness. In the second instance, almost everyone does get poorer in real terms over time – via the enslaving power of easy, revolving credit and it’s ugly little sister, ever increasing debt.

  44. Stuart says:

    I guess we’re screwed then. New cars are 100% more feature loaded than several years ago, so have only increased in price by 50%. Yup, screwed over royally.

  45. Charles says:

    I see that all the time, and people say they use the card for points. I agree with you, paying for food with a credit card signifies the apocalypse.

  46. Norman says:

    Keynes–Shamens, remember he lost his ass on commodities and he was wrong on the effects of government spending. Start quoting economists whom have been right.

  47. VJ says:

    Brian,

    I dont want to pay for the greatest Ponzi scheme ever, ooppss I mean SS

    That RightWing claptrap has been debunked over an over again. For the umpteenth time, Social Security is more financially sound today than it has been throughout most of its 71-year history.
    .

  48. VJ says:

    Rich,

    The inevitability of the problem was recognized by the Clinton camp, but largely ignored by Bush & Co., who, off camera, pine for the pre-new deal days.

    They only ignored it after their plan to scrap it and give it to Wall Street blew up in their faces.
    .

  49. Marcus Aurelius says:

    I guess we’re screwed then. New cars are 100% more feature loaded than several years ago, so have only increased in price by 50%. Yup, screwed over royally.

    Posted by: Stuart | Oct 29, 2007 11:20:21

    ______________________

    And they’re selling like hotcakes.

  50. Winston Munn says:

    Marcus Aurelius,

    You are correct that debt plays an important role – it explains the conundrum.

    The conundrum is how can unemployment be low with no wage pressure yet higher commodity prices?

    Globalization has diluted the earning power of workers, and world inflation has added more dilution, so wage pressures are held in check by inflation’s effect of increasing the labor pool – yet the U.S. has been able to moderate the inflationary impact by importing GDP via the weakened dollar. It is the dollar carry-trade in action; FCBs buy cheap U.S. paper, and the U.S. enterprises then turn around and invest overseas in higher risk/higher return ventures, creating profits on U.S. balance sheets from overseas activity – all the product of debt.

    Labor has been impacted by inflation; prices have been impacted by debt.

  51. Brian B. says:

    VJ,

    never said SS was going insolvent. read again

  52. Red Pill says:

    These social security debates always stimulate heated exchanges. Yes, it requires a constant supply of new payers for the receivers.

    We are so far away now from our hunter gatherer roots.

    We can talk about personal responsibility and families taking care of their elderly.

    But, we all know given the current state of our society that if social security stopped tomorrow we would be stepping over bodies in the street.

    Now, I would prefer not to step over bodies, but if push comes to shove I am looking after my own.

  53. crozelle says:

    I just finished an email to the Federal Reserve.

    The hidden tax on all those who budgeted; sacrificed; and saved in order to pay their own way and live debt free seems to fit with the on going “reward the perps” like paying for education of young women popping the babies out all over the place; homeowners who lacked resposibility in budgets; and everyone who dared to survive without a couple of months salary in the bank. Government has taught the people well.

    I am extremely alarmed, frustrated and yes very angry seeing irresponsibility constantly rewarded so richly in the USA.

  54. Bruce says:

    “While inflation seems like a cruel hidden tax, it also is actually a boon to debtors in some ways.”

    It is only a boon to debtors when prices do not reflect future inflation. Arguably, the large run up in housing prices (which the banks allowed– they didn’t have to lend the money) was a good forecast of future inflation, the banks correctly predicting future debasement of the dollar.

    Higher prices leading to having to take on larger debt and then being subject to the risk of future interest volatility are to the disadvantage of debtors.

    Will T– inflation funnels money into the hands of the finance industry, which is arguably taking more of the wealth from society than is appropriate for their role in efficiently allocating resources. To that extent, financiers are those who don’t produce.

    Of course, we’re all financiers here, and I imagine we are all eating very well :-)

  55. The quote is right in many aspects and it misses others. It does not capture the role of government and deficit spending.
    The governments spend money they does not have on entitlement program, in order to stay in power. The Romans referred to it as bread and circuses. The governments spend money to wage war. The Central Banks create money from this air to finance the governments’ largess.
    Inflation benefits those who get their hands on the money at the point its creation and are then able to convert it into assets. Everybody else is left holding the bag.

  56. camp says:

    I’m in the Austrian Camp. Anytime the Fed creates money out of thin air, the dollar is inflated. Prices may or may not follow (technology declining in price). I am also in a “saver” so continued monetary expansion hurts me while those spending wildly are benefited.

  57. randy says:

    i am not an economist, and so i have little to say regarding the keynes quotation above. i just trust a lot of what i read on this site to begin with.

    i can still say the citizenry are being robbed by our government. see the recent article in the christian science monitor regarding the $2.9 TRILLION lost in the Dept. of Commerce’s ledgers.

    i’ll post a link to the article though i’m unsure if links are allowed in the comments:

    http://www.csmonitor.com/2007/1029/p15s01-wmgn.html

  58. karl smith says:

    There is a little of both.

    First, inflating the currency when the economy is below potential has benefits for nearly everyone. This is probably not the case Keynes had in mind but when evaluating modern central bank policy it is important.

    Japan could have been spared much of the destruction of the 90s if the BOJ had been more willing to inflate.

    Second, even when overheating the economy more people benefit that loose in the short-run. Looser credit means less defaults which means more economic activity. These are generalized benefits but they do accrue heavily to those who are heavily leveraged.

    Third, yes when inflation sets it the pain is not evenly distributed. Long leverage gains still more and of course fixed income investors loose.

    However, even more than that as fixed income investor recoil from the market, labor almost has to loose as the expense of currently leveraged players. The economy is no longer accelerating beyond potential and the only residual claimants are labor and leveraged capital. Since, leveraged capital gains, labor must loose.

    I think this is the effect Keynes had in mind.

  59. VJ says:

    Brian,

    never said SS was going insolvent. read again

    Nowhere in my post did I claim you did. I merely responded to your, by definition, false claim:

    greatest Ponzi scheme ever, ooppss I mean SS
    .

  60. Robert says:

    The impact of FED largesse is exactly what the FED wants it to be – They intentionally create excess money, which creates bubbles in asset classes, which must eventually pop. The only real difference is which asset class becomes inflated and under what circumstances they do so. The most recent example, obviously, is housing. Take a look at the Shiller Used Home Price Index – From 1890 to 1997, inflation “adjusted” home prices rose about 20%. From 1997 to 2006, they rose another 85%. When these bubbles pop, it gives the banking “community” (the super rich) the opportunity to buy real assets at pennies on the dollar, further consolidating real power in the hands of a few at the expense of the many. It did not take a genius to see what was going to happen with all the new money creation and lax lending standards, and indeed, many bloggers did. Why, then, did the FED, who are supposed to be the great financial wizards in our country, supposedly not see what they were doing? Answer: They did. I am consistently amazed at the attitude of some internet economists who believe themselves smarter than the FED. The FED has engineered a pretext for the devaluation of the dollar via housing, possibly for legitimate reasons (such as to stimulate exports and stem imports, thereby balancing the budget)… or they could be softening up the populace for a shift to the Amero. When the dollar only buys .3 Euros, our great leaders, in order to form a more perfect union (with Canada and Mexico), just might pop the Amero on us. Sadly, I think most people will not object, as we all know, the new American way is a quick fix, an easy way out, the path of least resistance. Once people are feeling the pain from a trashed dollar, patriotism will take a back seat to “practicality,” the Amero will be implemented, and we will no longer have the ability to party our asses off in Tijuana for $100.

    Or they could all be idiots at the FED.

  61. HankP says:

    While everyone above has listed very good points about the effects of inflation on individuals and the country, I’m wondering what any investing professionals think about the relative ease in which people can now avoid inflationary risk because it is so much easier now to invest in non-dollar denominated assets. Is that enough to make a difference this time? And will those types of investments help or hinder the US economy? In other words, will the ability for “hot money” to leave the dollar denominated world provide resistance to inflationary pressures, or will it accelerate them?

  62. Northern Observer says:

    Keynes–Shamens, remember he lost his ass on commodities and he was wrong on the effects of government spending. Start quoting economists whom have been right.
    Posted by: Norman | Oct 29, 2007 11:22:05 PM

    Sooner or later every economist is wrong about something, even Rothbard, Hayek and Friedman.
    But you knew that.

  63. tjofpa says:

    “If you bought a house in 1965 for $40,000 on a 30 year note, how nice would it have been to be able to pay it off in 1980 dollars.”

    But if u “owned” a house and retired on a decent pension in 1965, then had the “misfortune” of living another 30 years, and found u couldn’t pay the real estate taxes…

  64. Bruce says:

    >Japan could have been spared much of the >destruction of the 90s if the BOJ had been >more willing to inflate.

    Interest rates 0%. Should they have paid people to take the money?

    The problem was lack of investment opportunities, or perhaps lack of the ability to perceive them, given that the perception mechanism (cost) had been broken by govt. activity (or lack).