Well inflation scares the rich because it is an environment where it is hard for them to remain rich, and they all are familiar with the old “scarecrows” of the Weimar republic etc. So it is not something that they (and their media labdogs) like to discuss as a serious solution to our problems. They also perpetuate myths of it as being a terrible thing for “ordinary” people, to try and prevent that it gets into the public debate. It is in reality a way of redistributing wealth from rich to poor – deflation is the opposite. I see it as the only way out of the current mountain of debt in both public and private sectors. Given the fact that 70% of the GDP is consumption, I am not surprised that inflation is better for overall GDP growth (because it favors the consumer class over the investor class). That is also why I am a lot more scared of the prospect of slipping into deflation than I am of hyperinflation. In an industrialized consumer driven economy as ours deflation could lock us into a spiral of economic contraction.

Haha, this is the first time I’ve heard anyone say something favorable about 5% or higher inflation in years! I don’t agree, I think a target of 2% core inflation is reasonable, but it’s refreshing to hear something so contrarian. But nevertheless, you’ve set me off on an proinflation/antideflation rant.

It is interesting to note that the last time we had a big increase in male median full time earnings was in 1960-1973 and that was a period of rising inflation. Also, lately, John Tamny (another Austrian) has been criticizing the 1970’s for its high inflation and poor stock market performance. But this was the decade when the poverty rate was its lowest (1973) and the proportion without health insurance was its lowest (1974) (not to mention male median full time wages set a record in 1973 that still hasn’t been surpassed). I ought to know, I was there, life wasn’t that bad. Even if all you had was a minimum wage job you could get by pretty well.

On the other hand I’ve heard some of the Austrians say deflation is good (such as Frank Shostak). But try as I might, I still can’t find even one example of a good deflation. Severe deflations are always associated with extreme hardship and inequality. Take the 1830’s and 1840’s in the United Kingdom (think of any Dickens novel). Or take the period after the Civil War through the end of the recession associated with the Panic of 1873 (1865-1878). This was the time when the words “bum” and “tramp” first came into vogue for the simple reason both were abundant. The best argument I have against deflation is the following. A good source of United States historical macro data is here:

http://www.measuringworth.org/usgdp/

The period from 1865 through 1895 was predominantly characterized by deflation in the US. On the other hand the US is currently passing though its longest ever continuous inflation on an annual basis in history. It began in 1950 and possibly may end this year. Here is the NBER list of recessions:

http://www.nber.org/cycles.html

Simple calculations will show you that from 1865-1895 we spent about 52% of our time in recession. From 1950-2008 we spent 15% of our time in recession. Personally I’d rather live in a country where most of the time jobs are plentiful and the economy is growing than in one where most of the time jobs are hard to come by and the economy contracting. Sure overall GDP growth may have been incrementaly higher in the deflationary period, but that was because the population was soaring often at 3% a year. GDP per capita has grown a lot faster during our inflationary time than that deflationary time. And in any case, a better measure of overall living standards is median earnings growth, not GDP growth. As bad as inequality is today in the United States, it was certainly far worse in the Gilded Age.

Just a little food for thought for someone dares to favor inflation!

I agree that pumping up the money supply cannot create inflation by itself. You have to pump money into the consumer class to get inflation, because no business can raise prises beyond what customers can afford. I don’t see how anymore than a small drip of the current explosion in money supply can reach the consumer class. It’s unfortunate, because what we really need for the next few years is inflation (5-10%) and we are a lot more likely to get deflation.

“Are you kidding? Did you really expect to see the inflationary impact of Treasury’s hyperactive printing press overnight? Or do you think the government can just print trillions from thin air with no consequence?”

No not overnight. Try never. The CBO just came out with its latest long term forecast. No, hyperinflation is not on the menu:

http://www.cbo.gov/ftpdocs/99xx/doc9958/01-08-Outlook_Testimony.pdf

In fact as you can see they are forecasting low to no inflation through 2019. Historically this should not be a surprise. In the United States the monetary base went up five fold and M-1 tripled between 1929 and 1944 and yet the price level in 1944 was no higher than in 1929. In Japan the monetary base nearly tripled and M-1 did in fact triple between 1994 and 2006 and yet they have been experiencing deflation ever since, not inflation. During the Great Depression, in Japan’s Lost Decade, and now in the United States today the velocity of money collapsed. There is no huge inflation on the way.

http://www.straightstocks.com/global-economics/stuff-happens-the-bush-administrations-economic-stewardship/

He looks at the following factors:
Fannie and Freddie
Community Reinvestment Act
CDO’s and CDS’s
Global saving glut
Monetary policy
Deregulation
Criminal activity and regulatory disarmament
Tax cuts and fiscal profligacy
Tax policy

In his own words: “I’ve already dealt with the first two “betes noire” — favorite villains in the fevered commentary of certain noneconomists….” He also dismisses the global savings glut thesis that has recently been advanced by Hank Paulson. He then proceeds to argue that the main culprits were poor regulatory and tax policy, with monetary policy playing a very minor role. In particular he points out that the mortgage deduction for second homes went into effect in 1997. This coincides with the big runup in housing prices quite nicely, and is not exactly what the advocates of the Fannie, Freddie and CRA thesis want to hear.

http://isteve.blogspot.com/2009/01/rove-calling-kettle-black.html

Stated another way, the main reason I was worried about Murdoch’s News Corp taking over the WSJ had nothing to do with the editorial pages, which could hardly be worsened without risking spontaneous liquidation into compost, and everything to do with the integrity of the news division: The thought of that division being transformed into Fox was, and remains, very troubling.