Monday, September 2, 2013

Inflation - Lets Skip the Myth Making and Deal with Hard Facts

Inflation is a very serious issue, but not for any of the reasons you hear from financial pundits.  Neither printing money nor our deficit spending are a serious source of inflation at this time in this country. When we have millions and millions of underemployed and unemployed workers- well- we are operating well below full employment. This means consumer demand is way down. How can we create demand pull inflation with the present level of deficit spending? Make sure you see the notes on what money really is,  the implications of our fiat currency and the discussion on deficit spending.

John Harvey, an economics professor at TCU and an overall fairly sane guy, has written a great article in Forbes magazine about inflation. Inflation is a serious issue but not in the way we hear about it. In fact, the specious arguments you hear on inflation only exacerbate the real issues we must come to grips with. Check out John's article here. It is essential that you understand the real causes of inflation, because we have serious challenges to overcome, and the prevailing wisdom at this time is part of the problem not part of the solution.

There are classic horror stories about hyper inflation with the implication that we are on the fast track there when we are printing too much money and deficit spending. Monetary Theory says that hyperinflation is caused by printing too much money.

 Hyperinflation is more complex than that oversimplified explanation, yet all cases of hyperinflation have similar causes.  We discuss hyperinflation here. Both the Weimar republic and Zimbabwe are discussed. Check out the photo of a 100 trillion dollar Zimbabwe note... These two tragic occurrences- millions of people were hurt by hyperinflation- but hyperinflation should not be concern for standing around with so many people out of work or underemployed in America.

It bears repeating. When we have millions of idle Americans looking for opportunity- our demand for products and services is way down because so many cannot afford to spend as they would wish. There are millions of things Americans might buy if they were working or working in a better paying job. Aggregate demand is missing. People cannot afford stuff they want. Aggregate demand is needed to push businesses to hire new people because they have to to meet consumer demand. And the economy grows, and then business gets excited and boosts investment, and the government collects more in taxes...  So instead of doing smart things to fire up aggregate demand, there is an overwrought worry about inflation. It makes no sense. People will not be going back to work in the numbers needed for a robust recovery until we figure this out. Incidentally, John Harvey also has a great article on aggregate demand and job creation.  WE DEMAND AGGREGATE DEMAND!

But the threat of inflation does hang over our head. This is cost push inflation.

There are big challenges that we face that will be inflationary if we don't deal with them. Inflation is a serious issue- to important to let idle bloviators corner the subject with myth-making for their own purposes. We need facts and perspective, not fear mongering. We have serious challenges with sith peak cheap oil, and sustainability and climate change which will be highly inflationary if we do not as a nation grapple with these national security issues.

Sustainability is another huge national security issue. You don't hear as much about this unless you are looking for it.  But the earth is on an unsustainable course, where, if we do not look forward to diversity loss-  if we do not stop pollution of the oceans- we will endanger the lives of our children- at least doom them to a battle of survival much tougher than our own. We will address diversity and environmental issues here. LINK CATEGORY

The future will see a crisis with fresh clean water that will be even more destabilizing than high oil prices and more disruptive to the status quo that oil embargos.

Climate Change and Ocean Rise  are key factors that will impact America's ability to create a robust economy and provide the basics for opportunity for our children. Yet, the powers that be- have the vision of  a politician who needs to be elected in two years, a power broker who is looking to make his own nut- and not worry about anyone else- or a corporation where profit and loss is the guiding light and a path forward for economic growth unimpeded by outside unrelated interests- our national interests in reducing CO2 emissions  and clean water and clean air. We really do need a clear vision as to how much our national interests are not aligned with big oil, and big banks. We discuss this here. LINK

Feel free to add your thoughts below.

More References

John Harvey, I sing his praises often, also has a cogent article on fallacies about the government deficit. You might find it entertaining but I hope it helps you grasp the numbskull thinking that debilitates our very best tool against economic recession and a critical to deal with the challenges of the 21st century- the real challenges not the faux crises over money and deficits and debt ceilings. We have real serious issues.

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