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  • Galbraith: loose monetary policy does not create inflation

    I think some of these guys are still living in the era of the gold standard when there was a mechanism that drove trade balances back to zero. Those do not exist anymore. Those kinds of views are tainted by a Bretton Woods view of the world. That discipline disappeared in the early 1980s. Perhaps the most delayed realization in the history of economics is that inflation disappeared in 1983. The Fed still operates like inflation is on some kind of hair-trigger mechanism, that if the Fed doesn't remain vigilant—always with a tightening bias—that the economy will fall into an inflationary cycle that will be very expensive to transition back out of. They behave as if the economy is dangerously unstable with respect to inflation, that the economy is ready to enter into a 1970s-style inflationary spiral at any time. But even during extended periods of loose monetary policy, inflation has remained tame. It hasn't happened and won't. The risk went away with the rise of the U.S. trade deficits.
    So what is the fed doing? Managing currency exchange rates? Distributing wealth? Trying to lengthen out the lifespan of the current currency system?

    Well, this completely altered my world view. Thanks for the interview, EJ...
    Last edited by blazespinnaker; November 28, 2006, 12:28 PM.

  • #2
    Re: Galbraith: loose monetary policy does not create inflation

    Link:

    http://www.itulip.com/forums/showthread.php?t=654

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    • #3
      Re: Galbraith: loose monetary policy does not create inflation

      I think some of these guys are still living in the era of the gold standard when there was a mechanism that drove trade balances back to zero. Those do not exist anymore. Those kinds of views are tainted by a Bretton Woods view of the world. That discipline disappeared in the early 1980s. Perhaps the most delayed realization in the history of economics is that inflation disappeared in 1983. The Fed still operates like inflation is on some kind of hair-trigger mechanism, that if the Fed doesn't remain vigilant—always with a tightening bias—that the economy will fall into an inflationary cycle that will be very expensive to transition back out of. They behave as if the economy is dangerously unstable with respect to inflation, that the economy is ready to enter into a 1970s-style inflationary spiral at any time. But even during extended periods of loose monetary policy, inflation has remained tame. It hasn't happened and won't. The risk went away with the rise of the U.S. trade deficits.
      Junk economics. It's simple as can be. The more there is of something, the less valuable it is. Currency is no different.

      Galbraith's addled thinking results from his tacit assumption equating inflation with rising consumer prices. A common mistake, but one that overlooks the fact that inflation can be manifest in rising prices of all kinds of things, including stocks and bonds. For example, much of the rise in consumer prices in the 1970s in fact was a catch-up phenomenon to inflation that took place in the 1960s. Rising oil prices in the 2000s are not unrelated to the same inflation that kited stocks in the 1990s.

      The statement "loose monetary policy does not create inflation" is flat out wrong. At best, we could say that "loose monetary policy does not create rising consumer prices in the near term".

      James, if you happen to read this, please at least state, if not justify, your assumptions.
      Finster
      ...

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      • #4
        Re: Galbraith: loose monetary policy does not create inflation

        I think you're working on a different definition than Galbraith, Finster


        http://www.m-w.com/dictionary/inflation

        2 : a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services

        What it is: a continueing rise in the general price level

        What "usually" causes it: an increase in the volume of money and credit relative to available goods and services.

        I'm not saying your logic is wrong, just your dictionary is not one that the rest of us are using.

        I think Galbraith is also saying that loose monetary policy can create bubbles (obviously, he felt the housing boom was a result of loose monetary policy) but it doesn't necessarily cause "a continuing rise in the general price level".

        I don't think that is necessarily addled thinking, but it is novel .. at least to me.

        Comment


        • #5
          Re: Galbraith: loose monetary policy does not create inflation

          Originally posted by blazespinnaker
          I think you're working on a different definition than Galbraith, Finster.
          You got that right, Blaze. And that is why I am right and he is wrong.


          Originally posted by blazespinnaker
          http://www.m-w.com/dictionary/inflation

          2 : a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services

          What it is: a continueing rise in the general price level

          What "usually" causes it: an increase in the volume of money and credit relative to available goods and services.

          I'm not saying your logic is wrong, just your dictionary is not one that the rest of us are using.

          I think Galbraith is also saying that loose monetary policy can create bubbles (obviously, he felt the housing boom was a result of loose monetary policy) but it doesn't necessarily cause "a continuing rise in the general price level".

          I don't think that is necessarily addled thinking, but it is novel .. at least to me.
          But what is the "general price level"? Does that mean that if the price of bread and gasoline goes up 50% you have inflation, but that if the price of stocks and real estate does, you don't? Why do you exclude the latter from the "general price level"?
          Finster
          ...

          Comment


          • #6
            Re: Galbraith: loose monetary policy does not create inflation

            Originally posted by Finster
            But what is the "general price level"? Does that mean that if the price of bread and gasoline goes up 50% you have inflation, but that if the price of stocks and real estate does, you don't? Why do you exclude the latter from the "general price level"?
            I don't and I suspect that neither does Dr. Galbraith. I think if you took the median across the price of all things attainable on the common markets (including stocks, currencies, etc), Galbraith would argue that loose monetary policy would not create a rise in those prices.

            What I mean, is anything there exists an open and transparent market for (be it barbie dolls on eBay or whatever).

            Personally, I see value in that measure of inflation. Though perhaps a tad hard to collect the data....

            I think his argument is that as long as we can import and have globalisation via trade deficits there will always be price pressure. Prices can't rise, because when they do, china will just start selling in the US. If the dollar starts dropping, Europe or whoever, will just buy more USD.

            What will happen, though, is all this liquidity will find a home, and that home will become a bubble which would generate some pretty nasty turbulence when it blows.

            I guess Galbraith sees the fed as bubble managers, and not really inflation managers, and really what they should be doing is making sure bubbles don't occur anywhere, and when they do, to lean against them a lot harder.
            Last edited by blazespinnaker; November 28, 2006, 01:54 PM.

            Comment


            • #7
              Re: Galbraith: loose monetary policy does not create inflation

              Originally posted by Finster
              Junk economics. It's simple as can be. The more there is of something, the less valuable it is. Currency is no different.
              Finster, you have likely elaborated on this somewhere, but truly my memory is poor.

              Take oil as perhaps a good example, if its price increases in bonars, is it possible to sort out how much of that increase is due to the bonar's being worth less vs. there actually being the case where oil is worth more? If there is less of something, the more valuable it is, to state differently what you wrote above. It seems to me that if something gains value, the price increase is not a reflection of inflation in some degree.
              Jim 69 y/o

              "...Texans...the lowest form of white man there is." Robert Duvall, as Al Sieber, in "Geronimo." (see "Location" for examples.)

              Dedicated to the idea that all people deserve a chance for a healthy productive life. B&M Gates Fdn.

              Good judgement comes from experience; experience comes from bad judgement. Unknown.

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              • #8
                Re: Galbraith: loose monetary policy does not create inflation

                Originally posted by blazespinnaker
                Well, I think even if you averaged out across the price of all things attainable on the common markets (including stocks, currencies, etc), Galbraith would argue that loose monetary policy would not create a rise in those prices.
                I don't understand this at all. How does having more dollars chasing the same amount of 'stuff' (to use one of Finster's tightly defined economic terms) not result in higher prices for that stuff?

                Comment


                • #9
                  Re: Galbraith: loose monetary policy does not create inflation

                  Originally posted by blazespinnaker
                  Well, I think even if you averaged out across the price of all things attainable on the common markets (including stocks, currencies, etc), Galbraith would argue that loose monetary policy would not create a rise in those prices.
                  Assuming we define loose monetary policy as creating a lot of money, then it drives down the value of that money. It's Econ 101. The greater the supply of something relative to demand, the less it is worth. That means that creating a lot of money makes it worth less. But since we use the money itself as our unit of measure, the only way we know the money is worth less is that it takes more of it to buy the same stuff. In other words, prices rise.

                  Since Galbraith didn't elaborate, we have no way of knowing for sure whether he would argue that "loose monetary policy would not create a rise in those prices" defined sufficiently broadly. There may be lags, for example if people (or their governments or central banks) hoard the money. There also may be special circumstances, such as there were in 1997-1998, when several emerging markets currencies collapsed, and the USD rushed in to fill the void resulting in the supply of dollars being used to cover more real stuff, and therefore the value of the dollars rose. But on the whole it is simply not possible to continually create currency faster than population growth without its being inflationary.

                  Originally posted by blazespinnaker
                  Personally, I see value in that measure of inflation. Though perhaps a tad hard to collect the data....
                  You're telling me. But here's what you get when you do it:

                  Finster
                  ...

                  Comment


                  • #10
                    Re: Galbraith: loose monetary policy does not create inflation

                    There is a coroallary to all this ... just as inflation isn't a risk, the absence of inflation is not necessarily a good sign either.

                    Comment


                    • #11
                      Re: Galbraith: loose monetary policy does not create inflation

                      Originally posted by WDCRob
                      I don't understand this at all. How does having more dollars chasing the same amount of 'stuff' (to use one of Finster's tightly defined economic terms) not result in higher prices for that stuff?
                      Well, if there is a barbie doll out there for 5$ and then someone tells it for 10$ and you have twice as much money as you did yesterday, are you suddenly going to buy the 10$ barbie doll instead? I don't think so...

                      I think people will still buy the lower priced goods, though maybe they might buy more luxury goods because they can afford them, but I stil think the cheaper version (all else being equal) will always win out.

                      The fact is, because of the trade deficit, we're no longer in a closed system. People can import cheap barbie dolls, and our inflation doesn't impact the wages of people in China.

                      What will happen I think though, is that speculative excess can occur a lot more easily. Suddenly people have more money to risk on investments, and bubbles can appear much more frequently.

                      Comment


                      • #12
                        Re: Galbraith: loose monetary policy does not create inflation

                        Ok then. You and Finster agree as far as I can tell. The price of financial goods is increased whether or not Barbie Dolls are more costly. Except he calls that inflation, and I think maybe you don't agree with the term? But the money gets spent and increases the cost of something right?
                        Last edited by WDCRob; November 28, 2006, 02:15 PM.

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                        • #13
                          Re: Galbraith: loose monetary policy does not create inflation

                          I think finster is right, in that we don't know Galbraith's exact definition of inflation. Until we do, this conversation is a little tough.

                          I will say that the fed might be worrying needlessly or wrong headedly about CPI / PCE / etc. Rather, they should be more concerned with the various economic crisis, and speculative bubbles that loose monetary policy creates rather than the various increases in prices.

                          Comment


                          • #14
                            Re: Galbraith: loose monetary policy does not create inflation

                            Originally posted by blazespinnaker
                            I think his argument is that as long as we can import and have globalisation via trade deficits there will always be price pressure. Prices can't rise, because when they do, china will just start selling in the US. If the dollar starts dropping, Europe or whoever, will just buy more USD.
                            If you look at the dollar on a global basis, you are considering a closed system and therefore none of that matters. What has been happening is that the excess dollars have been piling up in China. First, China buys US financial assets with them (creating financial bubbles in the US) and then starts buying things like oil, metals, and cement. But in the final analysis, it's ALL excess dollars. It's ALL inflation.

                            Originally posted by blazespinnaker
                            What will happen, though, is all this liquidity will find a home, and that home will become a bubble which would generate some pretty nasty turbulence when it blows.

                            I guess Galbraith sees the fed as bubble managers, and not really inflation managers, and really what they should be doing is making sure bubbles don't occur anywhere, and when they do, to lean against them a lot harder.
                            Sounds like he is confused. He thinks when inflation is in consumer goods and wages, it's inflation. When it's in financial markets, it's bubbles. But it's ALL inflation.
                            Finster
                            ...

                            Comment


                            • #15
                              Re: Galbraith: loose monetary policy does not create inflation

                              Originally posted by Jim Nickerson
                              Finster, you have likely elaborated on this somewhere, but truly my memory is poor.

                              Take oil as perhaps a good example, if its price increases in bonars, is it possible to sort out how much of that increase is due to the bonar's being worth less vs. there actually being the case where oil is worth more? If there is less of something, the more valuable it is, to state differently what you wrote above. It seems to me that if something gains value, the price increase is not a reflection of inflation in some degree.
                              I think so, Jim. In fact, I've posted on this before. To learn how much of the oil price increase is due to a real increase in the value of oil, versus a decrease in the value of dollar, all you need do is take dollars out of the equation completely. Use, say, ounces of gold for your oil price units. When you do so, you find that the price of oil is up something like 10% in the past thirty years. In dollars, it's about 1900%.

                              Oil Price In Ounces Of Gold



                              Oil Price In Dollars Of US

                              Finster
                              ...

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