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Jim Grant: What Henry Hazlitt Can Teach Us About Inflation In 2014

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Submitted by James Grant via The Ludwig von Mises Institute,

This article is adapted from a portion of the Henry Hazlitt Memorial Lecture, delivered at the 2014 Austrian Economics Research Conference by James Grant.

Believe me, ladies and gentlemen, when you stand at the pinnacle of financial journalism, you’re standing at sea level. There are exceptions to the rule, of course. The Victorian polymath Walter Bagehot, second editor of The Economist, was one. The twentieth century Americans Garet Garrett, John Chamberlain and — my old mentor at Barron’s — Robert M. Bleiberg were others. Each brought something extraordinary to the prosaic business of financial and economic reporting and commentary. Then there was Henry Hazlitt (1894-1991), author, critic, self-taught economist and visionary. I stand before you in the reflected glory of his reputation.

The author of Economics in One Lesson, a longtime columnist for Newsweek and an editorial writer for The New York Times in the distant, pre-Krugman era, Hazlitt waged a career-long battle against inflation. He was at it in 1946 — and he was still going strong in 1966. It may be well at this point to define terms — Hazlitt would have certainly wanted us to.

You have heard inflation reduced to the phrase, “too much money chasing too few goods.” It is an overly narrow definition. Inflation is too much money. What the redundant increment of purchasing power chooses to chase is variable but always mischievous. It varies from cycle to cycle.

In one market interval, the dollars may chase skirts — or toothpaste or automobiles. This is inflation at the checkout counter, the familiar CPI variety. Or the dollars may chase stocks — or bonds or Iowa farmland. On Wall Street, where I work, this is the kind of inflation known as a “bull market,” and most of us cheer it on. The inflation of asset values is the kind of inflation that is prevalent today.

In the past year, the world’s central banks have materialized — net — $1.9 trillion (net, for instance, of the substantial shrinkage of euros effected by the European Central Bank). They conjured it on their computer keyboards. It may help to grasp the meaning of this vast pile of scrip to note that it is more than the GDP of India. One hears constantly that these central bank effusions are merely helping us adjust to the “new normal.” I dispute it — and I’m sure that Henry Hazlitt would dispute it if he were here today.

“Deflation,” too, is a perennially misunderstood term. It is not — as one so often hears it defined — a simple decline in aggregate prices. Let’s try a mind experiment. Suppose you lived in a time of material and technological wonder: of digital technology that sets robots to work, makes universally accessible the canon of human knowledge (and, to be sure, of human error) and coordinates and arbitrages the world’s far-flung labor markets. As it costs less to make things, so it should cost less to buy them.

Would you call this happy state of affairs “deflation” — or might you call it “progress”? Most Americans seem to not to mind it, whatever the Federal Reserve chooses to call it. They spend half their weekends looking for it.

With this in mind, let’s hear from Hazlitt himself, master of economic clarity. Here he is in June 1946 — in the New York Times, no less — taking the government to task for its misplaced worry about a return to the 1930s.

“A Washington correspondent of the Wall Street Journal reports that the government economic experts are now convinced the ‘deflation’ and not inflation will be the big problem six months to a year from now,” Hazlitt began. “Planners of federal financial policy make no secret of their belief that the danger of post-war inflation was passed in late spring, and that from now on the greater danger lies in too-rapid deflation. Such a belief on the part of the government planners in Washington would not be surprising, the whole economic philosophy they have adopted leads them to believe that ‘the real danger is deflation,’ whatever the evidence may be on the other side.”

In 1946, as now, the government held up the threat of deflation to justify a policy of ultra-low low interest rates and easy money. Now ladies, and gentlemen, I have devoted thirty-one years of my life to writing about interest rates, and I have to tell you that I can’t see them anymore. They’re tiny. And so they were in 1946. Then, as now, the Fed had been conscripted into the government’s financial service. Just as it does today, the central bank pushed money-market interest rates virtually to zero and longer-dated Treasury securities to less than 3 percent. Just as it does today, the Fed had its thumb on the scales of finance.

Hazlitt urged the government to remove it:

“When interest rates are kept arbitrarily low by government policy, the effect must be inflationary,” he wrote. “In the first place, interest rates cannot be kept artificially low, except by inflation. The real or natural rate of interest is the rate that would be established if the supply and demand for real capital were in equilibrium. The actual money interest rate can only be kept below the natural rate by pumping new money into the economic system. This new money and new credit add to the apparent supply of new capital just as the judicious addition of water add to the apparent supply of real milk.”

Hazlitt concluded that “the money rate of interest can be kept below the real rate of interest only as long as the supply of new money exceeds the supply of new real capital. Excessively low interest rates are inflationary in the second place because they give an excessive stimulation to the volume of borrowing.”

Why, I could quote those perfectly formed sentences in Grant’s today (and I believe I just might). They’re as timely now as they were during the administration of Harry S. Truman. The effective federal funds rate has been zero for well nigh six years.

There is a doctrine in finance called the dividend discount model. It says that the price of a common stock is the present value of its future cash flows discounted by a suitable rate of interest. Now what would happen to the calculation of the value of that stock if the rate of interest were unsuitable — if it were artificial?

Hazlitt says this: “Excessively low interest rates are inflationary because they mean that bonds, stocks, real estate and unincorporated businesses are capitalized at excessively high rates, and will fall in value even though the annual income they pay remains the same, if interest rates rise.”

If interest rates were artificially low, it would follow that prevailing investment values are artificially high. I contend that they are, and you may or may not agree. But you must allow the observation that we live in a kind of valuation hall of mirrors. We don’t exactly know where our markets should trade, because we don’t know where interest rates would be in the absence of central-bank manipulation. Natural interest rates — free-range, organic, sustainable — are what we need. Hot-house interest rates — the government’s puny, genetically modified kind — are the ones we have.

Hazlitt understood the effects of these intrusions in the market. More than that, he was able to explain them in words so simple, yet so elegant, that the proverbial milkman in Dayton could follow his argument. What a remarkable man was he, and how well it would suit us all to live more closely to his example.

 

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Mon, 06/09/2014 - 21:14 | 4839225 teslaberry
teslaberry's picture

jim grant , perenial hawk. love the guy's way with words, but he's like a dodo bird, an anarchonistic vestige of a 19th century mustache comb. 

howdy do.  we are going downt eh rabbit hole jim, and history will come out on the other side.............somewhere as horrible as you think it might wind up, and probably a lot worse. but without suspenders.

Mon, 06/09/2014 - 21:27 | 4839252 Joe_in_Indiana
Joe_in_Indiana's picture

Rather I back him as an ethical person than the others that run around and blab pablum.

Mon, 06/09/2014 - 21:37 | 4839272 0b1knob
0b1knob's picture

No bow tie on Jim Grant?  What does this mean?  The end of the world?

Mon, 06/09/2014 - 22:01 | 4839320 spine001
spine001's picture

Jim, if you read this or somebody makes you aware of this, please think about what is happening with Cycle Inventory right now due to the CBs. By keeping interest rates artificially low, the are decreasing the holding cost of inventories, which goes into every LOT SIZE and BATCH SIZE calculation in every major supply chain worldwide. Yes Cycle inventory worldwide is way too high thanks to the artificial financing of the CBs. So CBs are printing money in part to sustain artificially high cycle inventories? That is a crazy unintended consequence of the ZIRP. It is decreasing the economic efficiency of every supply chain in the world. Furthermore, during the unwind, as interest rates go up, the decrease in cycle inventories due to the decrease in lot sizes and batch sizes, will create a sucking sound like no other, most likely bringing a recession with them.
For those curious I posted the actual formula for calculating optimum lot and batch size and from it cycle inventories in a previous post.

Mon, 06/09/2014 - 23:00 | 4839387 NoDebt
NoDebt's picture

Spine- that's actually a REALLY good observation.  I had never quite thought about inventories in that way.  It makes sense and IT ALSO FITS THE FACTS.  

Feel like I learned something tonight.  Thanks.

Mon, 06/09/2014 - 21:58 | 4839316 SoilMyselfRotten
SoilMyselfRotten's picture

Jim is the coolest nerd of them all

Tue, 06/10/2014 - 09:06 | 4840102 astoriajoe
astoriajoe's picture

I logged in just to -1 you. Unless you are secretly mdb, in which case +1.

Mon, 06/09/2014 - 21:14 | 4839227 Cognitive Dissonance
Cognitive Dissonance's picture

Jim Grant is an extremely dangerous man for he speaks truth to power. While now he is mostly ignored, there will be a time when the people will turn on those who speak the truth since "We the People" are wed to the Big Lie.

Mon, 06/09/2014 - 21:21 | 4839240 Madcow
Madcow's picture

Terrorist

Mon, 06/09/2014 - 21:55 | 4839305 RaceToTheBottom
RaceToTheBottom's picture

If for no other reason than the confirmation of reason, I eagerly await the demise of the financial world....

Mon, 06/09/2014 - 21:58 | 4839314 Okienomics
Okienomics's picture

Financial repression has robbed savers of wealth.  It has punished the conservative investor and enriched leveraged speculators.  MMT, the magic money tree, has no answer for depressed velocity of money.  They push more and more money into an economy drowning with liquidity and it serves only to further dilute the flood.  Debt grows but the ability to repay it does not.  The loans can be refinanced, refinanced again at lower rates, refinanced again at near zero rates but the debt cannot and will not be repaid because there is not enough to pay both principal and interest.  Negative interest rates against held cash and bail-ins are two signs of the times.  Deflation is disaster to the leveraged (which, in a fractional reserve system, is banks and their clients).  But to the unleveraged deflation enhances their wealth.  

Mon, 06/09/2014 - 22:46 | 4839412 Policraticus
Policraticus's picture

very well stated.  If only others could process your coments.

Mon, 06/09/2014 - 21:59 | 4839319 Bro of the Sorr...
Bro of the Sorrowful Figure's picture

if only no one "ran" the world, and men like hazlitt and grant were listened to instead of disregarded.

Mon, 06/09/2014 - 22:16 | 4839352 spine001
spine001's picture

Jim, I contend that you are correct and I don't dispute what you say.
That said, there is no future looking truth, only backwards looking. The Fed wrongly did what they did. Now the key question is not whether it was right or wrong, but how do we get out of this mess.

Any valuation model will tell you that when interest rate goes up, the valuation of companies will go down.
That is why you need to bring Bernanke's statement that rates will not normalize for more than 20 years into bear. They can't normalize them. The system would break and they won't allow it.

So I find the article hollow since it doesn't have a reasonable proposal for how to get out.
If you were to ask me, well I don't have a solution. But may be, only may be, that if all the bests minds in the USA were to put their brains together and exit would be found, but that would only happen if people stopped biasing their opinions and statements with the color of past positioning. Once the solution is found, the next step is execution, probably even more difficult than the solution itself, but without the solution being proposed or discussed, nothing that will get us our of this mess will happen.

Tue, 06/10/2014 - 02:54 | 4839422 honestann
honestann's picture

Jim could give solutions, and so could many people.  The reason nobody with half a brain bothers any more is... because the predators-that-be have absolute, complete, utter control over everything at this point, and they will never implement any ethical or rational solution.

Therefore, for fools who play markets and such, the only game that remains is to guess what the predators-that-be will do, and try to get ahead of that.  Fortunately for me, I don't waste my time with grossly rigged and manipulated non-markets, but some people do.

BTW, no need for "the best minds".  The solutions are easy to identify.  A good start would be to dissolve all federal, state and county governments.  When the gringos came to the American continents, the continents were already inhabited.  There was never any ethical or rational basis to take over the continents and implement predatory systems in the first place.  So just eliminate them, and let individuals interact with each other as they will.

There are no ways to tinker with predatory authoritarianism and make it work.  From skin to core they are dishonest, unethical, destructive and malevolent by their very nature.  They cannot be fixed, they can only be eliminated.  That's the only solution.

-----

BTW, there is not "too much money" today.  The fact is, there IS no money, unless you count old gold and silver coins burried in backyards and vaults.  What there is today is "too much debt".

But the funny thing is, even that debt is unreal, because... well... what exactly ARE these debts?  What exactly is owed?  Dollars?  But dollars are debt.  But how can dollars be debt when nobody knows what is owed.  Surely the answer can't be "more debt" (more dollars).  That's blatant nonsense.  Yet that's also as close to an answer as anyone can give, as far as I can tell.

Tue, 06/10/2014 - 00:05 | 4839561 Frilton Miedman
Frilton Miedman's picture

 

 

"So I find the article hollow since it doesn't have a reasonable proposal for how to get out. ..."

Von Mises is Austrian school, to them, no solution is the solution, in other words, let the market & economy crumble with no Fed or Fiscal intervention, then let it "repair" on it's own.

I might suggest a web search for "Austrian" economics, or Friedrich Hayek.

Or, better yet, a web search for "Hayek Friedman debates" to learn the differences between Libertarian and Austrian economics.( https://www.google.com/search?q=Hayek+Frriedman+debates&rlz=1C1CHFX_enUS... )

 

Tue, 06/10/2014 - 00:26 | 4839605 ReactionToClose...
ReactionToClosedMinds's picture

not to pick a fight ... but you sound like Barry Ritholz........ in your 'simple' articulation and contrast you misstated egregiously.......not fair bro'.

Essentially you just articulated your indoctrinated understanding & 'explanation' (and opinion one might conclude)....nothing more 

And what does your moniker Frilton Midman suggest if I can cautiously ask?

 

 

Tue, 06/10/2014 - 00:47 | 4839625 Frilton Miedman
Frilton Miedman's picture

 

 

 

OK, I'll bite, WTF are you talking about?

I stated that Austrian economists (Von Mises) frown on both monetary (Friedman) and fiscal (Keynes) intervention, I used Friedman/Hayek to exemplify one of the key differences between Austrian (Hayek) and Libertarian (Friedman) theory on monetary policy.

Don't just make a whacky statement about my "indoctrinated understanding" (& Barry Ritholtz -whatever the hell you meant there).

What's your point? ..Do you have one, or did you just toss a few random words together for the sake of it?

 

 

Tue, 06/10/2014 - 09:56 | 4840284 ATM
ATM's picture

So what you are really saying is that Austrians beleive that centralized planning is a general failure and that the millions of people acting independently and in their own best interests come to a solution in a much better and more efficient way?

Seems all of this has been tested in the real world and we know without a shadow of doubt that centrally planned economies end in disaster. So what Grant is arguing is to simply end the central planning in our economy and financial systems because we know the end result already. We also know that the longer the centralized planning is left to run it's course th emore destruction that it will conjure when it implodes. That's not Earth shaking news only historical fact.

So for Grant the answer seems to be to pull the bandaid off now, take your lumps and all the pain that will occur because it s the logical choice when faced with the rot that is happening below that bandage. The gangrene that is developing needs to be exposed to sunlight and loped off today. The next best time is tomorrow. Feels better to let it fester but we know, WE ALL KNOW how it will end. We just do not know when.

Procrastination isn't really a strategy. 

Tue, 06/10/2014 - 12:10 | 4840836 Frilton Miedman
Frilton Miedman's picture

 

 

 

 

"Austrians beleive that centralized planning is a general failure and that the millions of people acting independently and in their own best interests come to a solution in a much better and more efficient way?"

Well, yes.

The term "central planning" becomes an oxymoron when you ask how will bridges, tunnels, highways and skyscrapers get built.

Will all the workers "acting independendantly in their own intereests" achieve that?

Is the Constitution and it's layout of the 3 branches of government "central planning"?

 

 

Tue, 06/10/2014 - 17:18 | 4841986 ATM
ATM's picture

In fact, Central Planning isn't needed to build any of those. Local government, states and the private sector would willing build them all.

Is the Federal government centralized planning? Yes, but it is in fact designed to be a little as possible and still perform the needed functions of a national government. 

The people who designed our government had a much better grasp on th enature of humans and governmetns than we do today. They knew that the natural progression was for government to assume greater and reater power over time at the expense of the people and their happiness and wealth.

They tried to design a government that was extremely limited with checks and balances against it's own nature to grow in power and destruction. they did a pretty good job that stood for over 100 years, then the cracks became too big to hold back the power grabs and we have what today is nothing like the government envisioned in our founding documents. 

 

Tue, 06/10/2014 - 18:24 | 4842150 Frilton Miedman
Frilton Miedman's picture

 

 

 

 

Trust me, buildings and bridges aren't built without a central group of architects, engineers to plan it.

Random groups of self motivated laborers doesn't work, but by all means, invest a boatload of capital into the idea, let me know how it works.

Capitalism, unregulated, of it's own device, creates wider and wider disparity - to assume there's a "natural" level of disparity that will come of it's own is blissful simplicity..

This is the seeds of Monarchy, to allow concentrated wealth, power & monopoly to grow without the consent of the governed.

That's not to say that disparity is a bad thing, it isn't, we all need to aspire for greater things, but excess disparity is also counterproductive to capitalism as the biggest players suppress all others without improving on their products, goods or prices.

In terms of your reference to "central planning", the Constitution alots the power to "centrally plan" via the commerce clause, however, we can both agree that Congress is NOT excercising that power in the interests of the people it's intended.

The fact that we all agree there is a central power acting against the interests of the majority is the start of that process.

The next step, knowing who to focus on, that lies in Congress, who has the power to make the changes to the Fed that we're all so angry with.

So, what good are we accomplishing by bitching about the Fed alone, if we're not calling out Congress, who has that power, about money's influence over the Fed, corporations, or eccentric billionaires, all gaming the system?

Or, did we make a big mistake in taking from King GeorgeIII, and deciding to "centrally plan", what was rightfully his to begin with?

 

 

Tue, 06/10/2014 - 00:15 | 4839592 ReactionToClose...
ReactionToClosedMinds's picture

........."dude" ............ he was honoring Hazlitt............there are constraints as to what his 'address' can "address".........give some slack man

Mon, 06/09/2014 - 23:00 | 4839410 Frilton Miedman
Frilton Miedman's picture

 

 

 

The cost to service household debt right now is at 1980 level, despite the size of that debt being 60% greater than 1980.

The same Von Mises that is promoting anti-Fed intervention also opposes minimum wage increases or fiscal/tax/foreign trade reform that might rebuild the middle class.

Austrians want us to go back to the 2009 crash and let it "finish what it started", so to speak.

Where our own government has failed to legislate or effect wage increases, tax & foreign trade policy, or mandate the return of net worth to those from whom it was stolen in 2008, the Fed can at least make debt less expensive, and for now, it's working, households have deleveraged 20% since 2008.

I'm not arguing there's no corruption in the Fed, there definitely is, but I don't see the Fed as the bigger boogeyman to the Congress, Senate, SCOTUS & POTUS that have declared "bribery is free speech".

We should be focused on why corporations & banks are exempt from the rule of law the rest of us adhere to, which has allowed them to steal such massive amounts of wealth to begin with....this is something that Von Mises refuses to acknowledge.

While I agree, Fed policy is scarefully easy and will likely have unintended consequences, it's a symptom of the extreme fiscal torture the middle class has been put through, largely due to Austrian influence over fiscal, tax and trade policies.

Von Mises, you can fight Monetarists, you can fight Keynes, but you can't fight BOTH.

 

Tue, 06/10/2014 - 08:26 | 4839948 Virginian
Virginian's picture

Okay, first - under what constitutional authority can the government dictate what I must pay - as a private citizen - to another who wishes to provide his labor in exchange for compensation?

Second, how did the middle class fair last time easy monetary policy was used as a blunt instrument to "mend" the economy?

You're free to come back to ZH when you can answer either of those questions.

Tue, 06/10/2014 - 09:34 | 4840186 Imagery
Imagery's picture

I'll catch that one for ya.  You are asking strawman questions so instead, I'll provide answers to the REAL questions we all should be asking.

Q1:  Under teh same <un> Constitutional Authority with which teh US FedRes was created in teh first place.  'Murikans like John McCain and his MIC cronies of both stripes will see to it that those policies are continued, via use of force on citizens of this country if necessary.  See militarization of local police forces if you have doubts.

Q2:  the same way they will fair this time.  Nothing ever changes unless / until the sheeple, or atleast a large enough percentage to effectuate change / prevention of repeats.  The magic act has been completed by the Fed.  It has bailed out its' members at the expense of large debts placed upon its' balance sheet.  YOU, those 'Murikans awake enough to have seen this act not once but now twice, know teh what and how, the only question now is what are you going to do about it?  You gonna pay those debts that were created by the banksters that reside on the BS of the US FedRes, continue to allow the banksters to print and issue unbacked credit which slowly bails them out but devalues those precious few fiats in your pocket and drops the level of dividend / interest you receive on your pitiful CDs and retirement funds, etc.  Another Bankster created magic trick coming that you damn well better be aware of relates to teh $Hundreds of Trillions of OBS iRate Derivatives about to blow.

so you see there is really only one question left and the Bible told you about how man, especially banksters, never change.  Since the written recordation of mans time here on this rock.  You gonna allow them to make YOU pay again or you gonna roll the guillotines?

Tue, 06/10/2014 - 14:30 | 4840854 Frilton Miedman
Frilton Miedman's picture

 

 

 

Imagery, thankyou - Q1 listed in the Constitutions "Powers of Congress", correct.                           

Q2, I agree, it's time for us to stop being whiny "sheeple", complaining on internet forums as if we can do nothing.      There are several active petitions to do something about campaign finance & Citizens United,  if a person has not at least signed one, he should stop whining.

It would also help if those who make accusations  of others lack of knowledge of the Constitution actually read the Constitution.

 

Tue, 06/10/2014 - 17:21 | 4842006 ATM
ATM's picture

If congress has the power to do anything it chooses why then enumerate in Article 1 Sec 8 specific powers at all?

Tue, 06/10/2014 - 20:08 | 4842478 Frilton Miedman
Frilton Miedman's picture

 

 

You could, at some point, actually read it yourself....the "regulate commerce" and "tax...collect to pay for the defense & common welfare ..." parts in particular.

This is where you ask "To what end is Congress supposed to regulate".

To where I say "the people who voted them into office", "not bribers" - which leads to -

Article II, section 4, asking you to note the words "bribery" in context to "high crimes", and although this section is for the executive branch, the appearance of " ... all civil Officers of the United States ..."

This is how the conversation usually goes, hopefullly now you understand who's in charge, who to blame and what they've done that's really "unconstitutional".

Bribery isn't free speech, not according to our Constitution.

 

 

Tue, 06/10/2014 - 14:56 | 4840809 Frilton Miedman
Frilton Miedman's picture

 

 

 

Virginian,

I'm free to come to ZH when I want.

First, read the "Powers of Congress" section of the Constitution, it's obvious you've never read your own Constitution.

Second, better yet, how well did Americans fare the last time the Fed was unable to do anything at all?

Hint, let Friedman 'splain - https://www.youtube.com/watch?v=MvBCDS-y8vc

 

 

Mon, 06/09/2014 - 23:05 | 4839445 disabledvet
disabledvet's picture

The great insight of the seventies didn't come from the midget Jew but from the Bankers Trust folks who realized that the USA did not have a debt problem back then. This is not to argue "the inflation was affordable" (another Nixon, Kissinger pile of bullshit) but it is to argue that recovery was still possible if the inflation could be snuffed out "like a Jew at a Holocaust Party."

And indeed it was.

This time around we're not so fortunate as we have a debt crisis that has not only not been resolved but exacerbated because a Bailout Regime has basically been decreed thus wiping out the Middle Class.

How any City of any size can survive this...even of small size (50,000) is simply beyond me.

In short even a "mild" inflation has devastating consequences as simply put you create the conditions for a debt repudiation...ironically by the very same banks you're bailing out.

Sorry for the smack talk but this is prima facie stupid now.

YOU CANNOT CONTINUE DOWN THE PATH OF MONETIZING EVERY DEBT.

It's either jubilee or nuke the dollar.

There is no more cash to "flow" save for where there are energy booms and/or deep liquidity (North Dakota, Ohio, New York.)

Usurious rates are coming for Agency Paper now.

"Thanks for playing, have a nice day."

Tue, 06/10/2014 - 17:23 | 4842013 ATM
ATM's picture

Who does a Jubilee hurt? Answer that and you will know that the end result will be the destruction of the dollar and our society to boot.

Mon, 06/09/2014 - 23:16 | 4839467 Flakmeister
Flakmeister's picture

It is all correct in the limit of an infinite world...

The old rules have changed, for the very first time ever cheap credit can not be used to create cheap oil. Since 2005 there has been $3.5 trillion spent in CAPEX exclusive of US shale and Canadian Tar Sands, the result of which has been a decline of 1 million bpd of crude oil. While "All Liquids" measures have slightly increased, the NGLs and condensates that those increases are driven by yield no distallate or fuel oil, and that is the stuff that drives the real economy...

Tue, 06/10/2014 - 00:51 | 4839633 ToNYC
ToNYC's picture

"The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups."

-HenryHazlitt further refining economics to one sentence.

 

"The more words I use, the less the words mean."

-Anna Karina in Godard's "Vivre Sa Vie"

 


Tue, 06/10/2014 - 04:13 | 4839777 Calculus99
Calculus99's picture

Classic line -

"Most Americans seem to not to mind it (deflation). They spend half their weekends looking for it."

So true...

Tue, 06/10/2014 - 05:57 | 4839809 Serenity Now
Serenity Now's picture

Interest rates aren't being held down by some conspiracy.  Interest rates rise in order to tamp down excessive growth.  Do you see any excessive growth these days?  Interest rates rise to encourage saving and discourage borrowing or investing.  Interest rates lower to encourage spending and borrowing and investing.

Problem is, people don't have capital to spend, and they have reached their borrowing limit.  The Ponzi is mostly over.  

I like Jim Grant, and this was a good article, but he didn't do a good enough job of defining inflation.  Many of you know that is my pet peeve.  It's so simple a definition, and yet almost everyone insists on getting it wrong.  

INFLATION = INCREASE IN MONEY SUPPLY

All other things being equal, an increase in the money supply increases demand which increases prices.  

Anyway, it was a pretty good article.  I liked the reference to Hazlitt, and I also liked the use of the term "economic clarity," which I use often here at ZH.  :)

Tue, 06/10/2014 - 12:25 | 4840886 Frilton Miedman
Frilton Miedman's picture

 

 

"INFLATION = INCREASE IN MONEY SUPPLY

All other things being equal, an increase in the money supply increases demand which increases prices.  "

With Excess reserves currently @ $2.5 Trillion, I think that's too generalized....we'd have hyperinflation if it were true.

The key is velocity, Fed's monetary expansion is stagnating in the hands of banks, I suspect because the ROI to lending exceeds the risk vs collecting 0.25% interest on E/R's.

This era may be a proving ground between Keynes "demand-push" inflation and Classic Liberals "monetary-only" cause of inflation.

Personally, I think it's a combination of both, not one or the other.

 

Tue, 06/10/2014 - 17:27 | 4842022 ATM
ATM's picture

Velocity of money can change in an instant. 

The excess reserves are just like gasoline that has been filling our basement. With each new QE or whatever else they wish to call the conjuring of new money they fill our basement closer to the ceiling with more gas.

All it needs is a spark and velocity ignites and all those reserves explode into lending and trillions of other dollars held overseas stream back into the backdraft created by the rush.

game over.

Tue, 06/10/2014 - 21:09 | 4842762 Frilton Miedman
Frilton Miedman's picture

 

 

I suggest a glance at mutliple decades of M1, M2 & MZM velocity regarding your first statement, but I don't disagree with the concern.

I agree over what might happen if that long term velocity trend reverses with excess reserves so massive, but ask what precedence you have that shows velocity to increase rapidly. (Weimar?...a country that tried to print on a gold standard, not the same)

In 2008, Congress voted to allow the Fed to pay interest on excess reserves, now at 0.25%, which plays some role in stemming an exodus of the $2.5 trillion, but again, I share your concern.

I'm short treasuries for the same concerns you have, if velocity surges too fast I suspect interest rates may have to increase, potentially fast.

In the same respect, I'm not betting the farm we won't be Japan either.

What I DO know is the problem is structurally a fiscal one, even Bernanke repeatedly tried to appeal to Congress that monetary wasn't going to be the solution.

The Fed is acting as a temporary means to keep household & government debt affordable, no debating Fed conspiracies, but to point to the fact that somewhere around 20% of all households hold underwater mortgages, higher mortgage payments at this stage without wage growth could make the Great Depression like like a small correction.

 

 

 

 

 

Tue, 06/10/2014 - 23:21 | 4843303 AdvancingTime
AdvancingTime's picture

Never before has mankind diverted such a large percentage of wealth into intangible products or goods.  I contend this is the primary reason that inflation has not raised its ugly head or become a major economic issue. If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar. Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.

The timetable on which economic events unfold is often quite uneven and this supports the possibility of an inflation scenario. A key issue being one of timing. If the price of gas jumps to $8 a gallon overnight do you buy gas and not make your car payment or stop driving the twenty miles to work? Answer, it could be months before your car is repossessed so you buy gas. It is important to remember that debts can go unpaid and promises be left unfilled. Is this possible and if so where would that leave us? Chaos and major disruption would result from such a scenario. As we have seen from the economic crisis of 2008 and following many other unsettling developments legal actions can continue to drag on for years.  More in the article below.

http://brucewilds.blogspot.com/2014/04/inflation-seed-of-economic-chaos....

 

Tue, 06/10/2014 - 07:00 | 4839857 Last of the Mid...
Last of the Middle Class's picture

I'll make your dollars worth nothing while I print more and more for myself. Oldest financial trick in the book. It's never inflation, it's the drought, wet spring, polar vortex, 100 year storm ad nauseum. It's sad when you can't listen to any financial outlet without the weather tie in to explain it away and of course my favorite is the carbon tax. A tax created by chicken little running around screaming "the sky is falling" with absolutely no repeatable scientific explanation for it. There is no press anymore, just propaganda to justify a horrendously broken financial and political system.

,

Tue, 06/10/2014 - 09:07 | 4840104 AdvancingTime
AdvancingTime's picture

During the "boom times" when asset values are going up lots of people think they are getting rich. In inflationary times government also does well as tax revenues grow. Not only does government get to spend the money they print, the side effects of inflation on taxes are good for government, though bad for their subjects.

By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. said John Maynard Keynes. As the central banks print like crazy to control interest rates on bonds they devalue the currency.

While there are not many Bond Vigilantes there are many Currency Vigilantes. Changes in the value of a currency directly affect "buying power" and the value of assets. Inflation, deflation, what is something worth? More on this subject in the article below.

http://brucewilds.blogspot.com/2014/02/when-will-inflation-strike_1.html

Tue, 06/10/2014 - 15:08 | 4841600 Frilton Miedman
Frilton Miedman's picture

 

 

" ... Inflation, deflation, what is something worth?"

Pivotal to that discussion, what is labor worth?

It's also subject to supply/demand, and we're in unprecidented levels of globalization, where multinationals can hire in a country where labor is 1/10 our rates, then sell to a country with consumers that have access to credit, or still has well paid labor, while putting a storefront in Ireland, instead of America, who has the lowest corporate tax rate in the world, while hiring almost no Irish labor in exchange for the lowered taxes.

The global middle & lower classes have become a candy store for multinational corporate executives.

 

Tue, 06/10/2014 - 09:34 | 4840184 lucyvp
lucyvp's picture

I'm thinking the party is over when medium term debt, seven year ???, cannot be rolled over to a lower rate.

Then instead of cash flows of borrowers increasing each time debt is refinanced, it becomes progressively harder to service the debt, it will have to be paid down instead of rolled.  Back of the envelope says total interest of the u.s. is about 3T on 60T of debt, about 5% interest rate.  The rate is still headed down thanks to ZIRP.  Give it a few more years. 7 years ago, rates were several percent higher than today.   In 2009,2010 rates were much lower.  those loans cannot roll into lower rates.

Tue, 06/10/2014 - 16:14 | 4841821 Flakmeister
Flakmeister's picture

Kudos to most everyone here....

As good a thread as I have seen in some while here...

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