The Man with the Inflation Plan
Proving beyond a shadow of doubt that Keynesian absurdity knows no bounds, Larry Summers has graced the FT – one of the West’s premier establishment propaganda mouthpieces advocating central economic planning as practiced by modern-day regulatory democracies – with yet another cringe-worthy editorial.
Larry Summers – it is probably no exaggeration to call the man a danger to civilization
Photo credit: Hyungwon Kang / Reuters / Corbis
The editorial is entitled “A world stumped by stubbornly low inflation” with a subheader reading “There is no evidence that policymakers are acting strongly to restore their credibility”.
The title and subheader alone deserve comment. First of all, absolutely no-one outside the inhabitants of the incestuous ivory tower of Keynesian and monetarist mainstream economists and the central planning bureaucrats infesting central banks is in any way “stumped” by “low inflation”.
We suspect that there are billions of consumers in the world who would prefer prices to stop rising altogether. In fact, we believe they not only want them to stop rising, they actually want them to decline. But what do they know? Mr. Summers and his central planning comrades have decreed that it is “bad” for them if they are able to buy more rather than less with their income!
As to the perceived lack of policymaker “credibility”: They don’t deserve any. The world’s economic malaise is to 100% their fault. If only it were true that they are “not acting”! The truth is unfortunately that they continue to heap folly upon folly.
Need we remind Mr. Summers of the Bank of Japan’s decision to implement the perversion of negative deposit rates, or the decision of the Riksbank to lower its negative rates to minus 50 basis points in the middle of a raging housing and consumer credit bubble, even though Sweden’s GDP is forecast to grow by 3%?
In an unhampered free market economy, mildly declining prices would be the rule, not the exception. In fact, the time period during which the US experienced the by far largest real economic growth per capita in history was one during which consumer prices steadily declined.
1869 – 1918 – the by far biggest and most equitable increase in US real economic output per capita in history was recorded in this time period. There was no Federal Reserve and government was but a footnote in most people’s lives. Federal spending amounted to less than 4% of GDP by 1910. People used sound money and a steady, mild decline in consumer prices took place – click to enlarge.
Mr. Summers urgently needs to familiarize himself with Hayek’s 1928 critique of the theories of two of the intellectual forebears of Keynes, the US-based economic cranks William Foster and Waddill Catchings. Hayek showed clearly that real economic growth has neither anything to do with spurring consumption spending, nor does it require any “price inflation”.
However, this insight requires one to understand capital theory, and to recognize that capital is heterogeneous and not a homogeneous, self-generating blob. It requires one to understand the inter-temporal interplay between saving, investment, production and consumption.
With respect to so-called “inflation” – the term originally designated an increase in the money supply. This definition is also the only one that makes any sense – both semantically and in terms of economic theory.
Inflation (in its original meaning of monetary inflation) has numerous possible effects. An increase in the prices of consumer goods is only one of these possible effects, and by no means the most pernicious one. What inflation invariably does cause are changes in relative prices in the economy.
This has far-reaching consequences, of which two of the most prominent ones are wealth redistribution (in practice largely from the poor to the rich) and the falsification of economic calculation. This in turn leads to capital malinvestment and the boom-bust cycle. In other words, these are ultimately the things of which Mr. Summers thinks we ought to have more of!
With regard to the change in the meaning of the term “inflation”, Ludwig von Mises notes in Human Action:
“What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates. This innovation is by no means harmless. It plays an important role in fomenting the popular tendencies toward inflationism. […]
[T]there is no longer any term available to signify what inflation used to signify. It is impossible to fight a policy which you cannot name.”
What is actually the true inflation situation? Let us look at three charts illustrating it.
And now for a real stunner:
Since we don’t have sufficiently granular data available to construct a TMS version of China’s money supply, we are simply using China’s official broad money supply aggregate M2 as a stand-in for the moment. Note that the growth rate of the narrow gauge M1 is even greater, especially in the short term. In fact, the recent acceleration in China’s narrow money supply gauge is so stunning that we are showing the chart of M1 separately below. Again we must ask: how much inflation does Mr. Summers think would actually be enough? – click to enlarge.
Summers’ Ideas – A Doctrine as Old as it is Bad
Summers’ article starts out by describing a hypothetical scenario (that he apparently believes could not possibly eventuate anytime soon), in which official measures of “consumer price inflation” and the associated market expectations as revealed by forward inflation rates and the spreads between “inflation-protected” and run-of-the-mill government bonds indicate sharp price increases.
Summers concludes it would be considered quite reckless if central banks were to insist on keeping monetary policy loose in such a situation. This is undoubtedly correct, ergo, so far so good. It gets real bad though when he moves on from this as of yet hypothetical danger to the one we are allegedly facing now:
“At present we are living in a world that is the mirror image of the hypothetical one just described. Market measures of inflation expectations have been collapsing and on the Fed’s preferred inflation measure are now in the range of 1-1.25 per cent over the next decade. Inflation expectations are even lower in Europe and Japan. Survey measures have shown sharp declines in recent months. Commodity prices are at multi-decade lows and the dollar has only risen as rapidly as in the past 18 months twice during the past 40 years when it has fluctuated widely.”
So what? First of all, it is a great relief to consumers that consumer goods prices have so far remained low, as they haven’t seen their real median income rise in decades. Consumers need to rebuild savings and prepare for an increasingly uncertain future. Making them suffer the ignominy of rising consumer prices would make their situation even more precarious.
Secondly, the assumption that market-based “inflation expectations” are a meaningful indication of what will happen to prices in the future requires quite a leap of faith. In reality, markets are often dead wrong, especially near medium to long term turning points. Meanwhile, the fact that the free-floating fiat currency regime is highly unstable and volatile is the fault of the system as such. Before governments decided to willfully destroy the gold standard, the global economy managed to do splendidly with sound money.
“The Fed’s most recent forecasts call for interest rates to rise almost 2 per cent in the next two years, while the market foresees an increase of only about 0.5 per cent. Consensus forecasts are for US growth of only about 1.5 per cent for the six months from last October to March. And the Fed is forecasting a return to its 2 per cent inflation target on the basis of models that are not convincing to most outside observers.”
Yes, the Fed couldn’t forecast its way out of a paper bag, and its “models” make no sense. What else is new? This is actually a good argument to do away with central monetary planning. It simply doesn’t work, mainly because it cannot work. The obsession with returning to the arbitrary “2% inflation target” makes even less sense – in fact, it is extremely dangerous.
US consumer price index – this consistent and extreme rise in prices has produced no economic benefits whatsoever for society at large. Only a small coterie of inflation profiteers has benefited at everybody else’s expense – click to enlarge.
“Despite the apparent symmetry, the current mood is nothing like the one posited in my hypothetical example. While there is certainly substantial anxiety about the macroeconomic environment, as judged from the meeting of the Group of 20 big economies in Shanghai last week, there is no evidence that policymakers are acting strongly to restore their credibility as inflation expectations fall below target.”
We can only repeat our “if only” sigh here. Unfortunately, there is plenty of evidence that the planners are going “total retard” in their attempt to force rising consumer prices into being. As to growing “macroeconomic anxiety” – it is certainly justified. However, the sorry state of the global economy is the result of precisely the policies Summers advocates. Why would anyone expect that more of the same will make the situation any better? This is insanity.
“In a world that is one major adverse shock away from a global recession, little if anything directed at spurring demand was agreed. Central bankers communicated a sense that there was relatively little left that they can do to strengthen growth or even to raise inflation. This message was reinforced by the highly negative market reaction to Japan’s move to negative interest rates. No significant announcements regarding non-monetary measures to stimulate growth or a return to target inflation were forthcoming, either.”
First of all, contrary to what Summers is implying here, recessions are not the result of “unexpected shocks” that drop from the sky unbidden, like an asteroid strike. They are solely the result of the damage done during the preceding boom periods, which as noted above are in turn the result of the policies Summers favors.
The worry that a recent “lack of announcements” regarding various new central bank or non-monetary policy-related government measures means that such measures won’t be forthcoming is completely unfounded. If anything, we should be greatly worried about the exact opposite.
How “stimulus” affects the economy.
Cartoon by Scott Stantis
Regarding the market’s negative reaction to the BoJ joining the monetary cranks in Europe by imposing negative interest rates: That was the market sending a message. It is saying that this lunacy is already one step too far, and that central bankers would do better to back off unless they want to see a complete and utter catastrophe unfold.
As Ludwig von Mises reminds us in Human Action:
“It is not necessary to point out the consequences to which a continued deflationary policy must lead. Nobody advocates such a policy. The favor of the masses and of the writers and politicians eager for applause goes to inflation. With regard to these endeavors we must emphasize three points. First: Inflationary or expansionist policy must result in over-consumption on the one hand and in malinvestment on the other. It thus squanders capital and impairs the future state of want-satisfaction. Second: The inflationary process does not remove the necessity of adjusting production and reallocating resources. It merely postpones it and thereby makes it more troublesome. Third: Inflation cannot be employed as a permanent policy because it must, when continued, finally result in a breakdown of the monetary system.”
Why would anyone want to pursue policies that are apodictally certain to make things worse? As far as we can tell, at the root of this is a mixture of economic illiteracy and political expediency. Summers represents both in equal measure in our opinion.
Someone has wisely produced a painting of Mr. Summers. This makes it possible to burn him in effigy.
Image credit: “Zach”, via newyorker.com
Summers concludes his jeremiad with a recommendation – as can probably be imagined, it is indeed a battle-cry for more of the same. The fact that it hasn’t worked so far has not been taken as evidence that it may actually be the wrong thing to do. In typical Keynesian fashion, Summers is convinced that this simply means that not enough of it has been perpetrated yet (after more than 26 years of these very same policy prescriptions failing in Japan, it certainly takes quite a bit of chutzpa to continue to make such assertions):
“Today’s risks of embedded low inflation tilting towards deflation and of secular stagnation in output growth are at least as serious as the inflation problem of the 1970s. They too will require shifts in policy paradigms if they are to be resolved.
In all likelihood the important elements will be a combination of fiscal expansion drawing on the opportunity created by super low rates and, in extremis, further experimentation with unconventional monetary policies.”
Say what? What “paradigm shift” is it that Summers thinks is required? The world is already quite close to maximum lunacy in terms of “monetary experimentation” and deficit spending. As to the danger of “secular stagnation” (a term Summers has apparently coined himself), if there really is such a danger, then it is the result of past economic interventionism.
Even more interventionism cannot possibly improve the situation, it can only make it even worse. Further above Summers mentions the alleged need to spur “aggregate demand”, which one always tends to come across in such screeds. It is a complete economic fallacy, as it is simply putting the cart before the horse. One cannot consume oneself to prosperity.
Ludwig von Mises provides us with the following assessment:
“A retailer or innkeeper can easily fall prey to the illusion that all that is needed to make him and his colleagues more prosperous is more spending on the part of the public. In his eyes the main thing is to impel people to spend more. But it is amazing that this belief could be presented to the world as a new social philosophy. Lord Keynes and his disciples make the lack of the propensity to consume responsible for what they deem unsatisfactory in economic conditions. What is needed, in their eyes, to make men more prosperous is not an increase in production, but an increase in spending. In order to make it possible for people to spend more, an “expansionist” policy is recommended. This doctrine is as old as it is bad.”
This seems obvious enough to us. It helps to know a thing or two about economic theory, but one should be able to recognize the truth of the above statement even if one is merely in possession if a modicum of common sense.
Ludwig von Mises – he and many others have long ago thoroughly debunked the economic fallacies propagated by people like Larry Summers.
Image via cafeliberte.de
What Summers proposes is indeed based on “a doctrine as old as it is bad”. The worrisome economic conditions of today are simply the result of the consistent implementation of this doctrine over the past several decades. We are all very lucky that the market economy has been able to continue to create wealth even in the severely hampered state it finds itself in nowadays. However, it cannot be taken for granted that this will continue if interventionist burdens on the economy continue to be ratcheted up.
It should be clear that as long as people like Mr. Summers and his cohorts in academe and policymaker circles are holding sway, things are absolutely certain to get worse. In fact, it is quite likely that there will eventually be a truly catastrophic denouement if the world continues down this path.
As we already noted in the context of similar admonishments to policymakers recently penned by Martin Wolf: Prepare yourself accordingly.
Charts by: Wikipedia, St. Louis Federal Reserve Research, ECB, TradingEconomics
You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.
Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke
9 Responses to “Mr. MORE!”
Most read in the last 20 days:
- US Financial Markets – Alarm Bells are Ringing
A Shift in Expectations When discussing the outlook for so-called “risk assets”, i.e., mainly stocks and corporate bonds (particularly low-grade bonds) and their counterparts on the “safe haven” end of the spectrum (such as gold and government bonds with strong ratings), one has to consider different time frames and the indicators applicable to these time frames. Since Donald Trump's election victory, there have been sizable moves in stocks, gold and treasury bonds, as the election...
- The Great El Monte Public Pension Swindle
Nowhere City California There are places in Southern California where, although the sun always shines, they haven’t seen a ray of light for over 50-years. There’s a no man’s land of urban blight along Interstate 10, from East Los Angeles through the San Gabriel Valley, where cities you’ve never heard of and would never go to, are jumbled together like shipping containers on Terminal Island. El Monte, California, is one of those places. Advice dispensed on Interstate...
- A Trade Deal Trump Cannot Improve
Worst in Class BALTIMORE – People can believe whatever they want. But sooner or later, real life intervenes. We just like to see the looks on their faces when it does. By that measure, 2017 may be our best year ever. Rarely have so many people believed so many impossible things. Alice laughed. "There's no use trying," she said: "one can't believe impossible things." "I daresay you haven't had much practice," said the Queen. "When I was your age, I always did it for...
- Where’s the Outrage?
Blind to Crony Socialism Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous. The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class. In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid. Believe me. I’ve been on both sides of this kind of dispute (except, of course, for the “failed”...
- Trump’s Trade Catastrophe?
“Trade Cheaters” It is worse than “voodoo economics,” says former Treasury Secretary Larry Summers. It is the “economic equivalent of creationism.” Wait a minute - Larry Summers is wrong about almost everything. Could he be right about this? Larry Summers, the man who is usually wrong about almost everything. As we have always argued, the economy is much safer when he sleeps, so his tendency to fall asleep on all sorts of occasions should definitely be welcomed....
- Pope Francis Now International Monetary Guru
Neo-Marxist Pope Francis Argues for Global Central Bank As the new year dawns, it seems the current occupant of St. Peter’s Chair will take on a new function which is outside the purview of the office that the Divine Founder of his institution had clearly mandated. Neo-Papist transmogrification. We highly recommend the economic thought of one of Francis' storied predecessors, John Paul II, which we have written about on previous occasions. In “A Tale of Two Popes” and...
- Side Notes, January 14 - Red Flags Over Goldman Sachs
Red Flags Over Goldman Sachs Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold. The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese's movie “The Wolf of...
- Trump’s Plan to Close the Trade Deficit with China
Rags to Riches Jack Ma is an amiable fellow. Back in 1994, while visiting the United States he decided to give that newfangled internet thing a whirl. At a moment of peak inspiration, he executed his first search engine request by typing in the word beer. Jack Ma, founder and CEO of Alibaba, China's largest e-commerce firm. Once he was a school teacher, but it turned out that he had enormous entrepreneurial talent and that the world of wheelers, dealers, movers and...
- Money Creation and the Boom-Bust Cycle
A Difference of Opinions In his various writings, Murray Rothbard argued that in a free market economy that operates on a gold standard, the creation of credit that is not fully backed up by gold (fractional-reserve banking) sets in motion the menace of the boom-bust cycle. In his The Case for 100 Percent Gold Dollar Rothbard wrote: I therefore advocate as the soundest monetary system and the only one fully compatible with the free market and with the absence of force or fraud...
- Silver’s Got Fundamentals - Precious Metals Supply-Demand Report
Supply-Demand Fundamentals Improve Noticeably Last week was another short week, due to the New Year holiday. We look forward to getting back to our regularly scheduled market action. Photo via thedailycoin.org The prices of both metals moved up again this week. Something very noticeable is occurring in the supply and demand fundamentals. We will give an update on that, but first, here’s the graph of the metals’ prices. Prices of gold and silver...
- Regime Change: The Effect of Trump's Victory on Stock Prices
A Soaring Market On January 20 2017 Donald Trump will be sworn in as the new president of the United States. On the stock market his victory has triggered a lot of advance cheer already: the Dow Jones Industrial Average rose by a sizable 7.80 percent between the election and the turn of the year. Two big winners: the DJIA and Donald Trump - click to enlarge. Many investors are now wondering what effect the change in government will have on stock prices in the new...
- Donald and the Dollar
No Country Can be Made Great by Devaluation John Connally, President Nixon’s Secretary of the Treasury, once remarked to the consternation of Europe’s financial elites over America’s inflationary monetary policy, that the dollar “is our currency, but your problem.” Times have certainly changed and it now appears that the dollar has become an American problem. Richard Nixon and his treasury secretary John Connally. The latter is today mainly remembered for his...