Keynes versus the Keynesians: Inflation & Cognitive Dissonance

“There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, & does it in a manner which not one man in a million is able to diagnose.”
~J.M. Keynes~

“Weighed against the political, social and economic risks of continued slow growth after a once-in-a-century financial crisis, a sustained burst of moderate inflation is not something to worry about, It should be embraced.”
~Kenneth S. Rogoff~

In a move to give some credibility to a really & truly stupid idea, the NYT has rounded up a gang of economist-fabulists to explain why everyone should learn to love, now wait for this, HIGHER PRICES.

Those foolish souls among you that believe that LOWER prices are good will find this a “must read”.

Of course, much of this is to give cover to Janet Yellen, the presumptimve nominee to head the Fed as of next year. For her part, he on record declaring that a “little inflation” is useful when the economy is weak. Presumably, the reference is to a rising (consumer) price index that itself is one of the several possible outcomes from central bankers inflating the money supply, which is the original definition of inflation.

In a bit of tortured logic, firms love rising price levels as a means to boost profits. But this only works if input costs (e.g., wages & salaries) rise less rapidly than output prices. Yet the same workers whose wages lag behind prices are supposedly earning (phantom?) wage hikes so they are better able to repay debt. (Like Keynes, this arguments shows an inclination to have it both ways.)

And then there is, the tried-and-true canard that consumer price inflation induces households & firms borrow more money & spend it more quickly. What this overlooks is that banks, as now, may find it cheaper & less risky to buy sovereign debt or purchase other financial assets rather than lend to small businesses or consumers.

While the US government is a clear beneficiary of a rising price level in repaying its debt with dollars that buy less than those originally lent to it, this is only advantageous if the debt is rolled over at the same interest rate, an unlikely outcome if price hikes are substantial.

Of course, Yellen is in concert with her likely predecessor, Ben Bernanke, who believes that “… falling & low inflation can be very bad for an economy.” This bit of inanity is beyond the pale in presuming that incrementally small rises in price levels could collapse into to a sharp decline the price level. Yet this sort problem only arises when central bankers monumentally mismanage the money supply as they did after the Stock Market Crash of 1929.

Just in case you tuned out, HIGHER prices are always good & LOWER prices (even smallish increases in prices) are always bad!?!

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About christopher

Content of "Natural Order" attempts to reflect the commitment of Universidad Francisco Marroquin to support the development of a society of free & responsible individuals. The principal commentator for this blog is Christopher Lingle.

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