Ritchie on inflation

The threat from deflation has been a regular theme for discussion amongst the economists linked to the Green New Deal group over the last few years and rightly so. Deflation might appear to increase the value of wages, but the effect is to encourage people to defer investment in the belief that there will be a financial gain from doing so. The consequence is a drain on economic activity that would compound current woes and just at a time when what the economy needs most of all is investment on a sustainable future.

The ECB was right to act.

The Bank of England is instead clearly thinking about when rates might rise here because the pressure of the pocket of house price inflation in London. That’s profoundly worrying when what we need are new housing, taxes to take the heat out of over-valued existing housing and long term stable and low real interest rates to encourage investment. Push too hard and we could easily end up with what the ECB fears.

It might be worth noting that we’re talking about two different currencies here, each with their own monetary policies, their own fiscal policies and thus their own money supplies and inflation rates.

You know, that everything is in fact different?

Which is why every free market economist has been screaming that the ECB should have lowered interest rates some 5 years ago and also why they’re all pondering when the UK will raise them.

Because, you know, they’re different?

30 thoughts on “Ritchie on inflation”

  1. The real threat is deflation… we can see this from looking a different figures, from somewhere else…So we need more taxes..to take the heat out of over-valued… because the real danger is deflation… and… non sequitur..words, words, words.

    Personally, I can’t find anything he has said that I disagree with. Can somebody tell me what he is trying to say?

  2. @IanB
    Yes. Heard a guy on Sky pushing that one last night. Apparently we need some inflation encouraged.
    Sorry. This loses me. Yes. i can understand certain elements of the business world might welcome some inflation but speaking as the ordinary punter, prices falling rather than rising suit me just fine. Isn’t this supposed to be one of the benefits of increased productivity? I can easy find something else to spend the money I’ve saved on. So the producers get hit. So what?.

  3. Stopped clock time.

    “what we need are new housing, taxes to take the heat out of over-valued existing housing”

    He serendipitously said something that’s broadly correct.

  4. BIS>

    There are benefits to small amounts of inflation; it acts as something of an economic lubricant. Consider that the effect of inflation on prices, absent inflation-matching increases, is to lower them steadily in real terms. That is, the default setting in the absence of regular price rises will be a steady drop in what things cost.

    Clearly, one effect of that is to make people selling stuff keep an eye on their prices and re-evaluate them regularly. Call it a kick up the bum that prevents complacency, if you like.

    Similarly, in an inflationary regime money take out of the economy – ‘stored under a mattress’ – loses its value over time, as it should. There is a consistent pressure to keep money invested productively.

    Since the economic costs of a small amount of inflation are low, it doesn’t have to do all that much good before it becomes a benefit overall.

  5. “Similarly, in an inflationary regime money take out of the economy – ‘stored under a mattress’ – loses its value over time, as it should.”
    Yep. That’s the bit I have problems with. Why? Where’s this mattress? No suspicious lumps under mine.If anyone’s keeping some cash around there’s usually a damned good reason why they’re doing so. Why should they see the value of their savings eroded to suit the business cycle? And generally one persons savings are someone else’s borrowings. Why do they get to have the cost of borrowing reduced at the expense of savers?
    My perspective is as a small business. I hate inflation. I have to constantly worry whether rising costs are going to erode my profit before I get paid. I have to buy forward & carry stocks to insure against it. That isn’t “money invested profitably”
    Yes, i can understand how manufacturing likes inflation because it encourages people to hold stocks or buy now rather than later. But a) It’s a single time event. One the stocks are built up, the purchases made, throughput’s the same. And b) Manufacturing’s not everything. Not even most of everything..

  6. “Where’s this mattress? No suspicious lumps under mine.If anyone’s keeping some cash around there’s usually a damned good reason why they’re doing so.”

    Quite. Because we have inflation. (Yes, that’s logically equivalent to ‘I sneeze three times every morning to keep the Snarks away; look how well it’s working’, but still… the absence of behaviour something is hypothesised to prevent is hardly an argument against the hypothesis.)

    “generally one persons savings are someone else’s borrowings.”

    That form of saving is not economically inactive. Lending to a bank (or someone else) is just fine as far as keeping the money in circulation goes.

    To take a completely ridiculous example, imagine Bill Gates decided to cash in all his investments – literally – and then bury the banknotes in a vault in his garden. That money would be genuinely economically inactive, and that’s what we want to discourage. (In this example we can ignore the deleterious effects on prices of him cashing-out, because that’s not the point.)

    “Why do they get to have the cost of borrowing reduced at the expense of savers?”

    Why would that happen? Lenders will expect a rate of return on capital that takes inflation into account. People often talk of real interest rates or rates of return, meaning those taking inflation into account.

    “I hate inflation. I have to constantly worry whether rising costs are going to erode my profit before I get paid.”

    I’d say rather that you hate _unpredictable_ inflation. As long as it’s easy to predict fairly accurately, it’s simply something to be factored in at the same rate to any negotiation.

    On top of that, if inflation is low – 1-2% – then you’re going to have to wait a very long time to get paid before it makes any difference, so it would seem you’re talking about a high-inflation regime rather than one with very low inflation. The damaging effects of high inflation are well known and include the things you’re complaining about.

  7. BIS-

    I was going to write a long post about this but can’t be arsed. Basically the deflation fear is a bunch of fallacies cobbled together from the assumption that unless the State pushes us all, we’ll just sit still and starve to death rather than wanting to produce anything.

    There’s also two definitions of deflation clashing and used interchangeably. One is the natural gradual falling of prices in a free market as production increases. The other is the collapse of the Mx figure (basically, a falling fractional reserve multiplier) as the web of junk contracts liquidates during the “bust” phase. The latter is actually a necessary function of the failure of those contracts, but leads to a liquidity crisis. So, they pump more M0 in, which fuels the next boom.

    THere’s also the situation in the PIIGS in which the populace are being ruined to keep the banking system running; effectively they are being forced to service debts on contracts which are already worthless and should themselves be just written off. But that would ruin the balance sheet at Goldman Sachs et al, so they won’t let that happen.

  8. Ian>

    You don’t half come out with some straw men.

    “Basically the deflation fear is a bunch of fallacies cobbled together from the assumption that unless the State pushes us all, we’ll just sit still and starve to death rather than wanting to produce anything.”

    No, the deflation fear is based on the entirely obvious point that it would be economically harmful for any given sale to be more valuable tomorrow than today. Unless you think that giving an incentive to delay won’t have any effect, for some reason.

  9. The actual point about inflation is that it doesn;t “lubricate” anything except possibly Ben Bernanke’s penis. To quote Friedman, the new money “isn’t dropped out of helicopters”. By pushing it into particular nodes in the economy, it causes constant destabilisation and fuels the boom and bust cycle, each cycle of which acts to ratchet wealth from those at the lower end- the working and productive middle class- to those closer to the source of the money- the finance and statist middle (i.e. upper) class.

    During the “boom” the lower end may claw some back due to growth, but it gets sucked back up to the top again during the next bust. Which is why, once again, we are all living in an “age of austerity”. Unless you’re standing next to the magic money tree.

  10. No, the deflation fear is based on the entirely obvious point that it would be economically harmful for any given sale to be more valuable tomorrow than today.

    Yep, those tumbling prices in the computer industry have really been a bad thing, haven’t they? I mean, I never buy a computer because I can have a cheaper one next month. Same for everyone else.

    People may purchasing and investment decisions based on the now.If there is some reason to delay due to deflation, that would be a rational choice based on actual market conditions. You don’t need to “fake” people into economic activity, really you don’t.

  11. Ian>

    “those tumbling prices in the computer industry have really been a bad thing, haven’t they?”

    Things getting cheaper is not deflation. Did you learn your economics from Ritchie? Or is it just a failure of logic, since deflating money without changing nominal prices would make things cheaper; have you somehow thought the reverse must therefore be true?

    In any case, it’s obviously true that people delay tech purchases waiting for the prices to come down. That is not an example of deflation, but it is clear evidence of how people would behave in a deflationary regime.

    Of course this doesn’t mean that no-one buys anything ever. When the immediate utility of a purchase is higher than the increased cost of making it sooner, it makes sense to buy whatever it is right away. It’s also trivially true that if the increase in value is large enough, people will even put off purchases that they would otherwise consider essential: consider whether you’d go hungry for a day if by doing so you’d be the richest man in the world tomorrow.

    It’s simply a matter of whether there is something which acts as an incentive to economic activity, or a disincentive.

  12. @Dave,

    What a load of bollocks.

    Inflation just means 1 thing: the unit of currency in your pocket will be worth less tomorrow than today. Which doesnt suit anybody, as it is just making you poorer. You don’t feel it that much because increases in productivity compensate for that. So now you have an iphone 5 for the price of an original iphone, even though your money is worth 10-15% less. Note that knowing that the iphone 6 (and before that , the 3, 3g, 3s, 4, 4s etc,..did not exactly gather dust on shelves) is coming in a few months does not stop people buying them.

    The only entity that benefits from inflation is the state, because it borrows £100 today which it will reimburse (well, not really since he’ll be borrowing £100 to pay you, plus another £100 because it spends too much) in a few years when £100 will buy you a fraction of what it bought at the beginning.

    Until it will all come crashing down.

  13. “Things getting cheaper is not deflation.”

    Of course it is. Just as inflation is things getting more expensive. They are descriptions of the increase or decrease of the purchasing power of the currency unit.

    In any case, it’s obviously true that people delay tech purchases waiting for the prices to come down. That is not an example of deflation, but it is clear evidence of how people would behave in a deflationary regime.

    If they do delay a purchase, that is the rational economic choice based on real market conditions. And what the computer industry experience tells us is that even when the price falls are massive- far above any natural deflation in the price of, say, foodstuffs or building materials- the effect is that the economy works hugely well. By coincidence, I was reminiscing earlier today how, in 1995(ish) I bought 8Mb of RAM for about £140, and then less than a year later replaced that with 32Mb that cost about the same. I did so because I wanted the RAM now, not next year.

    Economic growth is deflation, effectively. Trying to spanner it with central banks “stabilising” prices via inflation just destabilises the economy, as we see with the targetted inflation massively distorting the property market.

    There is no benefit to inflation at all. Not for the consumer. It is a total myth that it benefits the economy, and it’s a myth that needs putting to bed.

  14. Ian B you have the same sources as Richie: an infallible oracle that lives up your rear end.

    You need to distinguish between real price changes and nominal. Economic growth and technological progress mean the real price of many goods fall over time, they fall relative to other prices like wages, house prices, whatever. Their nominal level may or may not fall. The words inflation and deflation refer to changes in the nominal level of all prices, included wages etc.

    Meanwhile there is a mountain of research about the benefits of modest inflation, your ignorance or denial of it matters not.

    Also no Keynesian would say that the threat of deflation should be met with tax increases. Unless that Keynsian is Richie.

  15. “No, the deflation fear is based on the entirely obvious point that it would be economically harmful for any given sale to be more valuable tomorrow than today. Unless you think that giving an incentive to delay won’t have any effect, for some reason.”
    It’s statements like this make me prefer Ian’s brand of economic illiteracy, Richielike or not. Harmful to who? Most people don’t have the elbow room to defer purchases. What they’re buying is to supply a need. The need won’t wait until tomorrow. Which is why this sort of “paper” economics irritates. We’re all economists because we participate in the economy. But most of us have real skin in the game rather than which model of Mercedes we’ll be treating ourselves with next year. I’ve nothing against speculation. I do enough of it. But there is more to the economy than speculation. Or should be.
    Our ever increasing house price spiral is a symptom of addiction to speculation. The only time property becomes anywhere near affordable to most people is during the depths of a price crash. Most of the time people are paying increasing prices in the belief the prices will be higher tomorrow & their ‘asset’ will increase in value. And Ian’s correct in his “money cannons” theory. it rises in the SE faster so that’s where you buy if you want the maximum increase. A self fulfilling prophesy. if you want to see what happens when that goes wrong, live here.
    No, I don’t want to live with a predictable 1 or 2% inflation. i’d rather live with a steady 1 or 2% of deflation so I can buy more things for less, not the same for more. I can counter the fall in earnings per by becoming more productive. But it’s me who benefits, not the wealthy.
    Or to put it another way, us people in the market can manage our own economy much better without economists telling us how to do it.

  16. “Meanwhile there is a mountain of research about the benefits of modest inflation, your ignorance or denial of it matters not.”
    Trouble is, Louis, all that mountain of research & the lessons supposedly learned from it, brings us to where we are now.

  17. Dave and Luis-

    I appreciate that you’re being rude because you can’t answer the points I’ve made, but I feel as such it is within my right to reply to you thusly; that if you continue to adhere to Keynesian macroeconomic voodoo, I will open my mouth wide and laugh at you like a horse.

    Meanwhile there is a mountain of research about the benefits of modest inflation, your ignorance or denial of it matters not.

    Though I fear that reading nonsense like this might ultimately induce such mirth that I burst a blood vessel or something.

    BIS-

    As I said, these fellows are believers in an idea that the market needs “running” by someone. That someone originally was explicitly “John Maynard Keynes” but since he passed on, it is “the government”. They believe in this nonsense that inflation is good, because it is something that the State can control (sort of) by central bank manipulations, and the justification for it is that unless we are pushed into purchasing, investing, etc we will not know that we are supposed to do so.

    And, as I did actually say above, deflation can depending on context either mean (a)prices falling due to market forces, or (b)due to a change in the money supply. The irony being that Luis seems not to notice the lunacy of trying to prevent (a) by manipulating (b). In particular, the attempt to hold prices stable with an extra 2% on top by pumping more money into the marketplace via the central bank.

    Which causes booms, as the new money causes false price signals and then busts, when the over-investment turns out to be malinvestment.

    But Dave and Luis seem to enjoy drinking the Kool Aid, so I daresay they will carry on the snark rather than think about the actual economics for even a minute.

  18. BIS>

    “It’s statements like this make me prefer Ian’s brand of economic illiteracy, Richielike or not. Harmful to who? Most people don’t have the elbow room to defer purchases. What they’re buying is to supply a need. The need won’t wait until tomorrow.”

    I don’t know what’s so hard to understand: we’re talking about a small effect, on the margins. Low inflation, remember?

    It is, or should be, obvious that a incentive to delay spending will decrease economic activity, and an incentive to bring it forwards will increase it. There are, of course, then consequences from those changes which may amplify those effects, or indeed even have completely different ones.

    We know very well that high inflation is a problem, but we also know that steady, low inflation is a good thing. It’s not somehow the best thing ever, or an absolutely massive influence, but it’s a small booster for the economy.

    “No, I don’t want to live with a predictable 1 or 2% inflation. i’d rather live with a steady 1 or 2% of deflation so I can buy more things for less, not the same for more. I can counter the fall in earnings per by becoming more productive. But it’s me who benefits, not the wealthy.”

    You’re another one who seems to have inflation and deflation the wrong way around. In the absence of compensatory price changes, deflation makes things cost more and inflation makes them cost less. If there are compensatory price changes, then prices in real terms will remain the same. There are, though, costs to changing prices which mean that price-rises will lag inflation somewhat – where the lost income from not changing is less than the cost of change – so the consumers will benefit to some extent. Obviously, the reverse is true for a deflationary situation, where the consumers will be the ones losing out.

    If you’re working for the money you spend, though, neither inflation nor deflation will affect you directly in the way you seem to think.

    Imagine you were paid in Macguffins instead of money. At the moment, you charge the equivalent of £1000 for a job, and snce Macguffins cost £1 each, you’re charging a thousand Macguffins per job; if you accept cash instead, you’ll want £1k for the work.

    If there’s some inflation, and now Macguffins cost £2 each, would you start doing the work for five hundred Macguffins a time? Or would you ask for the same number of Macguffins, and therefore if accepting a cash payment demand £2k for the same work, in order that you can buy your thousand Macguffins?

    If there’s some deflation, and Macguffins now only cost 50p each, do you think you’d still be paid £1000 cash equivalent for the job, and so be able to buy twice as many Macguffins? Of course not.

  19. “You’re another one who seems to have inflation and deflation the wrong way around. ”
    Well we certainly have deflation here. I’ll be negotiating the next year’s rent on the apartment soon & I’m minded to offer the owner 20% less. Can’t see he’s got any option, really. That’s all he’ll get if he re-lets. But do I suffer a commensurate fall in the income that pays for it? No,because I can increase my productivity thanks to advances in technology. Being able to reduce prices to customers is a feature not a bug. i and they are getting the benefit. Shame for the bloke who thought investing in rental property was clever, but who am I to care? That’s between him & his bankers. Not my problem.

  20. Ian>

    I wasn’t intending to be rude. I really think there’s a good chance you’re Ritchie, based on the things you’ve been saying, your refusal to read and respond to the arguments of others, the straw men you erect (and are then defeated by), and so-on. You even have a similar writing style, heavy on tedious prolixity and yet somehow still ambiguous.

    I’m damn sure Ritchie does read and comment here, because he would be unable to resist stroking his ego that way. The only question is which of the regulars it is. Arnald’s obviously been the leading horse, but you’re certainly making the running today.

    My apologies if you’re actually just Murphy Richardsing instead. Your strange rants are a little too subtle a parody if that’s the case.

  21. BIS>

    That’s still not deflation you’re talking about. Something can be worth less than previously without it being anything to do with the money changing value. Spanish property _is_ worth lots less than before, so it’s not surprising rents are dropping.

    Once again, the price of something going down is not deflation. That’s just it getting cheaper.
    .

  22. Dave,

    I can only presume the “you are Ritchie” is intended as some combination of insult and joke. Do try to be less pathetic in future.

    As to your la-la land where “inflation makes things cheaper”, the opposite is of course true. Inflation manifests as price increases in the economy, which is why everyone measures inflation as… the increase in the aggregate price level. Even the Bank Of England. Their inflation target (2%) is an increase in the measured aggregate price level of 2%.

    So far as I can tell, you seem to think that the consumers get the extra money, and then eventually prices catch up. This is true for a small cohort of consumers who are the first to get the money direct from the State, but the majority get it later when it has lost its purchasing power. Ludwig Von Mises did a very thorough temporal analysis of this, demonstrating that this is how inflation wipes out the middle and lower classes, since they are far from the magic money tree. It acts as a wealth ratchet from those who get the money last to those who got it first. I recommend Googling.

    Anyway, so the point is that for the majority of the populace, the money supply is inflated then prices rise then they try to get a pay rise to compensate. Meanwhile, their savings are being wiped out. I think pretty much everyone understands that it goes in that order.

    And it is worth adding that even La Keynes knew this, which is why he recommended inflation as a sly way to reduce wages when the workers won’t take a pay cut due to “money illusion”.

    On the other hand, if you don’t have inflation of the money supply, what happens is that wages stay on average the same, and prices across the economy gently fall due to economic growth, allowing everyone to purchase a few more Macguffins every year. Which is a lot simpler, and a lot more desirable. And how things worked pretty much up to the First World War, by the way.

  23. Dave. We really do have deflation here. Everything’s getting cheaper. (Apart from things provided by our wonderful government, of course.) And wages are falling. Unemployment’s over 25%. We’re adjusting to the effects of years of politicians mismanaging the economy. Once we’ve got them all in jail, things’ll be looking up.

  24. incidentally, we’re almost a perfect example of what happens when ‘experts’ manage economies. Infrastructure projects? We’ve got airports never seen a single plane. Four lane highways laid next to three lane highways laid next to dual carriageways. But hardly any traffic on any of them
    We do need bigger prisons for more politicians.

  25. Motorways are vital to transport the space lasers to where the aliens might land, or so that Paul Krugman was saying in the pub last night.

  26. Stopped clock time.

    “what we need are new housing, taxes to take the heat out of over-valued existing housing”

    He serendipitously said something that’s broadly correct.

    Hmmm. He’s diagnosed that there is a problem in housing; well every O-Level student could tell you that. He then goes on to propose the only solution he knows, one that he applies to all problems, raising taxes.

  27. @SF
    Better to raise taxes or institute a tax on hoarded land to deal with the housing crisis than raise interest rates which would impact SME’s and fuck demand by putting up people’s mortgages.

  28. SimonFA, beat me too it.

    This debate about inflation/deflation is all very interesting (yawn). I think Simon has hit the nail on the head, Ritchies solution to high housing prices it to increase taxes. When the only this we need is the first part of his statement, build new houses. If you increase supply by say removing planning restrictions and encouraging new builds then the price should fall, no additional taxes necessary thanks.

    Won’t work in central london unless of course you allow taller buildings.

    But of course supply side economics is neoliberal sophistry (or did Murphy Richards already say that somewhere)

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