Economic truth discovered!

Raymond Carter says:
November 27 2020 at 2:13 pm
Haven’t we had inflation without full employment in the past?

Richard Murphy says:
November 27 2020 at 4:01 pm
Yes, due to an external shock called oil

But that cannot be controlled using any economic policy

It just has to be worked through

Only oil can be that external shock creating inflation? Our word there, our word. That medal from Stockholm is imminent.

No one else has managed to explain stagflation so simply. Nor things like imported inflation as the FX rate slumps because of excessive money creation – just to give one other example.

Sam says:
November 27 2020 at 12:26 pm
Is the answer when faced with the usual retort “by creating more money you are pushing the value of sterling lower” that this mainly affects overseas investors or could it have an impact on imports for UK businesses and how is this offset?

Reply
Richard Murphy says:
November 27 2020 at 12:46 pm
Where is the evidence for this?

Err, Zimbabwe? Venezuela?

3 thoughts on “Economic truth discovered!”

  1. He’s asking for evidence *for a question*???
    “Is grass green?”
    “What’s the evidence for this????”
    To which the natural answer should be:
    “I have no idea, that’s why *I’M* *ASKING* *YOU*. *I’M* asking if grass is green, if you assert that it is, then it’s ****YOU****** that provides the evidence.”

  2. “Err, Zimbabwe? Venezuela?”

    Once again, Mr. Worstall gets it exactly backwards.

    Hyperinflation causes money printing, not the other way around. Here’s the long explanation:

    “In Zimbabwe, which is Mitchell’s focus, a massive contraction in supply occurred as a result of the backlash against an unjust distribution of resources. Land was confiscated and taken over by people not experienced in putting it to productive use. The motivation for the land reforms was laudable, but the immediate economic effect was a dramatic contraction in supply, with the country’s food-production capacity almost cut in half.

    Critics of expansionary monetary and fiscal policy are often quick to point out that hyperinflation is invariably accompanied by a rapid expansion of the money supply (defined as currency plus demand deposits). This is true, but does not negate the MMT argument. Consider the quantity equation, which is an identity:

    MV = PY

    M is the quantity of money. V is the income velocity of money in circulation. P is the general price level. Y is real output.

    In the case of Zimbabwe (and Weimar Germany), there was an initial sharp contraction in supply, and hence real output Y. Let’s say real output fell from Y to Y1 (Y > Y1):

    MV = PY1

    The massive reduction in Y means that, even with no change in MV on the left-hand side of the identity, there must be a massive increase in the general price level P to conform to the identity. For any given money supply, P must be much higher than before.

    According to Mitchell, the reduction in food supply combined with a severe neglect of infrastructure (e.g. in industrial rail transport) amounted to a 60 percent contraction in potential supply. There is no easy way out of such a situation. If the government had attempted to contract the money supply M by 60 percent to keep prices from rising (or in an attempt to reverse their rise), this probably would have resulted in even more poverty and starvation than occurred. Continuing to add government spending will not help much either because demand has already hit the productive limits of the economy. However, there can be distributive reasons for a government to continue spending in the face of a massive supply-side contraction. The resulting inflation redistributes income to debtors at the expense of lenders and savers (who, in the case of Zimbabwe, primarily comprise a wealthy 1 percent of the population that prior to the land confiscations owned 70 percent of the productive land and a high proportion of the country’s wealth). Without this redistribution, matters probably would have been even worse for the general population.

    So, from an MMT perspective, a common factor in episodes of hyperinflation is an initial sharp contraction in supply.” -heteconomist

  3. phoenix_rising. I’d disagree. The drop in supply caused by the confiscation of the white owned farms was a problem, but the system could have adjusted if the massive printing of money had been avoided. This was proven when the economy began to recover when Zim switched over to using foreign currency.

    I’d argue that the real problem is that, in order to retain power, the rulers of Zim simply need to spend more in bribes than the economy can sustain. Thus they print money as a short term solution.

    Where Britain could be blamed is the government’s foolish bowing to black and leftist pressure in the UN and refusing to rubber-stamp Ian Smith’s declaration of independence. This destroyed any independent power bases in the country, and gave all power to Mugabe and his minions.

    You’ll have noted that South Africa has not yet gone the same way as Zim, since the ANC does not yet have untrammeled power.

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