Wednesday, August 20, 2008

More on Brian Wesbury's Concern About Inflation

Brian Wesbury asks: "How can monetary base growth slow for seven straight years without pushing inflation down? If you agree with Friedman, it should have caused a decline in inflation, but every measure of inflation is higher, not lower."

MP: What about annual core inflation? It's been flat for 10 years now at about 2%, see chart above, is lower now than it was several years ago, and less than 50% of the long-term 4.58%average.

As I suggested before on several posts, unless and until core inflation rises like it did in the 1970s (see chart above), inflation can't be "a clear and present danger," as Brian suggests.

10 Comments:

At 8/20/2008 9:37 PM, Anonymous Anonymous said...

Ugh. Your reasoning is so specious. Firstly you have to recognize that inflation (CPI) is measured differently from the 70s so you're comparing apples to oranges. You really need to read Kevin Phillip's article which appeared in Harper's Magazine.

Secondly, price inflation isn't even well defined.

Only monetary inflation is well defined, and the only sensible way of measuring it is through TMS (the Austrian measurement called True Money Supply). It's showing DEFLATION not inflation. This should be obvious as massive deleveraging is occurring and the financial system's ability to grow credit has been obliterated.

 
At 8/20/2008 10:02 PM, Anonymous sam said...

i'm with you professor. despite negative fed funds rate ,m2 and monetary base are not growing/accelerating and every type of bank credit/loans is contracting,the velocity of money is contracting.most of our inflation has been in the form of increased food and energy prices ie imported inflation.developing countries have higher inflation because food more so than energy make up a larger portion of their spending . i don't think its due to our monetary policy as mr westbury states but due to our ethanol from corn policy.so i don't see how increasing the ffr will decrease imported inflation or help the mortgage/financial industry recover by flattening the yield curve again. inflation is supposed to be a lagging economic indicator,reflecting previous commodity price rises and with current on going demand destruction headline inflation should subside.i've heard it said a recession always slays inflation. nber the official arbitor of recessions hasn't declared it yet but all it's indicators have decined .i know mr westbury is always the optimist since i read his as well as prof roubini posts .i've learned alot of economics from ya'll. appreciate your input.

 
At 8/20/2008 10:07 PM, Anonymous sam said...

i'm with you professor. despite negative real fed funds rate ,m2 and monetary base are not growing/accelerating and every type of bank credit/loans is contracting,the velocity of money is contracting.most of our inflation has been in the form of increased food and energy prices ie imported inflation.developing countries have higher inflation because food more so than energy make up a larger portion of their spending . i don't think its due to our monetary policy as mr westbury states but due to our ethanol from corn policy.so i don't see how increasing the ffr will decrease imported inflation or help the mortgage/financial industry recover by flattening the yield curve again. inflation is supposed to be a lagging economic indicator,reflecting previous commodity price rises and with current on going demand destruction headline inflation should subside.i've heard it said a recession always slays inflation. nber the official arbitor of recessions hasn't declared it yet but all it's indicators have decined .i know mr westbury is always the optimist since i read his as well as prof roubini posts .i've learned alot of economics from ya'll. appreciate your input.

 
At 8/20/2008 10:34 PM, Blogger DonLloyd said...

Mark,

A trend in the monetary base growth, by itself, means nothing without knowing the concurrent trend in the demand to hold money. As an example, the demand to hold money falls as more and more people hold unexhausted credit cards and more and more goods and services can be purchased with credit instead of cash, meaning that there is less need for cash.

For a significant lasting inflation to occur the FED must be willing and able to continually expand the availability of credit AND the banks must be willing and able to actually make loans to willing borrowers to a degree that overcomes the ongoing defaults of existing loans. At present, this seems highly unlikely at least until the end of 2009.

The demand-driven commodity price inflation that we have seen is not likely far from exhaustion.

Regards, Don

 
At 8/20/2008 11:03 PM, Anonymous Brian Wesbury said...

Mark, three points.

I said in my WSJ article that it was more like the 1960s right now, than the 1970s. Comparing us to the 1970s and saying there is no inflation problem is like saying you aren't sick when you have a 101 temperature because a few years back it hit 102 one time.

Two, the monetarybase has been slowing for seven years as you point out. If that was a true measure of Fed policy, then inflation should be lower today than it was seven years ago. But by vour own admission, inflation has been flat. Actually, however, inflation is higher today than it was in 2001 and 2002.

Finally, as the first comment in this section points out, inflation is measured differently today than it was in the past. And it is probably understated. But I don't want to make too much of this, the fact that core inflation for CPI, PPI, intermediate PPI, and crude PPI are all higher today than they were seven years ago suggests that the monetarybase is not a good signal of Fed policy.

Brian Wesbury

 
At 8/20/2008 11:03 PM, Anonymous Brian Wesbury said...

Mark, three points.

I said in my WSJ article that it was more like the 1960s right now, than the 1970s. Comparing us to the 1970s and saying there is no inflation problem is like saying you aren't sick when you have a 101 temperature because a few years back it hit 102 one time.

Two, the monetarybase has been slowing for seven years as you point out. If that was a true measure of Fed policy, then inflation should be lower today than it was seven years ago. But by vour own admission, inflation has been flat. Actually, however, inflation is higher today than it was in 2001 and 2002.

Finally, as the first comment in this section points out, inflation is measured differently today than it was in the past. And it is probably understated. But I don't want to make too much of this, the fact that core inflation for CPI, PPI, intermediate PPI, and crude PPI are all higher today than they were seven years ago suggests that the monetarybase is not a good signal of Fed policy.

Brian Wesbury

 
At 8/21/2008 12:45 AM, Blogger Omer Faruk said...

If your oven is sill hot and water is still boiling long after you turned it off, either the switch or the thermostat is not functioning properly. You cannot claim the water is in fact cold!

The proof of the pudding is in the eating. The proof of excess money growth is the accelaration in prices. Period.

Brian Wesbury is right.

 
At 8/21/2008 1:09 AM, Blogger DonLloyd said...

Omer,

The proof of the pudding is in the eating. The proof of excess money growth is the accelaration in prices. Period.

This is absurd on its face.

Are you claiming that the increase in the price of crude oil by a factor of 5X in dollars, and presumably by a similar factor in other currencies as well, is the result of money supply growth?

Regards, Don

 
At 8/21/2008 1:35 AM, Blogger Omer Faruk said...

Don,

First, if you remove money out of the system, comparative price changes would always even out. If the price of orange in terms of apples is increasing, the price of apples in terms of oranges must be decreasing. Both of them cannot increase at the same time.
That can only happen with monetary values and with the help of excess money supply.

The increase in the comparative price of oil may not be due to monetary expansion. It may be due to some other factors. However, if all prices are increasing, that means higher inflation, there must be excess money supply.

When considering the acceleration of inflation in the global scale, in my view, global growth of money supply should be taken into account, not only the supply of US dollars.

Finally, why do we tend to not remember excess and generous liquidity conditions in the years before 2005 and 2006? Do we remember the term carry-trade? Who was printing excess money then?

Regards,
Omer

 
At 8/21/2008 2:02 PM, Blogger Marko said...

Is everyone forgetting about the big deflation in housing? That is not considered in the CPI. The phenomena of declining money supply and increases in CPI inflation may actually be an indication that our way of measuring inflation is off.

Also, inflation is a moving target. Maybe core inflation would be 10% right now if it were not for the shrinking money supply.

Static analysis has confused plenty of smart people, don't feel bad.

 

Post a Comment

<< Home