STAFF NEWS & ANALYSIS
Bloomberg Editorial in Support of Inflation Misses the Point
By Daily Bell Staff - July 18, 2016

Overcoming Our Inordinate Fear of Inflation … Why do we care so much about preventing inflation?  When I put this query to baby boomers, they tell me that if I had lived through the inflation of the 1970s and early 1980s, I would understand. But … why does it stand out so strongly in our collective memory? –Bloomberg

This Bloomberg editorial provides us with lots of reasons why moderate inflation is not a terrible development.

Noah Smith is one of Bloomberg’s more original columnists, though we almost always disagree with him. Once again, with this editorial, he misses the main point in our view.

He analyzes inflation from the standpoint of communal rather than individual harm.

Thus, he concludes that in moderate doses it is not terrible at all.

More:

The harm of inflation cited in economics textbooks seems laughably unimportant. For example, inflation generates so-called shoe-leather costs — a term for the hassle of moving money from one’s brokerage or savings account to one’s checking account.

This hassle is larger when prices change a lot, since you have to put spending cash in your wallet more often. But in the age of digital-account management, this cost is nonexistent.

A more sophisticated argument against inflation is that when companies want to change their prices but for some reason can’t, inflation distorts prices from what they should be, which decreases economic efficiency.

Economists have tried to measure these costs, and found that they’re just as small as we might expect.

He explains that  University of Chicago economics professor Robert Lucas researched the costs of inflation and developed a model that showed price inflation did not produce terrible effects.

According to Lucas, “10 percentage points of inflation is only about as harmful as a 1 percent reduction in gross domestic product.”

Recession is more to be feared than inflation.

The article then looks at inflation from the viewpoint of volatility and finds this may explain people’s concern more realistically. Fast-rising prices are volatile ones and make it harder to plan.

But Smith also makes the intriguing point that it is the volatility itself that makes the difference.

If inflation is at two percent or four percent, it really doesn’t matter, he argues, so long as prices are not volatile.

It is not the rate of inflation but the volatility that makes people miserable. The article then develops some interesting insights based on the idea that people are more concerned with volatility price appreciation.

It suggests that viewing inflation and recession as equal dangers is wrong. Recession is by far the bigger danger so long as the inflationary trend is not volatile.

In reality, a loss of one percentage point of GDP probably is many times worse than a 1 percent rise in inflation.

The article’s conclusion is that the Fed ought to worry more about price volatility than inflation itself – so long as the economy is growing.

The Fed should worry about employment, in other words, rather than inflation.

As stated, from our point of view, this argument misses the main reason why people don’t like inflation.

Inflation takes control out of their hands.

People can work as hard as they want, but if some nameless, faceless individuals in Washington DC decide to change monetary parameters and heat-up inflation, all that hard work is rendered valueless.

People resent it, now more than ever – as these days millions more understand how central banks really work and the price-fixing that takes place.

Inflation deprives people of money that they made by working hard and saving.

It makes a mockery of the idea that people have control over their own destinies.

Interesting that the article doesn’t recognize this.

In a way it is a perfect Bloomberg article, beating at the heart of the Bloomberg’s ever-present authoritarian impulse.

In this variant, people’s freedom and ability to control their own savings is seen as irrelevant so long as the Fed is able to generate increased employment.

The “good of the many” is viewed as far more important than individual freedom.

It is an immaculate rendition of the technocratic meme – the propaganda that places “experts” above individuals and celebrates the power of a handful of individuals over people’s own, hard-won, human action.

Inflation makes people feel out-of-control and mocks their ability to build a better and more secure life for themselves and their families.

What’s so hard to understand about that?

Conclusion: For the Fed and its supporters, higher “employment” is preferable to people’s control over their own money. This is a terrible state of affairs, and a persistent one. As long as we’re at it, we should probably add one more observation: At the root and heart of central banking is a destructive impulse. None of what is said to be for our benefit actually is. Many now realize that as well.

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  • Praetor

    The buffoons at Boomberg are just playing mind games. The harder people work, the less likely they will succeed, and the more likely less people working. That is the policy of the Fed and government. You be right, DB.

    Who do the Feral Bank and Gov of dysfunction blame for this failure. Who?!!!

  • guestimate

    People hate inflation because they can afford less stuff, living costs more. There’s no guarantee they get anything positive from inflation, and the central bank makes money either way and in some cases more so is not a neutral umpire and the rich aren’t affected so everyone else can eat cake. The detachment is epic.

  • pcnot

    Try getting old and living on fixed income, especially in an environment of zero interest and a real inflation rate closer to 10% than zero and see how you like it.

    Nixon instituted wage/price controls when inflation hit, I think, 3.5%. Not that what he did was correct, but people in general realized what a thief inflation really was-something to be feared and fought. How times have changed. The pointy headed bastards that populate economic academe should have a bounty put on their heads.

  • mary

    People hate inflation because it’s a tax, and the worst kind of tax since it favors the wealthy and compounds other taxes. All taxation is theft, and therefore immoral.

    To say that “inflation makes people feel out-of-control” (why the hyphens???) is ridiculous. It trivializes the situation. Sadly, you’ve both missed the point.

  • r2bzjudge

    Overcoming Our Inordinate Fear of Inflation … Why do we care so much
    about preventing inflation? When I put this query to baby boomers, they
    tell me that if I had lived through the inflation of the 1970s and
    early 1980s, I would understand. But … why does it stand out so strongly
    in our collective memory? –Bloomberg

    What is the FED’s inordinate fear of deflation? Bernanke wrote, Deflation, Making Sure it Doesn’t Happen Here.

    Inflation and deflation complete a cycle. It is the natural rhythm. Day and night complete a cycle. It is the natural rhythm.

    100% of booms end in a bust and 100% of financial bubbles burst and deflate, because that is the natural rhythm. A cycle always completes itself.

    Yet the FED want to fight the laws of nature and the laws of math. Math will always win.

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