Is Rampant Inflation in Our Future?
History and economics both teach that pumping too much money into an economy leads to inflation. This is typically, but not always, through excessive borrowing and spending. And if the infusion is substantial, as when Spain imported much gold and silver from the New World and when Germany printed too much money, substantial inflation results. How high do you think inflation will rise in the U.S. within the next ten years?
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Not as high as you’d think.
Of course, many of us will be too poor for the net result to be much different.
—History also shows that keeping the money system small is what lengthened the biggest recession of the 20th century into the Great Depression. Expanding the amount of cash in circulation ameliorated the effects.
—When the housing bubble burst and the derivatives market crumbled, a lot of value (“money”) blipped out of existence. Are you taking this massive disappearance of money into account when positing that a huge influx of cash will cause inflation?
—Money that is hoarded in mattresses, or kept in savings accounts bearing miniscule amounts of interest, might as well not exist for all they factor into inflation. Inflation may kick in when people start spending again. And that won’t happen until people are working in jobs again. And that won’t happen until the economy recovers. And that won’t happen until (among other things) the value that disappeared in the crashes is restored.
—Part of the way the government expanded the amount of cash in circulation is by buying financial instruments (aka “bank bailout”.) When the economy recovers, they can recoup some of that money by selling what they bought, and blip that money out of existence the same way it came into existence (either by repaying loans, or by returning imaginary cash to the pixel compost pile). That will smallify the amount of cash in circulation at the time when it needs to be nulled out to keep inflation from climbing.
In short, to answer your question: not too much. Economic questions and economic systems are rarely as simple and one-sided as people think, especially people that would have us try Hoover’s economic recovery plan all over again.
The right-wing resistance to using the tax system to direct wealth from the upper class to the middle class has hurt the economy worse than nearly any other measure. I am old enough to remember 90% tax rates, and we had a booming ‘50s and ‘60s. Since Reagan, not so much.
How much do you predict? Do you estimate that inflation will stay below the annualized rate of 12–14% that it reached in many months a couple of decades ago? Why or why not?
Look to the bond market for your answer, specifically the spread between 30 year treasury bonds and 30 year TIPS. They predict inflation to average 2.5% over the next 30 years. If the people with the most skin in the game are not worried, I’m not much worried.
I would also note that excessive borrowing is only an inflationary issue if the central bank has little independence, which I don’t think characterizes the current Fed.
@laureth Hoover did nothing? lets see. 1. revised tariffs, 2. extended authority of tariff commission, 3. put pressure to maintain wages and control strikes. 4 Put on pressure to “share work” 5. mobilized charities and state and local governments, 6. increased federal construction spending, 7. renegociated debts with germany, 8 created the National Credit Association, 9. raised taxes on the top rate from 25% to 63%, 10. created the RFC, Reconstruction Finance Corporation, 11. used RFC to strengthen federal banks and other lending institutions, 12. Created home loan discount banks, 13. Used RFC to help depositors in closed banks. 14. Used RFC to subsidize state-level relief. 15. Used RFC to fund public works. 16. Created a system of agricultural banks, 17. Make ag. commodity loans, 18. “Mobilized” banking, industry, business, labor, and agriculture, 19. developed a worldwide economic conference, 20. worked on disarmament.
Don’t forget the Roosevelt attacked Hoover for reckless spending during the campaign.
The do-nothing history or Hoover is inaccurate.
Perhaps you misunderstand what game I’m talking about. Anyone can make predictions, but the bond traders are the ones who will win or lose the most based on the quality of their predictions.
@arpinum – It’s true, Hoover did try. But his philosophy was to not do enough, basically. I will grant that people didn’t generally expect the Depression to get so bad or to last so long. FDR did his best, too, to ameliorate it, and did better, but the only thing that got us out was the vast governmental spending and jobs program known as WWII.
Well, that’s the standard narrative, but recent and ongoing research is beginning to question some of these well-known scenarios. For example, Roosevelt may, under pressure from Republicans in Congress, have clamped down on spending at the worst possible time, delaying the recovery until the war changed the game.
As an aside, I think it’s almost sad how any sort of financial discussion winds up turning into a political one.
That’s OK, @jerv – so do religious and sexual discussions.
God, I HOPE not! I’m one of those “fixed income” types! : (
@CaptainHarley Yeah, but veteran pensions and VA benefits seem to do better at keeping up with inflation than plain old Social Security, so I don’t think you have much to worry about.
@jerv I think both VA pensions and social security use the CPI as their COLA.
@arpinum and hopefully they do a better job of it that active-duty pay checks did in the early-90s :P
@ItsAHabit There is another fly in the add money equation you are working to. The hyperinflation that Germany ran into did not occur because the German government was just stupid and kept printing money. It occurred because of ridiculously onerous war reparations demanded of Germany by the other greedy European powers after WWI. And their greed got them a second world war and 60 million people dead.
The US is not currently in a position anything like Germany post WWI, so it isn’t sensible to project their outcomes onto our situation. When we get this recession tamed, we will need to bring spending and revenue into line either with tax increases or spending cuts. We need a legitimate debate about the amount of government we as a people actually want, because whatever level that is, we do eventually have to pay for it.
ETpro – You’re certainly right that we aren’t in the position of post-WW I Germany (and aren’t about to be). However, war reparations constituted a “ridiculously onerous” national debt. Fairly or unfairly, Germany owed an enormous national debt just as if it had incurred the debt by its own voalition. And it suffered the terrible natural consequence (runaway inflation) of owing that enormous national debt.
The war reparations weren’t the only cause, but the total demands were 132 billion goldmarks (more gold than all German reserves) plus 26% of all German exports. THe economy couldn’t possibly stand under that load.
I agree we need to address our debt problem before it gets anywhere near that bad. But we did pay down debt of 120% of GDP after WWII and our current debt is not nearly that bad. We just need to get the economy back on track then pay down the debt as the Greatest Generatin did back then.
Not as long as China keeps flooding the US market with cheap goods. Inflation requires a shortage of goods.
@mattbrowne I beg to differ. Say that a certain product from China currently (as of 14 June 2010) costs about 136 Yuan or around $20US. Suppose that next month it costs about 136 Yuan or $25US. Is it still cheap? I mean, it’s the same price but it costs more dollars.
Or lets go with Zimbabwean hyper-inflation. Same product is 136 Yuan or $20 today, but next month it’s $21,474,836,480 but still only 136 yuan. (IIRC, prices were doubling approximately every 18–24 hours at one point. Double the price every day for 30 days and you get big numbers!)
Get it?
mattbrowne – By “a shortage of goods” you mean a shortage of goods in relation to the money supply, don’t you?
Yes, shortage of goods in relation to the money supply. But what @jerv says makes also sense. A few weeks ago there was an interview in a German economics magazine dealing with the danger of inflation. It seems that not all economists come to the same conclusion.
Just remember; how much money is in circulation matters less than how much that money is actually worth.
It’s the relationship between money in circulation and total goods and services that determines what money is worth. Given a steady level of goods and services, an increase in money supply decreases its value whereas a decrease in money supply increases its value.
@ItsAHabit Probably a good thing that all of the “wealth” created by the derivatives market isn’t real money then or else we’d be even more screwed :D
@jerv Excellent point. The US derivatives market was at $62 trillion a year before the crash. That’s what really caved in, because it was all leverage, there wasn’t enough cash in circulation in the US money supply to back it all up. The sub-prime lending market was nothing but the tiny puff of breeze that blew the house of cards down.
And yet people still believe that the Conservatives are economic masters….
You know, I wonder how much of this would’ve happened if our education system was good enough to teach people how to do math :D
Seriously though, the Conservatives claim it is unfair to tax the rich and put 60% of the tax burden on the people earning 35% of the income yet somehow that is more fair and that the uber-rich still pay too much in taxes? It will be funny in a sick, sad way when the rich are the only ones that actually earn enough to pay taxes; 47% of households didn’t in 2009. What will they do then?
The rich will take actions to reduce their tax burdens. LeBron James’ move to Florida will save him over $2,000,000 in state income taxes per year. I think that Tiger Woods and Rush Limbaugh made the move there for the same reason. Some people move overseas to save on taxes. Can’t say that I blame them.
@ItsAHabit If LeBron moves to Haiti to escape taxes, so much the better. They have a 2% income tax and 10% VAT there. I’m sure he’d find it a paradise.
From 1050 to 1963, the US had top rates (on income over $250,000 per year) pegged between 91% and 92%. We started paying the war debt down, and we also made tons of new millionaires in those boom years and grew a vibrant middle class to boot. The GDP grew 3 times as fast in those years as it did under Bush’s anemic 35% top rate that doubled the National Debt during his 8 years. The more regressive you make the tax structure, the more you chip away at what remains of the middle class. When they can no longer drive consumer spending, the greedy con men that backed welfare for the rich end up getting screwed right along with all the rest of us. Not to worry, America’s billionaires are not an endangered species in need of special protections.
@ETpro Many argue that the billionaires spend just like we poor people do; that every penny they make flows back into the economy.
Others insist that the only way to create jobs is to let them line their coffers so that they can invest and/or that that is the only way banks will ever have any money to lend out, and that that creates more jobs than consumer spending.
My question is this; how many of those people could pass both an economics course and a psychiatric examination?
Oops. Correction @ETpro above meant 1950 and not 1050.
@jerv There are some billionaires who invest in the US and create jobs. Hats off to them. But far too many of them are just the sort of people @ItsAHabit fears LeBron James will be, not giving a crap about the USA and only looking for the ultimate tax shelter. They are multinationals who invest offshore in tax havens and places where returns are higher than what’s available now that their government clients have off-shored so many of our well-paying jobs,
This was your link, I believe, but the info was so worthwhile I bookmarked it.
@ETpro I have immense respect for Bill Gates and Warren Buffet. However, I have actually heard a couple call Warren a Socialist for precisely that reason; that wealth is supposed to be hoarded and passed on to his children.
States with little or no personal income tax have some other way of raising funds – they don’t just deal without cash. Some have higher taxes on business, some have an industry like tourism that brings in money, and some, like NV, rely on innumeracy in tourists coming to gamble. ;)
@laureth NH has property taxes whereas WA taxes alcohol, tobacco, candy, and bottled water to high Hell in addition to having a state sales tax (something NH lacks).
ETpro. Years ago Ontario increased the taxes on cigarettes so high that the price of a pack was over $7.00. After it raised the taxes, the revenue from cigarette taxes dropped. It later dropped the tax rate and revenues increased.
The point isn’t how high the rate is (it used to increase up to about 90%) but how high the revenue is. After the high federal tax rates were dropped, revenue actually increased.
@ItsAHabit The Laffer curve is a bitch, but revenue aside, you really can’t increase spending the way W did and expect much good to come of it. Also, you have to keep an eye on sustainability. Imagine if we cut down all of the trees in order to turn a quick profit. What would we cut down next year? The modern American answer is, “Who cares? I got rich!”.
I would like to hear your reply to the question I asked above though; What will happen when only the rich can afford to pay taxes? Will there be a policy change then as the rest of the world is in squalor? Or is it possible that the people will revolt before we reach that point and defenestrate the types of people who got us here?
@jerv The average right-winger today who throws the term “socialist” around constantly has no earthly idea what it really means. Warren Buffet and Bill Gates are just about as far from socialists as human beings can get. And it’s a fascist, Brownshirt tactic to use such smears and lies for political power aggrandizement.
Interestingly, the far right also claim that Nazis were leftist (they were as far fight as humans can get) because they called their party the National Socialist German Workers’ Party. I guess by that logic, the fact that Kim Jong Il calls his country The Democratic People’s Republic of Korea must mean that North Korea is a free Democratic Republic just like the USA. ~
@ETpro Many of those people also Socialist and Fascist as synonyms, and occasionally put them together as an oxymoronic attempt at a slam on anybody less Right-wing than Mussolini.
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