It just won’t stop. Oh, you can tell people to focus on long-term involuntary unemployment and the negative effects thereof, which make the effects of inflation seem like a walk in the park – and it should be the main topic of discussion – but, no. Some people must talk about inflation and, quite frankly, 99% of these “some people” have no idea what they’re talking about. Why is that, you might ask? Well, it’s all quite simple really.
These particular people have no real interest in learning. Their interest lies in digesting an overview of the basic fundamentals of a particular macro school of thought (which my twelve, ten and nine year old children can easily do) and then, without any actual education in the field of study, proceed to modify theory or even prove that school of thought “errant” in its logic. It is as though they think professors, associate professors and researchers have missed something important and by God, they’re going to uncover it, proving the theory wrong or perhaps modify it and make a name for themselves without ever having to complete an undergraduate degree, a masters and a doctorate. They wouldn’t dare attempt such a scheme with medicine. But when it comes to economics, it’s just a giant sandbox where everyone’s opinion counts. Why is that?
Politics. Bloody politics.
Because politics infests macroeconomics like cockroaches in a house owned by an extreme hoarder, these people think – “Ah well, this school of economic thought is clearly all just political opinion.” Politics takes pure fantasy and then using nonsensical fantasy economic talking points, indoctrinates the public to believe that the fantasy realm is, in fact, the world that we live in today. Some of the hallmarks of that macroeconomic fantasy include:
1. “The US Government is broke, in debt up to its eyeballs!”
2. “We can’t afford universal healthcare!”
3. “Can’t have full employment. Inflation would kill us all!”
4. “Gotta find cuts to pay for it.”
5. “How you gonna pay for that?”
6. “The damn government is living beyond its means, I tell ya!”
7. “I don’t want my tax dollars goin’ to lazy moochers on welfare!”
8. “I don’t want my tax dollars goin’ to corporations!”
9. “Damn government is printing money makin’ my dollars worthless!”
and number 10:
“Monetary policy can cause inflation. You all are wrong and I’m going to discuss this subject into the ground until I prove you wrong or become famous. See how I’ve made this thread seven hundred comments long? Yes, I heard what you said about unemployment and I know you’re an economist, but my opinion is bla bla bla. If this school of thought were right, why do we have inflation? Clearly, you’re all missing something. You see, inflation is bla bla bla.. CPI bla bla bla. See? I used the term Consumer Price Index, thus it is clear that I can understand terms that economists use and so, I’m qualified to discuss and teach on the subject. I read all about CPI in Forbes and on a government website. Oh, but I do know what inflation is and here are my thoughts on the subject: BLA BLA BLA BLA.”
Now then, students, people on social media and friends know that when it comes to the field of macroeconomics I am an easy-going person and like to maintain some semblance of professionalism. There comes a point, however, when professionalism must fall by the wayside in favor of stern correction and I’m afraid that I’ve reached that point with these particular people on the subject of inflation. You’ll forgive me, but I must say that when it comes to the monetary system and macroeconomic reality, these peoples’ “opinion”, such as the one below, doesn’t mean jack squat.
“So if monetary policy can’t cause inflation, then why have we had any inflation at all during the past few years? I suspect that monetary policy can cause inflation, but it’s just not very good at it. kinda like beating a nail into a wall with a screw driver, it’s not the best tool, but it can be done.”
The subject who wrote the above ‘thinks’ he’s hit on an error in MMT, but in fact, his “suspicion” and resulting opinion is all kinds of wrong. Why have we had inflation at all during the past few years? First of all, what inflation? There hasn’t been any inflation. So, number one: He doesn’t know what inflation is to begin with. Now clearly, he’s talking about what the mainstream calls “inflation” and the Fed’s 2% targeting of “inflation” and he wants to know why it’s been hovering around 1% in the past few years. Since he feels that all inflation, regardless of whether its stable, accelerating, decelerating or just a tiny bump up in the cost of living is caused by increasing the “money supply” and government spending, he simply puts the two together and says, “It’s so simple” then declares “These professors have no idea what they’re talking about. They’re ignoring the obvious!”
Well, first Captain Obvious, the “increasing the money supply results in inflation” theory has already been thought of and proven a total failure (RE: Friedman and QTM). Second, were he to look back to 2010-2012 and had he been educated thoroughly in macroeconomics and working in the field, he’d have noticed that a foreign entity was propping up the price of oil, which was practically the only thing keeping inflation dangling just above 1%. Holy lack of education, Batman! You mean that monetary policy had nothing to do with it?
Correct. Monetary policy cannot create inflation. Let me explain.
The Federal Reserve is the nation’s central bank. Its main job is monetary policy. Now then, what is monetary policy? It is the shifting of assets and dollars around. In other words, it changes the portfolio composition of private entities by swapping assets for dollars. What it does not do is increase the amount of US dollars in the economy. It just moves them around. Now, we are talking about the Federal Reserve here – it does create HPM on the fly. But we are discussing monetary policy, not fiscal policy and when it comes to monetary policy, it’s merely the shifting of assets and dollars. Fiscal policy is what adds more US dollars to the economy. Monetary policy then shifts what already exists between accounts or changes the composition of portfolios (exchanging bonds for dollars in equal amounts, exchanging dollars for bonds in equal amounts, etc.) “But what about when the Fed does QE? What then, smarty pants?”
QE doesn’t cause inflation, because QE is merely an asset swap for liquidity. The Fed exchanges an asset and supplies an equal amount of dollars for that asset, the dollars going into a reserve account which are never lent out into the economy. Banks do not lend reserves, so QE cannot cause inflation.
“But what about when the Fed raises interest rates or lowers them? What then, smarty pants?”
Raising or lowering interest rates only moves dollars around between people who are borrowing and people who are saving. It’s just shifting dollars, not adding dollars. Shifting dollars from here to there won’t result in inflation.
Fiscal policy is the tool to use if you wish to create accelerating inflation. But to do so, you must first get the economy to actual full employment, ok? You need federal deficit spending to persistently exceed the real ability of the economy to produce goods and services. Before that, forget about it. Developing accelerating inflation from deficit spending right now or in the near future is a non-issue with unemployment at 9.7% and hyperinflation is literally impossible at this juncture.
Inflation is defined as the “continuous” rise in the price level of goods and services over the period of time that price rise is observed. So, when people want to talk about “inflation”, then let’s keep the subject clear:
People like the person mentioned above want to talk about dangerous accelerating inflation and hyperinflation episodes caused by government spending.
His failure, and those like him, is to understand the difference between monetary policy and fiscal policy. Fiscal policy injects dollars and monetary policy only moves those existing dollars around.
If these people can make such a simple, basic error then how can we possibly expect them to be qualified to inject their “opinions” concerning any aspect of macroeconomics, let alone discover something that we’ve somehow missed? Shall those who do not know the difference between monetary and fiscal policy somehow make a name for themselves by modifying a macroeconomic school of thought?
Finally, let me conclude with why I find all of this irritating. The reason is rather than concentrate on what matters – involuntary unemployment and the effects, which are far more damaging than the effects of inflation – these people would rather waste my time and yours on their own fantasies and in the process, confuse and derail the education of those who are genuinely trying to learn.
In short, I say to these people: For the benefit of those who are trying to learn, you need to come to terms quickly with the fact that you do not know what you are talking about. And since, to those of us who do understand macroeconomics and MMT, you clearly do not know what you’re talking about, do what others do – ask questions and learn.