Gyroscopic Investing

This should spur some nice debate.

Critics of the Austrian School of economics have been throwing barbs at Austrians like Robert Murphy because there is very little inflation in the economy. Of course, these critics are speaking about the mainstream concept of the price level as measured by the Consumer Price Index (i.e., CPI).

Let us ignore the problems with the concept of the price level and all the technical problems with CPI. Let us further ignore the fact that this has little to do with the Austrian business cycle theory (ABCT), as the critics would like to suggest. The basic notion that more money, i.e., inflation, causes higher prices, i.e., price inflation, is not a uniquely Austrian view. It is a very old and commonly held view by professional economists and is presented in nearly every textbook that I have examined.

https://mises.org/daily/6340/Where-Is-the-Inflation

Austrian economics has a lot to recommend it, but the constant inflation prognostications aren't among them, IMHO. Ask yourself this: if Austrian economics constantly predicts hyperinflation in response to a certain policy (e.g. QE), and the policy is repeatedly implemented over a period of years and no real inflation occurs, and Austrian economists twist and turn to desperately find some inflation anywhere and explain how more is just around the corner waiting to burst onto the scene… doesn't that speak, perhaps, to a flaw in the theory?

I think there's a lot wrong with our current monetary and fiscal policies, but Austrian economics looks at it through a dated lens. The school never really caught up with the idea of a hybrid public-private debt-based monetary system with an extremely elastic currency that requires someone's indebtedness in order for more of it to appear.

Did you read the article?  (I did not read all of your post)

Yes. And I've read many, many more like it from my hardcore Austrian days.

"Inflation's just around the corner, just you wait…"

Remember the boy who cried wolf!

There are other major reasons why consumer prices have not risen in tandem with the money supply in the dramatic fashion of oil, gold, stocks and bonds. It would seem that the inflationary and Keynesian policies followed by the US, Europe, China, and Japan have resulted in an economic and financial environment where bankers are afraid to lend, entrepreneurs are afraid to invest, and where everyone is afraid of the currencies with which they are forced to endure.

I have thought this for years as well. Investors and entrepreneurs hate uncertainty. When you have the Fed propping up banks that should have failed, real estate that should be cheaper, govt. intervention in other industries, etc. it creates a lot of uncertainty. The natural tendency as a business owner is to be very conservative and hoard cash because you don't know what is going to happen next (even more than usual). I also think this was a major contributor to the length of the Great Depression as well. With lots of market uncertainty due to government policy the natural reaction is to pull in your horns and brace for impact.

What I got from the article is not that the author is saying that hyperinflation is just around the corner, but that he's making the argument that there already has been some inflation as evidenced by increases in commodity prices.  He cites three examples: oil, gold, and "all commodities".  I haven't made up my mind on the matter, which is why I brought it up, but I think it's an interesting perspective.  Another question that I wonder is if that's the case, why can't he show that consumer prices are rising?  I think he actually states that consumer prices aren't rising.  What is happening?


On a side note, I still find it interesting how the mind (mine included) comes across something and immediately fits it into its preconceived notion of what it expects something to be.  A quick search of that article shows that it doesn't use the word hyperinflation once, nor did I get the feeling that it's suggesting hyperinflation is imminent.  Just because you've read some Austrians in the past and used to think that hyperinflation was imminent, does not mean all Austrians think that, nor does it mean that some or all of their other ideas are wrong.  The fact that I tend to be open-minded toward Austrians doesn't mean that I believe any of that either.

hoost wrote: I still find it interesting how the mind (mine included) comes across something and immediately fits it into its preconceived notion of what it expects something to be.

Nothing to do with the thread subject, but this is a supurb point.

Benko wrote:

hoost wrote: I still find it interesting how the mind (mine included) comes across something and immediately fits it into its preconceived notion of what it expects something to be.

Nothing to do with the thread subject, but this is a supurb point.

Kind of like "confirmation bias"...

You guys are right, I did see what I wanted to see there. It's always nice to have a wake-up call like that.

That said, those linear-scale graphs in the article can be used to make it look like continuous inflation when all it shows is the impact of compounding inflation over time. I think manufacturers are absorbing any higher commodity prices rather than passing them onto their customers because they recognize that their customers wouldn't tolerate price increases at a time like this when everybody feels poor.

It's quite possible that once the economy picks up and people are awash in cash again, businesses will start to pass those absorbed costs on. But then again, maybe not. Business profitability is at record highs right now.

The inflationists' mostly unasked and unanswered question is IMHO: Where will the consumers get the money to pay the higher prices that would accompany significant and sustained increases in the rate of inflation?

The answer, of course, is through rising wages or expanding credit levels, neither of which are present right now.

Are U.S. wages likely to see dramatic gains any time soon?  I don't think so either.

Are consumers about to start up another credit binge when they haven't paid down the debt from the last one?  I don't think so either.

If wages aren't rising and credit isn't expanding, there won't be any sustained inflation.  There will be episodic inflation in certain sectors of the economy, but when it starts to spread people will simply run out of money to pay higher prices, which will push the economy back into recession, which will put fresh downward pressure on prices.

I'm surprised so few people are out there telling this story because it seems so intuitive and based on such common sense observations.

MediumTex wrote: The inflationists' mostly unasked and unanswered question is IMHO: Where will the consumers get the money to pay the higher prices that would accompany significant and sustained increases in the rate of inflation?

The answer, of course, is through rising wages or expanding credit levels, neither of which are present right now.

Are U.S. wages likely to see dramatic gains any time soon?  I don't think so either.

Are consumers about to start up another credit binge when they haven't paid down the debt from the last one?  I don't think so either.

If wages aren't rising and credit isn't expanding, there won't be any sustained inflation.  There will be episodic inflation in certain sectors of the economy, but when it starts to spread people will simply run out of money to pay higher prices, which will push the economy back into recession, which will put fresh downward pressure on prices.

I'm surprised so few people are out there telling this story because it seems so intuitive and based on such common sense observations.

MT...if I recall from when you've made the same argument, this time you've added expanding access to credit, not just expanding wages?

Please confirm your definition of inflation...it seems its basically rising CPI? Or rising PPI? ie...not a function of expanding money supply.

murphy_p_t wrote:MT...if I recall from when you've made the same argument, this time you've added expanding access to credit, not just expanding wages?

Wages often come from private credit (i.e. you take a loan out to build a business or a house to pay contractors). All money, except coins, comes from either public debt or private credit — with the overwhelming majority of the money supple comes from private credit. He's just explaining where the money could possibly come from to cause inflation.

MediumTex wrote: The inflationists' mostly unasked and unanswered question is IMHO: Where will the consumers get the money to pay the higher prices that would accompany significant and sustained increases in the rate of inflation?

The answer, of course, is through rising wages or expanding credit levels, neither of which are present right now.

Are U.S. wages likely to see dramatic gains any time soon?  I don't think so either.

To offer a counterpoint: We import a lot of goods and raw materials from elsewhere. If those exporters think the dollar is worth less, then those import prices will go up and travel through the production lifecycle. This can bring domestic inflation without a rise in wages here.

Better to be "worth less" than worthless.

craigr wrote:

MediumTex wrote: The inflationists' mostly unasked and unanswered question is IMHO: Where will the consumers get the money to pay the higher prices that would accompany significant and sustained increases in the rate of inflation?

The answer, of course, is through rising wages or expanding credit levels, neither of which are present right now.

Are U.S. wages likely to see dramatic gains any time soon?  I don't think so either.

To offer a counterpoint: We import a lot of goods and raw materials from elsewhere. If those exporters think the dollar is worth less, then those import prices will go up and travel through the production lifecycle. This can bring domestic inflation without a rise in wages here.

Right, but that wouldn't technically fuel an inflationary spiral. Demand would drop as prices increased, since people wouldn't have the money to afford those imports. And then the prices would fall back down to meet demand.

Pointedstick wrote: You guys are right, I did see what I wanted to see there. It's always nice to have a wake-up call like that.

That said, those linear-scale graphs in the article can be used to make it look like continuous inflation when all it shows is the impact of compounding inflation over time. I think manufacturers are absorbing any higher commodity prices rather than passing them onto their customers because they recognize that their customers wouldn't tolerate price increases at a time like this when everybody feels poor.

It's quite possible that once the economy picks up and people are awash in cash again, businesses will start to pass those absorbed costs on. But then again, maybe not. Business profitability is at record highs right now.

Thanks for keeping an open mind.

It would be nice if they graphed % change year-on-year on the same graph; I think it would be a bit more meaningful. 

As far as manufacturers absorbing any higher prices, that's kind of what I was thinking.  I don't think consumers are willing to pay more; I think any increased costs are more likely to result in "cost reductions" than price increases.

hoost wrote: What I got from the article is not that the author is saying that hyperinflation is just around the corner, but that he's making the argument that there already has been some inflation as evidenced by increases in commodity prices.  He cites three examples: oil, gold, and "all commodities".  I haven't made up my mind on the matter, which is why I brought it up, but I think it's an interesting perspective.  Another question that I wonder is if that's the case, why can't he show that consumer prices are rising?  I think he actually states that consumer prices aren't rising.  What is happening?

Haven't we been over this already?  What is happening is the value of money is being destroyed by negative real rates, so commodity hoarding is the natural response to a system where interest rates are not free to float, i.e. demand is higher relative to supply.  There's also secondary supply/demand effects from "chasing yield".

Gumby wrote:Right, but that wouldn't technically fuel an inflationary spiral. Demand would drop as prices increased, since people wouldn't have the money to afford those imports. And then the prices would fall back down to meet demand.

The U.S. is not a vacuum though. If other country's currencies were stronger and willing to buy the supply then prices in the U.S. would escalate as a market response even with lower demand here.

craigr wrote:

Gumby wrote:Right, but that wouldn't technically fuel an inflationary spiral. Demand would drop as prices increased, since people wouldn't have the money to afford those imports. And then the prices would fall back down to meet demand.

The U.S. is not a vacuum though. If other country's currencies were stronger and willing to buy the supply then prices in the U.S. would escalate as a market response even with lower demand here.

Can you offer a real world example? The example I'm thinking of is what we see with oil. The price of oil goes up, the price of gas climbs above $4/gallon and people can't afford it. A recession ensues and people stop spending like they used to. And, the dollar becomes stronger as money becomes tight and the recession worsens.

Gumby wrote:

craigr wrote:

Gumby wrote:Right, but that wouldn't technically fuel an inflationary spiral. Demand would drop as prices increased, since people wouldn't have the money to afford those imports. And then the prices would fall back down to meet demand.

The U.S. is not a vacuum though. If other country's currencies were stronger and willing to buy the supply then prices in the U.S. would escalate as a market response even with lower demand here.

Can you offer a real world example? The example I'm thinking of is what we see with oil. The price of oil goes up, the price of gas climbs above $4/gallon and people can't afford it. A recession ensues and people stop spending like they used to. And, the dollar becomes stronger as money becomes tight and the recession worsens.

But the fact that U.S. consumers are buying less oil has not pushed the price of oil down on world markets. That's because the worldwide demand for oil is offsetting any potentially lower consumption here. As long as the majority of the planet wants to buy the product and the market is strong the price can very well continue to go up whether U.S. monetary policy makers want it to or not.

craigr wrote:But the fact that U.S. consumers are buying less oil has not pushed the price of oil down on world markets. That's because the worldwide demand for oil is offsetting any potentially lower consumption here. As long as the majority of the planet wants to buy the product and the market is strong the price can very well continue to go up whether U.S. monetary policy makers want it to or not.

Agreed. But, typically a slowdown in the US tends to cause slowdowns everywhere else. As you say, countries are not in a vacuum. That's why it's a bit difficult to find a real world example of this.

I find measuring inflation as an increase in the base money supply is almost pointless. If we want to define inflation as that, fine, but then we're left with the chore of telling people what to worry about in their real lives.  Measuring inflation with M0 is like measuring the murder rate by the number of deadly weapons in society.

Gumby wrote:

craigr wrote:But the fact that U.S. consumers are buying less oil has not pushed the price of oil down on world markets. That's because the worldwide demand for oil is offsetting any potentially lower consumption here. As long as the majority of the planet wants to buy the product and the market is strong the price can very well continue to go up whether U.S. monetary policy makers want it to or not.

Agreed. But, typically a slowdown in the US tends to cause slowdowns everywhere else. As you say, countries are not in a vacuum. That's why it's a bit difficult to find a real world example of this.

The U.S. is not just another economy.

It's hard to imagine a prosperous world in which the U.S. is not experiencing prosperity, and vice versa.

It won't always be this way, but it is this way right now.