Inflation Everywhere Will Always Get Worse (Economists Erroneously Believe)

A Benjamin Cole post

An important chart ran in University of Chicago scholar John Cochrane’s blog recently, and it revealed that at any point in time Wall Street economists predict interest rates will go higher, almost certainly a reflection of inflation fears.

B Cole_Inflation_1

I suspect this chart could be fitted out back to the 1970s, and would look the same. I can recall no period in recent U.S. history in which many prominent economists were not warning that higher inflation, often accelerating or galloping, was pending, unless it was when some shrieked above the chorus that hyperinflation was imminent.

Let us add another favorite chart of mine, showing that if you want to cut inflation by 1%, then hike the unemployment rate by 5%.

B Cole_Inflation_2

That’s the “Phillips Curve,” which in modern times needs to be renamed the “Phillips Phlat-line.”

With the two above charts, an inescapable conclusion is reached: U.S. economists overestimate inflation possibilities continuously, and wildly overestimate the effect that a robust economy will have on inflation.

Why? The answer is not in economics, but in sociology or politics. Surely no thinking profession could be so relentlessly wrong for so long.

What These Huge And Basic Errors Mean

True, the first chart is of Wall Street economists, but few would argue that U.S. Federal Reserve Board economists, or FOMC board members such as Richard Fisher, Dallas Fed President, are anything but obsessed with inflation, and some have even called for a “single mandate,” that is official central bank monomania with inflation.

When I look at these two charts I can think only of the millions of workers and businesses that have for years endured weak total demand—and less employment possibilities and smaller profits—due to the chronic upward bias of U.S. economists in forecasting inflation, or the unfounded fear for what a robust and growing economy—and healthy job markets—would mean for inflation. Fed economists and policymakers, in general reflecting professional predilections, have been no different from Wall Street economists.

As if another percentage point or two in inflation would mean anything anyway.

Perhaps no two other charts capture so much human cost and disappointment, and not for gain, but for nothing.

Has the profession forgotten that the purpose of macroeconomics is to promote prosperity?

12 thoughts on “Inflation Everywhere Will Always Get Worse (Economists Erroneously Believe)

  1. I have collected 50 different explanations for hyperinflation. As I read these it seems Japan is ready for hyperinflation. Do you have a theory that explains the experimental results of previous hyperinflations yet makes it look like Japan will not get hyperinflation? Macroeconomists, like Krugman, promoting “stimulus” for Japan have lead Japan to hyperinflation, which will not be prosperity.

  2. Vincent Cate-

    My theories for pre-conditions of hyperinflation would be a government that has lost credibility, a central bank that has lost all credibility, a government trapped into rapid printing of even more money to meet payrolls etc., and increasing velocity of money in circulation (the racing to market to spend money). Perhaps a shrinking real economy too.

    BTW, the Dallas Fed recently released a study (I posted on it here maybe 6 months ago) that QE is anti-inflationary, as the central bank acquires assets that back currency, ala the Rentesbank in Germany of the late 1920s. You are probably aware there are other theories, such as those of John Cochrane and Stephen Williamson, that QE is actually anti-inflationary (both are right-wingers btw), which involve mountains of calculus, and I have not taken calculus since undergraduate days, and that was not yesterday.

    The Fed has now halted QE, and seems very, very uncomfortable with any rate of inflation above 1.5%.

    I just do not see a hyperinflation scenario in the U.S., or even double-digit inflation. Professional and institutional investors seem to be looking for 10 years of very low single-digit inflation.

    I would not mind a good long stretch of inflation in the 3% range.

    • If a government/central-bank is trapped into printing money to cover government spending, then the government/central-bank lose credibility. You can see this in Argentina, Venezuela, Ukraine, Russia, Belarus, etc today. Japan is trapped into printing money to cover government spending. They are spending twice what they get in taxes and nobody is buying their bonds. At 0.03% interest on a 5 year bond when the Yen drops 1% most weeks, you don’t get many takers. Kruman encouraging the Japanese to print more money should be ground for revoking his Nobel prize. Japan will soon get high inflation.

    • The Fed is still making money and loan it out at near 0% interest. Printing money is printing money. Does not really matter if you call it QE or “conjuring money up from the ether with black magic Fed spells” or “easy monetary policy”. Does not matter if you do it electronically or by really printing on actual paper. Does not matter if they “buy bonds” or “make loans”. I have a list of more than 100 euphemisms for “printing money”. A rose is a rose.

  3. Vincent: If you are right, then sophiticated institutional investors are wrong—-they are throwing money at U S Treasury auctions.
    Time will tell.
    You do pose a frightening scenario. What should a guy, already down on his luck (me), do (if you are correct)?

    • It is the nature of a sudden crisis that most people don’t see it coming. So that most people don’t see something coming does not tell us anything one way or the other.

      If hyperinflation hits you would be better off with gold, silver, bitcoin, guns, and food storage.

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