Facts are stubborn things...

... and Paul Krugman says they have a strong Keynesian bias.

I tend to agree. Krugman takes a recent Greenspan op-ed to task for regretting that fiscal stimulus does not seem to be causing any inflation, because it makes people "complacent". There's no attempt to delve into why we haven't seen any inflationary response to an unprecedented budget deficit. It's just random and unfortunate for Greenspan. I think it only makes you "complacent" if you don't understand why we haven't seen the inflationary response. I'm not complacent. I don't talk about it as much on here, but in other fora I regularly harp on the long-term debt. There are very real and very obvious risks to public debt. If you know the difference between why we have debt in the short-run and what it is doing and why we're going to have debt continue to accumulate in the long-run and what it will do, there's nothing about the stimulus that makes you "complacent". It's only if you act like all recessions are identical (say, if you're one of those people that thinks 1920-21 is comparable to 2008-2010) that you might get "complacent".

Anyway, I've always wondered when the other shoe is going to drop with these inflation fear-mongers - and I hate to say it, but I'm looking at you, my Austrian readers. A year or two ago we heard warnings about inflation all over the place. They were all sufficiently vague, of course. We never really hear that much anymore. The opponents of stimulus now talk about sovereign default instead. I have news - sovereign default ain't gonna happen just like a large inflation ain't gonna happen. At some point these people need to face reality and account for what they got wrong.

I've wondered this about the inflation of the 70s too in the past. Does it mean nothing to these inflation-fear-mongers that prices were tame (and falling at certain points) after the enormous deficits of the New Deal and World War II? It took decades of boom-year deficit spending and two more grueling wars just to get up to double-digit inflation (which, in the grand scheme of things, isn't that high anyway). I'm no expert on the 70s, but it's also important to note that most economists seem to agree that (1.) price expectations, and (2.) supply shocks had at least as much to do with that inflation as fiscal or monetary profligacy. You would think that would have made a dent in the deficit-doomsdayers arguments, but no! The 1970s are held up as an example of what government spending can do to the economy.

I guess my question is - when does the cognitive dissonance kick in? When do these people start realizing that the story they're pushing doesn't match up with reality? We're not clamoring for year after year after year of deficits, after all. There's strong support in my camp for getting the medium- and long-term debt under control. Nobody is saying that public debt is consequence-free. We're just saying it has different effects under different conditions and the conditions right now warrant fear of just about anything but inflation.

And then there are those who highlight or highlighted inflation as the primary concern. At some point, they have to relent. I suppose the methodological aversion to relying on experience is strong enough with many of these people that the process of aligning their theory with reality might take a while.

Catalan on the 1920-1921 Depression

I don't have time to write a post on this right now, but you can see some of my thoughts in the comment section here. Jonathan has a post up on the 1920-21 downturn that was a little surprising to me, and very thoughtful. Please read it - tomorrow morning or soon I think I'll write something on the downturn myself.

North Korea and Inflation

The market is just a network of social relations - social relations which are orchestrated by prices which signal individual abilities, individual needs, individual hopes, and individual ambitions. Make the signals meaningless and social interaction becomes impossible. Induced inflation distorts those signals. Hyper-inflation destroys them. North Korea unleashed this weapon today in an attempt to destroy fledgling private markets.

I've spoken at times on the value of low, constant inflation in a modern economy. I've been meaning to talk about this in more detail, with reference to "inflationist" movements in early America, and in the late nineteenth century. A lot of these sorts of ideas are grounded in the work of Keynes, and consistent with more recent monetarist theories. But it's important to distinguish the argument for a low, constant level of inflation (as opposed to violent inflationary and deflationary episodes) from the argument for high spikes in inflation as a confiscatory tool. Keynes spoke to inflation as a weapon of the state in the months after World War I:

"By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery. Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

- John Maynard Keynes, 1919