Defining Inflation Down?

By the time Chairman Powell of the Federal Reserve found the gumption to concede the Fed had misjudged prices yet again, Grant’s Interest Rate Observer was out with a particularly wise issue in respect of inflation. The definition of too much money chasing too few goods is helpful, he reckons, “as far as it goes.” What about, though, the problem of unchecked public borrowing, he asks, and the issue of asset prices, meaning gold?This is the kind of talk we like to hear. It’s amazing to have seen the value of the dollar plunge to record lows of less than a 2,300th of an ounce of gold without a single major economist addressing our failure to understand inflation. Nor a single member of the House financial services committee or the Senate banking committee asking whether any blame can attach to the Congress — the sole institution to which the Constitution grants our monetary powers.Instead, we have Mr. Powell lamenting that “recent data have clearly not given us greater confidence” of inflation falling and that “it’s likely to take longer than expected to achieve that confidence.” Yet just weeks ago Mr. Powell was revving up markets with talk of being “not far from” the confidence needed “to begin to dial back the level of restriction.” If it’s to the Fed’s credit that it isn’t rushing to cut rates, the delay speaks to the stubbornness of today’s inflation.Mr. Grant suggests the Fed is having such a hard time stopping today’s inflation because the expectation of steady price increases “is inherent in our politics, culture and finances.” He points to a German economist of the 20th century, Wilhelm Röpke, who defined inflation as a country’s economy reacting “to a continuous overstraining of its capacity, to demands which are extravagant and insistent,” and “a tendency towards excess in every and all circles.”In contrast, Mr. Grant contends, Americans “show no signs of restiveness with the two major political parties that compete with each other to say nothing against overstraining.” Indeed, he observes, inflation has risen in tandem with the expansion of the federal government, the rise of the welfare state, and the creation of entitlements, like Medicare and Medicaid, that have “come to devour the federal budget.”Every incremental loosening of the belt of fiscal restraint, Mr. Grant explains, “played its part in removing the inhibitions that had guarded against overborrowing and overstimulating.” Indeed, he adds, “they have sped us to this time of monetary improvisation and fiscal overreach.” This contrasts with “the rigors of the classical gold standard,” he notes, under which “government budgets were balanced.” After all, “there was no welfare state to unbalance them.”When the dollar was convertible into gold, Mr. Grant explains, “prices were stable over the long run.” So if “the integrity of the currency is a moral question,” he reckons, “you will have scant patience for the Fed’s self-assigned remit of skimming 2% a year from the purchasing power of the dollar.” Such a policy, he contends, amounts to a kind of “monetary shoplifting, tricked out in the econometricians’ algebra.”A policy of steady inflation, these columns have noted, creates but the “illusion of wealth.” This, Mr. Grant suggests, is at the heart of the dilemma facing Mr. Powell, who now must bring inflation back down to 2 percent without popping the asset bubble prompted by a “dozen years of interest rate suppression.” That Fed policy, Mr. Grant observes, “facilitated what has turned out to be a years-long sleepwalk to a kind of national leveraged buyout.”There are few better symptoms of illusory wealth than America’s national savings rate going into the red, Mr. Grant warns, a rarely-seen occurrence over the past century, but one that will make it harder to make the kind of investments needed to maintain our competitiveness. It’s hard to avoid the logic of Mr. Grant’s conclusion that inflation is “a disease of political and cultural character as much as it is of monetary and fiscal malpractice.”

Defining Inflation Down?

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