Inflation is always and everywhere a political phenomenon

My latest at Pieria picks apart the irrational basis for beliefs about inflation:
"So we don't understand the causes of inflation, we don't agree about what we mean by inflation and we have no reliable means of measuring it. Yet we are absolutely terrified of it. And we want government (via its central bank) to make sure that inflation NEVER HAPPENS. How very dare government rob us of our precious savings by means of inflation!
Underlying this statement, and indeed all statements about the control of inflation, is a powerful and fundamentally irrational belief. Inflation can be prevented by government. Therefore, if inflation happens, it is because government has allowed it to. Inflation is therefore always and everywhere a POLITICAL phenomenon."
There is lots more - and a worrying conclusion. Read the whole piece here


  1. Japan has a huge debt and is spending about twice what they get in taxes. How confident are you that Japan can "credibly commit to controlling the money supply"? At the moment the central bank is almost the only buyer of JGBs, using new money. As inflation picks up it seems there will be even less interest from other buyers. If interest rates go up to 2% the interest on the debt is more than all Japanese taxes. How can Japan control the money supply and still fund the government?

    You say that since hyperinflation can happen with the money already in existence that it can not possibly be caused by money printing. This does not logically follow. It may be that they had printed so much already that people lost confidence.

    You commented on my post below when I first made it but since then I have added a bunch more explanations for hyperinflation. I have more than 30 explanations for hyperinflation now. I would be grateful if you could look at it again.


    1. This comment has been removed by the author.

    2. As Japan's debt is mainly held by its own citizens, and the central bank is the largest buyer of JGBs anyway, the whole thing is pretty circular. It will end up monetizing debt outright, of course, and we will then discover whether the Dallas Fed is correct that primary monetization is always inflationary. I suspect that because of demographic changes in Japan it won't be. But that is a controversial view.

      I suggest you actually read the Dallas Fed's paper (link is in the post). They show that hyperinflation can happen with a fixed monetary base. If the monetary base is fixed then a sudden loss of confidence cannot possibly be caused by money printing.

      Interesting that you are fascinated by how fiat money dies but not at all interested in how hard money dies - which historically it has done repeatedly.

    3. Giles Wilkes does not say a sudden increase in the amount of gold makes hyperinflation, just inflation. Historically big silver or gold discoveries (like Spain getting gold/silver from the New World, or gold in California in 1848) did change the value of gold money (inflation) but never hyperinflation.

      An ounce of gold or an ounce of silver has never "died", so I am not sure what you mean by "hard money dies". You mean that people stop using hard money and switch to paper? Or that paper backed by gold stops being backed by gold? A gold coin from 1,000 years ago still has value today, even though the government that coined it is long gone. Gold and silver coins are true "hard money". Paper backed by gold is still just paper.

      That inflation is higher than just the growth of money during hyperinflation is because the velocity of money is also going up. Clearly a "quantity theory of money" that assumes a fixed velocity of money does not hold exactly when the velocity of money is going up. As the value drops faster and faster, people rush faster and faster to spend the money. If it loses 20% per day the velocity of money will be faster than when it is 5% per month. So if you want to say that the simple quantity theory of money is contradicted by this data, I agree. But the equation of exchange still works.

      I don't think you get my point on the logic of your claim. You can have a situation where the bank/government has printed so much money that then people start the hyperinflation feedback loop. At that point the hyperinflation might go on even if they stopped making money. But it would not follow that "the sudden loss of confidence cannot possibly be caused by printing money". The sudden loss of confidence could happen after the money printing had stopped and still be the result of the money printing.

      That the Dallas Fed has a model does not really prove much. If it did I could say my model/simulation for hyperinflation proves that monetizing bonds during a bond panic causes hyperinflation.

    4. If Japan has to monetize the bonds to keep the government in operation (taxes cover only half of spending and could never pay off bonds coming due) then it does not seem like Japan can credibly commit to controlling the money supply. What difference does it make if the bonds are owned by Japanese citizens or foreigners? How is it circular? If the bonds are replaced by new money there will be more money and most probably inflation at some point.

    5. Vincent,

      I discussed Giles' post with him before posting this. He describes people dumping gold in favour of anything they can exchange it for, in anticipation of price falls. That is hyperinflation.

      Yes, gold is still gold when it is no longer used as money. And paper is also still paper when it is no longer used as money. Both these items have intrinsic value to some extent, but what makes them "money" is their use as a medium of exchange. Gold standards have died, in the sense that gold is no longer needed as a medium of exchange (or as backing for the MoE), every bit as often as fiat currencies. Gold coins in treasure trove have no value as a medium of exchange. They have value as gold (scrap value) and they may have additional value as rare antiques. But they are every bit as worthless as a medium of exchange as Weimar banknotes.

      Regarding the fixed monetary base - yes, I do get your point, but it's not logical. If the sole reason for loss of confidence is worries about out-of-control monetary issuance, then stopping monetary issuance should prevent hyperinflation from commencing. In the Dallas Fed model it does not. Therefore the loss of confidence must have another cause beside the size of the monetary base.

      Regarding your model: hahaha. Your model demonstrates EXACTLY the point the Dallas Fed is making. What you show in your model is "fiscal dominance". Hyperinflation is not caused by money printing, it is caused by irresponsible government borrowing and spending: money printing is the RESPONSE to that. See Wallace and Sargeant's paper:

      Under these circumstances the only alternative to monetization of debt is sovereign default. Which of these paths is taken depends on the degree of independence of the central bank. It is therefore a political choice.

      I rest my case.

  2. Monetary policy is politics. Key word is policy. Therefore a monetary phenomenom is a political one.

  3. Hello Frances.
    In the 1970's we had the oil price shock. The price went up by 4 times? Being only 15 at the time I wasn't paying attention. Given we live in a highly mechanized situation. Especially farming. The most probable cause of inflation (things getting more expensive) is the increased cost of energy. Energy underlays all economic activity. Some of great gains in productivity were caused by replacing human animal power with mechanized power. (More reliable, controllable, scalable and cheaper). I recall (sorry not very academic), labour accounting for 10% cost of factory prices on average. The wage inflation notion was and is politicing by the wealthy.
    The immediate effect of the oil price shock was too reduce money availability for other things (recession). An increase money supply to counter balance this might have helped. e.g. Reduce taxes in lower bands. As ever fake austerity notions prevented this from happening in a timely manner.

    A Loyal Lurker (Lee)

    1. Hi Lee,

      I was a similar age.....

      The 1970s oil price shocks (two of them) were both political: the first was a consequence of OPEC sanctions against the US in the Yom Kippur war and the second was due to the Iran crisis, where the US was on the losing side (it supported the Shah). But my comment about the 1970s was not about what actually caused inflation, it was about what people believe. People don't remember the Yom Kippur war, or if they do they don't see the connection to the high inflation they experienced: but they do remember strikes, exorbitant pay demands and power cuts. I do remember the anger felt by ordinary people such as my parents against the miners at that time - they held them responsible not only for the power cuts but for inflation. Their anger drove the election of Thatcher and the subsequent dismantling not only of trades union powers, but also of the mining industry: "never again will the miners be allowed to hold the country to ransom". It was a fine example of belief and emotion trumping fact and sense. We are seeing a similar attitude to bankers at the moment - note the calls for bankers to be jailed and the industry destroyed.

      I'm personally of the opinion that supply-side shocks like the 1970s oil price shocks should be ignored: yes, they cause high inflation, but the cure for that can be worse than the disease. In 2011 the ECB raised interest rates to combat inflation due to rising oil prices....the rest, as they say, is history.

    2. The OECD has a slightly different take on the UK coal industry story. They note that from 1957 British power generators were legally required to purchase a certain proportion of British mined coal, and also to pass the extra costs on to retail customers. They note that "By the 1990s the British coal industry had become very inefficient by world standards." The Thatcher Government gradually removed subsidies and requirements to buy British coal, and as a result the industry and the power of the unions both shrank. For the OECD the end result was "..the UK has since maintained a 'more or less‘ competitive coal industry.."

      I would agree that Thatcher had a political motivation - can you really tolerated the country being held to ransom by strikes? - but it seems to have coincided with good economics. I don't see "fact and sense" really being trumped.

    3. It is not Thatcher's motivation I am describing, but the motivation of the people who elected her. Anger, not economics, drove the 1979 Conservative victory.

  4. Good article by Krugman on the relationship between inflation and politics:

  5. Frances, you make a solid case that inflation is a political phenomenon. I concede your point. However, that does not prove that it is not also a monetary phenomenon. The value of money sure sounds like a monetary phenomenon. Having a "credible commitment to control the money supply", sounds like part of a monetary phenomenon. The quantity and velocity of money are clearly part of inflation, and those are monetary phenomenon.

    I would say that at the core it is a political phenomenon but the mechanics and details can be studied as a monetary phenomenon.

  6. Inflation , deflation blah blah blah blah.
    The banks which control us via the state apparatus use a static unit of currency against a select basket of goods.
    To use such a metric in the present monetary system is worse then absurd as the vast majority of people do not have a stock of money in the millions to run down.

    What people need to talk about is the progressive loss of purchasing power most easily seen during the euro years.
    For instance the loss of real purchasing power of people in Ireland decreased in a dramatic fashion when we went from one dastardly banking union (1979~) into a even larger more demonic repeat experiment.
    The symbiotic bank /state creates credit to buy unneeded junk (generally in a neo liberal economy rather then a classic war economy "capital goods" such as a glut of cars & houses rather then tanks and other naff stuff)
    The depreciation or destruction of such goods become manifest over time.
    To pay for this deeply structured event the monetary authority creates inflation or the taxing arm of the monetary authority (the state) creates a inverted form of inflation using tax to pay for such credit poison infusions.
    To the ordinary man on the street a increase on the tax of a pint or inflationary increase of the product makes no bloody difference)
    Over a multi decade timespan these inflation / deflation events run much like clockwork.
    Think of the Irish deflation of the 50s
    Inflation of the 60s & 70s
    Deflation of the 80s
    inflation of the 90s and 00s
    deflation of the current time period.
    The future inflation is just beginning to happen (Irish car sales - the perfect physical item to create real world scarcity is just beginning to ramp up)

    The only true goal is to maintain the concentration of wealth at all costs.

    Belloc was correct in his overview of capitalism.

    Ireland is the perfect petri dish.
    The banks favourite experimental gaff since the Tudor (banking) conquest

  7. What has caused the present crisis in capitalism (just to note capitalism thrives on crisis as it works to further scale up its malice and will to power.)
    We need to look at the banks most perfect monster yet.
    The Euro market state.
    Since the beginning of that experiment but most especially seen from the 80s and beyond we have seen a progressive erosion of peoples real purchasing power.
    This real latent energy was used to expand further the global supply chain via a transfer of this energy to further expand the easts production and unneeded high end products in Germany etc etc
    The present crisis is a simple result of this gross concentration of money power and nothing else as most people are now unable to afford the products of Mordor causing a progressive collapse of supply chains ie, the production distribution and consumption system.
    Cromwell and the lads that came in his wake have been working on ejecting us from the village cooperative system - that is their sick reason for being.
    Destruction of village systems comes naturely for them.
    Destruction is the means to maintain the concentration of power.

    MMT of course fails as it undervalues the role of capital to overpower all labour - most especially in the age of oil & gas.


Post a Comment

Popular posts from this blog

WASPI Campaign's legal action is morally wrong


The foolish Samaritan