Mises on inflation

First some background from the WSJ.

IMF chief economist Olivier Blanchard, in a recent paper, said maybe the U.S. central bank’s future inflation goal should be 4% instead. John Williams, head of the San Francisco Fed’s research department, argued last year that higher targets might be needed to provide a cushion for future crises.

The proposals underscore a broader rethink that is rumbling through the economics profession in the wake of the financial crisis. Many of the things economists thought they knew turned out to be wrong.

Ludwig von Mises addresses these points in his Economic Freedom and Intervention. Mises on what economists know (pg. 127)

The fanatical supporters of inflationism, unbalanced budgets, and reckless government spending have, it is true, succeeded in banning sound theory from universities and textbooks. And they have founded special research institutions whose main purpose it is to put the monetary theory into oblivion. But their triumph is always shortlived.

Then Mises on inflation as a solution to economic problems (pg. 274).

The interventionists, however, ascribe to the government the power to prevent or, at least, to mitigate considerably the harshness and duration of the slump by measures which they call “anti-cyclical.” Under this high-sounding name they recommend, for the emergency in which government revenue is shrinking on account of the depression, tax abatement, on the one hand, and, on the other hand, a huge increase in government spending through gigantic public works and an increase in unemployment compensation. Though the crisis is the inevitable outcome of the creation of additional quantities of money and money substitutes, the interventionists want to cure it by still further inflation. They blithely neglect to take cognizance of the teachings of both theory and history concerning the final outcome of a protracted inflationary policy.

Speaking of what economists know and Mises my RMIT colleague and Catallaxy blogger (soon to return now that he’s back from his summer travels) Steve Kates will be seminaring this Friday on the topic ‘Why Your Grandfather’s Economics was Better than Yours’. This is a dummy run for when he presents the Ludwig von Mises Lecture at the Austrian Scholar’s Conference to be held at the Mises Institute in Auburn Alabama March 11-13, 2010.

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29 Responses to Mises on inflation

  1. I don’t buy this. A reserve bank should maintain liquidity. Prices should reveal scarcity in the real economy and so the target impact on prices should be to have as little impact as possible. Our reserve did provide liquidity, but too much. Inflation increased over the target range during a time when pundits expected deflation.

    You can increase M as to rebalance MV = PY and over do it.

  2. Sinclair Davidson

    Sorry – you don’t buy what?

  3. I don’t buy into the idea that we need higher inflation targets.

    We need a lower target with a more flexible short term band but a more rigid long term band.

    “Oh it’s hard”

    Come on guy’s it’s your job. If you don’t like it, downshift.

  4. sdfc


    We agree on something, I don’t believe in higher inflation targets either. In fact while the RBA was tardy in raising the cash rate during the boom I was toying with the idea that perhaps our 2 – 3 percent target is too high. In my view the Bank’s adherance to the 2 – 3 percent target while ignoring the run up in household debt has left the economy in a fragile state.

    Australian inflation wasn’t increasing during the downturn it declined. While underlying inflation has fallen only slowly, it is due to inflation being a lagging indicator. I’m not aware of anyone (except for maybe Steve Keen) who thought we would have deflation here.

    Our inflation target is flexible, we don’t have a hard and fast rule that inflation needs to be within the target band at all times but on average over the economic cycle.

  5. Milton Von Smith

    Glenn Stevens was asked about this the other day when he appeared before the House Economics Committee, and he was absolutely scathing. It really is well worth reading what he said about the IMF’s nonsense.

  6. JC

    I’m not aware of anyone (except for maybe Steve Keen) who thought we would have deflation here.


    You must be a guru, SDFC. With the asset markets basically 1/2ed, the currency at 60 cents looking like it was going to drop to 30 (and people talking about it), the banking system unable to fund it’s com paper programs and Steve Keen was the only person that thought we were going to hell in a hand basket according to you of course.

    You bullshit artist.

    Hey, you’re stabbing Steve Keen in the back at this blog behind his back, but at least he was the balls to put his money where his mouth is. How about you SFDC, what did you do in 08 that we can verify that shows you were in the inflation camp?

    I think Keen’s economics is about as bad as yours in some ways, but I do admire him for his courage of convictions instead on being an arm-chair strategist like you who goes around from blog to blog trying to stab people in the back and look good to the people there.

  7. sdfc

    You’ve got a few problems haven’t you JC.

    Maybe you can fire off a few names of those who thought we were heading for deflation. A depreciating $A is inflationary (you really struggle with even the simplest of concepts). I sure as hell don’t know anyone who thought the Aussie was going to 30c. Interesting how you thought we were heading for deflation and yet you think the government should have sat on its hands. That you bag anyone’s economic credentials is pretty funny.

    Who was stabbing Steve Keen in the back? I was simply stating what I thought was the case, you really do need to get a grip.

    By the way Keen’s economics is pretty good.

  8. JC

    No i don’t have any problems at all, SDFC.

    The thing is, I was a little put off by was you joining the rest of the psyche ward at Shiny’s bog umming and urrrrhing about a 5 year old email that comprised one of a few going backwards and forwards between myself and the squashed reprobate, which he didn’t show you (from his side). He also didn’t show you the hate mail he sent Jason soon.. numerous times.

    You said some disturbing shit over there. I really don’t give a toss what you think of me in any way, but you shouldn’t go around and lie. You said that I have made sexually explicit comments here and elsewhere. That’s what really is disturbing because like most lefties, you’re a lying sack of shit.

    Show people here where I have ever, ever made a sexually explicit comment other than messing about in the way we do in a light manner, that in any place other than a psyche ward could be deemed explicit? You asshat.

    You end up having to lie and cover your tracks every time we discuss economics here and then turn up at the equivalent of a battered wives meeting (at Deltoid) and lie like that which isn’t all together surprising really. That’s a serious scumbag thing to do, but as I suggested I’m not in the last shocked at your antics. After all, you’re doing that to Steve Kean over here as some offering to our Gods trying to suck up and appear reasonable. But you’re really nothing but a coward.

    You’re truly pathetic.

    Maybe you can fire off a few names of those who thought we were heading for deflation.

    Here’s the thing, you dishonest douche. You dissed Kean’s view because of his deflation trade, although he was man enough to act on it in his personal life and take a few bets. Let’s see what you did in terms of an anti inflation trade, squire. Provide the evidence.

    I’m quite happy to show I was flat in 08 and made 127% on my invested money in 09 my bet year ever.

    You’ve said you work in the financial markets so therefore you must have made a decision at the time to show exactly what you did to make a play in term of your convictions. Lets see the evidence.

    I’m quite happy to show my trading accounts to some one to prove my point. …. You dickhead, Sdfc.

    There was weeks when the earth looked like it was going to end in 08 and part of 09, you financial markets wiz living in Perth.

  9. Sinclair Davidson

    Milton – you got a link?

  10. JC

    One other thing, SDFC, you gutless turd, you mentioned what you thought was my name there with that accusation.

    How about doing the honorable thing and posting by your real name, if you’re going to make accusations like that. You gutless douchebag, if I have a mind to it, I may simply peruse you legally and find out your real name. You asshat, financial market guru from Perth.

  11. sdfc

    Shiny’s psyche ward? The only two places I comment are here and JQ’s blog. You’re having paranoid delusions now. Amazing.

    Anti-inflation trade? We don’t trade the equity market, we fund our position and invest. I’m a rate strategist who does a bit of portfolio management on the side, not making a loss was our #1 priority. You watch too much TV.

    Accusations like what? Pscychos like you are the reason I use a pseudonym.

    If you can’t handle opposing views maybe you should re-think you participation in these forums.

  12. JC

    You didn’t comment at Lambert’s site? Was that another SDFC then?


    Comment 54 wasn’t you, right? That just happened to be another SDFC … the small case one Lol

    You lying douchebag.

    I’m still thinking about pushing this, you lying Grub and the only reason I’d do so is to find out who you are. I’d make sure the press found out and we’d see how your employer would like it when they read it in the paper.

  13. sdfc

    I’ve just visited Tim’s blog and what you wrote now makes sense.

    That shit-for-brains using my moniker is not me and I have left a message asking Tim to have him erased.

  14. JC

    I’ll take your word for it and forget about it. I don’t really care about other sort of stuff. But that kid of stuff really gets my goat.

  15. Wow. You’ve both been had.

    Now that shit is over, sdfc you miss my point slowly –
    we should have a flexible short term and rigid long term target. I understand you may say we effectively have such a thing.

    Keen was wrong. I admire him for trying to model his theory and taking it on the chin, and also putting his money where his mouth is.

  16. sdfc

    Well JC I’m pretty pissed off that someone has seen fit to impersonate me.

    SRL – I actually agree with a lot of what Keen has to say, I think he just misjudged just how aggressive the RBA would be. If house prices ever do fall 40%, I reckon we’ll see cash rate of around 1% or less.

  17. Jason Soon

    that sdfc on Lambert’s sounds suspiciously like Phil the greek

  18. sdfc

    I’m talking about Australia-wide SRL. Who care’s about Sydney anyway?

  19. sdfc

    I have a problem with superfluous commas.

  20. Maybe 1/5 of the population.

    Anecdotally, one house valuation they mention fell by 46% in a year.

  21. JC

    Jeez loiuse, Jason. There must be a god.

    SDFC. I’m really sorry but I know you understand how I arrived a the conclusion i did.

    Just as I clicked the page to say I think it’s phil, I saw Jason’s comment there. LOl

    Yes it is Phil, I’m sure. Some time ago she wrote some really nasty stuff about me at Bird’s site, which Bird of course allowed on, where she pretended it was my better 1/2. Her comments were really quite turgid and quite disgusting.

    Following on from that I am now more than certain it was her and just took your moniker seeing she saw we’d been conversing recently.

    Again I’m sorry this all happened.

  22. sdfc

    No worries JC as soon as I saw the comment it became very clear what you were on about. Like I said earlier I only comment here and at John Quiggin’s site with about 80% of my comments being here.

    My objection to Tim is in moderation.

  23. Labor Outsider

    To be fair on Blanchard, he isn’t really arguing that developed countries can inflate their way out of trouble. Nor is he arguing that there is a long-run tradeoff between inflation and output. He is simply arguing that there isn’t much evidence that inflation expectations anchored at 4% is unlikely to distort the economy much more than a stable inflation rate of 2% and given that, the greater flexibility that higher equalibrium nominal interest rates would provide might be useful in combating deflationary shocks. While one can of course question whether central banks could shift inflation expectations in this way without losing credibility and hence control of inflation expecations, it isn’t a lot different from the RBA’s arguments about why there are benefits in having an inflation target that is slighly higher than most other central banks.

  24. JC

    It would be a policy towards currency destruction and rampant inflation. I honestly don’t know how any economist would think higher levels of potential inflation rates would be beneficial for anyone. It beggars the belief.

    The only rate on a long term basis ought to be perhaps .5% either side of zero.

    Rightly we would have to assume that our inflation rate would be 4% at it’s rare that in a normalized economic setting central banks don’t operate at close to the top of the band. So we would be losing 50% of the currency’s value every 18 years.

    Where is the benefit in running a high inflation policy? What possible reason would there be to allow such a further taxing? That’s nut’s.

  25. Labor Outsider

    Dude – read the paper – it sets out the justification – whether you agree or not is up to you. Same for Possum’s analysis on the other thread. It includes sensitivity analysis. Again, if you don’t find it convincing, why don’t you write to him with your critique and see what he says. Not everything has to be about ideological warfare.

    Anyway, I’m off on holiday for 4 weeks so we can resume our debates in a few weeks time!!

  26. JC


    He’s posting at Crikey and LP and you’re telling me I may be ideological? Are in in some parallel universe?

  27. Sinclair Davidson

    LO – enjoy. See you in 4 weeks.

  28. Capitalist Piggy

    Sinclair asked about a link to recent comments by the RBA Governor. On 19 February he was before the House of Reps Economics Committe to discuss the RBA Annual Report, here is the Hansard transcript (PDF).

    I think the part of interest begins on page 29:

    On inflation targets: I do not agree at all with what the IMF paper said there. The basis for the argument that maybe you need a higher average inflation rate is so you can then have higher average interest rates, and that means you could cut them more in an emergency, and the reason they think that is a good idea is that these countries hit the lower bound, of zero. We have an inflation target centred on 2½, and we had 300 points left when we got to the bottom that we could have used but did not need to. So it seems to me that this problem, in our case, has not— has not anything like—arisen. I think it might well be argued that some of these countries should have had higher average interest rates than they did. But they did not actually need a higher inflation target to do that. That is a line of argument that many people ran—that rates were just too low….

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