Classical inflation

Being a classical economist myself, I understand what the classicals meant when they said that public sector deficits lead to inflation. They meant that if a government ran a deficit, they would eventually be forced to inflate the money supply.

You’d have to go back to an economic text written in the 1930s at least. Once Keynesian economics became the fashion, since the very policy was of itself inflationary in the classical sense – and could in some circumstances lead to a rise in the price level (our modern definition of inflation) – there was an imperative to change the meaning of inflation among economists.

But what you see before your eyes is the very embodiment of classical theory. We now have central banks trying to save their mates in Treasury from having to finance the debts they racked up in the non-stimulatory stimulus. If they actually had to repay this debt at a market rate, we would all go bankrupt. Instead, they are thieving from the public to cover for their own incompetence.

The SMH this morning has a particularly absurd story, but it’s what they are trying to tell us: “Rate cut isn’t about money, it’s about jobs”. Well, the only jobs they are trying to save are the jobs of those Treasury incompetents who took us into the fiscal deficit adventure we are now in the midst of and will be for many years to come.

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19 Responses to Classical inflation

  1. Entropy

    Last time we sold off Telstra to get out of the debt hole.
    What of real value do we have to sell off this time? NBN? Snort!
    Because a second’s rational thought will demonstrate it will not be possible to pay it off through surplus budgets.
    Maybe the Chinese will pay it off in return for our obeisance. or as our Beijing masters might say, Ketou.

  2. flyingduk

    Fifty years ago, my favourite icecream, the coveted ‘Pine Lime Splice’ cost 17c, and I well remember having to amass that princely sum to buy one on the way home from school. Today, the exact same item sells for over $3. That means nearly 95% of the value of the Aussie dollar has been destroyed by inflationary money printing in my lifetime.

  3. mh

    …there was an imperative to change the meaning of inflation among economists.

    Inflation is the cost of a basket of supermarket groceries today compared to a previous point in time.

    Am I close?

  4. Tel

    There’s another problem: although ideally government should finance the deficit by borrowing at market rates (i.e. selling government bonds to the highest private bidder) but because governments are ever tempted to inflate their way out of debt … so that sends a message that government bonds are not really sold at honest market rates. Who would buy government bonds under such circumstances? Only those institutions that are forced to buy … which means now you have treasury guys in the business of figuring out ways to strong-arm buyers of their paper.

    This is not a new thing, King Edward I being the well known example of a king who spent a lot of money, borrowed heavily then got into debt, and gradually turned towards taxation and eventually outright standover tactics to escape repayments. King Edward didn’t have the option of inflation, but I’m sure he would have given that a go if he could.

  5. Mark M

    The Fed — already overwhelmed and incompetent — wants to incorporate global warming voodoo into its calculations.
    Fun ensued ..

    U.S. Fed charts its own course on climate change, too

    https://www.reuters.com/article/us-usa-fed-environment/u-s-fed-charts-its-own-course-on-climate-change-too-idUSKBN1WH0ZS

    Firms that don’t respond to [global warming] ‘will go bankrupt’ – Carney

    https://www.independent.co.uk/news/uk/politics/climate-change-companies-bankrupt-mark-carney-impact-a9030231.html

    The Reserve Bank has warned it will have to take the impact of [global warming] into account when setting interest rates.

    https://www.abc.net.au/news/2019-03-12/reserve-bank-warns-of-impact-of-climate-change-on-the-economy/10893792

  6. Pyrmonter

    @ Steve Kates

    1 – published in 1960 – so, well into the period of ‘Keynesian’ dominance.
    2 – by a then Harvard economist (albeit one habilitated in Vienna)
    3 – who was President of the AEA 3 years later
    4 – setting out (in essence) an orthodox position on inflation.

    With what at pp 16-20 do you disagree? If an AEA President could write such material, how is it not ‘mainstream’?

    https://mises-media.s3.amazonaws.com/Inflation%20Its%20Cause%20and%20Cure_3.pdf

  7. Has there been a worse RBA Governor than Philip Lowe?

  8. flyingduk – pine lime splices were an outstanding ice cream.

  9. Pyrmonter

    @ Kinglsey – Coombs?

  10. kingsley

    Pyrmonter – yes I think you are probably right. Early days I guess for Lowe. I guess we should hope and pray in a few years time we can still say Lowe is the worst RBA Governor since Coombs and not THE worst Governor.

  11. Mother Lode

    The SMH this morning has a particularly absurd story

    It is not particularly absurd if it ran in the SMH. In fact, it would be in its element there.

    Anywhere else it is a twisted lurching travesty.

  12. Mother Lode

    I note that the newspapers are talking about the banks ‘defying’ the RBA and Morrison upbraiding them for profiteering because they doing what the RBA wants them to do even though there is no requirement for them to do it.

  13. Entropy

    The Reserve Bank has warned it will have to take the impact of [global warming] into account when setting interest rates.

    https://www.abc.net.au/news/2019-03-12/reserve-bank-warns-of-impact-of-climate-change-on-the-economy/10893792

    Thing is, even if you were the worlds most fervent catastrophicist, why would future climate change be relevant to current interest rate settings?, or those in ten years for bond rate settings if it came to that. They are set to make them worth the purchase now. It would just not fit in the planning horizon.

  14. Entropy

    I note that the newspapers are talking about the banks ‘defying’ the RBA and Morrison upbraiding them for profiteering because they doing what the RBA wants them to do even though there is no requirement for them to do it

    Interest rates are so low now how would it be possible for the banks to comparably reduce rates while still covering the marginal cost of providing the damn loans in the first place?

  15. Mother Lode

    Interest rates are so low now how would it be possible for the banks to comparably reduce rates while still covering the marginal cost of providing the damn loans in the first place?

    The government is full of fantasists who dream of a world where everybody likes them, admires them, and are grateful to them.

    What they would like is for the banks to drive walk around offering house keys to people, who would enter their new abode to find a fruit basket with a card reading “Welcome to your new home. Signed, the PM/Deputy PM etc”.

  16. Dr Fred Lenin

    You critics of our able politicians ,none of them are real working class any more ,all are university educated mostly in arts , but a few have small law degrees . To attack such a fine group of altruistic intellectuals is unkind and almost criminal . Have a bit of respect for your betters you lot . They are not in it for the money or perks ,its adesire to improve society that drives them .
    (Now is that not worthy of a Nobble Prize in Spin ?)

  17. Pyrmonter

    Apropos inflation … this is doing the rounds:

    https://www.bbc.com/news/world-asia-india-49907266

    Full decision here:

    http://www.bailii.org/cgi-bin/format.cgi?doc=/ew/cases/EWHC/Ch/2019/2551.html

    By a rough calculation, had the Nizam, instead of depositing Stg 1 million in the Westminster Bank managed to secure its equivalent in gold at prevaling exchange rates, his heirs would be sitting on USD17 billion. How inflation expropriates savers.

  18. John A

    Entropy #3174074, posted on October 3, 2019, at 12:45 pm

    The Reserve Bank has warned it will have to take the impact of [global warming] into account when setting interest rates.

    https://www.abc.net.au/news/2019-03-12/reserve-bank-warns-of-impact-of-climate-change-on-the-economy/10893792

    Thing is, even if you were the worlds most fervent catastrophicist, why would future climate change be relevant to current interest rate settings? or those in ten years for bond rate settings if it came to that. They are set to make them worth the purchase now. It would just not fit in the planning horizon.

    Entropy and others who referred to climate change risk earlier

    This is from my CPA journal (now openly available online, I think)

    https://www.intheblack.com/articles/2019/10/01/headed-for-litigation-over-climate-change

    to have every business account for “climate change risk” and report on same. The article assumes that all the risk is detrimental, that it will impact “stakeholders” and that said stakeholders will sue furiously unless the company reports beforehand.

    The stupid, it burns in private industry also.

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