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Inflation and the Tea Party

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November 23, 2010 – Comments (5)

Pretty good piece from Curious Capitalist:

http://curiouscapitalist.blogs.time.com/2010/11/10/will-sarah-palin-and-the-tea-party-cause-hyper-inflation/

 

 

5 Comments – Post Your Own

#1) On November 23, 2010 at 2:31 PM, dbjella (< 20) wrote:

I liked this rebuttal

Time says Tea Party will cause hyperinflationShare335POSTED AT 10:12 AM ON NOVEMBER 11, 2010 BY ED MORRISSEY
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If hyperinflation arrives, Time Magazine wants its readers to know who the real culprits are.  It won’t be the federal government that hiked annual spending by 38% in three years and began running trillion-dollar deficits.  It won’t be the Congress that kept raising debt limits to allow for that spending spree.  And it won’t be the Federal Reserve that, in desperation over the government’s spending and debt spree, began printing money to artificially keep interest rates low.  No, the real culprit will be the political movement that opposes all of the above, according to The Curious Capitalist:

Perhaps at some point, Mr. Curious (or Mr. Capitalist) can explain why we had runaway inflation in the 1970s even with a low debt-to-GDP ratio and a predilection for higher taxes.  Curiously, when we started cutting taxes in the 1980s, that inflation disappeared, and remained under control during a long period of low tax rates, especially in the 1980s and in the last decade as well.  Those years of low taxes, low inflation, and consistently high real growth in GDP would tend to argue that tax cuts don’t create inflation but actual growth — as well as confidence in both the economy and the currency.

Not only does Mr. Curious fail to take that into account, he also fails to use accurate accounting of our debt.  With a projected GDP growth rate this year of 2.5%, we can estimate the final GDP for 2010 at around $14.48 trillion, rounding up a little generously.  According to the Treasury’s own debt calculations, our national debt stands at $13.73 trillion as of November 9th, which would put our debt-to-GDP ratio at 94.8% of our GDPeven if we didn’t add a single dollar from now until the end of the year. By this measure, the ratio was 55.9% in 2001, and 65.6% by the end of 2007.  In 1995, it was 67.3%.  The rate now is significantly worse than any time in the last 60 years.... 

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#2) On November 23, 2010 at 2:51 PM, Melaschasm (52.15) wrote:

LOL

I have heard Keynesians claim that cutting spending will cause a recession, depression, and/or deflation.  I have heard that cutting spending will cause poor people to starve and deny medical care to both the old and the poor.  I have not heard anyone claim that cutting spending will result in inflation.

If anyone has a link to a professional economics research paper that indicates that cutting government spending will result in inflation, send it my way.  I would love to read the paper in question.

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#3) On November 23, 2010 at 8:19 PM, ChrisGraley (29.97) wrote:

Wow! That's the argument!

We spent too much money, but don't let them in office because they won't tax you enough to make up for the money that we shouldn't have spent in the first place.

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#4) On November 24, 2010 at 9:53 AM, Gemini846 (54.83) wrote:

I really don't like Palin but she seems to have such a voice among libertarian minded republicans (even though she is not one) that I want to know if inflation is a credible threat.

I spent a good deal of time last week studying the 1930's inflation in Germany which was a direct result of the government printing so much money that it intentionally crashed it's own currency. All taxes that could be converted to gold were being paid in reparations so the government had to pay it's own people in fiat.

There was some debt paid off in the early days as the germans traded marks for pounds or dollars and bought gold with pounds and dollars leaving the foreign holders of marks holding the bag, but this was a minimal cause of the inflation since those trades stopped happening once the currency got out of control.

The main cause of inflation was the payment of non-productive workers by the state at inflated salaries. It took only 5-7 years to inflate the currency 2500%.

Inflaton helped industrialists pay off thier loans and start paying higher salaries.

In this case the government was printing and putting money directly into the population. While our government is doing the same thing, the scale and scope is not nearly as high.

At this time the "extra" money in the system has not made its way to the hands of people who can spend it, nor is most of it returning to US industry in a way that would result in increased wages. For inflation US companies would require labor so bad that they would have to pay higher wages. The only way that would happen is if there was a severe shortage of labor (due to a war or other event where the government was paying more in benefits than the private sector).

Since pay in the private sector, while low, still excedes pay in the public sector (for the unemployed) inflation of this sort cannot happen. For that type of inflation to happen buying power has to be in the hands of the people.

With that said, as I explained this to my parents sitting at the kitchen table watching Glenn Beck, they glazed over remembering buying thier first house at 11% interest thinking rates would never be lower and remembering prices of everything in the US going up 300% in the span of a presidential term while the country was in a recession (stagflation).

That led me back to the study board so I spent another day studying stagflation, US policy in the 70's and wondering to myself exactly how that happened.

The answer was simple. "Economic Shock" due to rising energy prices. This is what's going on in China right now which the government there has responded with price controls. Price controls simply lead to less production and rationing, especially when the cost to produce excedes the controled price to consume.

So the question is, in our economic largess, can the costs of production rise (usually energy)? The argument the Palanites are making is, "yes" and it is evidenced by the rising price of highely consumable items such as food and fuel. I'm not totally convinced the prices of coffee going up is representitive. Bread has gone up a bit and eggs (Although not egg producers such as CALM), but I haven't really seen an increase in Milk, meats et.

I think any price rise would have to be sustained over a period for me to really call it localized inflation. Bread going from $1.09 to $1.20 is a 10% rise in price, but show me in 2 months from now that it went up to $1.30 or $1.40 before I'll believe there is something to worry about.

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#5) On November 24, 2010 at 10:37 AM, Melaschasm (52.15) wrote:

Gemini, that is a well thought out post, but you have missed one of the important causes of inflation. 

Specifically the cause that has people worried right now.  Increasing the money supply (printing money) is inflationary.  Ben Bernacke justified QE2 by saying that the Fed needs to create more inflation to avoid the dangers of deflation.

The Tea Parties and Palin have not said much about inflation.  The libertarians, austrians, and a variety of others have been complaining that the Fed is printing so much money that we will soon be seeing high inflation. 

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