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Sunday, July 06, 2014 11:49 PM


PIMCO's Nonsensical Inflation Analysis; "Brain Worms" Revisited Already


Mihir Worah, PIMCO's Deputy Chief Investment Officer and head of PIMCO’s real return and multi-asset portfolio management teams says Inflation Is Rising, But No Sirens Ahead.

Pay particular attention to the third paragraph in which Worah states: "In the developed markets, the U.S. and Europe in particular, inflation is bottoming and poised to move up modestly. We expect inflation in the U.S. to move close to the Federal Reserve’s 2% target, though it is still likely to be relatively low over the secular timeframe. However, we have a slight bias to higher inflation since that is what the Federal Reserve wants – stronger economic growth in the U.S. cannot be achieved without higher inflation."

Emphasis mine.

I nearly choked when I read that paragraph. The idea one needs inflation to have economic growth is ridiculous.

Hayek trashed that notion in his work "Paradox of Savings".

Interestingly, a discussion about inflation and growth came up in an email conversation I had last week with Pater Tenebrarum at the Acting Man blog.

From Pater ...

We have become used to think of economic progress in purely monetary terms by the highly inflationary fiat money system, but this is actually not how it should be seen or measured. In fact, every single industrialized society has attained its economic superiority in a time when prices did not rise at all. Economic progress would continue even if the money supply were forever completely fixed. Hayek has demonstrated in 1928 (in the only reply to the Foster-Catchings challenge that actually made sense and completely demolished their assumptions) that profitable production can continue if under conditions of a fixed money supply savings are increased and consumption concomitantly reduced to enable increased investment in the economy's production structure. The interest rate spread between the stages of production will decline, but at the same time physical productivity will rise.

As I have related before, I have observed the evolution of technological and economic progress specifically in the music and recording industry in great detail. It is quite amazing really - e.g., a high quality Lyrec 24 track machine used to cost almost 80,000 USD in the mid 1980s. Today a PC in combination with the relevant software delivers multi-track recording capabilities that are a 20 times larger, at a total cost of $2,500. And that includes peripheral gear that nowadays exists as software that used to cost many thousands of dollars more. Obviously, all the profits of the makers of 24 track tape machines have been wiped out, and the jobs that came with them as well. But the industry overall is booming like never before. Only the job descriptions have changed. And obviously, total wealth in society has increased significantly by these developments.
Brain Worms and the Paradox of Saving

The "Paradox of Savings" is a difficult read, but Robert Blumen offers a relatively easy to understand explanation in Hayek on the Paradox of Saving.

Please read it, then send a copy to Mihir Worah. Perhaps Worah picked up a nasty infection of "brain worms" from somewhere. Has Worah been hanging around Noah Smith by any chance?

For a discussion as to who has brain worms and who doesn't please see Brain Worms - Bloomberg Writer Noah Smith Has Them, written in response to an absurd attack on Austrian economics by Noah Smith.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

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