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Tuesday, December 24, 2013 3:09 AM

Economic Illiterate Proposal: "Inflation Creates Jobs"; Inflation Economics 101

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Those looking for economically illiterate proposals can have a field day reading Ezra Klein's "Wonkblog" on the Washington Post.

In Full Employment Gives People Jobs Klein states (citing two others) "The Federal Reserve Bank’s focus on keeping inflation below 2 percent effectively sacrifices the other half of its dual mandate: full employment."

It's difficult to know where to start debating such economic lunacy, but let's briefly discuss the notion of a "dual mandate".

Dual Mandate Equals Mission Impossible

Here's the deal.

1. The Fed can control money supply but it will have no control over interest rates (or anything else).

2. The Fed can control short-term interest rates, but then it would have no control over money supply (or anything else).

That is the full and complete extent of the Fed's "control". Note that neither price stability nor unemployment is in either equation. The reason is the Fed controls neither.

That is a mathematical certainty, yet people have preposterous beliefs that the somehow the Fed can not only control inflation but also unemployment.

If the Fed, the Bank of Japan, the Reserve Bank of Australia, the ECB, or the Bank of England, or the central bank of China could control the unemployment rate, rest assured they would have done so long ago.

The economic illiterates will point out the unique nature of the Fed's dual mandate, but I will counter with the mathematical stupidity of such an idea.

At best, the Fed can control (using the word loosely) a maximum of one thing at at time, and employment is not one of those things.

Does Inflation Create Jobs?

If inflation creates jobs, where are the jobs right now in Venezuela? Where were they in Zimbabwe? Argentina?

No doubt the economic illiterates will state "wait a minute, we don't want massive inflation, just the right amount of inflation".

But depending on which economic illiterate you ask, the alleged "right" amount of inflation may be 2%, 3%, 4%, or even higher.

So the debate rages "what is the right amount of inflation?"

The debate itself is economic insanity. Inflation does not and cannot create jobs in the long term.

Inept Monetarist Choir

In the short term, inflation can create the illusion of economic prosperity, but Klein and his monetarist choir cannot manage to see their own noses even while looking in a mirror.

Yes, inflation helped create a massive housing boom. Builders employed like mad. Speculators built condo towers in Florida, Phoenix, Las Vegas, and numerous cities in California. It was a grand party. All based on inflation.

Then the bubble burst. Then a consortium of economic jackasses came along saying we need more inflation (as if the cure was the same as the disease). The Fed tried, and tried and tried. However, the Fed did not create enough inflation to satisfy the monetarist jackasses, but it did create bubbles in stocks and bonds.

Benefits flowed to the banks, the corporations, and the already wealthy. That gave rise to still more economic lunacy regarding income distribution.

Inflation Economics 101

Ezra Klein needs to brush up on inflation economics 101. I have a simple, easy to understand crash course.

Practical Examples

Economic illiterates will tell you that deflation (for this example defined as falling prices) is a bad thing. They will tell you that when prices fall, people will delay purchases waiting for still more falling prices, and then consumers will not buy goods and employment will drop and a downward economic spiral will ensue.

That is the theory of people in ivory towers who read books and articles by economists who cannot find their ass with two hands and a road map.

If falling prices stopped people from buying goods, no computers, TVs, monitors, or electronic goods would have been purchased for years.

Just yesterday I bought a 27 inch high-end NEC monitor for $800. It was one of the top-rated monitors for digital photography display that I could find.

It beats hands down my Dell 24 inch monitor I bought a few years ago for $2400. Will monitors be better and cheaper next year. Of course. Did that make me wait? Not in the slightest.

Lower Prices Spur Sales

People hold on to things when replacement costs are high. Lower prices, not higher ones, spur sales. Sales spur employment!

Think about cars. If prices dropped 20% would that spur cars sales? I think so. If you could replace your aging car 20% cheaper and it had more features, would you do so?

What if they rose 20%? My guess is that, all thing being equal, car sales would plunge

All Things Never Equal

Not to fear, socialist fools don't want all things to be equal. They want prices and wages to go up. Well, history shows, and Klein even has charts to prove it, that wages have not risen with prices.

To compensate for the fact that wages have not kept up with inflation, socialists and monetarists want higher minimum wages. They also want inflation targets and they expect businesses to pay more in wages than prices go up!

How do businesses respond? They outsource or replace humans with software and hardware robots that do not complain about minimum wages.

In short, Klein proposes exactly more of the same policies that caused the massive rise in income inequality in the first place. His solution is more government controls, more Fed controls, and more command-economy nonsense similar to what sunk the Soviet Union.

The Real Problem

The problem is not falling prices, but rather the inability to pay back debt as prices fall. The irony is inflation encourages more and more debt, with bubbles of increasing magnitude over time. And each time the bubbles burst, complete fools shout for more of the same policies that caused the bubbles.

I propose getting rid of economic jackasses at the Fed and in Government. I propose falling prices are a good thing. Who doesn't want falling prices (except of course in asset prices). And who owns the bulk of the assets? Here's a hint: It's not those who Klein thinks will be helped by more inflation.

Unfortunately, Klein is more likely to get his way than I am my way. As a direct result, expect more  bitching from Klein and others in his camp about rising income inequality. Also expect more inane inflation proposals that will destroy still more jobs and the middle class.

Mike "Mish" Shedlock

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