Wednesday, August 9, 2017

Nobel Prize-Winning Fools - by Gary North

John Mauldin wrote a report that deserves wide circulation.

Benchmarks like the Consumer Price Index try to reflect the experience of an “average” family, but few families are actually average. We all have our own preferences and priorities.
And I want to clear up a common misconception. Deflation is actually good for your household budget in that it means that you have to spend less to get the same goods and services. Inflation, in contrast, means that you have to pay more. Governments like to have inflation because they want to inflate away their large debts.
I find it passing strange that economists think 2% inflation is the right number to target. First, 2% inflation means that in 36 years you will have lost 50% of the buying power of the dollars you save today. It also means you need to earn at least 2% on your savings just to stay even on buying power; and if you want to grow your future buying power, you have to make more than 2% – not easily done when interest rates are 1% – unless you want to take on some extra risk.
I have been in the room with Nobel laureates conversing under the Chatham House Rule (which means that I cannot name names), when they have argued that the Fed should actually, surreptitiously, target 4% inflation, or let the economy run “hot,” because that is the only way that we can “grow” our way out of the massive debt we have accumulated. There is a certain twisted logic to that. If you could have 4% inflation and 2% actual growth, that combination would increase the nominal size of the economy by 6%. If you were increasing total debt by only 3%, then your debt-to-GDP ratio would decline by 3% a year. No one in the room argued that we should actually balance the budget.
And no one spoke up for the little guys (that would be you and me, Glenn) who at 4% inflation would see a 50% loss of their buying power in 18 years. Inflation is a destroyer of capital and purchasing power.

What he wrote is utterly sensible. It would be a weakness to get 4% price inflation. We had more than that during the 1970s, and that was the worst economic decade since the end of World War II. I got my start as a publisher in 1974. I had the government working for me full time. The economy experienced a series of disasters. The disasters began on August 15, 1971, when Nixon unilaterally destroyed the last traces of the old gold exchange standard.

What bothers me about Mauldin's article is his comment about the meeting that he had among the Nobel prize-winning economists. I understand the rules on silence. I also understand his horror at what he heard.

The thought of targeting 4% price inflation as a policy goal indicates a degree of economic idiocy that I find unfathomable. Of course, the idea that any institution should be given the authority to target the price level of the nation's economy is bad enough. But the thought that the Federal Reserve should deliberately follow a policy that would produce price inflation at 4% per annum is inconceivable to me. The benefits would be limited to a relative handful of people at the very top of the income heap who would use borrowed money to buy high-risk investments. When the investments went sour, which they would, then these people would come to the federal government the Federal Reserve to get bailed out, which would take place. That's how the system works. That's why they have the Chatham House rules. It's the folks in Chatham House and Pratt House and the Eccles building who arrange these sorts of things.

I prefer the median CPI to the regular CPI. The median CPI is more stable. I am looking for a stable indicator so that I can see the trend of prices. I don't think it's particularly useful to get into a debate about the actual creation of the index. The creation of the index is arbitrary. One is as good as another. The important fact is the trend, not the way the index was created.
The median CPI indicates that, over the last year, the United States has experienced about 2.2% price inflation.

That is way too much price inflation. A productive economy should be growing at least 3% per annum. Prices in general should be falling by at least 3% per annum. Anything digital should be falling at 10% per annum or more.

The fact that we have had 2% price inflation is appalling. The Federal Reserve claims that it is now going to shrink the monetary base. Let us hope that this is not just another Federal Reserve promise. It has been shrinking the monetary base slightly over the past two years. What we need now is a systematic policy of shrinking the monetary base. This policy should prevail for at least the next half century.

This is not the opinion of the unnamed Nobel prize-winning economists.

There is zero political pressure to restore a full gold coin standard. There has been no such pressure since about 1935. That is the one thing that could restore monetary stability and increase liberty. When there are Nobel prize-winning economists who recommend 4% price inflation per annum, I guarantee you that there is no academic support for the restoration of a full gold coin standard.

Add to this the abolition of the Federal Reserve System, and you have a truly utopian program. "End the Fed" is not a likely scenario coming out of Washington.

We forget just how foolish the brightest products of the best university economics programs are. Mauldin reminds us of how little hope there is in mainstream economics today.

Only one Austrian School economist has ever won the Nobel Prize: Hayek in 1974. He won half of it. The other half was given to a socialist, Gunnar Myrdal. That was a long time ago. If the Nobel committee had a lick of sense, Israel Kirzner would have won it 20 years ago. His work on entrepreneurship is certainly worth $1.4 million. You would not find him advocating 4% price inflation per year.

No salvation is going to come out of Washington. There is no economic reform that is going to matter. The best and the brightest of the world's economists are not committed to shrinking the federal government and eliminating the central banks of the world.