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.
