Reframing inflation

Solidus of Con­stans II and Con­stan­tine IV

Solidus of Constans II and Constantine IV, ca. 7th century, Byzantium

Should the U.S. gov­ern­ment send a debit card loaded with $2000 to every Amer­i­can and then reload it with $1000 every month until the pan­demic passes?

Should the Trea­sury mint two trillion-dollar coins to pay for this?

In the weeks and months ahead, you will encounter — or might even dis­cover in yourself — a knee-jerk objec­tion to pro­pos­als like this, because “they’ll just cause run­away infla­tion.” Sure, you’ll have an extra $2000, but so will every­one else, and a banana will cost $500, so who cares?

To eval­u­ate these pro­pos­als seriously, you need to under­stand what infla­tion is and what it isn’t. So, I want to offer a really brief explanation — maybe a reframing.

The apho­ris­tic econ-prof def­i­n­i­tion of infla­tion is “too many dollars chas­ing too few goods.” Infla­tion scolds tend to focus exclu­sively on the first part of that formulation, the “too many dol­lars,” but that’s misleading.

It’s my opin­ion that the fear of infla­tion has its roots in two things:

  1. The “cultural memory” of high inflation in the U.S. in the 1970s, which was driven pri­mar­ily by oil pro­duc­tion politics. High oil prices cas­cade into almost every other good and ser­vice; there’s no cor­ner of the economy that’s unaffected. To stim­u­late a floun­der­ing econ­omy, the U.S. gov­ern­ment spent a lot of money, but that couldn’t change the under­ly­ing real­ity of an oil short­age. Thus: infla­tion.

  2. The “hyperinflation ghost stories” of strange extreme peri­ods like, e.g., the mid-2000s in Zimbabwe, a time when econ­omy-wide pro­duc­tion dipped calamitously — “food output capac­ity fell 45%, man­u­fac­tur­ing out­put 29%”—while the gov­ern­ment printed money pell-mell. Thus: hyperinfla­tion.

Notice that, in both of those cases, there is a real phys­i­cal short­age of goods at the core, but it’s the cur­rency infla­tion — the spec­ta­cle of worth­less money — that becomes the bogeyman. (For many years, I had a Zim­bab­wean trillion-dollar note stuck to my refrigerator.)

For ten years now, no matter what central banks have done, no mat­ter how much money they’ve printed — and they have printed a lot — inflation hasn’t budged, locked around 2%, the tar­get these insti­tu­tions osten­si­bly struggle to maintain. For ten years now, there has been no strug­gle. This really stresses cen­tral bankers out. Why is infla­tion so low??

My per­sonal (crackpot?) the­ory is that the answer has to do with (a) the dig­i­ti­za­tion of more and more goods and ser­vices — the price of Netflix can never inflate because Net­flix can repro­duce its ser­vice instantly and infinitely — along with (b) the “perfection” of the phys­i­cal sup­ply chain.

In the mid­dle of 2019, the real econ­omy could, in a way unimag­in­able in the 1970s, spin up addi­tional pro­duc­tion of nearly any good very quickly. This was espe­cially true of electronics, which con­sti­tute so much of our con­sump­tion now. You want twenty mil­lion flat-screen TVs? They’re already on a boat!

You can only fear infla­tion if you believe the real economy can’t “keep up” with new money, and for all its other failings — there are many — one thing the econ­omy has proven, 2010-2020, is that it absolutely can.

But it’s not the mid­dle of 2019; we live in a dif­fer­ent world now. The pan­demic has totally dis­rupted sup­ply chains. For months, it shut down all the fac­to­ries in China! Here in the U.S., ship­ments are mov­ing more slowly. Real peo­ple with real jobs — truck drivers, ware­house workers — will get sick.

So here’s where reasonable peo­ple can disagree. If you believe the pan­demic’s effect on the pro­duc­tion and dis­tri­b­u­tion of phys­i­cal goods is pro­found and lasting, then it’s not unrea­son­able to be con­cerned about “too many dollars chas­ing too few goods.” However! You should under­stand it’s the “too few goods” as much as the “too many dol­lars” that you fear.

But if you believe the under­ly­ing capac­ity and flex­i­bil­ity of global pro­duc­tion is largely unchanged, and that there is cur­rently a surplus of goods and ser­vices sit­ting idle, oil not least among them — this is what I believe — then print­ing money will sim­ply give you “dol­lars chas­ing goods,” i.e., an econ­omy, which is a nice thing to have.

I’m down for the trillion-dollar coin is what I’m saying.

One more thing:

Inflation is the ulti­mate eco­nomic bogeyman, the neme­sis of cen­tral banks, largely because it laser-tar­gets the very wealthy, erod­ing the value of the dol­lars in their bank accounts. Infla­tion is the dark mold that blooms on the under­sides of your oranges while they sit wait­ing in their pretty bowl.

But … what if you don’t have any dollars in your bank account? What if, on the contrary, you hold mostly debt — a mortgage, a stu­dent loan? That debt is recorded as a fixed num­ber of dollars, so, if dol­lars are less valuable, you effectively owe less. What a magic trick! The polit­i­cal econo­mist Mark Blyth has pointed out that the infla­tion of the 1970s and 1980s was a gift to any Baby Boomer with a mortgage: effec­tively, a dis­count on the price of their homes.

There are a lot of Amer­i­cans who hold a lot of debt, and, for them, a lit­tle bit of infla­tion might be a good thing.

That’s all to say: don’t accept the assump­tion that print­ing money causes run­away infla­tion. You need to have an opin­ion about the real econ­omy, too.

Solidus with Jus­tinian II Rhinometus and His Son Tiberius

Solidus with Justinian II Rhinometus and His Son Tiberius, ca. 8th century, Byzantium

(I really like how so many of these Byzan­tine coins have two dudes on them: expres­sions of continuity.)

March 2020, Oakland