Reframing inflation

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, 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