I have not had much time to blog this week due to various projects I’m working on from my day job. But I’ve had a few ideas: new evidence inflation is the wrong target (evidence is nearly everywhere), George Selgin’s new gig at the Cato Institute, whether Bernanke really is a Republican or ever was, and whether the use of paper money constitutes socialism. Most of these will be addressed in coming posts. What I’m covering today is the social aspect of fiat money.
As a regular reader and sometime commenter on Scott Sumner’s blog, The Money Illusion, I’ve noticed that Sumner draws quite a diverse discussion participation. Included in that participation is an internet Austrian by the name of “Greg,” aka Major_Freedom, whom I should probably acknowledge as one of my original motivating factors to start my own blog. The reasoning is a bit difficult to explain in time I have to do so. But there are two major ones, with the first being his abuse of comment section real estate. Oh yes, the “Major” has quite a lot to say, most of it of the monetary extremist flavor as to be inflammatory, not to mention that he is not shy at all about insulting Dr. Sumner while abusing the platform provided by his most generous host. It’s not exactly the kind of behavior indicative of a thought leader.
I have to admit, however, that at least some times I read what he has to say, as difficult as it is. And recently, likely sensing defeat due to the improved economic conditions he said two things that stuck in my mind. The first one is that inflation does indeed have very long lags, even decades long. And the other point he made was that fiat money is socialism while trying to defend Austrians everywhere who don’t believe people are generally smart enough to act in their own interests.
I wonder how he squares the last point, knowing what happens in disinflation. If, as most Austrians claim, inflation is a tax, then deflation must be a rebate. No? And if inflation is a tax, and the higher the inflation, the higher the tax, then it seems rather bizarre to call it socialism because it seems rather difficult to tax people and give them things way beyond their means at the same time. It certainly appears to me that the Major wants it both ways. But of course, mild inflation, if it is a tax, is much less of one than a sudden deflation. I can’t get into what kind of tax inflation is because of supply side nuances in the time I have, but supposing that a central bank mostly relies on credit channels to provide liquidity instead of cold hard cash, a sudden, severe disinflation is a form of wealth tax; a tax hardily advocated by gold bugs everywhere because it would happen frequently under a commodity standard. A properly managed fiat system prevents that kind of tax.
I am unsure how the Major would qualify the point about decades-long lags that somehow we’re all still paying for the monetary volatility of the 1970’s. Without any qualification, it’s the sort of normative statement that one might reach for when boxed in with no other argument to make. It might be true, and is probably true that there was permanent damage done in the 1970s, as there was certainly permanent damage done in the Great Recession. But then there was permanent damage done in the deflationary crash in 1834, and in 1858 (how about a civil war to go with your deflation?), 1907, 1921, and in 1929 that lasted decades, plus many others in the late 1800s that are too numerous to count – all on the gold standard – and we’re all still paying for! The only point that proves is that no monetary system is perfect and we gain the convenience of money with some associated risk. Are we better off with money than barter? Probably. And certainly one can print fiat money, but not gold.
Earlier I posted a sort of critique of a David Glasner post in which I thought he had gone over the dark side in consideration of inflation as one of the great evils, supposing that inflation has very little at all to do with monetary evil. Even in a barter system inflation exists as quantities of certain goods accepted in trade for other goods might change depending on supply and demand factors, meaning that it would be an irrational expectation for 10 apples to always equal 10 oranges given the fickleness of Mother Nature and changing appetites of insects, for example. So I am not certain what inflation has to do with anything evil, but rather being one of those inconvenient and pesky facts of life. And that sort of outlook on economics can and should also be extended to a monetary economy.
If the Major can disentangle all of the variables included in all market price changes and logically attribute proportionality to monetary factors, then he should certainly come out with it and win the Nobel Prize. But alas, we’re stuck with the concept being misconstrued and blamed on the Fed, quite a hurtful condition that we all pay for in the here and now – no lags on the pain.