{"id":545,"date":"2022-06-12T17:52:36","date_gmt":"2022-06-12T17:52:36","guid":{"rendered":"https:\/\/moneydelusions.com\/wp\/?p=545"},"modified":"2022-06-12T17:52:36","modified_gmt":"2022-06-12T17:52:36","slug":"keynesians-and-market-monetarists-didnt-see-inflation-coming","status":"publish","type":"post","link":"https:\/\/moneydelusions.com\/wp\/2022\/06\/12\/keynesians-and-market-monetarists-didnt-see-inflation-coming\/","title":{"rendered":"Keynesians and Market Monetarists Didn&#8217;t See Inflation Coming"},"content":{"rendered":"\n<p><a href=\"https:\/\/mises.org\/\"><\/a><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Keynesians and Market Monetarists Didn&#8217;t See Inflation Coming<\/h2>\n\n\n\n<p><a href=\"https:\/\/mises.org\/wire\/keynesians-and-market-monetarists-didnt-see-inflation-coming\">https:\/\/mises.org\/wire\/keynesians-and-market-monetarists-didnt-see-inflation-coming<\/a><\/p>\n\n\n\n<ul class=\"wp-block-list\"><li><img decoding=\"async\" alt=\"inflation\" src=\"https:\/\/cdn.mises.org\/styles\/slideshow\/s3\/static-page\/img\/infla1_3.jpg?itok=ZyYUBqC7\"><\/li><\/ul>\n\n\n\n<p><em>MD: At Money Delusions we have come to know that neither the &#8220;Keynesian&#8217;s&#8221; nor the &#8220;Austrians&#8221; are even close to getting INFLATION right. How can you get INFLATION (or more generally economics) right when you don&#8217;t know what money is? Further, this, like government (i.e. the Republicans and Democrats) is like watching the Harlem Globe Trotters and the Washington Generals. It&#8217;s theater. But just for exercise, let&#8217;s annotate this article from that infamous Mises Monk, Bob Murphy, who has relaxing life away as a college professor (most recently at Texas Tech, my sons&#8217; alma matre). With an NYU PhD we don&#8217;t ever expect much but a professional shill.  Interestingly, not only does Murphy claim to know what money is&#8230;he&#8217;s proving he doesn&#8217;t know in his books. <\/em><\/p>\n\n\n\n<p>Understanding Money Mechanics<\/p>\n\n\n\n<p><a href=\"https:\/\/mises.org\/library\/understanding-money-mechanics-0\">https:\/\/mises.org\/library\/understanding-money-mechanics-0<\/a><\/p>\n\n\n\n<p><em>MD: Let&#8217;s get started.<\/em><\/p>\n\n\n\n<p>04\/18\/2022<a href=\"https:\/\/mises.org\/profile\/robert-p-murphy\">Robert P. Murphy<\/a><\/p>\n\n\n\n<p>Listen to <a href=\"https:\/\/mises.org\/node\/58713\">the <em>Audio Mises Wire<\/em> version<\/a> of this article.<\/p>\n\n\n\n<p>The <a rel=\"noreferrer noopener\" href=\"https:\/\/www.bls.gov\/news.release\/cpi.nr0.htm\" target=\"_blank\">government\u2019s latest report<\/a> puts the twelve-month official consumer price inflation rate at 8.5 percent, the highest since December 1981:<\/p>\n\n\n\n<p><em>MD: Of course we at MoneyDelusions know INFLATION cannot be measured. We also know with a &#8220;real&#8221; money process, it is guaranteed to be perpetually zero&#8230;we don&#8217;t need to measure it. But look at the time series below. Notice, it starts its abrupt ramp up at the end of 2021&#8230;when the SSA had to finally admit they had been lying about INFLATION for fully 20+ years. In January, 2022, annuitants got a 5% raise. That&#8217;s not the 7% average inflation that we provably had since 911&#8230;but it&#8217;s 5x the less than 1% they claimed we had. The numbers are pure fiction. So why try to tell a story about what they mean?<\/em><\/p>\n\n\n\n<figure class=\"wp-block-image\"><a href=\"https:\/\/cdn.mises.org\/cpi1_1.png\" target=\"_blank\" rel=\"noreferrer noopener\"><img decoding=\"async\" src=\"https:\/\/cdn.mises.org\/styles\/max_1160\/s3\/cpi1_1.png?itok=zezUWbxa\" alt=\"cpi\" title=\"\"\/><\/a><\/figure>\n\n\n\n<p>As economists debate the causes of, and cure for, this price inflation, it\u2019s worth recounting which schools of thought saw it coming. Although individuals can be nuanced, generally speaking the Austrians have been warning that the Fed\u2019s reckless policies threaten&nbsp;the dollar. In contrast, as I will document in this article, two of the leaders of the Keynesian and market monetarist schools didn\u2019t see this coming at all.<\/p>\n\n\n\n<p><em>MD: Notice Mises Monks like to refer to &#8220;price&#8221; inflation&#8230;as if there was any other kind. What we have had for the last three or four generations is government counterfeiting. They claim to be doing it at 2%&#8230;but on average have been doing it at 4% &#8230; since 1913.<\/em><\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>My Worst Professional Mistake<\/strong><\/h4>\n\n\n\n<p>Before diving into it, I need to address a problem: my hands-down worst professional mistake occurred during the early years of the Fed\u2019s \u201cQE\u201d (quantitative easing) programs, when I made bets on (consumer price) inflation with two economist colleagues. I ended up losing those bets&nbsp;and thereby gave <a href=\"https:\/\/krugman.blogs.nytimes.com\/2012\/12\/31\/on-not-learning-continued\/\" target=\"_blank\" rel=\"noreferrer noopener\">Paul Krugman the opportunity to lecture me<\/a> on my intellectual dishonesty&nbsp;because I clung to my (ostensibly falsified) Austrian model even after my prediction blew up in my face. Indeed, if you check out <a href=\"https:\/\/en.wikipedia.org\/wiki\/Robert_P._Murphy\" target=\"_blank\" rel=\"noreferrer noopener\">my Wikipedia entry<\/a>, you\u2019ll see that apparently my life story is that I was born, got my PhD, and lost an inflation bet\u2014in that order. (For those interested in the details, I summarize the episode with relevant links in <a href=\"https:\/\/consultingbyrpm.com\/blog\/2013\/01\/learning-from-brad-delong-and-paul-krugman.html\" target=\"_blank\" rel=\"noreferrer noopener\">this postmortem blog post<\/a>. I also participated in a <a href=\"https:\/\/reason.com\/2014\/11\/30\/whatever-happened-to-inflation\/\" target=\"_blank\" rel=\"noreferrer noopener\">2014 Reason symposium<\/a> along with Peter Schiff and others, commenting on the lack of inflation.)<\/p>\n\n\n\n<p><em>MD: Now come on Bob! Do you really think giving everyone 1 weeks rent as a stimulous is going to do anything different than buying them beers for a week?<\/em><\/p>\n\n\n\n<p>Ever since the rounds of QE failed to yield surging consumer price inflation at the scale some of us warned of, the Keynesians and market monetarists understandably ran victory laps, saying that they were to be trusted over those permabear&nbsp;Cassandra Austrians. (To be sure, the market monetarists were far more civil about it than the prominent Keynesians.) So it is not with gloating or vindictiveness that I write the present article, but rather I do it to set the record straight&nbsp;and document for posterity that the leading Keynesians and market monetarists totally missed this bout of price inflation.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>The Keynesians Camp: Paul Krugman and Klaus Schwab<\/strong><\/h4>\n\n\n\n<p>Let\u2019s do the fun one first: Paul Krugman has not fared well in light of our current inflationary experience. As late as June 2021, Krugman wrote <a href=\"https:\/\/www.nytimes.com\/2021\/06\/21\/opinion\/inflation-economy-biden-fed.html\" target=\"_blank\" rel=\"noreferrer noopener\">an article<\/a> in the <em>New York Times<\/em>&nbsp;titled&nbsp;\u201cThe Week Inflation Panic Died.\u201d Here are some key excerpts, with my bold added, and keep in mind that when Krugman wrote this, the most recent Consumer Price Index (CPI) inflation rate was only 4.9 percent:<\/p>\n\n\n\n<p>Remember when everyone was panicking about inflation, warning ominously about 1970s-type stagflation? OK, many people are still saying such things, some because that\u2019s what they always say, some because that\u2019s what they say when there\u2019s a Democratic president\u2026.<\/p>\n\n\n\n<p><em>MD: Even if they were able to measure INFLATION, the disruptions caused by a two year shut down would make their numbers useless.<\/em><\/p>\n\n\n\n<p><strong>But for those paying closer attention to the flow of new information, inflation panic is, you know, so last week.<\/strong><\/p>\n\n\n\n<p>Seriously, both recent data and recent statements from the Federal Reserve have, well, deflated the case for a sustained outbreak of inflation \u2026 [T]o panic over inflation, you had to believe either that the Fed\u2019s model of how inflation works is all wrong or that the Fed would lack the political courage to cool off the economy if it were to become dangerously overheated.<\/p>\n\n\n\n<p><strong>Both beliefs have now lost most of whatever credibility they may have had\u2026.<\/strong><\/p>\n\n\n\n<p>The Fed has been arguing that recent price rises are similarly transitory \u2026 The Fed\u2019s view has been that this episode, like the inflation blip of 2010\u201311, will soon be over.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>And it\u2019s now looking as if the Fed was right &#8230;<\/strong><\/h4>\n\n\n\n<p>\u2026. Monetary doomsayers have been wrong again and again since the early 1980s, when Milton Friedman kept predicting an inflation resurgence that never arrived. Why the eagerness to party like it\u2019s 1979?<\/p>\n\n\n\n<p>To be fair, government support for the economy is much stronger now than it was during the Obama years, so it makes more sense to worry about inflation this time around. <strong>But the vehemence of the inflation rhetoric has been wildly disproportionate to the actual risks\u2014and those risks now seem even smaller than they did a few weeks ago.<\/strong><\/p>\n\n\n\n<p><em>MD: Really? Remember all the vaccinations? Who paid for those? Government you say? With money they counterfeited into existence? And who got the money? Drug companies and medical delivery plants like hospitals? As far as the economy was concerned, all that money went down a rat hole. But in reality, it went into government, and government dependants pockets.<\/em><\/p>\n\n\n\n<p>Of course, Krugman\u2019s confident dismissal of those Biden-hating doomsayers blew up in his face, as CPI inflation kept ratcheting higher and higher. In a <a href=\"https:\/\/www.nytimes.com\/2021\/12\/16\/opinion\/inflation-economy-2021.html\" target=\"_blank\" rel=\"noreferrer noopener\">December 2021 <em>NYT&nbsp;<\/em>column<\/a>, Krugman threw in the towel and admitted he had been wrong, but in his own special way (again, with my bolding):<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p>The current bout of inflation came on suddenly\u2026. Even once the inflation numbers shot up, <strong>many economists\u2014myself included\u2014argued that the surge was likely to prove transitory. But at the very least it\u2019s now clear that \u201ctransitory\u201d inflation will last longer than most of us on that team expected\u2026.<\/strong><\/p><p>\u2026 I believe that what we\u2019re seeing mainly reflects the inherent dislocations from the pandemic, rather than, say, excessive government spending. <strong>I also believe that inflation will subside over the course of the next year and that we shouldn\u2019t take any drastic action.<\/strong> But reasonable economists disagree, and they could be right\u2026.<\/p><p>The latest projections from board members and Fed presidents are for the interest rate the Fed controls to rise next year, but by less than one percentage point, and for the unemployment rate to keep falling.<\/p><p><strong>MD: So how does the Fed control interest rates? Don&#8217;t they sell their counterfeit money at auction? And don&#8217;t they use that to pay back the counterfeit money they sold at earlier auctions? And don&#8217;t they guarantee their member banks 10x leverage regardless?<\/strong><\/p><p>Perhaps surprisingly, my own position on policy substance isn\u2019t all that different from either Furman\u2019s or the Fed\u2019s. I think inflation is mainly bottlenecks and other transitory factors and will come down, but I\u2019m not certain, and I am definitely open to the possibility that the Fed should raise rates, possibly before the middle of next year\u2026.<\/p><p>Maybe the real takeaway here should be how little we know about where we are in this strange economic episode. <strong>Economists like me who didn\u2019t expect much inflation were wrong, but economists who did predict inflation were arguably right for the wrong reasons, and nobody really knows what\u2019s coming.<\/strong><\/p><\/blockquote>\n\n\n\n<p>For those keeping score at home, remember that when I pointed out that Keynesians Christina Romer and Jared Bernstein had been notoriously wrong in their forecasts of unemployment following the Obama stimulus package, <a href=\"https:\/\/consultingbyrpm.com\/blog\/2013\/01\/learning-from-brad-delong-and-paul-krugman.html\" target=\"_blank\" rel=\"noreferrer noopener\">Krugman told us<\/a> that \u201csome predictions matter more than others.\u201d So this time around, Krugman can\u2019t argue that his botched inflation predictions are irrelevant. Instead, as we see above, he\u2019s claiming that his opponents were right but for the wrong reasons. Even when Krugman is wrong, he\u2019s still better than his enemies!<\/p>\n\n\n\n<p>And for the sake of completeness, let\u2019s reproduce this quotation from Klaus Schwab (who has doctoral degrees in both economics and engineering) and Thierry Malleret in&nbsp;<em>COVID-19: The Great Reset. <\/em>Writing in July 2020, Schwab and Malleret claimed:<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p>At this current juncture, it is hard to imagine how inflation could pick up anytime soon\u2026. The combination of potent, long-term, structural trends like ageing and technology \u2026 and an exceptionally high unemployment rate that will constrain wages for years puts strong downward pressure on inflation. In the post-pandemic era, strong consumer demand is unlikely. (p. 70)<\/p><\/blockquote>\n\n\n\n<p>So when he\u2019s not <a href=\"https:\/\/www.bobmurphyshow.com\/episodes\/ep-235-behind-klaus-schwab-the-world-economic-forum-and-the-great-reset-part-5\/\" target=\"_blank\" rel=\"noreferrer noopener\">plotting to take over the world<\/a>, Klaus Schwab is making erroneous inflation predictions.<\/p>\n\n\n\n<p><em>MD: Earth to economists! The jig is up. We have a Wiemar, Zimbabwe, and Venezuela moment at our doorsteps. And there&#8217;s nothing they can do about it. Why do I get a dozen calls each day from so-called investors wanting to buy my real property for cash? Because they know the counterfeiting that produced the cash they think they have has yielded it worthless.<\/em><\/p>\n\n\n\n<h4 class=\"wp-block-heading\"><strong>The Leader of the Market Monetarists, Scott Sumner<\/strong><\/h4>\n\n\n\n<p>As I said earlier, the market monetarists are far more civil than Krugman, Brad DeLong, and some other leading Keynesians. (And as far as I know, they\u2019re not bent on world domination either.) But to repeat myself: since 2008, the one trump card the market monetarists had in their rivalry with the Austrians was that many of us prematurely warned about consumer price inflation \u00e0 la the 1970s, whereas the market monetarists relied on TIPS (Treasury inflation-protected securities)&nbsp;yields and other market indicators to reassure their readers that inflation wouldn\u2019t be a problem.<\/p>\n\n\n\n<p>In that context, then, it\u2019s very interesting that Scott Sumner, founder and leader of the market monetarists, wrote a blog post entitled, <a href=\"https:\/\/www.themoneyillusion.com\/fed-policy-the-golden-age-begins\/\" target=\"_blank\" rel=\"noreferrer noopener\">\u201cFed Policy: The Golden Age Begins,\u201d<\/a> in January 2020. Here are the key excerpts, with my bold:<\/p>\n\n\n\n<blockquote class=\"wp-block-quote is-layout-flow wp-block-quote-is-layout-flow\"><p><strong>We are entering a golden age of central banking, where the Fed will become more effective and come closer to hitting its targets than at any other time in history. Over the next few decades, inflation will stay close to 2%<\/strong> and the unemployment rate will generally be relatively low and stable. And this certainly won\u2019t be due to fiscal policy, which is currently the most recklessly pro-cyclical in American history.<\/p><p>\u2026\u00a0<strong>Fed policy is becoming more effective because it is edging gradually in a market monetarist direction<\/strong>\u2026.<\/p><p>If they continue moving in this direction, then NGDP [nominal gross domestic product] growth will continue to become more stable, the business cycle will continue to moderate, inflation will stay in the low single digits, and unemployment will stay relatively low and stable.<\/p><p>It won\u2019t be perfect; the business cycle is not quite dead. There will be an occasional recession. But the business cycle is definitely on life support\u2026.<\/p><p>As an analogy, when I was young I would frequently read about airliners crashing in the US\u2026. My daughter is a junior in college and doesn\u2019t recall a single major airline crash in the US, excluding a couple of small commuter planes in the 2000s\u2026.\u00a0<strong>After each crash, problems were fixed and planes got a bit safer.<\/strong><\/p><p><strong>Recessions and airline crashes: They are getting less frequent, and for the exact same reason.<\/strong><\/p><\/blockquote>\n\n\n\n<p><\/p>\n\n\n\n<p>Before closing, let me deal with the obvious response from the market monetarist camp: They could defend Sumner\u2019s claims by arguing that the Fed only strayed from the ideal path because of covid. Well, sure, but Sumner was still wrong for placing so much faith in central bankers and their \u201cindependence.\u201d<\/p>\n\n\n\n<p>Furthermore, as I explain in my chapter on market monetarism in <a href=\"https:\/\/mises.org\/library\/understanding-money-mechanics-3\">this book<\/a>, Sumner\u2019s criterion of \u201cNGDP growth\u201d as a measure of tight or loose policy is almost a tautology. It is close to me arguing, \u201cWe will continue to see rising prices because of the Fed\u2019s reckless policies, unless demand growth subsides, in which case we won\u2019t.\u201d<\/p>\n\n\n\n<p><em>MD: When will the day come that Bob Murphy gets a clue? <\/em><\/p>\n\n\n\n<p>Author:<\/p>\n\n\n\n<p><a href=\"mailto:bobmurphy@mises.com\" rel=\"noreferrer noopener\" target=\"_blank\">Contact Robert P. Murphy<\/a><\/p>\n\n\n\n<p>Robert P. Murphy is a Senior Fellow with the&nbsp;Mises&nbsp;Institute. He is the author of numerous books: <em><a href=\"http:\/\/contrakrugmanbook.com\/\" target=\"_blank\" rel=\"noreferrer noopener\">Contra Krugman: Smashing the Errors of America&#8217;s Most Famous Keynesian<\/a>; <\/em><a href=\"https:\/\/mises.org\/library\/chaos-theory\"><em>Chaos Theory<\/em><\/a>; <a href=\"https:\/\/mises.org\/library\/lessons-young-economist\"><em>Lessons for the Young Economist<\/em><\/a>; <a href=\"https:\/\/www.amazon.com\/Choice-Cooperation-Enterprise-Human-Action-ebook\/dp\/B01228F4OE?tag=misesinsti-20\" target=\"_blank\" rel=\"noreferrer noopener\"><em>Choice: Cooperation, Enterprise, and Human Action<\/em><\/a>; <em>The Politically Incorrect Guide to Capitalism; Understanding Bitcoin<\/em> (with Silas Barta), among others. He is also host of <em><a href=\"http:\/\/mises.org\/BobMurphyShow\" target=\"_blank\" rel=\"noreferrer noopener\">The Bob Murphy Show<\/a><\/em>.<\/p>\n\n\n\n<p><a href=\"tel:1-334-321-2100\">4.321.2100<\/a> | FAX 334.321.2119<\/p>\n\n\n\n<p><a href=\"https:\/\/mises.org\/contact\">Email Us<\/a><\/p>\n\n\n\n<p>Tu ne cede malis,<br>sed contra audentior ito<\/p>\n\n\n\n<p><a href=\"https:\/\/mises.org\/about-mises\/subscribe\">GET NEWS AND ARTICLES IN YOUR INBOX<\/a><\/p>\n\n\n\n<h2 class=\"wp-block-heading\">Stay Connected<\/h2>\n\n\n\n<p><a href=\"https:\/\/facebook.com\/mises.institute\" rel=\"noreferrer noopener\" target=\"_blank\"><\/a><\/p>\n\n\n\n<p><a href=\"https:\/\/twitter.com\/mises\" rel=\"noreferrer noopener\" target=\"_blank\"><\/a><\/p>\n\n\n\n<p><a href=\"https:\/\/instagram.com\/misesinstitute\" rel=\"noreferrer noopener\" target=\"_blank\"><\/a><\/p>\n\n\n\n<p><a href=\"https:\/\/podcasts.apple.com\/us\/artist\/mises-institute\/1280664810\" rel=\"noreferrer noopener\" target=\"_blank\"><\/a><\/p>\n\n\n\n<p><a href=\"https:\/\/youtube.com\/user\/misesmedia\" rel=\"noreferrer noopener\" target=\"_blank\"><\/a><\/p>\n\n\n\n<p><a href=\"https:\/\/mises.org\/feed\/blog.rss\" rel=\"noreferrer noopener\" target=\"_blank\"><\/a><\/p>\n\n\n\n<p><strong>Website powered by Mises Institute donors<\/strong><\/p>\n\n\n\n\n\n<p>Mises Institute is a tax-exempt 501(c)(3) nonprofit organization. Contributions are tax-deductible to the full extent the law allows. Tax ID# 52-1263436<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Keynesians and Market Monetarists Didn&#8217;t See Inflation Coming https:\/\/mises.org\/wire\/keynesians-and-market-monetarists-didnt-see-inflation-coming MD: At Money Delusions we have come to know that neither the &#8220;Keynesian&#8217;s&#8221; nor the &#8220;Austrians&#8221; are even close to getting INFLATION right. How can you get INFLATION (or more generally economics) right when you don&#8217;t know what money is? Further, this, like government (i.e. the &hellip; <\/p>\n<p class=\"link-more\"><a href=\"https:\/\/moneydelusions.com\/wp\/2022\/06\/12\/keynesians-and-market-monetarists-didnt-see-inflation-coming\/\" class=\"more-link\">Continue reading<span class=\"screen-reader-text\"> &#8220;Keynesians and Market Monetarists Didn&#8217;t See Inflation Coming&#8221;<\/span><\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[],"class_list":["post-545","post","type-post","status-publish","format-standard","hentry","category-uncategorized"],"_links":{"self":[{"href":"https:\/\/moneydelusions.com\/wp\/wp-json\/wp\/v2\/posts\/545","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/moneydelusions.com\/wp\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/moneydelusions.com\/wp\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/moneydelusions.com\/wp\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/moneydelusions.com\/wp\/wp-json\/wp\/v2\/comments?post=545"}],"version-history":[{"count":1,"href":"https:\/\/moneydelusions.com\/wp\/wp-json\/wp\/v2\/posts\/545\/revisions"}],"predecessor-version":[{"id":546,"href":"https:\/\/moneydelusions.com\/wp\/wp-json\/wp\/v2\/posts\/545\/revisions\/546"}],"wp:attachment":[{"href":"https:\/\/moneydelusions.com\/wp\/wp-json\/wp\/v2\/media?parent=545"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/moneydelusions.com\/wp\/wp-json\/wp\/v2\/categories?post=545"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/moneydelusions.com\/wp\/wp-json\/wp\/v2\/tags?post=545"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}