My sweet inflatable you
One of the bigger ‘destabilizing’ forces in economy is when prices of everything goes up or down.
If the price of stuff goes up (inflates), then money doesn’t go as far and everyone hurts. If prices go down (deflates) then firms don’t make money and budgets hurt, which means everyone hurts. Working through the CORE-Econ’s free resources on the subject is helpful.
Michael Kinnucan had a nice post illustrating how this works generally:
For instance, if inflation were 100% and had always been and would always be 100%… People would offer and take loans at 105% nominal interest where they now take 5%, people would expect that their salaries should double every year… Changes in the rate of inflation have clear winners and losers (if inflation was 2% when you took out your loan and then suddenly goes to 100%, then you’re in luck because your debt is halving in value every year)…
Inflation affects how much people make, how much they owe, and how much things cost generally. It’s a big source of force in the mode of production.
So I decided to do another flaneur, this time through possible causes of inflation and deflation in the production crisis.
Inflation is cultural
Econospeak had a great post reflecting on social justice and the economy in crisis, linking to an amazing Walter Benjamin essay called “A Tour of German Inflation.” (I found a PDF here.)
Benjamin’s wry, cultural critique walks the reader through the corrosion of Weimar Germany in the lead up to fascism. His idea is that inflation, rather than a strictly monetary phenomenon (like Milton Friedman said), inflation rises and falls with the culture of its society. For Germany at that time inflation “was literally that cultural impasse, that ineffectual nostalgia for foregone “stabilities” that had benefited those pining for them.”
The whole essay is worth a read for gems like:
Noble indifference to the spheres of wealth and poverty has quite forsaken manufactured things. Each stamps its owner, leaving him only the choice of appearing a starveling or a racketeer. (59)
So it’s good to keep in mind that inflation/deflation aren’t just monetary. They’re cultural impasses. I wonder what our cultural impasse is right now in terms of inflation/deflation. I’m thinking of the right-wing protests to ‘liberate’ the economy.
But let’s take a look at the monetary aspect too.
Got the swaps
I’ve written before about the dollar swaps the Federal Reserve was doing internationally. I had a sense that it had something to do with inflation, and was almost sort of right.
Basically the demand and supply of dollars effects the prices of everything. Because banks all over the world do their financing in dollars, there’s a higher demand for dollars to get credit as investor pull back in the crisis.
So the Fed flooded those central banks with dollars. That, combined with upwards of $10 trillion of new spending at home, made money (M1) supply go up a whopping 20% year over year last week.
Such a big increase in dollar supply is bound to have some consequences. In the short term the threat is deflation, but in the long term its inflation. Again, I want to understand why but don’t.
In terms of this international source of inflation/deflation, I’m trying to understand this podcast with Brad Setser, one of the money technocrats that are running the show from behind the scenes.
(Interesting to note that China was not one of the countries the US would do swaps with, which may be a play to maintain hegemony as China might just be moving into the number one spot with the US so weak.)
International issues
So inflation/deflation can come from international debt issues. But it could also just come from central banks printing money simultaneously, combined with the shutdown in production.
Econoday Unplugged is becoming my favorite finance podcast. There’s no music, fancy takes, or guests from consulting firms pushing any particular lines. It’s just an economist from the US and an economist from the UK talking about what’s happening.
Econoday itself just provides an economic calendar that releases information, so the hosts don’t have incentives to push any particular line.
On yesterday’s episode, the hosts said:
Printing money printing money printing money…I don’t know, inflation should go up. If everyone does it at once, we don’t know what to say. Our toolkits are limited.
If you’re printing all that money without the goods and services to back it up in the first place, then inflation has to go higher because you’ve got too much money chasing too few goods.
They also said this situation of increase of money supply and low GDP could be “deeply deflationary as well” which would be “catastrophic.”
Direct financing
There’s also domestic sources of inflation and deflation. Central banks paying for government budgets is one of them.
Capitalists generally don’t like to ‘directly finance’ governments using central banks. There’s a ‘money taboo‘ because (for reasons I don’t understand) if central banks direct fund governments then we get problematic inflation/deflation. It also threatens central bank independence.
But quantitative easing–when the central bank makes big buys in the bond market–has been popular since Japan led the way in the 1990s and has become de facto policy in the US since 2008.
So one source of inflation/deflation could be the extent to which the government relies on the Fed to keep paying for stuff.
Fed ‘for itself’
So much relies on the Federal Reserve. I’ve been reading a marxist history of it to get a better sense of the institution which, apparently, is propping up the global capitalist system like Atlas.
Adam Tooze says the crisis has made the Fed go from being an institution ‘in itself’ to being an institution ‘for itself.’ This is a thoroughly badass marxist way to put what’s happening both domestically and internationally in the dollar swaps program.
Seems to me that a Fed ‘for itself’ will have consequences for inflation/deflation, but again, I’m not sure what they are or how the mechanics work. So I’m going to start a little reading group (so far we’ve got a few people interested):
1) CORE-Econ Units on Inflation
2) Anwar Shaikh (2016), Capitalism, pg. 62-65; 569-573; 677-719
Want to join the group? Email me back and I’ll add you!