The Legal Tender Blog: Inflation

Scarred by inflation (September 30, 2023)

The real value of my financial assets has been scarred by the excessive inflation. 

The astronomical 1923 German hyperinflation (October 2, 2023)

Why do we call it "astronomical"?

I printed a graph of recent US inflation, with 10% = 10cm (4 inch).

A printed graph of that inflation (85,000,000,000%) on this scale can circle the Earth twice, then reach the moon and back. 

2*40,000km +2*385,000km 

A politician who understands inflation! (October 1, 2023)

PM Sunak: "Inflation is a tax. It's the tax that impacts the poorest people the most."

Because the fraction of cash or checking accounts in their financial assets is the highest, often 100%. And they owe no debts to be eroded by inflation because nobody lends them. 

Keynes on Krugman (September 30, 2023)

"In the long run we are all transitory." 

The brilliance of Bidenomics (September 27, 2023)

"Hast thou killed, and also taken possession?"

- 1 Kings 21:19.

Excessive government spending (for political gains) -> inflation -> real wages decline -> strikes -> POTUS joins a strike (for political gains).

He's a genius. 

Legislators' fault (September 26, 2023)

No pity for US legislators seeing their wages eroded by inflation.

This is poetic justice.

Only they can narrow the Fed's legal mandate to "stable prices" only, and legally define it as 0% CPI inflation. 

Strikes are strikingly predictable (September 23, 2023)

As sure as night follows day, strikes follow inflation.

If you keep spending like there's no tomorrow,

there'll be many picket lines to join tomorrow. 

The future of cash (September 22, 2023)

In Istanbul (and the rest of Turkey): Waste paper. 

Spiraling out of logic (September 21, 2023)

Whence the money to pay these higher and spiraling prices and wages? 

The Federal Preserve System (September 18, 2023)

He should also change the name to Federal Preserve.

As in preserving the price level. 

German inflation irony (September 14, 2023)

100 years after German inflation shocked the world, a German is chosen to this year's Next 100 for misleading the world about inflation. 

Super core inflation (September 13, 2023)

If we take all data out of CPI data, there will be ZERO inflation! 

Geographical economics (August 28, 2023)

Stability? (August 26, 2023)

Powell: "Two percent is and will remain our inflation target." 

Mainstream economists cheer.

But wait. The Federal Reserve Act's "Monetary policy objectives" include "stable prices," not "stably increasing prices." 

Does the English language need a new dictionary? 

Protection against economic misfortune (August 25, 2023)

Keynesians now want a 3% inflation target to give the Fed more interest-rate flexibility to fight recessions. Is it worth the price?

What are our alternative protection mechanisms against these two evils - unemployment and inflation? 

For unemployment: Unemployment insurance. 

For inflation: Argentinians buy bricks. 

What's "hawkish" about the new monetary policy? (August 22, 2023)

US economy to Fed: Your interest-rate roller coaster is making me nauseous. 

Furman to Fed: Make the roller coaster even taller. 

What is your dollar? (August 22, 2023)

Is asymptotically shit. 

With inflation target > 0%. 

A higher inflation target? (August 22, 2023)

Formerly serious economists now suggest to give in to the inflation and reset the target to 3% instead of 2%. Because this will allow a higher nominal interest rate on average, and thus more room to go down in case of a recession before hitting the Zero Lower Bound. 

Turkey presents: The good life, far away from the Zero Lower Bound. 

Let us all increase the inflation target. Not. 

US and global inflation (August 17, 2023)

Argentina's inflation tragedy is that it was never as strategically important to the US as tiny Israel and Panama were. Panama is dollarized, while US envoys forced Israel in 1985 to kill its inflation. One of them was Stanley Fischer:

Argentina Presidential elections (August 14, 2023)

This is Argentina's best chance ever to cease being the recurrent inflation joke that it has been for decades. 

Federal Reserve FAQ (August 13, 2023)

#FedFAQParody:  I received a suspicious-looking bill that claims to be money from the Federal Reserve. Is it a scam? 

Answer: It is both money and a scam. It's named after a silver coin but every year we take away 2% of its value - and we tell you it's for your own good. ;)

Argentina and disinflation (August 12, 2023)

Argentina is so in love with its inflation, it fights disinflation measures conducted by benevolent foreigners.

Sticky prices, before the era of paper money (August 8, 2023)

Ferries crossing the Thames:

Lawyer. Lawyer (August 5, 2023)

For Milton Friedman's birthday, we asked the world's monetary leaders: 

When did you first hear "Inflation is always and everywhere a monetary phenomenon"? 

Powell: Jim Bullard said it in my 10th FOMC meeting. 

Lagarde: Cool phrase! Did Friedman say that? 

111 years to the birth of Milton Friedman (July 31, 2023)

Watch my academic great-grandfather (through Neil Wallace and Per Krusell) 3 times every morning before you access the media and read "revolutionary" analyses of the current inflation. False explanations have been around for centuries. 

How devoted was Milton Friedman to fighting inflation?

Totally devoted. In 1980 Friedman the Jew asked a former Nazi officer to tell us all how to beat inflation, because the latter did it better than anyone else.

The Inf-22 vaccine (July 19, 2023)

Forget the Covid-19 vaccine; we've been vaccinated against ever supporting inflation. 

Not too long ago some said "let's have 5-10% inflation to lower unemployment." 

Aside of the fact that this is impossible in the long run, the weakened form of significant inflation experienced in 2022 taught younger generations what it really means. They will never support inflation.

A silver lining (July 13, 2023)

There is one good thing in this current inflation, which by historical standards is mild. 

Young generations were taught: 

1. Inflation is a bitch. Even 5-10% is painful and confusing. 

2. Disinflation is politically difficult.

3. Inflation can be justified only in an emergency such as an existential war (with humans or a virus). 

Liar Liar (July 8, 2023)

Milton Friedman, 2006: Central banks are good at justifying their poor performance. 

Politicians, 2017-2019: We'll do this even better with lawyers in charge. 

And maybe that's why we have inflation. 

An underrated monetary theorist (June 28, 2023)

Mel Brooks, 97 years old today, gave us a hint how to predict inflation: 

The continental (June 22, 2023)

The continental dollar, born on this day 248 years ago, bought Americans' independence. 

It taught us that during a real emergency, inflation is sometimes a price worth paying. 

Is it also true for monetary policy during the war on Covid? Maybe, especially ex ante when nobody knew for how long economies would be shut down and whether vaccines would be developed. 

The MMT road to serfdom (June 20, 2023)

1. Flood an economy with money; claim it won't cause inflation. 

2. Watch profit-maximizing firms raise prices (because buyers can pay them). 

3. Before wages adjust, document higher profits. 

4. Blame greed for inflation. 

5. Control some prices. 

6. Repeat. 

The price-wage spiral is a true wonder (June 19, 2023)

Somehow everyone has the actual extra money at hand to pay all these repeatedly rising prices, costs and wages. 

I wonder how that happens. 

Inflation is such a puzzle (June 16, 2023)

Yeah, we need the brightest minds to work on this mysterious puzzle. 

3% inflation?! (June 5, 2023)

That's evil. 4% is better. 5% is really compassionate. 

And after the next crisis let's adjust the target to 10%. 

And now we have shipflation (June 4, 2023)

Maybe the Fed should send all its economists to dig a deeper Panama Canal. 

The folly of price controls (June 3, 2023)

I'm sure there would be no effect whatsoever on incentives of investors now that they know the government can cap/tax their prices/profits at will. 

I'm also sure that not a single landlord requested and received extra rent in the black market. 

MEASURED inflation is low! Yay! 

A useful acronym (May 29, 2023)

Don't say "I Am An Imp."

Say "II AA EAMP" 

= 

Inflation Is 

Always And 

Everywhere A Monetary Phenomenon. 

Happy(?) 25th birthday, ECB (May 25 - June 1, 2023)

You admit: "The ECB’s primary objective is to maintain price stability." 

But your money lost 40% of its value during this period.

How dare you say that you "worked to safeguard the value of the euro"?

What/why exactly are you celebrating? 

A 2% inflation target is unjustified - lower it (May 22, 2023)

Economists in 1990s: Need 2% inflation. Because with a 3% natural real interest rate we'll get 5% nominal interest rate, which gives room to reduce nominal rate in a recession from 5% to 0%. 

2023: Ha ha ha! The Fed created a NEGATIVE real interest rate most of the time since 2000!

Lucas for dummies (May 17-21, 2023)

Macroeconomists noted the passing of Nobelist Robert Lucas. He had a major role in forming today's mainstream view in monetary economics. The best accessible expression of that is in his 1995 Nobel Lecture. Below is a popularized version I made of his main arguments and of the reason he was so admired.

1. Sorry MMT: Printing money does not create economic growth; it only creates inflation, proportionally.

On an average of 110 countries, in the long run (1960-1990): 

Updated diagrams from Jason Furman:

In the short run inflationary money printing does seem to reduce unemployment. 

But:

- The relation breaks down in the long run. 

- Artificially keeping low unemployment (say 5%) requires not constant inflation but INCREASING inflation. 

In physics, the holy grail is a "theory of everything" that would reconcile the very different physical theories of quantum mechanics with the physics of everything else. Lucas' 1972 mathematical model provided the first "monetary theory of everything" (my phrase): He explained the observed effect of money on output in BOTH the short run (positive) and long run (0). 

The "science" of monetary policy?! (May 2, 2023)

In December 1999, Richard Clarida was one of the coauthors of a paper titled in a millennarian spirit: "The Science of Monetary Policy." The paper was published in a journal of the American Economic Association. Such a funny title in retrospect, after all the mess created by monetary policy since 2000. 

I'm glad to see that, according to Clarida, monetary policy is now only a "framework" rather than a "science."

The ECB has the wrong disasters on its mind (April 24, 2023)

Can the ECB advise us how to insure against inflation? 

"a wonderful machine" (April 22, 2023)

On this day in 1779, Ambassador Benjamin Franklin wrote from France about the inflationary finance of the Revolutionary War: Costs, benefits, inflation tax, and how Europeans didn't get it.

It is the best 2-pages piece on inflation ever written.

Exactly 50 years earlier he published his first pamphlet on paper money.

ECB and climate again (April 21, 2023)

The only concern the ECB should have about the stratosphere is to prevent the price level from getting there. 

IMF-Argentina talks are proceeding as planned (April 16, 2023)

Inflation is always and everywhere a monetary phenomenon (April 12, 2203)

Remember this and you'll never be confused about inflation.

Inflation is caused by deficits (April 7, 2023)

Defense spending is so big that the US government's deficit looks like a melting M16. 

The European Central Bank: Inflation is not our fault (March 31, 2023)

Somebody give the ECB a mirror: 

0% inflation for financial stability (March 27, 2023)

Here is another argument for 0% inflation.

In brief:

- Inflation is positive to give more room to monetary policy.

- Volatile monetary policy has caused bubbles, inflation and financial troubles since 2001. 

- So less room for monetary policy would be an improvement.

In detail: 

1. The main argument for the official theft of our money's value at the rate of 2% a year is that it pushes the average nominal interest rate up. 

Why is that good? Because if inflation is regularly 2% then expected inflation will also be 2%. 

The nominal interest rate is the real interest rate (say 3%) + expected inflation, which will then normally be 5%.

Then in a recession the central bank has lots of room (5 percentage points) to decrease the nominal interest rate until it hits the lower bound of 0%. 

2. But look at monetary policy in the US since 2001. Negative expected real interest rate after 9/11 fed the housing bubble, which blew up as the nominal rate increased back.  

That caused the Global Financial Crisis of 2008, addressed yet again by a negative real interest rate - that fed the crypto bubble. 

Covid policy of a negative real interest rate created inflation while again the later increased nominal interest rate causes financial trouble.

Is the monetary cure worse than the diseases? 

3. If less active monetary policy will bring less crises, then restricting policy is good. 

A 0% inflation target will bring the average nominal interest rate to 2% and will restrict the central bank's ability to create that interest rate volatility that has caused so much chaos. 

The expected real interest rate (March 23, 2023)

The expected real interest rate is a key variable in economic decisions.

It appears in infinitely many theoretical models in microeconomics and macroeconomics.

Its positive sign is taken for granted in theory. But it's been mostly negative since 2000!

And it is not mentioned enough in discussions on monetary policy.

So the nominal rate minus expected inflation used to be positive. 

The Fed pushed it below 0 in crises, and the results were terrible: 

1. In the 2000s: Inflated the prices of housing.

2. In the 2010s: Inflated the prices of crypto.

3. In the 2020s: Inflated the prices of all goods 

Argentina - serving monetary science for decades (March 16, 2023)

"Hi Argentina, long time no see!"

- Triple-digit inflation.

Even with the corona virus infecting the economy and the political virus infecting official statistics, inflation during the past decade has been - guess what - a monetary phenomenon. 

Fight inflation or a banking crisis? (March 13, 2023)

What's the main monetary lesson from the collapse of Silicon Valley Bank?

Wrong: See what inflation-fighting does? It can cause a financial crisis. So give up and adjust the inflation target to 4%.

Right: Inflation must be fought ASAP. The longer the delay, the bigger the pain. Don't keep taxing everyone without Congressional authorization because of one negligible bank.

P.S. Don't print so much money! 

What the US government thinks about inflation (February 25, 2022)

In the middle of 2021, US inflation hit 5%, the highest in 30 years, after a 25% increase in M2 in 2020.

The White House's Council of economic Advisers then published an analysis of all post-war inflationary episodes - without using the word "money" even once. The Federal Reserve is mentioned only once, regarding Volcker's disinflation.

So what creates inflation? Only supply shocks and, repeatedly, a mysterious "pent-up demand." 

Damn you, evil "pent-up," inflicting inflation on the US when you feel like it!

What a travesty. 

Great minds think alike (February 19, 2023)

"Dear humanity,

Inflation secretly destroys societies.

Politicians, beware."

Signed:

Nicolaus Copernicus, 1525.

John Maynard Keynes, 1919.

Milton Friedman, 1980.

* Happy 550th birthday to Copernicus. His writings were translated into English only in 1985, so Keynes and Friedman did not copy from him.

The Larry Summers of 1691 (February 12, 2023)

A Harvard professor, closely connected to Harvard's presidency and the country's Treasury, became the key public intellectual during a monetary crisis. Sounds familiar?

Meet Cotton Mather, born on this day 360 years ago, who promoted Massachusetts' novel paper money. Mather convinced a skeptical population to accept paper money which was only legal tender for taxes. See his open letter to the colony's Treasurer here. 

His father was then Harvard's president, his father-in-law the colony's Treasurer. Summers himself was Haravrd's president and Secretary of Treasury.

- "History doesn't repeat itself but it often rhymes" (Mark Twain).

Nixon's good intentions (January 27, 2022)

2.5 years before he took most of the world off gold 

Inflation misunderstood - 1948

In 1948 politicians didn't know / admit that inflation was always and everywhere a monetary phenomenon.

Some still don't. 

Greedflation nonsense (January 22, 2023)

Robert Reich, former Secretary of Labor, complains that corporate greed increased egg prices recently.

Damn those corporations, for their greed. 

Because humans were all perfect, non-greedy and altruistic before that atrocious legal device was concocted in Europe. 

100 years to the Ruhr invasion (January 11, 2023)

100 years ago on this day, France and Belgium invaded Germany because of World War I reparations. 

It is widely considered a major cause for German inflation jumping from a "mere" 4000% in 1922 to 85,000,000,000% in 1923. The beginning of that process is shown below. Soon it became far worse, peaking in November.

The aggrieved France and Belgium hurting Germany ended up hurting them in the long run. I'm reminded of the 1980s Israeli phrase "Don't be just, be smart," invented for aggrieved drivers. 

Friedman's Role of Monetary Policy (December 29, 2022)

55 years ago on this day: Milton Friedman's Presidential address at the annual meeting of the American Economic Association, in Washington, DC, put the Fed in its place.

It was soon turned into one of the most influential papers ever in monetary economics. 

** Oddly, this tweet received 67,000 views, 385 likes, 85 retweets. Perhaps equal to all my previous 1000 tweets combined. Not sure why.

The honesty of high inflation (December 28, 2022)

Hypothesis 1: Countries with high inflation are more likely to display their dumbest-looking local animals on their paper money.

Hypothesis 2: It is the central banks' method of alluding to the government's intelligence.

Secret inflationary finance of Israel's War of Independence (November 29, 2022)

On this day 75 years ago the United Nations voted to create Jewish and Arab states. 

Upon declaring independence in May 1948, Israel was invaded by its four neighbors, as well as Saudi Arabia and Iraq. 

The immediate defensive effort was funded by paper bonds that were marketed thus (translation from the picture below):

The National Loan

5,000,000 pounds

Sign - and you hit the enemy! 

This loan was fully subscribed by the end of July 1948. The government openly issued treasury bills to banks in November 1948, and by the end of 1948 the public knew of an additional 5,000,000 pounds raised this way.

The public did not know that from June to November the government secretly issued treasury bills and sold them to the Anglo-Palestine Bank, raising 18,000,000 pounds. This amount single-handedly maintained the war effort from July to November. This is work in progress. A preliminary lecture (in Hebrew) about it is on my Youtube channel. 

Inflation target: 0, 2, or 4 percent? (November 11, 2022)

Finally, someone agrees that the inflation target of 2% should change by 2 percentage points.

But The Economist got the sign wrong. It should be 0, not 4. 

Governments should stop stealing our wealth, feeding the cryptomania, and raising gold bugs. 

My childhood inflation trauma (October 19, 2022)

I found the headline that was my first step to becoming a monetary economist. 

It announced the monthly Israeli inflation in July 1985: 27.5% and the headline said it was an all-time record.

I remember thinking: "This 'inflation' thing seems to be important. But I don't understand it. That's wrong." 

I wasn't in high school yet.

The numismatics of hyperinflation (October 15, 2022) 

Turkish inflation (September 22, 2022)

Dear prices, we are ready for

take-off!

[see bottom of image below]

Inflation of ransoms (September 13, 2022)

Dirty Harry (1971) is no comedy. But the first ransom demand in that movie is a bit funny in retrospect: only $100,000!

Probably all movie ransoms since the 1980s have been in millions of dollars.

So what happened? Who is to blame for the large increase in movie ransoms since 1971? Here are some options:

A. OPEC

B. Labor unions

C. The Federal Reserve

D. Criminals' rising greed

Answer: C.

It was the same year in which Federal Reserve notes were released from their gold anchor. Their quantity (and therefore value) became the Fed's discretion.

Here is Clint Eastwood as Inspector Harry Callahan looking at a pathetic $100,000 ransom note without laughing:

My dad and my research (August 28, 2022)

How my dad set my research agenda for many years.

I wanted to ask a real person why state currency is accepted when it's not backed by gold and even when it is beset by high inflation.

Me: Why did you accept Israeli currency during 450% inflation?

Dad: Because with US dollars we couldn't buy groceries...

Me thinking: Hmm, but that's endogenous - the store would have accepted dollars if everyone else had.

Dad: ... and with US dollars we couldn't pay taxes.

Me thinking: Aha! That's exogenous.

Later thinking: The government can thus induce people to accept state currency from each other, without forcing it (and supervising) in all transactions, without promising to back it by gold, and even when the government itself inflicts high inflation.

Publications inspired by this: An article on the mathematical theory, an article on the history, and a book on the history.

Happy 80th birthday to my dad.

The highest denomination during the 1980s Israeli inflation is presented below.

P.S. A late colleague and friend of mine said once: you could tell where there was a currency problem 25 years ago by checking the nationalities of people currently attending monetary conferences. He was Leonardo Auernheimer, an Argentinian.

End-of-gold anniversary (August 15, 2022)

Nixon nixed gold, on this day in 1971. Since that day, our currency is no longer backed by gold, or convertible on demand into gold. See here at 09:42

Why did it happen? And should gold return to anchor the global monetary system?

From 1944, according to the Bretton Woods Agreement, only the US maintained a formal relation to gold, promising to convert upon demand any paper dollar presented by a foreign central bank into a fixed amount of gold. This US discipline, with fixed exchange rates, was supposed to keep the entire world (minus communist countries) disciplined by the quantity of gold and thus free of the threat of inflation.

So why did Nixon do it?

It had happened countless times before that governments at war put gold aside and printed as much paper money as needed in order to pay soldiers and suppliers. In the decade preceding 1971 there was no major war, but there were three expensive wars, loosely defined: The Vietnam War, The War on Poverty (President Johnson’s extension of the welfare state), and the war on gravity (the space program). Too many dollars were printed, and the amount of gold backing them was clearly insufficient. Speculators and foreign central banks threatened to converge on the insufficient gold stored at Fort Knox, until Nixon changed the rules (“temporarily” — yeah, right), and threw gold into the dustbin of monetary history.

From a wider perspective, the Bretton Woods Agreement was bound to fail, and in fact it has sown the seeds of its own destruction. The agreement promoted US and worldwide economic growth so much (the fastest growth in history) that the latter outpaced gold discoveries. In such a situation, there is no good option:

1. Print as much money as needed for growth to continue and hope that nobody will call your bluff for claiming you have enough gold to cover it.

2. Print as much money as needed but revise the promise of gold convertibility accordingly. Instead of, say, $35 paper dollars per ounce, revise the promise to $50  paper dollars per ounce. But then the promise, easily revised at will, loses all credibility and thus its value.

3. Limit money printing to the increase in gold — slower than the economy’s growth rate. That would mean not enough currency going around, which would bring deflation. Deflation could have catastrophic consequences for the economy, as in the Great Depression.

The US chose Option 1, and those three wars, and in 1971 the game was over.

How about going back to gold? Unlikely, for the reason stated above. It would again be a failure waiting to happen.

Relative prices go nuts in inflation (August 11-13, 2022)

The New York Times story on Argentina's current inflation reminds of 1980s Israel (e.g., illegal dollarization, many distortions). A similar story from early 1984 Israel brings back the forgotten term "the correct economy" used by the government. It's so inspiring, self-congratulating, and eventually catastrophic. Like "modern monetary theory." In that story a shopkeeper supposedly said “nobody knows how much anything is worth.” In 200% inflation, each price had its own path up to the stratosphere.

This rise in dispersion of relative prices severely distorted many economic decisions. One of the most influential works on this phenomenon was written by a University of Rochester graduate student who lived with inflation in 3 countries. Today Professor Emeritus Zvi Hercowitz is member of Israel's Monetary Committee, tasked with keeping inflation low.

Quantity Theory ignored (August 5, 2022)

Turkish government on inflation: “Prices are chosen by God.”

Milton Friedman: