How to Completely Waste Your Life

Step 1) Get an advanced degree in economics
Step 2) Get a job with a central bank and become a career bureaucrat
Step 3) Spend you time writing apologetic articles for central bank inflation


Here we have a brief publication by an Assistant Vice President for the St. Louis FED. The topic: the odd disparity between the way inflation is viewed by the public and by professional bureaucrats. I mean, economists. Like many such academic publications, it is written in $40 vocabulary and the author never really states a firm opinion or elucidates much of anything. But there's good stuff in here if you know where to look and how to read these kinds of papers.


Shortly after the opening we learn that--

[S]tandard economic theory predicts that the costs of inflation are small. The argument is that nominal income can adjust for anticipated inflation, leaving people almost as well off as they would have been in the absence of inflation except for the opportunity cost of holding non-interest bearing cash. Hence, economists commonly measure the cost of inflation as the area under the money demand function, which reflects the deadweight loss of holding cash instead of interest-bearing assets. By this measure, inflation has surprisingly small costs: about 0.1 to 0.8 percent of consumption when the inflation rate is 10 percent per year.

Translation: Standard economic theory is for certifiable morons. There are actually people out there who call themselves economists who believe that the only effect of an increase of the money supply is an overall and proportional increase in the price of goods. These so-called economists also assume that all economic actors are able to take this inflation into account with such unerring precision that interest rates and economic activities will precisely reflect the rate of inflation, even though inflation is produced by the arbitrary and unpredictable actions of the FED, no economic topic is more controversial at the moment than the inflation/deflation debate, and the FED itself, a veritable bottomless well of supposedly expert economists with absolutely nothing else to occupy their time but study this very topic, has proven consistently unable to prevent or even predict one monetary crisis after another. At this point, only a person who wouldn't mind being declared clinically brain-dead would give a moment's consideration to the efficient market hypothesis, yet we are asked to take it as a given.

On the basis of these wildly outlandish assumptions, economists believe that interest bearing assets and accounts like savings accounts and bonds will compensate their holders more or less perfectly for the loss of purchasing power due to inflation. They therefore conclude that the only ‘cost’ of inflation is the cost of holding non-interest bearing cash, and that this is relatively small, so inflation is really not a big deal and the unwashed masses should be okay with it. Never mind that there would be absolutely no reason for anyone to want to systematically increase the money supply if this were the case, least of all the banking system itself, and that the newly printed money always enters the money supply as credit. Such facts do not, and more importantly cannot, indicate that increases in the money supply have a distortive effect on the economy because that is not what real economists want to believe. Real economists, like the ones that work for central banks, can’t be bothered with these inconvenient trifles as they tend to threaten their job security and interfere with publishing incomprehensible papers that nobody reads.

With this introduction to the topic of inflation, we move on to the crux of the paper, namely, that if all the economist-bureaucrats agree that this is the case and that the heathen shouldn't concern themselves with the pervasive mismanagement and destruction of their economies and money systems, why exactly is it that there is such a disparity between the popular and professional views on inflation? The author suggests two plausible hypotheses:

One is that standard economic measures may have failed to fully capture the costs of inflation. Another is that people are myopic and fail to see the connections between the costs and the benefits of inflation.

These are, indeed, hypotheses, though the use of the word plausible might be a stretch. Might I take the liberty of suggesting a few others:

--Call me crazy, but some people might instinctively view the act of creating money out of thin air to be wrong.

--Most people possess a level of common sense that exceeds that of tenured bureaucrats with advanced degrees, and can plainly see that they have been getting hosed. They are skeptical of papers by halfwit intellectuals that tell them that according to theory, everything is fine even as the economy is a flaming ruins.

--The masses are possessed by antiquated notions like equal protection under the law, and dislike the idea that they would be thrown in jail for doing things that are perfectly legal for the banking system, like printing money and keeping their accounts according to fractional reserve and FASB rules. To such vulgar sorts, it further seems unfair that they are prevented by legal tender laws from escaping the destruction of their livelihoods at the hands of national fiat currency systems that they know are rigged against them. Sophisticated people, like politicians and bureaucrats, are not taken in by such thinking and recognize that they are better than the hoi polloi and should have the authority to do these kinds of things for the good of society.

--Broadly speaking, people resent being treated like cattle.

The author then cites a paper in support of his first hypothesis which makes a slightly different case for a higher inflationary burden for lower income households. A quick check of the paper's references confirms that, yes, the author is in fact speaking about himself in the third-person.

The second hypothesis is explored with an argument that ordinary people who haven't managed to land a job with a central bank and don't have advanced degrees in economics are, in reality, too stupid to grasp the situation accurately. If they were more enlightened, like their overseers in their ivory towers, they would understand that according to accepted economic theories, inflated prices also come with inflated incomes and government handouts, so that the aggregate result is for the effects to cancel one another out, and since humans are best treated as aggregates, that should be just fine with everyone. According to this line of reasoning, benighted people who do not accept or understand this are actually ingrates who fail to appreciate the benevolence of bureaucrats who use accounting sleight of hand to accomplish nothing and live at their expense.

In making his argument, he notes that “the government never hands out money to people on the street when it increases the money supply.” If he had continued along this line of reasoning, he might have encountered arguments that would have revealed the fallacy of neutral money, and possibly might have gone on to discover for himself the basis for inflationary distortion of markets and the monetary causes of the economically destructive business cycle. However, undaunted by the possibility of an original and insightful line of inquiry, he remains true to bureaucratic form and refuses to be sidetracked by any line of thought that might cause him to question the well-established though clearly and utterly false economic nostrums that are used to justify his further employment. This is a strategically sound decision on his part, as doing so might have called into question the legitimacy of the tireless, fraudulent, and invasive meddling of his employing agency and the wisdom of publishing papers that insult the intelligence of the general public. He finishes the paper by suggesting that there might be a degree of similarity in the stupidity of anti-inflationary sentiments and the equally insipid resentment of income taxes.

Conclusion

Thoughtful consideration of the following questions should help to illustrate the significance of this paper. The four personalities named below can be matched to the following descriptions. See if you can identify the individual with his accomplishments:

1) Benjamin Strong
2) Michael Jackson
3) Narayana J. Kocherlakota
4) Roy A. Young

a) current president of the Minneapolis Regional Federal Reserve Bank
b) chairman of the Federal Reserve during the market crash of 1929
c) crotch grabbing musician accused of pedophilia
d) the first governor of the Federal Reserve Bank of New York who oversaw the inflationary expansion of the roaring '20's.

If you were able to get the correct answer for question 2) but were unsure of the others, you have successfully demonstrated the central point of this paper, namely, that despite their supposed status and influence in society, even highly successful Ph.D. wielding bureaucrats will in all likelihood prove to have lived far less significant lives than a gender confused pop star with a sub-normal IQ.