canlı bahis Albet poker oyna Milanobet Rulet fick geschichten instagram begeni kasma sexo relatos

Why My Generation (Wrongly) Fears Inflation

June 20th, 2011 at 8:03 pm David Frum | 44 Comments |

| Print

If you were born in, say, 1930, what was your best way to get rich before you turned 50?

Answer: borrow as much money as you possibly could, then borrow some more, and use the money to buy hard assets with maximum leverage. It almost didn’t matter what the asset was — real estate, pork bellies, Old Masters, oil and gas contracts, antique postage stamps.

This was the road to wealth if you started in 1969. It worked almost as well if you started in 1972. Or 1975. Or 1978.

And yet despite abundant examples of the success to be gained by following this advice, the record shows: most people did not seize the opportunity. They did not seize it because they did not believe it. They had endured the Great Depression as children. The urgency of saving, the dread of debt, had been seared into their very souls. Even when the world capsized every childhood lesson, they could not adjust. They continued to act upon the wisdom of the past long after the wisdom had been rendered obsolete.

Something like this dead hand of inherited wisdom lies upon those of us who were young in the 1970s. We grew up haunted by inflation. I wrote a whole book about it. I still remember the five cent bag of potato chips dwindling away, to be replaced by the 10 cent bag, the 15 cent bag until … until there is no longer even a cent symbol on my computer keyboard!

When we see the Federal Reserve creating massive quantities of new money, we have to believe that the money creation portends a price surge just as surely as it did in 1977. M . V = P. Q was our QED. We may see the “Velocity” in that equation drop away in a massive deleveraging. But we cannot believe it is happening even when we see it.

And yet it is happening. The Fed keeps creating money, and yet no inflation appears. The lessons we need to learn are those our grandparents knew. Money does not create inflation if every new dollar is used to extinguish debt rather than buy goods and services.

Those straining their eyes as they scan the horizon for signs of non-existent inflation should consider the economic applications of the wisdom of C.S. Lewis:

We direct the fashionable outcry of each generation against those vices of which it is least in danger and fix its approval on the virtue nearest to that vice which we are trying to make endemic. The game is to have them running about with fire extinguishers whenever there is a flood, and all crowding to that side of the boat which is already nearly gunwale under

Recent Posts by David Frum



44 Comments so far ↓

  • mbilinsky

    Perhaps I can enhance the velocity of monetary usage in our economy with all the money I’ve won in bets from morons who assured me that “Zimbabwe-like hyper-inflation” was coming our way by the end of 2010. They must not have noticed that whole $3 trillion asset de-leveraging that occurred.

  • ProfNickD

    yet no inflation appears

    I don’t believe I’ve seen a claim exhibiting such monument ignorance since I read one movie critic predict that Krush Groove would outperform E.T. at the box office.

    http://www.indexmundi.com/commodities/?commodity=commodity-price-index&months=300

    Commodity prices have quintupled over the last 25 years. I have the sense that it will take paying $25 for a gallon of milk to convince some people of inflation.

    • mc419

      And the S&P has nearly doubled in two years, all the while seeing a corresponding 400% drop in the VIX. According to your logic, this would also be a sign of inflation? The truth is that you are confusing high commodity prices and price inflation – which incidently are not helpful for overall consumption and GDP – with the specific kind of monetary inflation that Frum is talking about. It is easy to confuse the two, and you don’t deserve to be insulted for such an error.

      • ottovbvs

        It is easy to confuse the two,

        Even for an economic expert like the “Prof?”

  • Raskolnik

    Well, Nick, since you won’t tell anyone what field your “doctorate” is in, I’m going to deduce it from the process of elimination. Judging by today’s offering we can safely rule out Economics. Although I’m increasingly suspicious that you never even finished your G.E.D., if for no other reason than your seeming inability to comprehend the meaning of a passage you have read. Not that I blame you or anything, just one more child left behind…

  • Raskolnik

    @Nick

    I don’t loathe myself. I don’t even loathe you. I loathe idiocy, and I aim to shine the bright light of wisdom, compassion, and genuine intelligence on our national discourse, where these qualities are so sorely lacking.

    Also, I’m ruling out Psychology from the list of your potential “doctorates.”

    • Elvis Elvisberg

      One can, I think, reasonably make a case that inflation is a possibility in the future.

      No one who knows anything about anything thinks that we’re facing inflation right now.

      QED. NickD doesn’t know anything about anything.

      • Chris Balsz

        Right. The price of commodities has nothing to do with inflation. Let them eat iPods.

        • Elvis Elvisberg

          The point is not that commodity price increases don’t count, but that they are highly erratic, and a poor indicator of inflation.

          If you had the ability to read a chart, you wouldn’t need someone to hold your hand to help you understand that fact.

  • ottovbvs

    Commodity prices have quintupled over the last 25 years.

    Alas the “Prof” has never heard of nominal and constant dollars, or the laws of supply and demand.

    • Smargalicious

      Nick, ignore the socialist trolls that infest this place. They gang up on people who don’t fit their worldview.

  • Raskolnik

    Smarg, I’ll bite: what exactly is “socialist” about noting that there is a difference between currency inflation and an increase in the price of commodities? Or: what is “socialist” about noting that those who fail to see or understand this difference simply do not understand literally the very first part of economics?

    Further: isn’t “socialism” the economic philosophy that the government should use its legislative power to control the price of (among other things) commodities? In that case, wouldn’t griping about a rise in the cost of commodities on a political forum amount to complaining that the government isn’t doing enough to control prices, i.e. that it is not “socialist” enough?

    I’m aware this will fall on deaf ears, as logical consistency has nothing to do with your or Nick’s point of view. But you could at least try to understand what the “socialism” boogey-monster you’re so afraid of actually is. Hint: he’s in the mirror.

    • ottovbvs

      Raskolnik: The “Prof” mentioned $25 dollar milk. I haven’t checked but I suspect that milk today is cheaper in real terms that it was in the 20′s. Mass production, and integrated transport and distribution systems have dramatically reduced the real price of foodstuffs and of course in the twenties food was also a larger part of domestic budgets. A gallon of milk today is around 4.25 and I seem to remember reading somewhere that in the late 20′s it was about 75cents. Another Republican myth crashes to the ground?

      • Chris Balsz

        Your test date predates the radial milk-pricing scheme set up during the Depression. Why bring up the cost of milk as a percentage of the average family food budget? Lactose-tolerance is an Indo-European mutation, and we’ve got many more Americans from populations that never developed it, and don’t buy milk whatever it costs.

        • ottovbvs

          Why bring up the cost of milk as a percentage of the average family food budget? Lactose-tolerance is an Indo-European mutation, and we’ve got many more Americans from populations that never developed it, and don’t buy milk whatever it costs.

          I know you have comprehension problems Balsz but a) I didn’t bring up the price of milk one of your fellow geniuses did and b) wtf has lactose tolerance got to do with the price of milk?

        • Chris Balsz

          If a greater percentage of the American population can’t digest milk, than previously, then fewer households will buy milk. That would result in a lower average consumption of milk, and a lower average household expenditure on milk as a percentage of household budget, than previously– regardless of the actual cost of milk.

  • SteveThompson

    The boomer generation’s new fear will be deflation rather than inflation. Over the next 15 years while baby boomers decide to sell their homes, the supply of for sale real estate will outstrip the demand, pushing prices to new lows as shown in this article:

    http://viableopposition.blogspot.com/2010/12/next-housing-bubble-is-this-perfect.html

    This will impact the retirement plans of many of baby boomers who are counting on the value stored in their homes to fund their retirement.

    • Chris Balsz

      Anybody who doesn’t think we face real inflation, should go ahead and get a reverse mortgage. Take 30 years of fixed payments from the bank and then hand over the house. Whip deflation now. If deflation is the problem, not inflation, that’s a no-lose investment.

  • Raskolnik

    Otto: I strongly suspect you’re right. A corollary would be the impact of extreme price controls (in the form of agro-business subsidies) on the price of commodities, specifically foodstuffs. It amuses me how often those who rail against “socialism” are often the strongest–or only–proponents of agricultural subsidies.

    Chris: that sounds interesting. This may be a good time to start thinking in terms of exchanging “toxic” assets for fixed revenue over a period of time.

    • ottovbvs

      (in the form of agro-business subsidies)

      It’s a factor but I suspect a small one. The real difference is how milk is produced and distributed. In the 20′s (hell in 50′s when I was a kid) milk was more or less a cottage industry although mass production was just starting now its almost universally processed food. I’ve been to dairies with 40,000 cows, ditto eggs, I’ve been to chicken farms with a million chickens. The real cost of food has dropped dramatically since the days when it was major part of the domestic budget thus creating more disposable income to spend on other goodies like ipods.

  • oldgal

    When I went to college I worked part time and paid for my last 2 years plus room and board. This is no longer possible, thanks to inflation…in the real world wages don’t keep up with inflation…in the mathematical world any answer is possible depending on the assumptions made.

    • Carney

      Inflation is a general weakening of the purchasing power of the dollar, and thus affects all sectors of the economy.

      College tuition have been rising faster than inflation, for various reasons unrelated to monetary policy.

      • dante

        You realize that your two sentences are diametrically opposed, right?

        Inflation in and of itself has zero affect on any sector of the economy. Income not keeping up with inflation, or costs rising higher than inflation are the real problems.

      • ottovbvs

        College tuition have been rising faster than inflation, for various reasons unrelated to monetary policy.

        Ditto healthcare and yet Ryan proposes to issue a voucher to enable seniors to buy health insurance pegged to the general rate of inflation which has averaged around 3% for decades while healthcare inflation has averaged around 9%. He claims it’s exactly the same as program received by govt employees while neglecting to mention that the govt program is tied to medical inflation not general inflation. Another one of his lies I’m afraid.

  • sweatyb

    in the real world wages don’t keep up with inflation

    that’s true, if by “in the real world” you mean, under Republican administrations.

    Though that has nothing to do with inflation (which we expect to increase as our economy grows), and everything to do with the diminished stature of workers.

  • ottovbvs

    Chris Balsz // Jun 21, 2011 at 10:48 am

    If a greater percentage of the American population can’t digest milk, than previously, then fewer households will buy milk. That would result in a lower average consumption of milk, and a lower average household expenditure on milk as a percentage of household budget, than previously– regardless of the actual cost of milk.

    Even if this was material to the price of milk which I very much doubt and of course you don’t have any data the population of the US in the 20′s was around 130 million, today it’s 310 million. Additionally given that US calorie intake has climbed since the 20′s and there are means of storing it more efficiently the odds are household consumption of milk is actually substantially higher than it was in the twenties despite any bizarre theories you may hold about a plague of the lactose intolerant invading the country. The significance of milk and foodstuffs generally being a higher proportion of domestic budgets is its relation to disposable income.

  • armstp

    The Power of Minus

    David Altig points out that given the recent decline in gasoline prices, we’re likely to see a negative headline inflation number by June. What will the inflationistas say?

    But then, we did have negative headline inflation, even on an annual basis, for much of 2009. Somehow that didn’t stop the inflationistas from panicking.

    Of course, all this is why we need something like core inflation, so as not to overreact to short-run fluctuations.

    http://macroblog.typepad.com/macroblog/2011/06/core-cuts-both-ways.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+typepad%2FRUQt+%28macroblog%29

    http://krugman.blogs.nytimes.com/2011/06/14/the-power-of-minus/

    “I want to contrast inflation to the cost of living. In casual language, we often interpret a rise in the cost of living as inflation. They are not the same thing. Cost-of-living increases are a result of increases in individual prices relative to other prices and especially relative to income. These relative price movements reflect supply and demand conditions and idiosyncratic influences in the various markets for goods and services…”

    “… The Fed, like every other central bank, is powerless to prevent fluctuations in the cost of living and increases of individual prices. We do not produce oil. Nor do we grow food or provide health care. We cannot prevent the next oil shock, or drought, or a strike somewhere—events that cause prices of certain goods to rise and change your cost of living.”

  • Frumplestiltskin

    As to housing deflation, that could be solved overnight if not for the xenophobic Republican party. I could sell every available house in Florida in no time in China if the wealthy Chinese who wanted to buy them could get tourist visas.

    I found this amusing: I still remember the five cent bag of potato chips dwindling away, to be replaced by the 10 cent bag, the 15 cent bag until … until there is no longer even a cent symbol on my computer keyboard!

    I suspect that there were no computer keyboards when potato chips were 15¢ a bag. And, oh lookie,
    ¢ ¢ ¢
    I hearby give David Frum permission to copy and paste this ¢ symbol everywhere.

  • DFL

    David Frum is hard of head with his no inflation whinny. Perhaps it is because he is an heir to a fortune. Although property values have devalued greatly the past five years(except, n oticeably, in David Frum’s Washington DC), energy and food prices have exploded since 2009. Americans are being whipsawed by the twin facts that 1) their homes have dropped drastically in value while 2) their energy and food prices have increased at the same time their salaries have stagnated or dropped. Tens of millions are financially stressed and their comfort of living has declined.

    • ottovbvs

      energy and food prices have exploded since 2009

      The tiniest bit of an exaggeration?

      Just a sidebar, while gold demonstrates how devalued our dollar has become

      Except that the price of gold isn’t an accurate reflection of the dollar’s purchasing power.

  • Diomedes

    This has already been beaten over the head somewhat, but just to drive the point home:

    Inflation, in its purest definition, is an increase in the money supply. i.e. the more liquid capital that exists in the marketplace. Deflation is the corrolary to that; a decrease in the money supply. (And available credit)

    The situation we are seeing nowadays is that price inflation exists, but is inconsistent. Which is why the Fed has their standard CPI, PPI numbers and then the ‘core’ number. (Which is somewhat dubious)

    But if you really break things down, we have been experiencing price inflation in the most important staples that are required for day-to-day life. Food prices have gone up. Energy prices are much higher. Medical expenditures are through the roof. And college tuition is skyrocketted. The only counterpoint is that certain consumer staples (electronics, appliances) have remained static or dropped in price. But as someone once stated in response to Ben Bernanke commenting on the price of the iPad: “I can’t eat an iPad”.

    So yes, we have had inflation. Combined with stagnant wages which exacerbates the problem. How will things play out? Hard to say. We still have lots of debt but we also have lots of liquidity. So my suspicion is that more volatile price measures (food, energy) will continue to be high while other price measures will be flat.

    Just a sidebar, while gold demonstrates how devalued our dollar has become, gold itself is also clearly a bubble. There was so much speculation driving that commodity that I am amazed we can have that many bubbles in a row (dot com, housing, gold) and people STILL can’t see a bubble for what it is.

  • DFL

    Gasoline prices at Inauguration Day 2009 were at about $ 1.85 a gallon. They have soared since. The lowest I can get it right now is at $ 3.52 a gallon.

    • ottovbvs

      The lowest I can get it right now is at $ 3.52 a gallon.

      But they were substantially lower than they were a couple of years before the inauguration! So energy prices Imploded? And oil is now around $93 a barrel versus $112 a couple of months ago. For better or worse wide fluctations in the price of gas are a feature of the US energy market.

  • Raskolnik

    DFL,

    That would be a great example of the laws of supply and demand at work. It has nothing to do with monetary policy as set by the Fed. Besides, the “real” price of gasoline is in the neighborhood of $4-5 a gallon; the reason we pay so little is the same reason the citizens of petro-dictatorships do (it keeps the mob quiet). We tax a gallon of gas at fractions of a cent, on top of heavy corporate subsidies to every leg of production and transportation, and that’s just domestically. Internationally the rates are more or less determined by the OPEC cabal.

  • Katie Fromage

    I understand that the statistics show inflation is low or non-existent.

    I just do not understand why every few months, when I review the numbers, that all of my utilities cost more, monthly groceries cost more, my insurance costs more, and so on.

  • Primrose

    Prices that are related to the cost of energy, like food have gone up. Others have not. In any event, it is a different dynamic than the 70′s which was Mr. Frum’s point. Not being an economist, I don’t know the term for an economy in which both deflation and inflation are present but I think we are headed for it.

    There is something to be said for permitting a small amount of inflation in order to recharge hiring because even if the price of that proverbial milk (soy or otherwise) is going up, it is better to spend more on it than not be capable of spending at all because one is out of work.

    As to the odd non-sequitor on milk and lactose intolerance. Do remember that the entire Indian sub-continent uses milk and milk products. Many cultures that do not drink it in their raw form, use it in cheese and yogurt, two ancient staples, and I have never heard of those of African descent having a particular intolerance for it either. That’s a large percentage of the world’s population.

  • ottovbvs

    Not being an economist, I don’t know the term for an economy in which both deflation and inflation are present but I think we are headed for it.

    Normality.

    As to the odd non-sequitor on milk and lactose intolerance.

    It was bs. Balsz is committed to the idea that the New Deal, inflation, et al, has ruined our great republic hence he finds it impossible to accept that many of the staples of life are in real terms cheaper than they were before the advent of the evil baron Franklin Delano so has to make stuff up.

    • Primrose

      I meant in a bad way Otto, with things like education, medical care, energy and energy related costs (food, natural fibers, etc) ratcheting up way past wages while other materials go deflationary,(including salaries) further slowing the economy. You can’t sell for the higher price but significant issues grow increasingly expensive and hard to afford.

  • Larz99

    Yes, we have inflation. It’s just not a big deal if you’re rich. Watch this video it is the best explanation of inflation I have seen.

    http://youtu.be/VL7V9BnJXO8

  • think4yourself

    That’s it. I’m never drinking milk again.

    • ottovbvs

      After you’ve visited some of these factory farms that feelling stays with you for a few days. The million hen chicken farm I visited had chickenshit piled up in aircraft hangers for onward sale to fertilizer plants. My sinuses have never been cleaner than after 10 minutes in one of these places.

  • Primrose

    I meant in a bad way. An asymmetric economy, where deflation rules the roost, depressing wages and profits, but certain key items are increasingly expensive and hard to afford. (Energy, Food and natural fibers because of energy, education and medical care).

    • ottovbvs

      You’re talking about weak demand for labor and declining real incomes arising both from long term trends and current shorter working weeks for many that have jobs.