James Surowiecki at The New Yorker delves into the mindset of inflation hawks. He notes that no matter what official readings say, and no matter how sluggish the economy is, the hawks are always worried about the exact same thing:
…there’s something peculiar about how powerful fears of inflation are. In the past 90 years, the U.S. has had only one sustained bout with high inflation—in the seventies. That track record should engender some faith that central bankers are going to be responsible, and that a healthy industrial economy isn’t prone to regular inflationary spirals. It hasn’t. Instead, we’re always about to relive 1974 all over again, which is why last year, as oil prices rose, we were bombarded with references to “stagflation.” In a way, there’s something profoundly puritanical, in the original sense of that word, about the inflation hawks: we are always on the verge of sinning, always about to succumb to our worst impulses. Even the rhetoric of inflation—the “debasement” of the currency—carries a moralistic tinge.
This isn’t to say that cheap money is always good—it has a nasty habit, for one thing, of starting asset bubbles. So, as Ben Bernanke, the Fed chairman, told Congress in July, once the economy starts growing again the Fed will have to start pulling money back out. But, in any balancing of the current threats to the economy, the danger of stagnation trumps the danger of inflation.
There is something to this, we think. Inflation hawks and their more apocalyptic cousins, the goldbugs, are always warning about trouble to come.
But it is odd that Surowiecki dismisses them so blithely with “the U.S. has had only one sustained bout with high inflation…,” and we think that probably has something to do with definitions. As inflation-hawk Rick Santelli (not to mention the entire school of Austrian economics) is fond of pointing out, inflation isn’t about an increase in general “core” prices. Expansion of the money supply is, definitionally, inflation.
An increase in general prices, as seen in the 70s, is but one possible outcome. Bubbles, which Surowiecki concedes, have a “nasty habbit” of inflation are also possible, because cash expansion leads to distortions. Yet another result of inflation is the preservation of an undesirable status quo — this past year, inflation as used to preserve the power of the financial industry, when it looked as though it could be toppled.
So yes, perhaps the hawks are wrong to obsess about the buying power of the dollar. But at its core, we can see that printing currency can create a multitude of problems, beyond just what we saw in the 70s.