Larry Kudlow’s Worrying About Inflation While Rome Burns
David Frum’s essay on Rush Limbaugh winds up making the excellent point that there’s an issue these days in which the conservative movement is hard-wired to offer solutions to the problems of the 1970s when, whatever you think about the solutions they offered at that time, today’s problems are totally different. Exhibit A for that trend could be this Larry Kudlow post at the Corner warning that current policy is going to produce inflation. This is like worrying that Barack Obama’s defense budget is showing weakness and likely to leave us open to aggression from Martians.
We have actual statistics about inflation, which show the core CPI increasing by just 0.2 percent in February. Inflation is very low. Very recently there was a very real threat of deflation, and expansionary policy has been aimed at preventing that from happening. Meanwhile, we have very good policy tools at our disposal for curbing inflation should it start to reach problematic levels.
At the moment, however, not only is deflation a bigger worry than inflation, but a modest (albeit non-accelerating) amount of inflation would probably be beneficial as it would help firms and households get out from under the load of debts they’re currently dealing with.
42 Responses to “Larry Kudlow’s Worrying About Inflation While Rome Burns”
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March 19th, 2009 at 12:34 pm
There’s good reason to think inflation is higher than it seems. The CPI isn’t necessarily the most reliable index, when all the money we’re printing is currently tied up in the financial sector. How is it possible, for example, that corporate debt is trading at 7 percent interests when treasuries are at 0 interest? The corporate debt is acting as though there, in fact, is high inflation. But since all the inflation is in finance, it’s not showing up in the normal consumer market.
The Fed just said they’ll print an additional TRILLION worth of cash, on top of the trillions outlayed already. So I think we can expect inflation is going to become a serious problem. That’s not necessarily to say we shouldn’t be spending now. But we shouldn’t fool ourselves about where this is heading.
March 19th, 2009 at 12:36 pm
Inflation could well be a real concern over the long term, even though it manifestly is not now, or for the foreseeable future.
It’s a tricky task Obama has before him, even if the stimulus and bailout efforts work. He’s going to have to turn on a dime at a certain point, throttling back fiscally and monetarily to avoid inflation and get the deficit under control. He’s going to have to pick exactly the right moment, to avoid choking off the recovery while also not allowing the loose money to go on too long. And even if he picks exactly the right moment, he’s going to have to close the spigots fast enough to avoid flooding the economy once it’s already “soaked,” but not so fast that the reversal itself is disruptive.
I feel like we’ve got the best possible guy in place to make such a maneuver work, but it’s a tall order for anyone. Good luck, Mr. President.
March 19th, 2009 at 12:36 pm
Kudlow is talking about wage-based inflation, probably. He’s that clueless.
We have been suffering deflation (despite what the papers say) as a result of all the deleveraging, and we will have it until all the losses are made transparent and realized.
We are in significant danger of a crackup hyperinflation (which is really not the same thing as inflation)some times down the road.
Last thing, Matt’s last paragraph is wrong. Modest inflation would not be beneficial. This is not purely a psychological recession, but one borne of a complete loss in confidence of the ability to save and invest.
That’s another way of saying that the economy’s downturn is reflective of the political economy’s inoperability. Way too many renter-class people jiggering the system for too many very stupid reasons–all the while preventing people from being able to invest in low margin but real productivity activities, from science education for themeselves, to green technologies and infrastructure.
We are in the decline phase of Empire, I think–part of my current doom and gloom.
March 19th, 2009 at 12:38 pm
Given the incredible, gigantic increase in money supply, the risk of severe inflation is far, FAR greater than the threat of deflation.
I was under the impression that the erosion in the value of financial sector assets — and the accompanying decrease in lending — basically is analogous to a whole lot of money disappearing. In other words, isn’t the Fed’s recent effort at money creation largely replacing destroyed money? So, shouldn’t there be little or no net increase in the monetary base from where it was, say, a year ago? If you combine this fact with the large underutilized productive capacity of the economy, you shouldn’t be getting much inflation. Although, as Matt points out, a bit more inflation that we’re currently experiencing would be welcome.
March 19th, 2009 at 12:40 pm
Al knows where the inflation is. It’s in the area of Tikrit, and Baghdad, east, west, south, and north somewhat.
March 19th, 2009 at 12:40 pm
a modest (albeit non-accelerating) amount of inflation would probably be beneficial as it would help firms and households get out from under the load of debts they’re currently dealing with.
Doesn’t inflation (again, at modest levels) also help the economy by punishing you for just sitting on your money? I mean, commentators have pointed out the high savings rate is getting in the way of economic recovery because people aren’t spending what they have. But if inflation is zero percent, then it makes sense for my money to sit in a savings account with even just 1 percent interest. Or if I don’t trust the bank – who could blame me these days – to keep my money in a safe in my house. But an inflation rate of something like 4 percent creates a subtle “use it or lost it” effect, and using money is stimulus.
March 19th, 2009 at 12:40 pm
Looks like cokehead Kudlow is back on the nose candy.
March 19th, 2009 at 12:41 pm
We have been suffering deflation (despite what the papers say) as a result of all the deleveraging…
Right. Bonds, stocks, houses, rents, furniture, oil, wages, restaurant meals, hotel rooms, air fares, business services, electronics: lots of things are cheaper than they were just a short time ago. No deflation my ass.
March 19th, 2009 at 12:42 pm
Maybe our society should be a little more superficial and judge people more by appearances. Kudlow *looks* like a fool aspiring to oracle status.
March 19th, 2009 at 12:42 pm
Please join me in supporting the passage of a law requiring all blog posts that mention Larry Kudlow to include this link.
It’s for the children. The partisan, bubble-headed children. Won’t you please give?
March 19th, 2009 at 12:43 pm
Kudlow is a moron, I haven’t been worrying about inflation until now either, and I think the biggest issue is getting the economy moving now. But it is actually pretty reasonable to worry that there really could be problems in the middle term with inflation after this bout of quantative easing because it wouldn’t be that simple for the Fed to manage the money supply when the economy picks up.
March 19th, 2009 at 12:55 pm
DTM– 7 percent is an awful lot of risk premium. I mean that’s where GE debt is right now. Is it really that risky that GE will not pay off its debt? Or is it more likely that everyone knows there’s a giant lake of cash in the financial sector, and the dollar’s going to be worth a lot less in the near future?
Isn’t anyone else a little disturbed, rather than enthused, as Matt is, by the power the Fed has? Without having to ask anyone, they can just print trillions upon trillions of dollars, which necessarily will devalue the currency. Does that sound like a power that might be abused?
March 19th, 2009 at 12:57 pm
There seems to be a lot of confusion here that falling prices equals deflation. Falling prices are a symptom of deflation, but falling prices could also be caused by other factors. The CPI is a poor measure of inflation, and has been for some time. The real inflation rate is higher. It will get higher if foreign governments start dumping the dollar.
Meanwhile Matt says “amount of inflation would probably be beneficial as it would help firms and households get out from under the load of debts they’re currently dealing with.”
This is just very stupid. Yes, it would help debtors, at the expense of creditors, who will be bankrupted on the margin. Remember, the people we are trying to get to loan us money again? We need a stable dollar more than anything. Go back to school Matt.
March 19th, 2009 at 12:57 pm
Inflation is something that needs to be worried about down the road, considering how much money the feds have been spending. I agree with most of the posters that this should not be a primary concern right now…but we need to recognize that this is a gravy train that could (and probably will) run off of the rails unless the Fed raises interest rates significantly at some point in the future.
There’s no such thing as a free lunch boys.
March 19th, 2009 at 12:57 pm
Anyone catch Kudlow lighting a dollar bill on fire live on CNBC today to make his point?
$100 to the Treasury please
March 19th, 2009 at 12:58 pm
Kudlow worried about inflation? Not! He’s hoping for it. So investors will rush to buy those equities he is always touting.
March 19th, 2009 at 1:01 pm
I lived through the inflation of the 70’s, and I’m retired on a fixed pension, so I think I’m more sensitive to inflation than the average person, and I don’t think inflation is much to worry about for the time being. Get back to me in a couple of years and I’ll be able to give an update.
Having said that, it is easy for inflation to creep up on you, so there will be a balancing act to keep it down to the 2-3% level as the economy improves.
March 19th, 2009 at 1:03 pm
DTM– 7 percent is an awful lot of risk premium.
To the risk premium, add the fact that people are scared enough to divert into savings accounts not just the money they might otherwise be spending on consumer goods (which has been widely discussed), but money they might otherwise be spending to buy long-term investments. People are pumping up their savings accounts because they’re afraid they might lose their jobs and have to live off of them for a while. You can’t do that with your 401k.
I imagine this is happening to a similar extent among the deposit institutions who might otherwise be buying corporate bonds. Their businesses are taking a beating, too, in this deep recession, and they probably want to have a lot of liquid money to make it through the dry times as well.
I suppose you could call this another type of risk premium – not the risk that the investment could go belly-up, but that the investor could.
March 19th, 2009 at 1:08 pm
In other words, isn’t the Fed’s recent effort at money creation largely replacing destroyed money? So, shouldn’t there be little or no net increase in the monetary base from where it was, say, a year ago?
This is a good point, but I wouldn’t use the term “monetary base,” which refers to currency and central bank reserves (M0). The money that was destroyed through deleveraging was credit money created by the banking system. But the general point holds, which is that expanding the money supply is a rational course of corrective action.
March 19th, 2009 at 1:09 pm
DTM–Correct me if I’m wrong but inflation should explain the corporate-treasury spread. I mean let’s say I expect the value of the dollar to fall precipitously over the next two years. And let’s say I want to lend someone money over a two year period. Wouldn’t it make sense for me to increase the interest on my loan to reflect the expected rate of inflation?
March 19th, 2009 at 1:16 pm
Isn’t anyone else a little disturbed, rather than enthused, as Matt is, by the power the Fed has? Without having to ask anyone, they can just print trillions upon trillions of dollars, which necessarily will devalue the currency.
But they can reverse this process just by selling off the assets they bought with printed money, which pulls that money out of circulation. As far as the Fed’s being able to execute monetary policy “without having to ask anyone,” the political independence of a central bank is generally considered a good thing. If you’re worried about inflation, political independence is likely to help. For example, Volker’s decision to sharply raise interest rates to halt inflation in the early 80’s led to a severe recession, but was probably beneficial over the long run. It’s doubtful that an elected official facing an imminent re-election campaign could have made that decision.
March 19th, 2009 at 1:16 pm
joe from Lowell–
I think increased savings should correspond to lower interest rates. If everyone wants to save, it’s not hard to find someone to lend you money, so you can get it for cheap.
March 19th, 2009 at 1:25 pm
Blake,
My point is that it can be hard to find someone to lend you money, even when everyone has a lot saved up and just sitting there, if they make the decision that they don’t want their money tied up in an investment, because they expect they will, or might, need to pay the bills next month.
More savings does, indeed, put downward pressure on rates. What I’m suggesting is that another factor – one that is, ironically, also increasing the savings rate – is putting upward pressure on rates.
March 19th, 2009 at 1:28 pm
Also, Blake, to the extent that people are shifting their savings from investment accounts to savings accounts and coffee cans, that money is made less available for lending.
March 19th, 2009 at 1:30 pm
Paulie Carbon–
Funny name.
I understand that the Fed can swing back the other way, sell the treasuries, and try to curb inflation. But that doesn’t make the added money dissappear, does it? It just puts the added money back into the Fed. In other words:
Step 1: Fed prints cash
Step 2: Fed uses cash to buy treasuries, thus circulating more cash in the economy
Step 3: Inflation kicks in, so treasury sells securities, and absorbs cash
And what happens next? Does the Fed keep that cash on its balance sheet, or can it make the cash go away as easily as it can create it? (I’ve been trying to understand the Fed the past few days, so I honestly don’t quite get how this works.) In any case, the giant influx of cash into the economy is going to require a giant outflux at some point. And that may be where the real pain hits.
March 19th, 2009 at 1:39 pm
Wow. It reminds me of:
March 19th, 2009 at 1:41 pm
DTM– The U.S. Government is not the same kind of debtor as a private company. The interest rate on treasuries is near zero now because the government is trying to prevent deflation and unfreeze credit: it’s a policy choice. GE is not issuing debt as a matter of monetary policy, it’s a simple financial necessity determined by the market. That’s why the big spread between treasuries and corporate debt is kind of disturbing. It suggests a big disconnect between where the market’s going and what government policy is doing.
March 19th, 2009 at 1:48 pm
And what happens next? Does the Fed keep that cash on its balance sheet, or can it make the cash go away as easily as it can create it? (I’ve been trying to understand the Fed the past few days, so I honestly don’t quite get how this works.) In any case, the giant influx of cash into the economy is going to require a giant outflux at some point. And that may be where the real pain hits.
I believe the money is effectively destroyed at that point. The fed can pretty much decide how much money it wants in circulation at any given time by either buying or selling bonds (or more recently unconventional assets like mortgages.) I believe these open market operations cancel each other out in terms of their effect on the money supply. I’m not sure it makes sense to view fiat currency as an asset that a central bank owns. I definitely agree that it could be really painful if the Fed takes the money out before the economy has recovered, which is why I think Kudlow is wrong to be worried about inflation now.
March 19th, 2009 at 1:54 pm
Kudlow is the real sleaze ball on CNBC. I wish Jon Stewart would interview Kudball.
Kudball says Obama wants to tax and regulate everything. Kudball also said government is incompetent to regulate and take over the banks and firms they now own.
Translation: give taxpayer many to Wall St. and banks and AIG, but never tell kudball’s buddies how to run things. They are so brilliant, only they can manage it. Yeah, the thugs who fixed and almost crashed our whole financial system.
Go after Kudball – he is the lowest of the low trying to protect his Wall St. crooked friends.
March 19th, 2009 at 1:55 pm
DTM,
I guess it’s all just a matter of timing. But it does seem like these are major manipulations in the money supply, and it could lead to inflation that’s difficult to manage.
I’m little uncomfortable with a financial architecture in which our fate is totally determined by the wisdom and benevolence of the Federal Reserve. It seems reasonable when they’re making marginal adjustments to the economy during normal times. But now the spending at the Fed dwarfs anything our elected government is doing. What does that tell you about the success of liberal democracy, and the status of democratic legitimacy?
March 19th, 2009 at 2:09 pm
Corporate debt is bringing a huge risk premium for one very simple reason – no one will buy corporate debt in this environment, especially not without a huge interest premium, and certainly NOT from a company like GE that just got DOWNGRADED from AAA to AA+ largely due to GE holding a lot of very bad CRE investments. Not to mention the plunge in GE’s stock value in recent weeks.
Treasuries are the only thing that is considered safe in this environment, so money market funds and similar low risk investors are sucking them up. They have to park their cash somewhere, so they are parking it where it won’t lose money.
Remember, when Bear went down, it caused money market funds to lose money. MM’s may not pay a lot, but they are never supposed to lose.
And GE – you may as well say that 7% is too much to pay for GM – is a very risky investment right now. Once the CRE goes kaplooey, and it’s in the process of doing just that (look at General Growth), GE’s going to be at risk of major losses, if not going into restructuring itself.
March 19th, 2009 at 2:16 pm
Another reason why GE (or corporate paper in general) command a higher interest rate is taxes – Interest earnings on treasuries is exempted from certain taxes and Corporate debt interest is not exempt.
That alone is a big part of why corporate paper ALWAYS commands a much, much higher interest rate than Treasuries (bills, notes, 3 month, 6 month, 10 year, whatever)
March 19th, 2009 at 2:23 pm
First, Kudlow is an ass.
Second, it is very difficult to tell how long or how much until we return to ‘normal’. We probably haven’t even been at normal in the last 15 years (when we consumed our pretend wealth.)
Third, when we do get to a more reasonable economic outlook, I don’t see how inflation doesn’t skyrocket for a period. (Despite Point #1, it doesn’t mean that an ass or a clock can’t be right twice a day.) Money is being dished out in every direction, with little of it (stim funds, mainly) going toward actually creating something of value.
Finally, I’m not so sure a little deflation of our debt will look like a bad thing by the time this mess is cleared up.
Okay, I lied. This is the last point: our debt will either grow from increased spending or plummeting revenues. So, the do-nothing choice may be as much as or even more costly (while creating no value).
March 19th, 2009 at 2:31 pm
Inflation is dangerous medicine, to be sure, because it’s a lot like heroin: it feels great at first, but you can’t stop using it, and eventually it kills you.
But powerful diseases sometimes call for dangerous medicines, and I think this is one of those times. Real estate, for instance, is still in a bubble, just as stocks were still in a bubble in 2001. Modest inflation may be one of the least-bad ways to bleed down real prices to something like a sane level. Inflation also forces money out of mattresses and into the working economy, which is vital. The increased rate of savings in America is not at all a bad thing, but those savings need to go into vehicles that circulate, rather than lock down, the capital.
And we do know a lot about controlling inflation, when the slump is over and we need to reel the slack back in. The current generation of bankers and economists came of age in a time of inflation and hyper-inflation, and know a lot about both the theory and the practice of eliminating it. The withdrawal can be painful–1982 painful–but we know how to do it.
We all fear inflation, but we have to guard against the tendancy to want to fight the last war over again.
March 19th, 2009 at 2:32 pm
Plus, with a little dose of inflation, maybe we can finally get rid of the damn penny.
March 19th, 2009 at 3:38 pm
This is like worrying that Barack Obama’s defense budget is showing weakness and likely to leave us open to aggression from Martians.
In fact, Larry Kudlow does believe this. But, of course, Larry Kudlow is mad as a hatter.
March 19th, 2009 at 3:49 pm
Meanwhile, on the healthcare front:
http://www.kansascity.com/115/story/1094370.html
Kansas lawmakers question whether Johnson County nonprofit benefited from political ties to Sebelius
Kansas lawmakers want to know whether a Johnson County nonprofit used its political connections to Gov. Kathleen Sebelius to get a special funding increase last fall.
But a hearing into the matter Wednesday left lawmakers with more questions than answers.
Lenexa-based Community Living Opportunities was awarded nearly $713,000 in extra Medicaid funds. The group serves developmentally disabled Kansans, primarily in Johnson and Douglas counties.
At the time, the agency’s board of directors included Kansas Democratic Party Chairman Larry Gates, a Sebelius confidant, and his former law partner, Dan Biles, whom Sebelius appointed to the state Supreme Court this year. Lew Perkins, the University of Kansas athletic director, also serves on the board. Biles has since stepped down from the board.
The allegations come as Sebelius, a Democrat, awaits U.S. Senate confirmation to lead the U.S. Department of Health and Human Services, which administers Medicaid.
Yet other service providers maintain that the state told them no extra funding was available. They told lawmakers at the hearing Wednesday that Community Living Opportunities was allowed to skip the usual process of requesting extra funds, which involves going before a local agency that oversees such requests.
Carolyn Risley Hill, chief executive of Starkey Inc., a Wichita-based service provider, worked for the state for 20 years and said she never saw a provider get the special treatment that Community Living received.
March 19th, 2009 at 6:36 pm
Doesn’t inflation (again, at modest levels) also help the economy by punishing you for just sitting on your money? I mean, commentators have pointed out the high savings rate is getting in the way of economic recovery because people aren’t spending what they have. But if inflation is zero percent, then it makes sense for my money to sit in a savings account with even just 1 percent interest.
But you are misunderstanding what savings is. At its heart, savings isn’t what you do with money. It’s what you do with production and consumption. Savings equals producing more than you consume. That extra production can then be invested in higher order goods of production and provides the basis for increasing our standard of living.
The most efficient way for this to happen is for money to go into an investment instrument or to go into a bank where it can be used for business loans. But even when it is stored in your mattress, the surplus goods that are produced and not consumed drive prices down, which makes buying these goods for investment purposes more attractive (and as the amount of money stuffed in mattresses grows and prices fall, the money is inexorably pulled into investment). (It should be pointed out that this effect can also stimulate consumption rather than investment, but savings, while they do not have to go to investment, are a prerequisite for investment).
Our main problem now is that we have too many investment projects and not enough capital to fund them all. We need (a) to let some of these projects liquidate, and (b) to build up our reserves of resources, i.e. save, so that we can fully fund our investments. (Essentially, we need to coordinate our savings rate to our investment rate).
But an inflation rate of something like 4 percent creates a subtle “use it or lost it” effect, and using money is stimulus.
This could just as easily encourage more consumption rather than more investment, which could deplete our reserves of savings for investment.
March 19th, 2009 at 7:02 pm
It’s very easy to see what the market’s expectation of inflation is: just look at the yield on TIPS vs. nominal treasuries of the same maturity. 10-yr TIPS are 1.24 vs a nominal treasury yield of 2.6, implying that investors are only demanding an extra 1.36% of yield to compensate for the inflation risk. Unless anyone can make a very compelling case to the contrary, I’ll take the market’s collective opinion that runaway inflation is just not a serious risk.
March 23rd, 2009 at 6:30 am
This doesn’t necessarily happen. Let’s say you have $1000 socked away. Over the next year, prices fall 10%, meaning your $1000 is worth $1100. So do you jump in and invest in the cheaper market? No! Why would you do that, when you’re mattress money is making 10% return sitting there, risk-free?
March 23rd, 2009 at 7:52 pm
I’ve tossed “Juice Box Mafia” as coinage for blue dog progressives like Yglesias. I think PoutRager is much more accurate and hammers home the point that it’s just the latest round of provocateurs to monetize webhits.
April 16th, 2009 at 10:12 pm
Good Day. Music with dinner is an insult both to the cook and the violinist.
I am from Cambodia and bad know English, give please true I wrote the following sentence: “Get discount airfare deals, last minute flights and charter.”
THX
, Townley.