According to a recent article by Daniel Amerman, Economists Can’t Account For 98% Of Rising Inflation (hat tip to Chris Coles for calling this to our attention). Referring to a Wall Street Journal article, Amerman says
”According to the article and the prominent economists interviewed, the leading inflation prediction methodology used by economists completely failed, leaving the Federal Reserve, White House & European Central Bank stunned and blindsided by the highest rates of inflation in 40 years.”
Could it be that conventional economics is 98% garbage? You bet. It’s so rent with false assumptions and invalid premises it’s hard to know where to start. But one standout with regard to inflation is that it – inexplicably – pretends that it affects only consumer prices. Asset prices can soar into outer space and it’s as if inflation had nothing to do with it.
We took a deeper dive into this problem in The Big Takeaway. Economists, either through gross negligence or willful self-delusion, have been wandering about their own field wearing self-donned blinders. They arbitrarily exclude asset prices from their reckoning of inflation. Maybe it’s because inflation is fun while it’s contained to asset prices, and they allow value judgment to cloud their vision. Inflation is a Bad Thing and therefore it cannot be inflation while it feels Good. Throwing objectivity out the window like this wouldn’t be acceptable in any other field aspiring to the status of science, but for some reason it’s become routine in economics.
So stock prices quintuple over the course of a decade. It’s just prosperity. Never mind that when the owners of stocks go to cash in their gains and buy stuff with them, that the amount of stuff out there hasn’t quintupled. The actual “prosperity” didn’t happen. All that happened was the nominal price of claims on stuff rose unsupported … how could this not be inflation?
If we can’t help ourselves and simply must allow value judgments to compromise our capacity to think clearly, maybe we should at least consider the possibility it was a Bad Thing all along. The illusion of wealth where it isn’t justified – confusing the expansion of claims on wealth with the real thing – should be taken as a sign that something is amiss. That maybe policy isn’t as appropriate as we thought. Must economics be forever condemned to acknowledge reality only after it has been painfully thrust in its face? As I’ve pointed out repeatedly, it’s simply not possible for asset prices to rise indefinitely without consumer prices eventually following suit.
This is no mere Monday morning quarterbacking. We’ve been 2% economists from the start … long before consumer price inflation was making headlines we tipped the that commodity prices were due to soar this decade. We didn’t call it “inflation” simply because it’s our position that It’s Been Inflation All Along. The only thing that’s changed is that it’s finally spilled over into commodity and consumer prices in a big way. Our home grown index of inflation, the FDI, draws on all classes of prices, and has since inception over fifteen years ago.
Amerman himself, alas, remains firmly ensconced in the 98%. He fingers fiscal policy as the cause of this inflation. No doubt it’s been a catalyst in greasing the skids for the spillover from asset prices into consumer prices, but that’s all. It was inevitable. He still shows no sign of understanding the fundamental nature of inflation as depreciation of currency, instead putting the focus on supply and demand for stuff. That understanding appears yet confined to the 2%.
To truly understand inflation is to understand two central points:
1) Inflation is currency depreciation. It is not things “going up”. It simply takes more of the shrunken currency units to buy the same stuff.
2) Inflation does not affect all prices uniformly and simultaneously. It first affects the prices of things used to store value (assets) and only later spills over into other prices (goods and services) for which that stored value is spent.
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