I’ve been trying to get an explanation from supposedly knowledgeable people who seem to believe inflation, or even hyper-inflation, is in the offing. What makes them think that?
Robert Wenzel writes a busy blog called Economic Policy Journal. He’s one of those Austrian economists, strongly associated with the Lew Rockwell crowd. I’ve been asking him. Watch M2, he says, and not much else.
That’s not much of an explanation, especially since a lot of people can show that M2 is not correlated with inflation, or even negatively correlated with it. There are so many opinions about M2 and what it means for inflation or deflation that it’s just intellectual noise at this point:
I think the problem is much more fundamental than policy geek data. This article on Zero Hedge has it just about right. The economy as a whole – globally, that is – is not only unable to repay the principal debt it has already incurred; it cannot even “service” the debt.
If this were an individual or a business it would be bankruptcy time, and anyone who has done bankruptcy work for debtors knows that there comes a point where it is inevitable, it is a mathematical certainty.
But bankruptcy is not possible for an entire economy, an entire world. So what then?
I’m open to suggestion, but I’m not hearing any. “Watch M2” doesn’t cut it.
Update: Click here to see that my conversation with Mr. Wenzel apparently ran out of steam. It centered on the relationship between the money supply statistic known as “M2” and inflation or deflation or neither or both. A sub-issue of that was Wenzel’s assertion that an increase in “required” bank reserves meant necessarily that banks were making more loans.
He said the required reserves were tracked every week and indeed they are. He said the “required reserves” had recently increased significantly and indeed they have.
Here is the latest weekly chart of bank reserves published by the Federal Reserve. Dry stuff, isn’t it? Note also that the “monetary base” is not just flat but has actually declined over the last year. That doesn’t sound inflationary, but what do I know?
Anyway, there is a category for “required” reserves, but the implication is that this is dependent not only on the amount of loans but also on regulatory reserve requirements that can change. Although I don’t know for sure and I’m apparently not going to find out from Mr. Wenzel.
It’s an important question because if the only reason “required” reserves increase is because there is more money loaned out then there’s an argument for inflation. But if more reserves are required because the banks have been told to increase reserves by regulators, then that would not support an argument for inflation at all.
I’m happy to hear from others on this, but I don’t think Wenzel is correct at all and if he’s not I don’t see any support for an inflation argument right now. Larger considerations argues otherwise as well. Such as the worldwide amount of debt.
Update 2: I’ve reconsidered the value of Wenzel’s blog, and as my last official blogging act of 2010 I’ve deleted Economic Policy Journal from the blogroll.