Phil Armstrong, an author and MMT scholar, dives into the intricate world of inflation, challenging popular misconceptions. He discusses how true inflation isn't solely about expanding the money supply but is influenced by various factors, including government policies. Armstrong also critiques central banking methods and considers historical instances of hyperinflation, like that of the Weimar Republic. Additionally, he explores the mechanics of monetary systems and the significance of a job guarantee in striving for full employment.
Inflation is a complex phenomenon influenced by various factors, including consumer behavior and production costs, not solely driven by money supply.
Critics of traditional monetary policy argue that raising interest rates to combat inflation may inadvertently exacerbate economic issues instead of resolving them.
The historical context of hyperinflation reveals that factors beyond money printing, such as loss of confidence and external pressures, play crucial roles in inflation dynamics.
Deep dives
Complexity of Price Indices
Price indices, such as the Consumer Price Index (CPI) and Retail Price Index (RPI), are constructed using a weighted basket of goods to measure price changes over time. However, the selection and weighting of these goods can be influenced by factors beyond just consumer behavior, such as fashion trends. An example highlighted is that of gentlemen's cardigans, which were once included in these indices but are now considered outdated. This slow adjustment in indices can lead to discrepancies in reported inflation rates.
Understanding Inflation
Inflation is primarily understood as the rise in price levels when too much money chases too few goods. However, it can also arise from cost-push factors, where increased costs of production, such as raw materials or wages, lead to higher prices. This presents a complex interplay, as overspending by the government is just one potential driver of inflation, rather than the sole cause. Therefore, accurately defining and measuring inflation proves to be challenging due to its multifaceted nature.
Misconceptions of Monetary Policy
Monetary policy, particularly the common practice of adjusting interest rates to control inflation, is critiqued for its effectiveness. The idea that increasing interest rates can combat inflation is challenged, as higher rates might actually stimulate spending and exacerbate inflationary pressures. Historical examples, such as Paul Volcker's rate hikes in the 1980s, are invoked to illustrate the potential negative fallout of such measures, including economic recession and widespread hardship. This highlights a need for alternative approaches to monetary policy that consider the broader economic influences at play.
The Nairu and Employment.
The concept of the non-accelerating inflation rate of unemployment (NAIRU) suggests that a certain level of unemployment is necessary to prevent inflation from rising. Critics argue that this perspective creates a cycle of unnecessary joblessness and economic hardship, suggesting that it serves the interests of capital rather than the workforce. The idea of maintaining a higher discomfort level in employment figures to control inflation raises moral and ethical concerns regarding the value of human employment. A potential remedy proposed is a job guarantee that focuses on achieving true full employment, which could also stabilize prices.
Lessons from Hyperinflation
Historical instances of hyperinflation, such as Germany's experience post-World War I, are often cited to caution against excessive government spending. However, the narrative that rampant money printing caused hyperinflation is challenged; instead, it is suggested that price level rises came before the extensive printing of currency. Factors like loss of confidence, external invasions, and the need to pay reparations significantly contributed to this economic chaos. This analysis encourages a more nuanced understanding of inflationary dynamics rather than attributing them solely to monetary expansion.
Patricia and Christian talk to author and MMT scholar Phil Armstrong about inflation, hyperinflation, the gold standard, John Maynard Keynes’ Bancor plan and more.
Phil talks about the Ruhr Valley, the industrial region of Germany which was invaded and occupied by French and Belgian troops from 1921 to 1925 as a reprisal for Germany failing to fulfil World War I reparation payments. More here: https://en.wikipedia.org/wiki/Occupation_of_the_Ruhr
Phil talks about the ERM (European Exchange Rate Mechanism), which locked together the various currencies of what were to become the Eurozone member nations at fixed or semi-pegged exchange rates. More here: https://en.wikipedia.org/wiki/European_Exchange_Rate_Mechanism
