The Derp and Fall of Inflation Fearmongers
And the rise of a new zombie economic idea
Eventually even charlatans, cranks, and economists notice when the world isn't cooperating with their grand pronouncements. Eventually reality wins. And after four years of making relentlessly wrong predictions about the second coming of Weimar, that eventually has come now for the inflation chicken littles. At least a little.
Back in March 2009, the Fed began expanding its first bond-buying program, and the usual suspects began hyperventilating about hyperinflation. They just couldn't conceive how all the Fed's "money-printing" wouldn't end with double-digit inflation, if not people needing wheelbarrows full of cash to buy the most basic of necessities. But, as Paul Krugman pointed out, this lack of imagination was really a lack of knowledge of Japan's lost decade. There, as here, prices barely rose (or in Japan's case, actually fell), despite big deficits and big bond-buying. Why? Well, the rules change when short-term interest rates hit zero. Risk-averse banks don't want to lend and risk-averse households and businesses don't want to borrow. So central bank bond-buying mostly pushes reserves into banks that just sit there, especially when the central bank pays interest on them. Now, that doesn't mean quantitative easing is pointless -- ask Europe -- just that it's not massively inflationary.
But the anti-Bernanke crowd has tried not to notice that prices haven't gone parabolic. They've mostly succeeded in this epistemic closure -- and even when they haven't, they've quickly discounted reality as just a fad. Their excuses have been as predictable as they have been wrong: either the official numbers are irrelevant, or miss "real" inflation, or will show more inflation in a few more years (just wait and see!). But with core PCE inflation, the Fed's preferred measure, now at an all-time low going back 50 years, it's getting harder and harder to get anyone to listen. Here are the stories each group has tried to tell.
Charlatans. It's been a bull market for fake populists the past few years. With wages stagnant, households feel like inflation is higher than it is, and they keep hearing that it is from fact-challenged fraudsters. If it's not pop historian Niall Ferguson putting on his tinfoil hat and saying inflation is "really" 10 percent, it's pop pundit Erick Erickson bemoaning rising milk and bread prices that he knows aren't rising. But the truth is catching up. After playing the "it's-always-1980" game where stagflation is always and everywhere the problem, Erickson has had to admit that it's just that -- a game. And he had to admit it, because Krugman called him on it. In other words, nerds bearing charts beat demagogues bearing derp. (For the uninitiated, "derp", as Noah Smith defines it, means loudly repeating things you believe in the face of contrary evidence).
Cranks. It's also been a bull market for crackpot economists the past few years. Now, so-called Austrian economists did do a good job predicting the housing bubble during the boom, but they could hardly have done a worse job during the bust. They've looked at the Fed's ballooning balance sheet, and screamed that Zimbabwe is coming, Zimbabwe is coming! Well, it hasn't, and it's not. But that hasn't deterred the Austrians: they think the price of gold shows the "true" inflation from the monetary base expanding, so they've been right all along! But what about now? Gold is down 24 percent from a year ago, and 36 percent from its August 2011 highs -- and that despite more "money-printing" by the Fed. So where's the inflation now? (And, sorry Austrians, an increase in the monetary base doesn't count if there's no increase in prices).
Economists. Conservative economists haven't done much better. They too have looked at the Fed's balance sheet and fallen for the inflation hype. Marty Feldstein, for one, has predicted again and again and again that inflation is a risk -- only to be wrong and wrong and wrong. Even after admitting these errors, Feldstein just reiterated his fear of future inflation. And then he called on the Fed to start tapering its bond purchases now, because ... I have no idea why. Yes, Feldstein said something about financial stability, which is the new bugaboo of failed inflationistas, but he didn't provide any actual evidence. He just said that rising real interest rates wouldn't hurt the economy even though they would hurt housing. It didn't make much sense. Nor did it when the Bank for International Settlements or Raghuram Rajan said much the same. It's a depressing kind of progress. Conservatives want tighter money, but they know they can't justify it by crying inflation anymore -- so they cry financial stability instead.
Nothing can kill zombie ideas. Not facts. Not figures. And certainly not failed predictions. Now, inflation fearmongers couldn't have a worse track record than they do, but it won't change what they think the Fed should do. At most, it will change why they think the Fed should do it. To use a technical term, it's derp. And it's derp the data-driven Fed shouldn't be intimidated by -- though its tapering talk suggests otherwise.
But Bernanke should remember: Derp doesn't fall under the Fed's dual mandate.