Posted by
Andrews on Thursday, February 12, 2009 3:11:32 PM
Dick Morris made two statements which not only contradict one another, but also misuse a basic economic term. The first quote is this:
Invite massive inflation in the future as consumers and businesspeople
sit on most of the money until times improve. Then, when confidence
begins to return -- no thanks to the stimulus package -- they will
deluge the economy with money, triggering massive inflation.
And the second is:
Now, with their backs to the wall, facing a spending package that will
consign America to rampant inflation, massive debt and continued
recession, these three senators have gone back on their most
fundamental pledge to their constituents -- to act in the public good.
Now, first the term he misused, though only in one quote and not the other, and I bring this up more because it is so commonly misused, not because it is important in this context, is "inflation".
Inflation, properly speaking, does not mean rising prices, but an increase in the money supply. Look at the word "inflation", as in a balloon, as in ballooning money supplies. See? Very simple. Rising prices are the usual consequence of inflation of the money supply, but rising prices are not themselves inflation. Politicians and Keynesian economists have tried to distort this by calling the rising prices themselves inflation, which allows them to pretend the price rises are caused by non-monetary factors, such as "cost push" inflation and other nonsense. But the sole purpose of such obfuscation is to white wash monetary meddling, and it is an incredibly dishonest. Worse it confuses discussion. It would be akin to calling lung caner "a cough" or death "a bad smell", it would muddy discussion and allow us to confuse pneumonia, a cold and cancer. Describing symptoms by the name of the disease is a bad practice.
And in this case Morris is doubly wrong, as he not only calls rising prices inflation, but also describes a very non-inflationary situation. What he is describing is a situation in which circumstances shift demand, causing consumers to hold money off market, followed by a sudden release of that pent up demand, which will cause a
TEMPORARY surge in prices. In true inflation, when the money supply increases, it causes a general and long term rise in prices. When pent up demand is released there is a temporary surge in prices, and then, once the monetary reserves are exhausted, or at least when the normal level of savings is reached, demand drops once more and prices shift back to normal. Using Morris' definition, there is "inflation" every Christmas shopping season, or "inflation" in beach house rentals every summer. It is a bad use of the word all around.
However, he also makes an even bigger mistake when you put together the two quotes, the one where he uses inflation properly and the one where he uses it improperly.
Just think about what he is saying.
Obama will issue a massive spending bill, which will as a consequence inflate the money supply. Yet this will cause people to withhold money and then suddenly dump it on the market causing prices to surge? That makes no sense for two reasons. First, let us assume his first few contentions are right, and people do hang on to money. If Obama's package is inflationary, that money will steadily lose value, so when they finally do spend it, it will be worth much less, which is hardly the prescription for rising prices. And, in reality, people would not withhold spending. Morris' second error is thinking inflationary times cause people to hoard money. In reality, during inflation, people retreat into concrete values, spending as much as they can to purchase goods that hold value. In addition, inflation actually spurs borrowing, as we have seen in the housing market, since inflation causes debts to have an ever decreasing real value. So it makes sense not only to spend every dime, but to borrow more dimes, as they will be repaid in what is effectively a nickel or less. So, not only is Morris wrong in overestimating the impact of the spending, but also in his estimation of how people will react to the supposed stimulus package.
Then again, he is right on the general points of his essay, so I don't want to make too big a deal about this. However, as the confusion over what inflation really is, and how people respond to it, is widespread enough I felt I had to comment.