this (long) article makes the awkward point that inflation – whilst shit for ordinary people – would be tasty from the govts PoV because it would rapidly erode the debt…and that governments of either stripe are probably prepared to have ordinary people take the shitty end of the stick accordingly:

http://www.lrb.co.uk/v32/n05/john-lanchester/the-great-british-economy-disaster

I was not a huge fan of that LRB article. I would also point out that the government’s advantage to pursuing inflation is somewhat overstated

Whoops, I meant to add:
http://blogs.telegraph.co.uk/finance/edmundconway/100002782/a-dose-of-double-digit-inflation-might-be-wishful-thinking/

gives some examples. Many many obligations are in real terms, and can’t be inflated away. And the godawful mess takes decades to clear.

When the value of the pound in your pocket keeps rising, you have no incentive to invest or spend it, and the economy stays trapped in a depressed mire.

But this is rubbish. Consider the case of electronics, or more specifically personal computers. Because technology in the market is developing so rapidly, every year you refrain from spending £500 on a computer means that the computer you eventually buy will be that much better. In other words, the value of the pound in your pocket keeps rising (at least relative to computers). So if you’re right here, we should expect that people have “no incentive” to spend any money on computers, and therefore that there would be no market in them. But there is such a market! People do still buy computers, even though if they held on a year they could buy a better one for the same price. It’s funny that during the last couple of decades, when price deflation in computers was at its highest, the industry was about as far from a “depressed mire” as it’s possible to imagine.

More importantly, if you take the Austrians seriously (and I think you’d be stupid not to), you’d take seriously the argument that investment is not unambiguously a good thing. It’s only a good thing when it’s economical. Artificially stimulating investment by playing around with interest rates is all fine and good, except that it makes uneconomical investments seem economical (hello housing bubble!), and thereby distorts the capital structure of the economy in ways which often prove to be disastrous.

“With the ascendance of Keynes, more people began to understand that what matters in economics is how much is produced and consumed, and not just how much ‘gold of a given fineness’ a unit of currency can get you.”

I think that Adam Smith made that point in 1789….

Otherwise I agree: the gold standard wouldn’t be that good.

Ah, yes, inflating the debt away. As Conway points out, not really possible.

And how did we get to this point? Well, the govt found that it was cheaper to borrow by agreeing to protect against inflation. Because lenders realised, after they’d been screwed over, that inflation was one of the major uncontrolable risks they faced.

So we’ve actually had a market solution to hte temptation of govts to inflate away their debt.

Dan

Couple of points. First, that ever-increasing performance of computers does have an effect on the market; ceteris paribus, if computers were no longer improving so fast, there would be different incentives to buy or sell. I frequently put off my upgrade decisions to buy. That is not the same as saying “demand is cratered”. The very high discount factor for people on computers clearly deals with this. Even though I would get a 20% better iTouch if I waited a year, for £30 less, I get so much value from having it now that I don’t really care.

Also, distinguish between demand- and supply-induced deflation. The thought that demand for the thing I am thinking of buying is going to fall is critical for business decisions.

For your second para, I would take more seriously the idea of multiple equilibria; if I am the only person investing, then my investment will be uneconomical; if there is a lot of investment, demand will rise and it will be. I can see how Austrians ex post find a lot of investment uneconomical, when their economic advice ends up rendering them so.

apan and the Japanese aren’t short on electronics, computers or robots compared with other affluent countries but the economy there stagnated after the bursting of the asset-price bubble which had inflated there during the 1980s.

From c. 1992, consumer prices indices went down and down through the rest of the decade as deflation became the expected experience and real GDP growth sank to persistently miserably low levels:
http://en.wikipedia.org/wiki/Economic_history_of_Japan#Deflation_from_the_1990s_to_present

Giles,

Even though I would get a 20% better iTouch if I waited a year, for £30 less, I get so much value from having it now that I don’t really care.

Well, quite! But doesn’t the same apply, mutatis mutandis, to food, clothes, petrol, housing, furniture etc etc? Even if I would be able to buy all of these things cheaper next year (because my money is constantly appreciating in value), I get so much value from having them now that I don’t really care.

I absolutely agree that we should distinguish between different types of deflation – deflation due to technological progress, for instance, is very different to deflation due to a reduction in the money supply. But saying stuff like “when the value of the pound in your pocket keeps rising, you have no incentive to invest or spend it, and the economy stays trapped in a depressed mire” doesn’t seem to me to be taking a calm, careful and balanced look at the merits and demerits of different kinds of deflation.

Dan

Some things are inelastic – food, an essential iTouch – and some are far more discretionary – business investment, which drove this recession. Keynes, the great adversary of you Austrians, noticed that, and the figures back it up for this year.

By using colloquial “consumers/pounds in pockets” terminology, I admit that I muddy this point. But consumer incentives are slightly affected, and business incentives powerfully affected, by this.

The inflation people want is extra demand for what they and their businesses do, not the sort that comes from a squeeze on supplies (i have a go at this in my publication – tell me what you think)

I find it hard to believe John Stuart Mill would be a contemporary gold bug, probably the most boring and dismal people in the world. Moderate inflation is good as it keeps people competitive and innovative. Without inflation as a constant risk, existing wealth would forego capital risk in preference for rent seeking and that ultimately leads to stagnation and poor innovation. Wealth has no more right to intergenerational transfer than political power. The inflation threat is the constant guard dog to punish the risk averse. For those reasons we should be moving away from taxing income and capital gains towards a land tax. However, that is a rather big issue but unless we tackle it we will never defeat the risk averse entrenched power in this country.

The Conway piece is complete bullshit, though: he’s pretending that future pension payments (along with various other things that government might choose to spend money on in the future if it likes, but is under no obligation to do so) count as “national debt”, which they don’t and which only crooked right-wing liars pretend they do.

It’d be interesting to find out how much of the *actual debt we actually owe* is inflation-proof. I strongly suspect the answer is “not very much at all”.

Calm down sloop,* whether or not there is a debt or just some other version of ‘ an obligation to provide future payments’ the pensioners in 2020 need real not nominal satisfaction – a ratio of whatever is normal in society at that time. rPI linked

*beach boys

@13, and we’ll still need an army to defend ourselves in 2020, and welfare payments to the poor, and firemen to put out fires – should we capitalise all of those and add to the national debt as well?

No! But I don’t believe we can inflate them away either!