Home > Democracy in America, Economics, Inflation, Jonah Lehrer, Martin Wolf, Paul Krugman, The Economist > Printing Money and Predictions in Print

Printing Money and Predictions in Print

I try not to make too many predictions on this blog. If I do the only prediction I’m likely to correctly make is that my predictions will be off. Jonah Lehrer shares the results of a big study that calls into question the ability of experts to accurately forecast.

How did the experts do? When it came to predicting the likelihood of an outcome, the vast majority performed worse than random chance. In other words, they would have done better picking their answers blindly out of a hat. Liberals, moderates and conservatives were all equally ineffective.

The reason so many experts were wrong was due to confirmation bias – they were confident they were right so they ignored evidence that undermined their preconceptions. While reading up on whether or not anyone should be concerned about inflation right now (due to Obama’s or the Fed’s policies) I feared ending up in that pitfall. So in my quest to find diverse viewpoints I discovered some older Art Laffer and others making predictions about future inflation because of Obama’s policies. Determined not to prove Lehrer wrong, who writes, “Famous experts were especially prone to overconfidence, which is why they tended to do the worst,” Laffer and gang’s predictions turned out to be almost exactly antithetical to reality.

On June 11, 2009, Laffer wrote a column Ehrlichianly titled, Get Ready for Inflation and Higher Interest Rates: The unprecedented expansion of the money supply could make the ’70s look benign. Now that we stand over a year later, let’s take a look at accuracy of some of his and other inflation Chicken Littles’ predictions.

It’s difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed’s actions because, frankly, we haven’t ever seen anything like this in the U.S. To date what’s happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits.

His primary evidence for his fears is this chart:

[Our Exploding Money Supply]

But let’s now check out this updated chart (upper-right), courtesy of Martin Wolf, from a few days ago.

Martin Wolf charts for Comment

The rate of change in M1 has plummeted and the new data doesn’t look so scary or out of place with history now, does it? M2 (the money in circulation) also dropped to very low levels. We can also see US inflation rate/expectations (lower-left) hit negative levels and currently floats under 2 (below the Fed’s target rate). With all the current talk about QEII and deliberately raising inflation expectations, the inflation alarmists are back, but as Martin Wolf points out, even if we were to see inflation growing too fast (which there is currently no evidence for) we could always just scale it back.

The hysterics then add that it is impossible to shrink the Fed’s balance sheet fast enough to prevent excessive monetary expansion. That is also nonsense. If the economy took off, nothing would be easier. Indeed, the Fed explained precisely what it would do in its monetary report to Congress last July. If the worst came to the worst, it could just raise reserve requirements. Since many of its critics believe in 100 per cent reserve banking, why should they object to a move in that direction?

Mark Thoma at his blog, Economist’s View, discusses further some mistakes that people worried about the growth in currency are currently making. It’s worth reading but here is the graph that he uses, which shows that the currency in circulation is not outside the historical norm.


Over at the American Principles Project, a conservative Christian organization, Samuel Gregg (who cites Laffer) also worries (7 July 2009) Obama’s policies are going to lead to 1970s style inflation – he even mentions Mugabe’s Zimbabwe.

More than one economist believes that it is only a matter of time before the third member of the 1970s trio – growing inflation – will be back to wreck havoc upon us.

Most amazingly, Gregg’s article stumbles onto an important insight about inflation. Since he takes for granted inevitable skyrocketing inflation, he spends the bulk of his article explaining why having to lower inflation will be so terrible.

Seriously fighting inflation entails a willingness to tolerate increasing unemployment. This is the price of reducing the excessive amounts of money sloshing through an economy.

So if lowering inflation will increase unemployment, what might raising inflation do? Yup, increase employment. Considering 15 million sit out of work right now, which is about 4 million people greater than the entire population of Greece, I think we could stand to raise the inflation rate a tad.

We can see that inflation expectations are low right now; it’s also worth going over some other measures of inflation and potential inflation. Here’s the Consumer Price Index.

FRED Graph

And here is core inflation (which is the CPI minus volatile items like food and energy):

FRED Graph

(By the way, you can have more fun data like this at the St. Louis Fed’s great website.)

Here’s our current core inflation overlaid with what happened in Japan (via Krugman):


Here’s the Treasury Maturity Spread (via DiA). Yup, also low.










Many alarmists point to rises in gold and other commodity prices. What about those? First it is important to remember that we don’t usually consider volatile commodities when looking at inflation because unpredictable spikes can occur. They’re also traded on world markets so judging US inflation can be thrown off because of that. Consider if a huge new supply (or disruption) of oil or gold was discovered that could suddenly change the price of those commodities, but that wouldn’t really represent a significant change in inflation. Commodities aren’t entirely useless (they’re not all constantly and extremely volatile) and inflation predictors keep using them, so let’s take look at some of them anyway.

On gold, many have been unnerved by the “record high” of its price. Yet, as David Leonhardt points out, it’s not true.

Gold is at a record only if you fail to adjust for inflation. And you should almost always adjust for inflation.


This isn’t simply a question of math. Anyone who says gold is at a record high (or who said oil was several years ago) is getting the story wrong. Why? Because $10 today is not more valuable than $9 a few decades ago. Claiming otherwise is tantamount to saying that 10 rupees is more valuable than $9 because 10 is a bigger number than 9.

Here’s a graph (via Krugman) that isolates commodity prices for us.


I don’t know about you, but it doesn’t really look like any historically high jump in commodity prices going on.

Everyone is entitled to make some bad predictions, but I’m not sure what Sarah Palin’s excuse is for her inability to predict the past. Here she is on grocery inflation.

“Everyone who ever goes out shopping for groceries knows that prices have risen significantly over the past year or so.”

The Wall Street Journal reporter who had the gall to question her responded.

The Nov. 4 Wall Street Journal article noted, in its first sentence, “the tamest year of food pricing in nearly two decades.” It does indeed report that supermarkets and restaurants are facing cost pressures that could push their retail prices higher — but it hasn’t happened yet on a large scale. Critics of the Fed’s quantitative easing policy are focused primarily on concerns about potential future inflation.

Let’s now take a look at few other predictions on inflation at about the time Laffer and Gregg wrote their pieces.

Paul Krugman (28 May 2009):

It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.

Seems he was correct.

Paul La Monica, CNNMoney Editor (4 June 2009):

So with all due respect to the Fed chair, he can talk as much as he wants about how he’s not too worried about inflation. But investors disagree. And Hoenig thinks that the Fed would be unwise to dismiss what’s going on with bond rates, currencies and commodities.

Score that one: Bernanke 1 – La Monica/Hoenig 0.

The Economist (22 Oct 2009):

In short, the likeliest triggers of an acute crisis—a lenders’ strike, a crash in the dollar or inflation—seem remote.

Cheers to the Brits on that one.

None of this should suggest that Krugman or The Economist is always correct or that La Monica, Laffer, and Gregg are always wrong (Palin I’m not so sure about). Remember Lehrer told us that “Liberals, moderates and conservatives were all equally ineffective.” But it does suggest to me that we shouldn’t keep listening to the same voices on a topic they’ve been so utterly wrong about until circumstances change (or they change) and indicate things might be different. For example, here’s Laffer –again in a WSJ Op-Ed– from 2 days ago.

Outlining his growth agenda he recommends,

2) Price stability. Congress should revise the Federal Reserve’s mandate, making it serve only the goal of price stability (and not also full employment). In addition, the Fed should follow a monetary rule, targeting either the quantity of money or the price level. There can be no prosperity without price stability. (my emphasis)

He’s still worried more about inflation than our current unemployment crisis. Can editors explain to me why we keep hearing more and more from those with such bad records? The inverse correlation between the voices of inflation alarmists and the actual inflation rate is surreal. We have plenty to worry about without concerning ourselves with phantoms and problems that only occur if we’re more successful.

I hope I’m not giving the impression that I think I know what will happen with our inflation rate or commodity prices. If I did I’d be in the markets right now, not writing blog posts. But what I can tell is that the bizarro Chicken Littles (“The ground is rising?!”) keep being wrong and the available data suggests we’re not in imminent danger of turning into Zimbabwe. So if you think Greece’s economy is bad and you realize that just because the overall health of our economy is better doesn’t mean that virtual unemployed nation we have living within our borders isn’t feeling real pain. Unconventional ways to further loosen monetary policy aren’t likely to solve all our problems but it could help alleviate a lot of needless suffering.

I’d rather not make a prediction, but I think we should put some money on this.

  1. Fraser
    November 15, 2010 at 12:13 am

    Note: I only took a few econ courses at university, so most of my understanding comes from reading news rather than formal study. The finance I need to know for work is more time-value of money focused, and doesn’t rely much on macro-economics past pricing debt for our models and for our negotiations. If I got anything wrong below, I would appreciate a correction, and treat it as education.

    “So if lowering inflation will increase unemployment, what might raising inflation do? Yup, increase employment.” This does happen sometimes, but it’s tricky to always count on the Phillips curve as an argument that increasing inflation can causally change employment. The idea in support is that a price increase (inflation) would encourage firms to hire more because they can increase output (and normalize prices vs demand). But that price increase needs to be driven by an increase in demand. At the moment, demand is constrained due to other factors that we can summarize as uncertainty in the markets.

    So employment improves with increased investment. Increased investment comes with stronger investor confidence. Confidence (certainty in the markets) has loads of factors: expectations of tax policy, attractive technologies to invest in that scale, expectations for currency markets (if the business either buys from or sells to an international market), confidence in the stability of debt markets to lever financing, etc. Most of these things are pretty uncertain right now, which is why company balance sheets flush with cash, but we are seeing very little investment.

    Interest rates are also a good indication at the moment: they’re near zero, yet we’re still not seeing increases in investment. So despite the fact that it is as cheap as it can be to borrow money for an investment, the demand to make investment is still too low to drive an improvement in employment. So now we are trying QE, which ought to improve long term interest rates and fill banks’ coffers with additional cash. Banks already have loads of cash that they aren’t lending – how much more will we see leave their coffers as loans now? People are skeptical about QE because they’re uncertain that an increase in the money supply is going to increase demand.

    All that said, we ought to see an improvement in exports with a weaker dollar that would arise from QE, but this has in turn pissed everyone else off, and creates new problems, some of which will be economic (but not formulaic-ly linked)

    I’m not saying any of this with an opinion on the effectiveness of monetary policy as compared to other reforms – I have no idea how strong it is comparatively. But I suspect that more factors need to be considered – and we are considering them, so I’m optimistic. Bernanke only has so many tools in his power, and he realizes that he is the only authority right now that can make hard, politically dangerous and unilateral decisions, so he’s doing everything he can understanding that it might not be enough, and betting that bigger problems wont erupt from his decisions (namely, a US sovereign debt crisis, which as Reinhart and Rogoff explain, we certainly have the wealth to avoid, but maybe not the political will)

    Having said that, I think I’ve read that the Fed is more worried about the downside of inaction than optimistic about the upside of action. Bernanke is combating specters of deflation (recently with QE) because deflation would make everything much worse.

    Silver lining: business still start during scary times, and loads of incredibly successful businesses started in times like these.

    • November 16, 2010 at 2:49 pm

      I want to make clear that I wasn’t writing a piece suggesting that QE or any other Fed policy will definitely work or certainly improve our employment situation. I was challenging the idea that inflation is a problem right now and that people who predicted that inflation would be a problem because of policies enacted over a year ago would cause inflation were wrong. Yes, I did suggest it would be worth the Fed trying to fulfill the second half of its dual mandate (maintain full employment), but I made sure to write things like, “Unconventional ways to further loosen monetary policy aren’t likely to solve all our problems but it could help alleviate a lot of needless suffering.” And also made reference to it being a bit of a gamble, “put some money on this.”

      I really think the best policy would be a combination of monetary policy, more fiscal stimulus, market friendly tax reform, and long-term budget reforms. The problem, of course, is that our legislature seems unwilling to do any of the latter 3 (and arguably much more important) things so we’re left with just monetary policy. With the equivalent of the combined populations of Ireland, Norway, and Finland all unemployed in our nation I think the downside risks to something like QEII are small. Imagine if we were at full employment right now and someone told you that there was a risk of unemployment swelling up to 15 million people if we didn’t raise inflation somewhat – would people consider that a risk worth taking? That 15M are out of work already, people have become oddly complacent to that reality. There are certainly potential downsides to aggressive monetary policy (here and here) but they aren’t persuasive enough to me to not try anyway. And Bernanke himself (who I think hasn’t been nearly aggressive enough!) has said he can always pull back if things start to get out of control.

      I gotta challenge your idea that “uncertainty” is the major problem right now. I assume you mean policy uncertainty. Here’s some of my past thoughts on that topic (here and here). Here’s some other recent people challenging the uncertainty notion: here, here, here, and here.

      That said, I think you’re basically accurate with the rest (e.g. exports, phillips curve, etc).

      • Fraser
        November 17, 2010 at 1:04 am

        Right, I didn’t want to challenge your point about inflation beyond the statement that raising inflation causally improves employment (which is sometimes true, anyway). You said a lot more about inflation in your piece than that, the rest of which I think I agree with.

        I listed what amounts to policy uncertainty as only one of the uncertainties that are stunting investment. There are other market-based uncertainties that are linked to, but not solely-driven by, government policy (and certainly not just the US government). Examples of uncertainty affecting investor confidence today include: The pace of deleverage going forward for households, companies, and governments; end-consumer behavior in consumer durables, consumer staples, etc.; real-estate and other asset prices; currency policy from foreign countries; European soverign debt crises; commodity prices; market volatility. There are lots of big scary issues that are all hopelessly interwoven, and US government policy is just one (admittedly enormous) factor.

        Looking at your “No More Uncertainty: It’s Demand” post, the items “Government Requirements” and “Taxes” are both affected by government policy uncertainty are look as big as poor sales when combined. And anyway, “poor sales” is too generic for you to draw any conclusions different from the ones I’ve made. Poor sales for B2B SMEs, which no doubt make up a large % of the total SME sector the chart describes, occurs when there is limited investment due to market uncertainty.

        Looking at your “The Great Revision” post, I thimk my response above applies. But further, I don’t see how this is an argument: “Aside from not having much evidence to support this claim, I’m also baffled that people somehow think the free market is more certain. The free-market does a lot of good things, but certainty isn’t really what defines it.” To the contrary, we count on the free market for valuation exactly because it is the most certain measure that we have of an asset’s worth. When the market gets valuation wrong, it is free market forces that (sometimes painfully) correct these values.

        I love the Bertrand Russel quote – definitely one of my biggest heroes.

        All of your other links are about policy uncertainty and not market uncertainty. That is, except for DeLong (who posts WAY too often in my opinion – how the fuck is he also a professor?), which is effectively neutral to our discussion.

  2. zach
    November 15, 2010 at 2:08 am

    Awesome piece, Dan.

  3. November 17, 2010 at 2:47 pm

    I didn’t exactly say that inflation always causes increases in employment. I wrote, “what might raising inflation do? Yup, increase employment.” As well, as the other allusions to chance. But anyway, point taken.

    I certainly don’t claim that there is no such thing as uncertainty. I just dispute that this is the particular problem that is causing our anemic recovery. Uncertainty is often the fuel for capitalism. Entrepreneurs take risks (risks are uncertain by definition) and hope to make money. Did you see “The Social Network”? Zuckerburg took huge risks and entered a field of many uncertainties. I wouldn’t say those uncertainties prevented him from creating a billion dollar corporation. I still dispute that free-markets aren’t uncertain. You took one aspect of markets (price allocation) is generalized it to being representative of the whole. Not only that you basically refute yourself in the same comment. Markets get things wrong, you use the phrase “market volatility,” and all these other things are very uncertain in market economies. We can’t always predict the future (or almost never can) but that doesn’t prevent capitalism from working. That some conservatives are now using “uncertainty” to discredit the President’s policies and suggest that it is those policies that are causing us to be in such a bad economic state is disingenuous. And yes, if prices weren’t stable it would be bad for the economy. But as I tried to argue we don’t have out of control inflation right now and there isn’t any strong reason to worry about it.

    On the “poor sales” part of my argument. You’ll notice that I never said taxes and gov requirements weren’t a problem. I believe I said specifically they were. Not only that, I explained my ideal economic recovery plan would involve tax reform. What that graph shows is that poor sales is what has changed recently and is the particular problem we find ourselves in. Taxes are always a problem. But this economy isn’t suffering at this level because of tax rates (those haven’t changed much… except for downward in most cases), it is suffering because of poor sales/lower consumption. In other words, inadequate demand. Therefore, more money circulating in the economy should help.

  4. Fraser
    November 17, 2010 at 10:23 pm

    Oh geez – I misread you then, sorry. I wouldn’t have brought up my point about inflation and employment if I noticed you wrote “might”. Definitely my bad.

    I know you aren’t claiming that uncertainty doesn’t exist, and I hope I didn’t try to insinuate otherwise. To clear the air, this conversation has gone from one about inflation as it relates to umployment (settled) to the validity of the argument that economic growth is stymied by uncertainty. There are two things I need to touch on here:

    Your entrepreneur example isn’t appropriate: In making a financial decision such as a business investment, one has to consider risk tolerance as well as the magnitude of the impact of the risk taken. An entrepreneur isn’t a representative example of the population we are considering (all businesses), because an entrepreneur has a much higher risk tolerance than, say, management at a 500 person firm that is considering whether or not they should update their widgets by entering into a new contract with Acme, Inc., an SME. This hypothetical firm might rather wait to spend money on updating their widgets until they had a better sense of how they will be performing in the future. That would be a B2B transaction, and when they don’t make this investment, Acme suffers from worse sales. I’m not up to looking for any data to support this, but from the M&A work that I’ve seen (and from school, to be honest), I know that these are decisions businesses make every day.

    To your point about me contradicting myself: Yes, free markets are uncertain to the degree that everything in business is uncertain. And I agree wholeheartedly that everything in businesses is truly wildly uncertain.

    But businesses have to be pragmatic, and want to operate with the greatest degree of certainty they can find. They always look first to the market for that certainty because the market really is the most accurate and robust measuring tool a business has (which is unfortunately saying a lot). Price allocation isn’t just “one aspect” – it is the defining quality of a free market and it’s fundamental to a discussion about our market, so it is perfectly sensible for me to generalize about price allocation here. My previous comment was you shouldn’t be surprised that businesses count on this certainty. Our use of market is “defined” by the certainty the market provides.

    I know the GOP argument about policy uncertainty, but I don’t appreciate that you bring it up in the same breath because I’ve explained twice now that I am talking about more than just policy uncertainty. Business is in a quagmire due to more than just policy uncertainty, and the negative effects of all of these uncertainties are far greater than they are normally. This has much to do with to the highly levered position everyone is in.

    Incidentally, this uncertainty also plays into decisions companies make about employment. Monetary policy just makes it cheaper for business invest (e.g., hire), but the decision comes down to those businesses, who can do any number of things with that cheap money. This includes sitting on it until they are more certain of how their position is going to change.

    “Poor sales”: You’re right – I was just being a bit cheeky in pointing out that the NYT was bending the truth when their opening sentence was “The biggest single problem facing America’s small businesses isn’t taxes or overregulation”. It’s the second biggest problem, and only 2nd by a tad. Didn’t have to do with you, really, aside from the fact that your title was “No More Uncertainty: It’s Demand”

    And if you’ll allow me to be pedantic for a moment: risk and uncertainty are different in that risk is measurable (like odds at a roulette table) while uncertainty isn’t. But I know we have both been using these terms interchangeably – I only bring it up in response to you calling risks uncertain “by definition.”

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: