Skip to comments.ART LAFFER: I Was Wrong About Inflation And The Fed
Posted on 01/03/2014 10:22:34 AM PST by SeekAndFind
Arthur Laffer is a legend in Washington, having been the leading voice on President Ronald Reagan's hawkish Economic Policy Advisory Board.
His "Laffer Curve," which argued that there are diminishing returns after a certain point of taxation, was taken as gospel.
If his views are not quite as frequent a presence in public debate, it's largely because Laffer's pet issues, regulation and taxes, took a back seat during the George W. Bush and Barack Obama administrations.
But Laffer himself still occasionally makes appearances on the public scene.
And in June of 2009, he penned an op-ed warning excessive quantitative easing would inevitably lead to higher inflation and interest rates.
...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 ...Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges. It wasn't a pretty picture.
Obviously, nothing like that happened.
In an interview with Business Insider from his office in Tennessee, Laffer admitted that he was wrong. The old maxim that dictates increasing the availability of cash through lower interest rates will lead to higher prices, he said, may need to be reexamined.
"Usually when you find the model this far off, you've probably got something wrong with the model, not that the world has changed," he said. "Inflation does not appear to be monetary base driven," he said.
He's not totally comfortable with what the Fed is doing, however. "Ask me whether inflation represents longer term problem, I think there's a potential there for excess reserves to create problems."
But it now seems impossible to predict.
(Excerpt) Read more at businessinsider.com ...
The rest of the world has too much to lose, and thus has no choice but to play along with the Fed’s scam.
Huh? Then why is everything I’m buying especially food going through the roof?
Western economies right now “need” to deflate. Obama’s policies are forcing the Fed to inject money into the system in a misguided attempt to re-inflate a deflating economy. The longer this goes on the worse the actual deflating correction will be...
The reason we’re not seeing inflation like we should is because people are panicked and not spending. Inflation is defined as too much money chasing too few goods. (Hyper inflation is people bailing out of currency as a store of value and into assets.) Our collective bunker psychology (caused by Obamacare and the job market) is keeping prices lower than they should be. But we do have inflation. I’m sure you’ve noticed in the grocery store. Cars, despite their high cost, are a relative bargain. They haven’t gone up nearly as much as food.
Art’s not ‘wrong’ per se.
It’s just hard to predict when the crash is coming with all the “created” cash being dumped into the economy holding stocks, bonds and real estate (investors) up. Iffen you buy mundane things like “food” and “Fuel”, well—it’s already here.
“Huh? Then why is everything Im buying especially food going through the roof?”
Food and gas (ie. the two things you actually have to buy, ie the two things that actually measure inflation) are specifically excluded from the govt inflation calculation.
Figures don’t lie but liers sure figure.
The contraction in credit reduced the money supply almost as much as the Fed quantitative easing increased it.
If the economy recovers and credit returns then there is potential for inflation. But the FED can sale the bonds it bought on the open market reducing the money supply and keeping inflation largely in check.
Combine that with the fact that the government is probably understating inflation by a couple of percent to avoid having to pay seniors increased social security benefits.
The debt is mushrooming totally out of control and a huge portion of it out of sight and off the balance sheet. The fed is swamping us with phony money, propping up the markets. Obama and the democrats couldn’t care less. Their bubble will burst after they’re gone.
I thought the fact that 80% of the QE money being held by banks as excess reserves had something to do with keeping inflation in check, and when that ends, all bets are off.
Needless to say, excluding food costs from the calculation of inflation is Laff-able. “Food and energy costs are too volatile. Therefore they should not be used to show inflation.”. He he.
Where is the money? That’s what puzzles me.
But inflation can only result from an increase in the money supply.
gawd, is he stuck on stupid?
I don’t really get that either, but the way I understand it, some time ago they stopped including food and fuel when calculating for inflation. Now, having said that, why would that matter? Increasing price of food and fuel SHOULD affect all commodities I would think.
So, bottom line, I have no idea! LOL I guess I need to reread some of Sowell’s books!
Guess Art hasn’t been out to buy bacon eggs & milk lately. The inflation is there on the shelves, not in the stats.
You’re right, of course.
But in the end, the king will be revealed as nekkid.
The part I struggle with is timing...
I would think inflaction is a factor of both money supply and velocity. I think the supply is way up, but the velocity is way down. That is why inflation is not up as much as Carter (but is up much more than the fed admits to).
In a way he is right. Based purely on the vast number of dollars created during the Obama terms of office, we should resemble the Weimar Republic. People should be walking around with baskets of money to buy an apple.
Why isn’t that happening?
I would like to hear more of what Dr. Laffer has to offer on this. I don’t think I agree with the idea that inflation is not monetary base driven. What is apparently happening is massive interference with the markets through manipulation.
What I find most telling is that a real economist, not a government funded university hack, is willing to admit he may be wrong when the real world data does not prove out. Try and get that from Paul Krugman.
The Bureau of Labor Statistics publishes the inflation rate both with and without gas and food. Now which one is publicized by the press during any month is up to them. The one used to calculate things like the Social Security COLA includes gas and food.
The reason we are seeing fuel costs go up is at least two-fold. First, as all crude is purchased in USD, and its value has declined in real terms. Crude is negatively correlated to the dollar, thus the price of crude has gone up. Secondly, Asian consumption of crude has also gone up considerably over the last 2 decades.
Food costs are highly correlated to oil costs. Crude is used in the production of fertilizers, the powering of farm vehicles, the transport of food, and its display and sale. Thus higher fuel costs generally equals higher food costs.
Finally, with loss in GDP during 2008-2009, an opinion is that QE has replaced less than 75% of the loss, and that is partly why we haven’t seen inflation. Combined with a largely stagnant US economy and slow global consumption, inflation is low. However, it won’t likely stay that way, in my opinion.
Yes supply is up, but where is real capital.
Yes no velocity means no turns which means no real commerce. When the system crashed they essentially flooded the markets and banks with cash and really forced banks to get garbage off their balance sheets no matter what. But it feels totally contrived and controlled. Again no real free-market accelerator for growth...
Smallish loaf of bread yesterday 4.79.
Swiss cheese 22.95 a pound. Gas 3.69 a gallon regular, 3.89 ethyl at cheapo station. Breakfast (no orange juice ) with tax and tip at small diner 22.70. One bedroom apartment rents in marginal neighborhood ( pretty much ok to walk in daytime if you keep your wits about you; stay in at night) 2900 and climbing. 3600 in a safer area. But no, there’s no inflation. Because the fed govt doesn’t include these things in its “ inflation statistics “. Everything’s wonderful. The Obama regime is in power. What could possibly be wrong?
His credibility will henceforth be a laff
Nobody on the panel believed him because inflation was very high just previously during Carter's regime. What he explained is that the manufacturing capacity in Asia is growing by orders of magnitude. High inflation requires BOTH, excess monetary expansion PLUS lack of goods and services to absorb the cash. There is no shortage of goods and services from Asian countries as far as the eye can see.
Besides, Western economies are not growing at a fast rate. So there is no hard demand push.
“Smallish loaf of bread yesterday 4.79.
Swiss cheese 22.95 a pound. Gas 3.69 a gallon regular, 3.89 ethyl at cheapo station.”
In 2008 it had taken 200 years to print $900 billion. That was all the US money in the world. in 2009 they printed $900 billion more. In 2010 another $900 billion. Then, they added $87 billion a month (quantitative easing.) The value of stuff hasn’t gone up, the value of the money has gone down.
Stalling. It is what I see as well. Save for the bright spots of energy production and what supports that the economy is stuck. I see storm clouds in energy production as well... oversupply. Short lived but I think we will see it and a reaction. Not horrible stalling but not good and very limited progression of have nots to become haves. We are about to end our spending years soon. I’m wondering how much / little maintenance will actually be?
As obastardcare impacts sink in I expect the bunker mentality of the sheeple will deepen. They will do what they have to do to provide access to medical care for their children and themselves. This will mean saving an emergency fund and there is also that huge premium increase to pay. The combination will wipe out discretionary spending for many of the common folk.
Job prospects still stink and that keeps wages down.
The economy can’t deal with a shock as great as obastard and his commie thugs without getting the wind knocked out of it. We have not yet seen the full impact of rising electric rates either. That will be ugly and is clearly contrived.
Three more years. What will be left? Who will rebuild?
Inflation has been cured by changing the metric: food and energy are no longer included in the inflation rate. However, even this doesn’t account for the lack of inflation that should be expected from the Fed’s infinite Q.
The only reason that I can see is that the money really hasn’t entered the economy. It is traded directly between the fed and select banks who then buy the debt and play the splits on the interest. Net effect: NULL except for the increase in debt.
The amazing (IE: totally unrelated to real growth or innovation) stock market is more of the fedgov mutual masturbation. Is there anyone who worked for Goldman who isn’t on the other side of the river? Insider trading has taken on an entire new meaning since this team has gained control. The SEC isn’t even a flea on a puppy’s hind end.
Thank God the Democrats are so opposed to WS and big banks, otherwise someone would suspect that they have been colluding to defraud and destroy the entire country!
That's right the Feds is buying it's own bonds
The money flow that normally would happen in Art's model isn't happening. This is why inflation is in check!
I agree, the Fed’s money isn’t in the economy yet pursuing goods and services. But the bulk of US currency is still overseas. As the value goes down other countries will send it here to buy goods and services; turn it into tangible assets. THEN, we’ll see inflation. Would it be racist to hang the president? ‘Cause I’d hang him regardless of his color.
You must live near Central Park in Manhattan for those kind of prices.
Here near the border of Poland, it’s:
$1.25 for a one-kilo loaf of bread.
$2.35 for one kilo of swiss cheese.
$3.35 for one gallon of milk (four one-liter boxes)
Fuel is expensive here, yes....about $7.89 per gallon.
Rent for a one-bedroom apartment (including energy + heating) is $215 per month. Quiet neighborhood.
If you want to save on the gasoline bill, a one-month all areas transit pass is $25. Covers the city and suburban areas, streetcars and buses.
“Inflation does not appear to be monetary base driven,”
Too bad he doesn’t get it. So many people are without jobs, so many jobs have gone overseas, than there is much less money to spend. This drives prices down. Couple that with the inflationary effect of ‘quantitative easing’ and you have inflation and PHD’s working at WalMart.
Yes. The wanton, reckless “printing” of money out of thin air (and the terrible ways it was distributed or “put into circulation”)
has been, in my humble opinion, a criminal raid on the living standard... and savings if you have it...... of every American citizen.
but it gets certain corrupt politicians re-elected....
Had time to think about that now.
That has not held true for certain items that are in short supply. There is a short supply of gold now, but the price is extremely under it's value. On the other side of the ledger, we are virtually swimming in oil and yet the price of gas is inflated. We are driving much less too.
We're the massive rates of interest under Carter due to lack of goods and services? In real terms, I think not. Interest rates were high due to monetary policies at the fed. We continually manipulate the market and specific items sold.
Aren't the banks buying government bonds with the QE money?
The way I understand it, is that the US essentially prints the money for the FED to loan at zero interest; the banks borrow the money (at no interest) to buy US bonds (which pays a low, but very safe interest rate).
It's almost like a check kiting scheme-except it's being done BY the banks and the gov't. The government puts the money back out to sustain the growing non-working class.
Inflation is not so much an issue because it's counteracting the deflation that would normally accompany high unemployment and a shrinking labor force. There is a sort of equilibrium that will exist for who knows how long.
I know people say that the debt is unsustainable; but when you have the luxury of printing money that still has value, the cycle can continue in perpetuity. The balance sheet looks bad, but who cares?
Did something I don’t normally do. I went to McDonald’s and got a value meal of a Quarter pounder with cheese, fries, and a drink. I literally asked the order take her if I heard her right that the cost was $6.59! What the...
Almost $7 for a “value meal”? That won’t happen again real soon. But yeah, there is no inflation whatsoever.
Our country has spent the last 40 years working on virtual money. The balances in our bank accounts are just numbers. Our government has controlled our access to cash and we’ve gone along like sheep.
What would happen if 30% of the people in this country demanded their assets in cash.? Don’t worry, we’ll digitize it for you. There isn’t enough actual money in this world to go around in case you may need yours but there are zillions of virtual zeros out there for you.
I no longer believe in debts, deficits, or Government owing anyone anything. We’re in a virtual world and just like in your favorite SciFi the government should just give everybody 50 credits a week and get it over with.
Obviously, nothing like that happened.
The Fed did the same thing in the 1950's and 1960's, and nothing happened. But then Nixon was forced to close the gold window, and then all the built up inflation broke loose.
Laffer should know better, or his words are being twisted around.
yes, McD has been raising its prices. and the “dollar menu” is now a “dollar and more” menu, with the majority of items now priced above a dollar, some quite a bit above a dollar too.
for what it does, McD does it quite well, but I can’t eat there because I barf it right up (maybe my stomache is just getting more sensitive as I get older). So anyway I don’t suffer from McD-inflation. Just wait until they are forced to start paying double-scale wages......your “value meal” will cash out at about $15 or so
Gold and oil are not manufactured items and Asia can do nothing to produce them in large quantities.
Our gas prices are down from near $4/gal to $3.35 in my neck of the woods, thanks to fracking.
Blame the minimum wage for that. Near my house in a toen called Seatac, the minimum wage is now $15. Try buying a value meal there!
Then why is the price artificially low?
And, re:oil, I would maintatin that gas is still at very high levels compared to the amount of oil produced right now.
What is apparently happening is massive interference with the markets through manipulation.
...and I would think that situation is uncharted territory at least the levels of interference we are experiencing today.
Meaning that no one can predict what will happen, only that happen it will and it won’t be pleasant.
Arts not wrong per se.
You mean that it’s actually an indicator of inflation when you can buy 3 pounds of hamburger for just a little more than 5 pounds of steak cost you a year ago?
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