24 Comments
Jan 2, 2023Liked by Claudia Sahm

Perhaps a minor quibble, perhaps not so minor: re: Point 5, as creator of U.S dollars, there is no need for the Federal government to impose new taxes to finance subsidies aimed at reducing prices of key commodities, and the government doing so in no way burdens future generations.

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"Unfortunately, this requires more trust than can be hoped for and does not happen."

The "Spirit" most lacking in the USA now is TRUST. Remedial policies by elected officials would be wonderful. In their absence the Fed is the only game in town.

(Really in the year past Biden had a bit of extraordinary and unanticipated luck that totally eluded Obama.) Elected officials have either (1) Totally been captured by corporate desires, or (2) been totally swept up by (juvenile) diversionary culture issues, or (3) thrown off the bus as actual, practical governmental interventions are derided as "socialist" or "communist." No wonder there is little trust in government. How will this vicious cycle be broken?

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Jan 2, 2023Liked by Claudia Sahm

"Outrageously, we leave fighting inflation to the Fed alone. An unelected, unaccountable group decides who wins and loses. Seriously??"

The Fed is, by design, an aristocratic institution inimical to labour. That this "unelected, unaccountable group decides who wins and loses" is no accident -- it's doing the dirty work of capital at the expense of labour. Every. Single. Time.

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This is great (Blanchard's is worth reading but not as clear). The monopoly stuff matters and I also think the creation of software (currently used by corporate landlords) that allows landlords to get near real-time info on rent increases may be important in this discussion.

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I disagree. Exactly nothing Blanchard writes is worth reading, other than to feel despair that he has the ear of some politicians.

If you wish to study human diseases you don't begin by studying the humors and how they create illness. You begin with the germ theory of disease.

If you wish to understand why soap does what it does, you don't begin by studying medieval alchemy; you begin with chemistry and the periodic table.

If you wish to use a rocket to put a satellite in orbit around Mars, you don't begin with Ptolemy's model of the solar system. You begin with Kepler's laws of planetary motion and Newton's generalizations of them with his laws of motion.

You will learn nothing about a capitalist money production economy that is rarely in equilibrium by reading the pseudoscience of equilibrium economists.

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author

I disagree. Blanchard's views are worth considering. He is also one of the few macroeconomists who publicly reversed course on one of his beliefs. Specifically he pushed the IMF away from austerity. It was too late, but it mattered and has affect policy advice now.

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Excellent work Claudia and much appreciated. Good accompanying dialogue as well. I’m still optimistic.

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For a different perspective on inflation, I quite like this from Blair Fix: https://economicsfromthetopdown.com/2022/12/15/inflation-everywhere-and-always-differential/

Different perspectives add to our understanding, but this is not what students get from our mainstream economics schools. Sadly, much of the public discourse is led by media commentators and politicians with a unit of undergrad macro in their comms or political science degrees - and that is where the monoculture of mainstream economics schools insidiously reinforces the status quo.

The conversation has changed, and for the better, but there is still a long way to go. We need to reform our economics schools to allow more diversity of thought (and people…). It's time to stop pretending to study the economy as it is, and start designing the future economy as it should be.

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founding

Could you please explain how the inflation that has ravaged my homeland Zimbabwe since the mid-2000s results from “… firms, workers, [my addition: consumers, shareholders,] and taxpayers. It stops only when the various players are forced to accept the outcome.” Isn’t it more appropriate to say that Zimbabwe’s crazy hyper inflation resulted from Mugabe’s socialist government printing increasingly worthless money like mad in order to pay soldiers, veterans, and government employees? When those trillions of worthless Zim dollars got in the hands of the general public, boom, we had inflation. What on earth did firms, workers, and taxpayers (that’s a joke) have to do with it? Thanks and Happy New Year.

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author

Hyper-inflation is an extreme case and it's clear that the Mugabe's government destroyed your homeland. He had the power and abused it. Olivier did not say who wins.

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founding
Jan 2, 2023Liked by Claudia Sahm

Right. Mugabe. Not firms, workers, or taxpayers.

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Jan 2, 2023Liked by Claudia Sahm

Keep in mind that, in large part, Zimbabwe’s hyperinflation was caused by the dual blows of Mugabe taking farms from experienced farmers and giving them to former soldiers who’d fought with him but lacked farming experience, coupled with a destructive drought. These combined to cripple the country’s agricultural capacity. The increase in the money supply was likely a response to increased food prices rather than the cause.

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author

understood but Mugabe's government and other dictators are particularly bad at good policy. in another, better governed country it would have been much worse.

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KenS, below has the right answer.

I'll only add you must remember most explanations of the hyperinflations of the last hundred years have the cause and effect backwards. The money creation is not the cause. It is the consequence of some other severe disturbance in the society. Whether it's Venezuela or Weimar Germany or Zimbabwe, the cause is some policy which creates a shortage of money. Then bad government, or just stupid government, attempts to fix the problem by creating more money. This is like being on a life raft on the ocean and getting thirsty. Drinking seawater will feel OK for a minute, but it just makes things worse.

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founding

Ok…but which entity in society causes the severe disturbance you point to? I submit that 99% of the time the entity responsible for the severe disturbance is….government. Whether Mugabe seizing white-owned farms and business, or Hugo Chavez in VZ, or the Allied govts imposing impossible conditions on Weimar Germany post WWI, the party most responsible is….government. Again, not firms, workers, consumers, taxpayers, etc.

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It worked. You convinced me. Government is terrible and we should abolish government.

Seriously, what is your point? Yes, Mugabe being the dictator and government caused the disturbance. Yes, the allied powers—governments—imposed and absurd and contradictory regime on defeated Germany.

Stating, yet again, that governments caused the inflation before the excessive money creation is about as interesting as telling me the sky is blue and leaves are green.

Where does knowing governments—whether dictatorial, parliamentary, or republican—cause these problems take you? What is your point?

I'll tell you where it takes me. In contemporary states money creation is a monopoly of the government, or agents or franchisees the government allows to create money. For example, banks create money when they lend money to firms or persons. But banks are, in principle, on paper, heavily regulated by the government to ensure they don't cause problems.

So, knowing the government is the monopoly issuer of the currency, the real questions become, "In whose interest and for whose benefit is this power to create money used?" and "For whose benefit does the government's chief monetary agent—the central bank—work?"

Ours supposedly has a dual mandate: price stability and full employment.

But equilibrium pseudoscience says full employment will cause an inflation fire, as idiot Blanchard himself tweeted before.

If the prevailing economic pseudoscience tells us full employment causes price instability (i.e. inflation), and our central bank is supposed to ensure no—or very little—inflation AND full employment, I call bullshit. Equilibrium pseudoscience is utter nonsense.

This pseudoscience is what all those dimwits—Blanchard, Summers, Krugman, and the recent fake Noble prize winner Bernanke—believe. Let's not forget Blanchard in 2008 said "The state of macro is good." In 2008. Moron. Let's not forget Bernanke and Krugman don't understand banks create money when they make loans. Let's not forget these fools still believe the loanable funds nonsense even though the Bank of England and the Bundesbank have explicitly said banks do create money when they lend.

So, what do we know?

We know equilibrium economics pseudoscience is as wrong about our economy as the geocentric model of the solar system is wrong about our solar system.

We know the cult leaders of this pseudoscience—Blanchard, Krugman, Bernanke, professors here and there, Fed chairmen and chairwomen—are actually so ignorant of how our economy actually works they didn't see the big crash in 2008 coming.

(If you have a theory of motion that does not allow you to calculate whether a giant asteroid spotted by a telescope is gonna hit us, then what good is your theory?

If you have a general theory of the economy, like say a dynamic stochastic general equilibrium model, that doesn't help you see a giant financial crash coming, then what good is your theory and model?)

We know somehow these cult leaders have been given power to make policy.

The problem is not government or the idea of government. The problem is what is in the heads of the people in government who have been given power to make policy.

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Well, it's great that Blanchard is now saying something that makes sense but I can't help but think why it matters what any neoclassical equilibrium economist thinks about anything, other than there are still thousands of people still in the neoclassical cult and able to influence policy.

Blanchard is like a Ptolemaic astronomer sometime around 1630 saying, "Yes, I do think we should consider the possibility the sun is at the center of the solar system and the orbits are elliptical."

Well, we're glad you're on board, man, but we've been saying this for decades, you moron.

On 26 Feb 2021 he tweeted, "If this increase in demand could be accommodated, it would lead to a level of output at 14% above potential. It would take the unemployment rate very close to zero.

This would not be overheating; it would be starting a fire."

What a moronic statement. You have to be an IMF chief economist to say something so stupid, all the effects of a good education.

Look at his thread from 5 Aug this year. He keeps reifying and talking about "inflation" as if it's one well-defined thing despite the academic definition of inflation being an utterly useless and vague notion of a "general increase in the price level." Yeah, my organic vegetables got more expensive last year, but my internet service and mobile phone service didn't, idiot, so what exactly are you saying?

Equilibrium economists have no predictive theory of inflation. But political economists do. Blanchard should just sit in the corner with Summers and Krugman, and they should all shut up and learn before they open their mouths.

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author

I have disagree with Olivier several times. That said, I always consider his views. He, not I, has the ability to change the mainstream thinking. In that spirit, his thread is extremely important.

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General questions: have you found the comment moderating tools better in substack than other platforms? Is chat moderation different?

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author

as the author, I have full control of moderation, very good!

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Jan 2, 2023Liked by Claudia Sahm

Glad it is a safe space for you to contribute your knowledge. Your ideas are much appreciated!

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Blanchard is spouting utter nonsense. CPI/PCE inflation is driven by the real value of the dollar, for which the CRB Index is a "good enough" indicator. The Fed has the power to target and stabilize the CRB Index and thereby hold PCE inflation within a narrow range centered on 2.0% no matter what anyone else does.

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So a little memory from, I think, the start of 2021. I recall hearing there was shortages of cream cheese. I shrugged, got a bagel with butter instead. But shortages shouldn't exist in the pure market model. If for some reason cream cheese runs short (either due to demand or supply issues), the price should just go up. The bagel shop should always have cream cheese, they may charge $5 more for it, but they will have it.

Blanchard, then, is saying here's where the power conflict starts. The bagel shop is opting not to just raise the price. I'm opting to instead just substitute butter. While this state of peace will last for a bit, sooner or later sparks will fly. The shop will demand I pay more, I will be confronted with that and decide do I fight back or demand my employer pays me more in exchange. Much like a single punch at a sporting event can quickly grow into a full blown riot, the action begins.

But before this point, suppose the gov't is smart and notices that there are some import quotas on cream cheese. By relaxing those, cream cheese can flow to the bagel shop (making them and me happy) but since the price doesn't go down, domestic cream cheese makers aren't too upset. This, though, requires a very smart government and a bit of luck that an easy fix just happens to be in the place where the first sparks are going off.

A more marco-monetarist view may say this is a bit like using sandbags to hold back a flooding river. Yes in theory if you had enough sandbags and put them just right you could hold off even a 100 foot cresting river but the reality is anything beyond a temporary barrier to hold off the surge is going to fail since the water will find some gap left and start pushing into it.

Too much money floating around will mean even if the cream cheese shortage is promptly fixed by a supply side policy that makes sense, that will only be a tiny boost to aggregate supply. The water (too much money) will soon find other places to start forcing its way in and unless there are massive, quick, reforms that can start a production boom almost immediately (such as in China in the 80's and 90's), you're going to throw in the towel and turn to the hammer of the central bank.

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All this discussion in Twitter reminds me of the work of the distinguished argentine economist Julio HG Olivera on structural inflation

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