Inflation Traffic

Paul Krugman blogs on the importance of how wrong inflationistas have been, including even Morgan Stanley predicting in 2009 that inflation would rise to 5.5% in 2010.

Something about that sounds eerily similar to his other post about congested traffic, choices of lanes, and perceptions about getting screwed by being in the wrong lane, though in many cases there is no optimal lane.

Of course, Selective Perception plays a large role here. But as Krugman pointed out, even if all lanes spend equal distance (or time – doesn’t matter) going slow, the uncritical mind will always perceive that they chose a poor lane because they will spend significantly more time “sitting”, watching other lanes whiz by, than having the opportunity to whiz by other lanes themselves – simply because there is no upper limit to how slow your progress can be on the path to a finite destination – but there is a lower limit.

Perceptions about rising prices (and thus inflation) work the same (but inverted). There is a lower limit to how little you can pay to get any particular good (it’s production cost, plus some reasonable profit for the vendor, if we disregard loss-leaders), but there is no upper limit on final price. Selective Perception means we do not notice the instances when price was “fair” but we do notice instances that seem much higher.

Ironically, if the problem really were inflation, then everyone should be able to ask for raises and get them – and if that were the case, then paying $1 more for Oreos wouldn’t matter! The REAL price didn’t changed – and the only problem is that the inflationistas aren’t asking for raises!

But that gets to the other argument put forward by the hard-money crowd – that the problem with inflation, even low inflation, is that low and medium-level wage-earners always tend to receive wage increases at a lower rate than the wealthy. The problem with this argument is that, even if it is true, many of the assets of the wealthy lose real value as a result of higher unexpected inflation (such as bonds and similar instruments). Likewise, debt instruments – which are much more relevant to the non-wealthy – tend to increase in value (that is, they become easier to pay off) with unexpected increases in inflation. All in all, a higher inflation target of, say, 4% (rather than the 2% inflation ceiling implemented by the FED, currently) would tend to benefit the non-wealthy more than the wealthy – but more importantly, would accelerate the deleveraging that is weighing the global economy down.

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About stormculture

In pursuit of reality.
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