06 August 2009

Romer on inflation

The White House economic advisor, Christina Romer, reveals philosophy on the underlying cause of inflation (here).
She signaled little concern about inflation, adding that deflation was a greater worry, in her view.

"Inflation doesn't just come from nowhere. It comes from an economy overheating," Romer said. "And we are so far from overheating I think we have a long time before we really have to worry about inflation."
A brief jaunt around the web (for instance, at wikipedia) should convince you that government spending and/or government printing of money is at least a strong "inflationary pressure".

Economists come in different flavors, I know:
Money supply is also thought to play a major role in determining moderate levels of inflation, although there are differences of opinion on how important it is. Monetarist economists believe that the link is very strong; Keynesian economists, by contrast, typically emphasize the role of aggregate demand in the economy rather than the money supply in determining inflation. That is, for Keynesians, the money supply is only one determinant of aggregate demand.
Turns out that if you look at the cause of aggregate demand, you will find this:
Demand-pull inflation is caused by increases in aggregate demand due to increased private and government spending, etc.
So, (if you subscribe to Keynesian economics) government spending will increase aggregate demand which will cause inflation (specifically demand-pull inflation), never mind the direct influence of monetary supply on inflation. Granted, the overall inflation rate may not explode since we will probably experience some "supply shock" through all this recession, but Romer is (IMHO) either ridiculously inept or collusional to redefine the root causes of inflation as she has here.

If you are not convinced, consider the experience of a chief federal reserve officer on his recent trip to China:

Richard Fisher, president of the Dallas Federal Reserve Bank, said: "Senior officials of the Chinese government grilled me about whether or not we are going to monetise the actions of our legislature."

"I must have been asked about that a hundred times in China. I was asked at every single meeting about our purchases of Treasuries. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States," he told the Wall Street Journal.

[sarcasim] Maybe China (who holds 6.7% of all U.S. treasury securities) should have a sit down with Romer who could assure them that printing money has nothing at all to do with the value of the U.S. dollar--it all depends on how "hot" the economy is. [/sarcasm]

1 comment:

  1. I agree with this. The Austrian school of economics says that inflation happens the moment the money is printed, but its effects show up later.