John Maynard Keynes on Inflation

[Ogaden]

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.

 

Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

 

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

 

In the latter stages of the war all the belligerent governments practiced, from necessity or incompetence, what a Bolshevist might have done from design. Even now, when the war is over, most of them continue out of weakness the same malpractices. But further, the governments of Europe, being many of them at this moment reckless in their methods as well as weak, seek to direct on to a class known as "profiteers" the popular indignation against the more obvious consequences of their vicious methods.

 

These "profiteers" are, broadly speaking, the entrepreneur class of capitalists, that is to say, the active and constructive element in the whole capitalist society, who in a period of rapidly rising prices cannot but get rich quick whether they wish it or desire it or not. If prices are continually rising, every trader who has purchased for stock or owns property and plant inevitably makes profits. By directing hatred against this class, therefore, the European governments are carrying a step further the fatal process which the subtle mind of Lenin had consciously conceived. The profiteers are a consequence and not a cause of rising prices. By combining a popular hatred of the class of entrepreneurs with the blow already given to social security by the violent and arbitrary disturbance of contract and of the established equilibrium of wealth which is the inevitable result of inflation, these governments are fast rendering impossible a continuance of the social and economic order of the 19th century. But they have no plan for replacing it....

 

The inflationism of the currency systems of Europe has proceeded to extraordinary lengths. The various belligerent governments, unable or too timid or too short-sighted to secure from loans or taxes the resources they required, have printed notes for the balance. In Russia and Austria-Hungary this process has reached a point where for the purposes of foreign trade the

currency is practically valueless. The Polish mark can be bought for about [three cents] and the Austrian crown for less than [two cents], but they cannot be sold at all. The German mark is worth less than [four cents] on the exchanges....

 

But while these currencies enjoy a precarious value abroad, they have never entirely lost, not even in Russia, their purchasing power at home. A sentiment of trust in the legal money of the state is so deeply implanted in the citizens of all countries that they cannot but believe that some day this money must recover a part at least of its former value.... They do not apprehend that the real wealth, which this money might have stood for has been dissipated once and for all. This sentiment is supported by the various legal regulations with which the governments endeavor to control internal prices, and so to preserve some purchasing power for their legal tender....

 

The preservation of a spurious value for the currency, by the force of law expressed in the regulation of prices, contains in itself, however, the seeds of final economic decay, and soon dries up the sources of ultimate supply. If a man is compelled to exchange the fruits of his labors for paper which, as experience soon teaches him, he cannot use to purchase what he requires at a price comparable to that which he has received for his own products, he will keep his produce for himself, dispose of it to his friends and neighbors as a favor, or relax his efforts in producing it.

 

A system of compelling the exchange of commodities at what is not their real relative value not only relaxes production, but [also] leads finally to the waste and inefficiency of barter. If, however, a government refrains from regulation and allows matters to take their course, essential commodities soon attain a level of price out of the reach of all but the rich, the worthlessness of the money becomes apparent, and the fraud upon the public can be concealed no longer.

 

The effect on foreign trade of price-regulation and profiteer-hunting as cures for inflation is even worse. Whatever may be the case at home, the currency must soon reach its real level abroad, with the result that prices inside and outside the country lose their normal adjustment. The price of imported commodities, when converted at the current rate of exchange, is far in excess of the local price, so that many essential goods will not be imported at all by private agency, and must be provided by the government, which, in re-selling the goods below cost price, plunges thereby a little further into insolvency....

 

The note circulation of Germany is about 10 times what it was before the war. The value of the mark in terms of gold is about one-eighth of its former value....

 

It is a hazardous enterprise for a merchant or a manufacturer to purchase with a foreign credit material for which, when he has imported it or manufactured it, he will receive mark currency of a quite uncertain and possibly unrealizable value....

 

It may be the case, therefore, that a German merchant, careful of his future credit and reputation, who is actually offered a short-period credit in terms of sterling or dollars, may be reluctant and doubtful whether to accept it. He will owe sterling or dollars, but he will sell his product for marks, and his power, when the time comes, to turn these marks into the currency in which he has to repay his debt is entirely problematic. Business loses its genuine character and becomes no better than a speculation in the exchanges, the fluctuations in which entirely obliterate the normal profits of commerce....

 

Thus the menace of inflationism described above is not merely a product of the war, of which peace begins the cure. It is a continuing phenomenon of which the end is not yet in sight.

How ironic is it that Keynes is considered the patron saint of inflationary economics?  Keynes wrote this essay just after the first world war, yet the themes seems as relevant today as ever.

Edited July 22, 2016 by Ogaden

[SoS]

He is the patron saint of advancing whatever theory serves his patron.

 

I find the above kinda naive of both Lenin and Keynes. Inflation is the lifeblood of capitalism. Sure, it can infrequently shoot out of control, temporarily. The worst cases are in governments that are basically committing a fraud with their printing presses. More commonly, the crash caused by skyrocketing inflation is due to the inability to grow value at anywhere near those rates.

 

You want to ruin capitalism? Deflation. It would destroy the profit motive.

[Lilac Veritas]

I agree with Keynes here, however the context is important. They had REALLY high levels of inflation which destroyed real wages. Nowdays with independent central bank focusing on keeping inflation in a target band, its not really an issue. However these long-running low-inflation expectations have made the economy more vulnerable to deflationary pressures. In May the Reserve Bank of Australia cut rates to 1.75% due to deflationary pressures. Once your money is worth more in the future then both the profit motive for allocative, technical and productive efficiency, and the price mechanism is destroyed. Measures like negative interest rates can cause distrust in the financial system.

 

Anyway back to the extract at hand, Keynes makes excellent points on the dangers of hyperinflation: whilst initially people are slow to react to change, people directly barter goods as currency becomes worthless due to its true purchasing power being realised in the exchange market and that flowing back as import prices skyrocket. 

[SoS]

REALLY high inflation when? WW1 or post reps Germany? Total war and sending all your wealth in reparations is abnormal and a poor benchmark.

[PigInZen]

>Lenin 

 

stopped reading

 

You don't think you can learn something by reading opinions and theories with which you cannot find agreement?  Seriously, do you always check your sources for appropriateness before investigating what's inside?

 

Just because I don't like Austrian economic theory in general doesn't mean there isn't anything valuable to be learned from studying it.  Or perhaps you believe you've already learned everything there is to know about Lenin...

[Donald Trump]

You don't think you can learn something by reading opinions and theories with which you cannot find agreement?  Seriously, do you always check your sources for appropriateness before investigating what's inside?

 

Just because I don't like Austrian economic theory in general doesn't mean there isn't anything valuable to be learned from studying it.  Or perhaps you believe you've already learned everything there is to know about Lenin...

Lord Floof Floof is 16 according to his profile, so I guess he does know everything!

 

[Doktor Avalanche]

You don't think you can learn something by reading opinions and theories with which you cannot find agreement?  Seriously, do you always check your sources for appropriateness before investigating what's inside?

 

Just because I don't like Austrian economic theory in general doesn't mean there isn't anything valuable to be learned from studying it.  Or perhaps you believe you've already learned everything there is to know about Lenin...

An amusing fact is Economists do not divide themselves into tight stoic clans vying for complete dominance of societies worldwide, waving flags of their specific ideologies on the market and parliamentary battlefields. To be blunt the ideologies are influences of direction used by all, not military banners of division. Only online chatrooms and forums do pointless battles rage on by pseudo-intellectual economists.

[SoS]

An amusing fact is Economists do not divide themselves into tight stoic clans vying for complete dominance of societies worldwide, waving flags of their specific ideologies on the market and parliamentary battlefields. To be blunt the ideologies are influences of direction used by all, not military banners of division. Only online chatrooms and forums do pointless battles rage on by pseudo-intellectual economists.

No, the political establishment waves economists and specific economic ideologies like flags and banners. And, economists either write to suit their patrons' interests or more generally they foll in line with the dominant theory.

 

Are you a professional economist?

[PigInZen]

No, the political establishment waves economists and specific economic ideologies like flags and banners. And, economists either write to suit their patrons' interests or more generally they foll in line with the dominant theory.

 

Are you a professional economist?

 

He's not but Kemal is.  

 

Should i have outed you Kemal or are you living a closeted life? wkwkwkwk

[SoS]

That would be nice, bcs I like to discuss economics.

 

Lo Pan, don't criticize psuedo-anything unless you are something yourself. You're a very bad man. Very bad.

[Donald Trump]

That would be nice, bcs I like to discuss economics.

 

Lo Pan, don't criticize psuedo-anything unless you are something yourself. You're a very bad man. Very bad.

Dark Magicans should be deported! 

[Lannan13]

Inflation isn't the evil everyone thinks of. It is necessary, but must be controlled.

[SoS]

Yeah, look what they did in the housing bubble. And, Greenspan acting like he didn't have a clue.

 

It was so obvious. I made so much money through their setup.

Edited July 27, 2016 by SoS

[Doktor Avalanche]

No, the political establishment waves economists and specific economic ideologies like flags and banners. And, economists either write to suit their patrons' interests or more generally they foll in line with the dominant theory.

 

Are you a professional economist?

No.

My brother is an Economics Professor; my cousin works for the Institute for Study and Labor in Germany; my niece works for the Economic Policy Institute in Washington D.C.

 

All three are Economists. My Niece is also a credited Phd. Statistician.

 

I am only a degree holding Religious Scholar.

Edited July 28, 2016 by Lo Pan

[SoS]

I like that threads on economics always turn to "you don't know shit about economics". We could be talking about theoretical shit...but economics, no.

 

I'm educated in economics. I don't have a degree, but I wasn't seeking a degree in economics, just the knowledge. I didn't want to be a teacher or a statistician.

 

Your original point was most economists are merely scribes for the religion. I agree.

 

Any insights on the inflation thing?

[Doktor Avalanche]

Any insights on the inflation thing?

As in "inflation bad?" or "inflation rising?"

 

An increase in inflation is not bad. A major increase in inflation is bad.

A decrease is not bad. A major decrease is really bad.

 

Basic shit. So no. Not really. 

[SoS]

Which factor caused the last major inflation spike in the run up to the great recession?

[Doktor Avalanche]

Interest Rates were higher than now but not ridiculous.

 

The Housing Market was saturated but too many bought but could not afford it. Many people blamed deregulation but there was no actual deregulation but enforced regulation from the government requiring banks to accept people/families who could not actually afford the loans being taken out. People failed to pay. Foreclosures on a huge scale. Boom! Recession. No inflation spike.

[SoS]

Interest rates were very low by normal standards. And stupid low in light of the housing bubble and economic growth. In fact the fed (specifically Greennspan) was asked why he was so stupid. His reply was he had faith in the market to self adjust. Easy money was a huge demand side factor.

 

Then you had oil quadruple in 5 years. Oil isn't on the cpi, but everything that requires oil or transportation tripled in the same time frame. Supply side factor.

 

Everything looked fun until unemployment got below transitional figures. Then wages inflated dramatically. Eventually roi and productivity couldn't feed the fire and it all collapsed.

 

I don't like how victims of all this are painted as the cause. The fed could have prevented all this, but they chose to let it happen. Keynes wrote some basic wisdom on interest seeking that would benefit anyone to learn. It briefly explains most economic activity.

[Doktor Avalanche]

Interest rates were very low by normal standards. And stupid low in light of the housing bubble and economic growth. In fact the fed (specifically Greennspan) was asked why he was so stupid. His reply was he had faith in the market to self adjust. Easy money was a huge demand side factor.

 

I don't like how victims of all this are painted as the cause. The fed could have prevented all this, but they chose to let it happen. Keynes wrote some basic wisdom on interest seeking that would benefit anyone to learn. It briefly explains most economic activity.

I agree. I cannot blame people trying to buy homes for themselves, especially when banks were required to lower their requirements to allow buyers of all types.

 

Interest Rates have not been horrible or drastically fluctuated for a long time.