Friday, May 29, 2009

Inflation is a "supply-side" phenomenon

Where I do agree with Laffer is the argument that inflation is a supply-side phenomenon. In other words, if the supply of goods and services (the real assets that we need to live our lives) is abundant (as in Adam Smith's characterization), then there will be no inflation. It has nothing to do with money and certainly nothing to do with the level of reserves in the banking system. On the latter point, a high level of reserves tied to monetary policy that is driving interest rates to zero is deflationary, not inflationary.

The supply-side is where the Obama Administration has made a critical error in judgement, in my opinion. Because they don't understand our monetary system and, therefore, are influenced by erroneous claims such as, "taxpayer on the hook (applicable only under a gold standard). They are implementing policies that will shrink the nation's ability to produce the real assets that we need to live. That will create shortages of supply in everything from vehicles to homes to skilled and educated workers.

This will ensure long-term inflation that is not commodity based.

1 comment:

googleheim said...

Underlying Republican't ideology though is to starve departments of the government, declare them broken or unconstitutional, and or then rework them for unbridled deregulation.

Newt Gingrich's attack on PBS and Barney the purple dinosaur's grant monies, or Colin Powell declaring the state department broken, or Tom Delay's declaring that the Department of Education is unconstitutional and should be closed down.

Finally, keep in mind that "tax payers on the hook" is only a function of the reality of the fetishness of the blatant deregulation of the derivative markets and the blatant manipulation of the Lauffer curve such that everyone everywhere is always on the right hand side - taxes are too high and tax revenue is too low.

We know this is false because if the tax code was updated on the sector of wall street that created the CDO's and all the mess based on false leverages of 30:1, then it would have been seen that this particular market was on the left hand side of the curve and demanded more regulation and concern given that it's fundemental basis on ever rising house prices was truly the real reason for the current crisis and why ...

tax payers were on the hook

way before the spending or lending