In one of the lead letters in the Wall Street Journal on 12/20/21 (print edition on 12/21/21), John Tamny closes with the following statement:
The state of the consumer-price index is a political phenomenon born of panic, not an inflationary story of dollar-price decline.
I assume that by “dollar-price decline,” Tamny means a decline in the value of the dollar; otherwise it wouldn’t be an “inflationary story.” But Tamny doesn’t deny that consumer prices have risen a lot. Another way of saying that consumer prices have risen a lot is that the value of the dollar has fallen.
So the CPI increase is a story of dollar-price decline.
Does anyone know any interpretation of Tamny’s sentence that both fits the recent data and is not contradictory?
Note: Lawrence H. White, “Inflation,” in David R. Henderson, ed., The Concise Encyclopedia of Economics, is still one of the best overall concise treatments of inflation.
READER COMMENTS
Scott Sumner
Dec 23 2021 at 8:12pm
I’ve had issues with other stories by Tamny. The only thing I can think of is that maybe he meant dollar-price to refer to the US trade-weighted foreign exchange rate. But then why not say so?
Jule Herbert
Dec 23 2021 at 8:33pm
I think the following link’s article explains Tamny’s view of money and monetarism. He seems to deny the underlying truth of the “monetary equation.”
https://www.realclearmarkets.com/articles/2021/10/26/lets_be_realistic_there_are_bathtubs_of_dollars_around_the_world_800345.html
Matthias
Dec 23 2021 at 11:28pm
Thanks for the link.
That seems to be a rather confused article.
A big part of the confusion seems to be that inflation historical was used both for increase in the money supply, and an increase in the price level.
The last paragraph seems to suggest that a dollar with a firmer base would leads to more dollars.
That’s exactly what Scott Sumner also suggests: slow ngdp growth or low inflation leads to a bigger central bank balance sheet. (Similarly that’s also what George Selgin’s writings suggest indirectly for privately supplied money.)
The quantity equation of money is trivially true, if you rearrange it to define velocity via the equation.
The empirical content is not so much in the equation itself, as in the implicit assertion that the velocity of money is roughly stable.
Tammy’s piece can maybe be interpreted to say that a more stable dollar would lower velocity so much that it would lead to many more dollars _and_ stable prices at the same time. Similarly a devalued dollar would lead to fewer dollars.
But I am not sure about that interpretation. The linked piece is just too confused.
George Selgin
Dec 24 2021 at 5:05am
“slow ngdp growth or low inflation leads to a bigger central bank balance sheet.”
I’ve never maintained any such thing.
Matthias
Dec 24 2021 at 9:19pm
Sorry, for putting words in your mouth!
Let me try to be a bit more precise, and perhaps you could tell me how far off I am, please?:
When multiple currencies compete, people are more likely to hold more real value in currencies that hold their real value better or even gain value over time?
For things like gold coins, the ultimate effect is a bit complicated, and I don’t want to get into it here.
But for things that are produced, like fiduciary media or fiat money, that extra demand for stable money would allow the issuer to circulate more of their currency?
So the balance sheet of the issuing bank would expand? (No central bank in this scenario here.)
Now that argument by itself doesn’t touch ngdp, only the value for money.
To say something about ngdp, I remember some arguments in Less than Zero about how the dynamics of (free) fractional reserve banking automatically stabilise ngdp when the amount of base money reserves is fixed?
If ngdp falls for some reason (say people become more risk adverse and want to spend less money and hold more), profit seeking banks can issue more money?
Did I go wrong anywhere here?
David D Boaz
Dec 23 2021 at 8:38pm
I think what he means is that the current rise in prices is a result of supply problems, caused either by the pandemic or by presumably unnecessary “panic” about the coronavirus, and not a monetary phenomenon.
vince
Dec 24 2021 at 3:23pm
I agree with your intrepretation. Tamny is pointing to “the imposition of ‘command-and-control’ lockdown policies.”
Walter
Dec 23 2021 at 11:10pm
Here is another example of his contention: “Inflation is a decline in the unit of account. In our case, a decline in the dollar. The problem there is that there hasn’t been any notable fall in the dollar versus currencies or commodities of late.”
https://www.realclearmarkets.com/articles/2021/12/16/thats_an_ugly_cpi_number_thank_goodness_its_not_inflation_807836.html
vince
Dec 24 2021 at 4:21pm
Thanks for the link to Lawrence White article on inflation. It says the Fed increases the money supply by purchasing bonds. That money is deposited in banks, who use the money to buy securites or make loans.
Why would any Tbond investor sell and then let the money sit in a bank, rather than pull it out immediately and reinvest in other securities or investments–which would not increase bank loans?
Michael S.
Dec 26 2021 at 5:10am
The whole discussion seems surreal to me: why doesn’t anyone mention labor income?
Tamny argues we’re experiencing a supply shock. No one will disagree. The shock mainly destroyed labor; capital is mostly what it was before. So we expect a decomposition into 1. a price increase of labor (and its output goods — inflationary) and a new (lower) equilibrium of economic activity (not inflationary), mediated in the concrete steppes by higher prices for goods/services without increased incomes to match.
Excuse me for not formalizing it in a simple blog comment, but it’s not particularly revelatory either. How is any of this controversial?
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