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Inflation Has Been Contained - But Not Because Of A Liquidity Trap

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Mises Institute

By Hal Snarr

Nobel laureate Paul Krugman took a victory lap on the pages of The New York Times in front of all who warned of impending runaway inflation from the Fed's massive monetary expansion. He did more than pronounce them wrong. He (a) labeled their analyses "unprofessional derp," (b) identified himself as one of a few who "correctly predicted" the Fed was not causing runaway inflation, and (c) identified the Keynesian liquidity trap as the culprit that has kept inflation subdued.

With all due respect to Professor Krugman, his pronouncements are clever and misleading. This is an apt characterization given the tone of his victory lap. His pejorative use of "Austrian types" and lumping "the Glenn Beck/Ron Paul frothing-at-the-mouth Austrian types" with monetarists in a giant homogenous blob of "unprofessional" subscribers of "right-wing ideology" mirrors his conflation of consumer price inflation and the Austrian concept of inflation.

Ludwig von Mises pointed out that newly printed money is not equally distributed to all members of society. It gets credited to the bank accounts of government and banks first. It then flows to defense contractors who sell bombs and boats to the Department of Defense, or it flows to the investor class which borrows to leverage investments in stock, real estate or bitcoin. Hence, massive increases in the monetary base inflate stocks, homes and bitcoin well before they inflate consumer prices.

Stock, home and bitcoin prices are graphed with the monetary base below. The monetary base's correlation with the S&P 500 and with bitcoin are very strong. The correlation between home prices and the monetary base is strong prior to 2008 and after 2012.

Why Inflation Has Been Contained: Interest on Reserves

Asset price inflation could have been much worse during the post-crisis recovery. It has been somewhat contained, but not by a

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The Mises Institute is the world’s largest, oldest, and most influential educational institution devoted to promoting Austrian economics, freedom, and peace in the tradition of classical liberalism. Since 1982, the Mises Institute has provided both scholars and laymen with resources to broaden their understanding of the economic school of thought known as Austrian economics. This school is most closely associated with our namesake, economist Ludwig von Mises.We are the worldwide epicenter of the Austrian movement. Through their research in the fields of economics, history, philosophy, and political theory, Mises’s students F.A. Hayek, Henry Hazlitt, Murray Rothbard, and others carried the Austrian School into the late twentieth century. Today, Mises Institute scholars and researchers continue the important work of the Austrian School.Austrian economics is a method of economic analysis, and is non-ideological. Nonetheless, the Austrian School has long been associated with libertarian and classical-liberal thought—promoting private property and freedom, while opposing war and aggression of all kinds. The Mises Institute continues to support research and education in this radical pro-freedom tradition of historians, philosophers, economists, and theorists such as Jean-Baptiste Say, Frédéric Bastiat, Richard Cobden, Herbert Spencer, Lysander Spooner, William Graham Sumner, Albert Jay Nock, Mises, Hayek, Hazlitt, Rothbard, and many others.

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Comments (1)

Although I like PK, you make a compelling argument regarding his misapplication of the KLT. I rarely read a post twice, but yours made me do it--it is a very good one. I wonder, however, how much the Fed will need to raise the IOR to feed the beast, so to speak, if the consumer can't qualify for loans (except student debt), is loaded down already and cc rates remain excessive? Wouldn't banks have to give money away to stimulate more money consumption; so instead of that loss, the banks will remain happy with a slow but steady IOR increase? Thus, fingers crossed, a soft landing? In which case, we will have witnessed a whole new historic economic event, where the end is not bad?
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