Re: ECON: The Hangover Theory?

Date: Wed Mar 21 2001 - 11:22:50 MST

In a message dated 3/21/01 4:49:12 AM, writes:

>I dispute this claim. By what measure has the Fed managed inflation?
>Stephen Horwitz points out in his recent book _Microfoundations and
>Macroeconomics: An Austrian Perspective_, the total costs of inflation
>are much than higher than the conventional measures.

Well, during the possibly past boom, there have been periods where
rational people concluded there was no inflation because the gov't
measures don't account for quality improvements. Also, in the
sense that, whatever the costs may be, we can obviously live with
them, and the Fed doesn't *have* to stop inflation. A little
inflation may be bad, but significant deflation can be catastrophic,
as nominal interest rates can't go negative and there's no good
way for the banking system to handle that. Japan has flirted
with that particular pickle several times recently; certainly
short-term rates of 0.2% are going to cause their own kinds of
costly distortions. Inflation may be acceptable insurance against that.

>There are unrecoverable costs of inflating period, mainly because of how any

>change in monetary equilibrium does not evenly flow through the economy.

Yes, but is it significant? It's not like the gov't isn't extremely costly
And what's the value of "deflation insurance"

>I don't know enough about the Japanese example, though I think there several

>problems with government intervention there, including a long period of

>inflation, price rigidities (set by law), and massive subsidies.

No, yes, yes. Low inflation for ages. Lots of detrimental gov't
besides what you mention, land use distortion, corruption, stock price
propping, and vast waste. It's scary that in just a decade Japan went
from being the most solvent gov't in the West to one where default
comes under consideration. They borrowed and spent *trillions* to
stimulate the economy, with minimal benefit. Exhibit A against

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