I Explain Inflation-Kudlow Solves It

Larry Kudlow gives a solution to the supposed looming inflation here.
Monetary policy is a bit difficult to explain and I’m still not sure I understand it the way I should.  It may be impossible for Americans to understand it.  That wasn’t always the case.  Here’s a snippet of William Jennings Bryan’s 1896 Democratic acceptance speech known as the Cross of Gold speech:

Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests and the toilers everywhere, we will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold.

(N.B. the Wizard of Oz is said to be montary policy allegory.  In the book, they were silver slippers.)

But I’ll give it a try:  as I said on my radio appearance here inflation is too many dollars chasing too few goods.  That’s about it.  It isn’t too much spending or debt or unions or corporate greed.

Its the gov’t printing dollars at a rate faster than the economy grows.

The classic example is this: consider an island economy where there’s 100 people using $10,000 U.S. Dollars to carry out their economic activity.  It’s a small island so there’s not much growth per se so prices pretty much stay the same year to year.  Some of the $10,000 is saved and some is borrowed, but most of it is used for what it’s for – a medium of exchange.  Now say a suitcase full of $20,000 washes up on shore.  The 100 residents are fair and divide up the money.  They all feel 3x as rich – in the short term – but as the cash works it’s way into the economy prices triple and everyone feels as if they’ve gotten nowhere.  That’s inflation.  The suitcase washing up on short is the gov’t printing money.

Off the island, the people who get hurt by this are savers because their old dollars are devalued, those on fixed incomes who can’t afford the higher prices, those who signed longer term contracts (union, suppliers) who are stuck at the old agreed upon price.

Inflation encourages short term planning and discourages saving and investing.

Let’s hope Pres. Obama and Mr. Bernake listen to Larry.

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