Noted for Your Lunchtime Procrastination for February 25, 2015
The Puzzlement of "Cognitive Capture"

Allan Meltzer on Imminent Inflation, and Other Topics

NewImage

Some Hoisted from the Archives from Six Years Ago, Most Newer...: Speaking of people who had not done their homework, were spreading lots of wrong information, and who lack the ovaries to have ever marked their beliefs to market or apologize for their purveying misinformation, we have Allan Meltzer starting in February 2009 as the Paul Revere of the coming upward breakout of inflation.

It is a real clown show.

I paraphrase:

  • Inflation is coming! (February 2009)
  • Inflation is coming! (May 2009)
  • Inflation is coming! Inflation will start with either a sustained increase in bank lending or a large increase in Fed purchases of government debt or both. (January 2010)
  • Inflation is coming! Those who believe inflation will remain low need to think more clearly. There are plenty of good textbooks that explain. (August 2013)
  • Inflation is coming! QE is Federal Reserve financing of budget deficits. Using central banks to finance government deficits sooner or later produces inflation, always and everywhere. (February 2014)
  • Inflation is here! Food prices will rise as much as 3.5% this year, the biggest annual increase in three years. Inflation is in our future. Food prices are leading off, as they did in the mid-1960s before the "stagflation" of the 1970s. Other prices will follow. (May 2014)
  • Paul Krugman is mean. The New York Times should not print him. But, really, inflation is coming! If Krugman were more astute he would recognize the $2.5 trillion of idle reserves means his claiming victory can be likened to announcing the game’s result with one half still left to play... (September 2014)
  • Inflation--or recession, or both--are coming! Eliminating excess reserves without causing inflation, recession or both is a major problem. The Fed’s major error is its baffling inattention to the growth of monetary and credit aggregates... (February 2015)

Details here

So: three questions:

  1. At what point should Allan H. Meltzer have stopped saying "inflation is coming!" and started saying: "the Hicksian IS-LM Keynesians with their liquidity trap have had a better handle on the economy, than I have; I should be quiet for a while, learn, and think"?

  2. At what point should Allan H. Meltzer have stopped saying "inflation is coming!" and started saying: "I have embarrassed myself by acting like a clown in refusing to mark my beliefs to market, and I am sorry"?

  3. Why hasn't Allan H. Meltzer done either of these natural things that one does when one learns that one has been wrong?

Those of us in the reality-based community who do mark our beliefs to market call what Allan H. Meltzer is doing to himself (and to whatever few readers of his do not recognize that this is the same guy who has now been wrong for six straight years) "cognitive closure". I raise this tag here and now because over at The Twitter Machine vir illustris Ron Rosenbaum is arguing that "cognitive closure" is not a useful concept, and I am trying to marshall my arguments as I prepare to disagree with him at greater than 140-character length...

Russ Roberts (February 2009): Meltzer on Inflation: "Allan Meltzer... explains why inflation hasn't happened yet...

...despite massive increases in reserves created by Fed policy. Then he explains why inflation is coming...

Allan H. Meltzer (May 3, 2009): Inflation Nation: "The administration’s [policies]...

...slow productive investment... which... increases the inflation rate. Some of my fellow economists... point to the less than 1 percent decline in the consumer price index for the year ending in March as evidence that deflation is a threat. But this statistic is misleading.... Enormous budget deficits, rapid growth in the money supply and the prospect of a sustained currency devaluation... are harbingers of inflation. When will it come? Surely not right away. But sooner or later.... Milton Friedman often said that ‘inflation was always and everywhere a monetary phenomenon.’ The members of the Federal Reserve seem to dismiss this theory because they concentrate excessively on the near term and almost never discuss the medium- and long-term consequences of their actions. That’s a big error...

Allan H. Meltzer (January 27, 2010): Bernanke's Anti-Inflation Exit Strategy Will Fail: "Ben Bernanke has explained his exit strategy...

...to prevent future inflation.... I don't believe this will work, and no one else should.... Proponents are guilty of practicing economics without prices.... When will inflation start?... The triggering event will be either a sustained increase in bank lending or a large increase in Fed purchases of government debt. Perhaps both.... The Fed should announce a policy for preventing inflation that reduces the enormous stock of excess reserves, such as by selling securities. And the Treasury or the Office of Management and Budget should announce a credible policy for reducing deficits. That would help to reduce the uncertainty about future taxes, spending and inflation. Policies without prices hide the serious problem posed by excessive debt and reserves, and are not credible...

Allan H. Meltzer (August 13, 2013): When Inflation Doves Cry: "Were the [inflation] doves right...

...or just lucky?... The Fed has printed new bank reserves with reckless abandon.... The Fed should end its open-ended QE3 now. It should stop paying interest on excess reserves until the US economy returns to a more normal footing. Most important, it should announce a strategy for eliminating the massive volume of such reserves.... How high will the Fed push up interest rates? Once rates get to 5% or 6%, assuming inflation remains dormant, the Fed can expect a backlash from Congress, the administration, unions, homebuilders, and others.... Those who believe that inflation will remain low should look more thoroughly and think more clearly. There are plenty of good textbooks that explain...

Allan H. Meltzer: QE is a Mistake—a Big One (February 13, 2014): "Neither Fed chair recognizes publicly...

...that continuing QE just expands the huge future problem of withdrawing trillions of idle reserves.... More than 95 percent of the reserves that the Fed supplied under QE 2 and 3 sit idle on bank balance sheets. M2 money growth for the year to the end of January 2014 is less than 5.5 percent. There is no mystery about why inflation remains low. The mistaken results of QE policy include Federal Reserve financing of outsize budget deficits. No one should require a tutorial about the longer-term consequences of using central banks to finance government deficits. Sooner or later the results are inflation, always and everywhere...

Allan H. Meltzer (May 6, 2014): How the Fed Fuels the Coming Inflation: "The U.S. Department of Agriculture forecasts...

...that food prices will rise as much as 3.5% this year, the biggest annual increase in three years. Over the past 12 months from March, the consumer-price index increased 1.5% before seasonal adjustment. These are warnings. Never in history has a country that financed big budget deficits with large amounts of central-bank money avoided inflation. Yet the U.S. has been printing money—and in a reckless fashion.... The Obama administration has run huge budget deficits.... The Federal Reserve... purchasing Treasury bonds and notes.... has also purchased massive amounts of mortgage-backed securities.... There is enormous fuel for greater inflation.... The Fed's forecasts of [low] inflation ignore Milton Friedman's dictum that "inflation is always and everywhere" a result of excessive money growth.... The Fed focuses far too much attention on distracting monthly and quarterly data, while ignoring the longer-term effects of money growth.... Instead of keeping interest rates low to finance deficits, the Fed should have explained that costly regulation, increased health-care costs, wasteful spending and repeated threats to raise tax rates were holding back the recovery.... We are now left with the overhang. Inflation is in our future. Food prices are leading off, as they did in the mid-1960s before the "stagflation" of the 1970s. Other prices will follow...

Allan H. Meltzer (September 16, 2014): My Response to NYT Columnist Krugman: "I avoid reading Paul Krugman’s column...

...If the Times were a better paper... it would refuse to publish his screed.... I have admitted publicly that I made a mistake by failing to anticipate that banks would decide to hold idle $2.5 trillion of the new reserves that the Federal Reserve supplied. Nothing to that extent had ever happened. Excess bank reserves delayed the coming inflation.... Federal Reserve history does not give reason for confidence.... If Krugman were a more astute analyst he would wait to see what happens to the $2.5 trillion of idle reserves before declaring all those who warn of inflation’s dangers unprofessional. Claiming victory at this stage can be likened to announcing the game’s result with one half still left to play...

Allan H. Meltzer (February 5, 2015): Three Strikes Against the Fed: "The Fed [has] made three major errors...

...Surely, by 2009, the Fed could have seen that most of the reserves it supplied ended up as idle reserves held by banks.... The Affordable Care Act encourages employers to give preference to part-time workers to escape expensive healthcare costs, yet Fed principals point to the rise in part-time employment as a reason for continuing to keep interest rates near zero.... A second major Fed error is the excessive attention paid... to very ‘noisy’ monthly and quarterly data.... Eliminating the excess reserves without causing inflation, recession or both is a major problem for the future. The Fed’s third major error is its baffling inattention to the growth of monetary and credit aggregates.... Some Fed principals express concern about deflation... mistake a large decline in the oil price--a relative price change--with a decline in the general price level...

Oh. And Allan Meltzer's complaisant interviewer in February 2009, Russ Roberts? Don't consider him a trusted information intermediary either. Nobody who tries to confuse his readers by eliding the difference between economic significance and statistical significance should be trusted.

Me in February 2010:

http://delong.typepad.com/sdj/2010/02/economist-russ-roberts-liar.html: Russ Roberts: "Cafe Hayek...

...Thomas Friedman writes in the New York Times:

Of the festivals of nonsense that periodically overtake American politics, surely the silliest is the argument that because Washington is having a particularly snowy winter it proves that climate change is a hoax and, therefore, we need not bother with all this girly-man stuff like renewable energy, solar panels and carbon taxes. Just drill, baby, drill...

He’s right in principle. One observation doesn’t make a trend. Of course Phil Jones has said recently that there’s no trend for the last 15 years. But never mind...

Russ Roberts knows that he is misrepresenting Phil Jones. Russ Roberts knows that he is trying to get his readers to confuse the--very different--concepts of "statistical significance" and "economic significance". For him, Deirdre McClosky wrote in vain...

What Phil Jones actually said was this:

BBC: Do you agree that from 1995 to the present there has been no statistically-significant global warming?

Phil Jones: Yes, but only just. I also calculated the trend for the period 1995 to 2009. This trend (0.12C per decade) is positive, but not significant at the 95% significance level. The positive trend is quite close to the significance level. Achieving statistical significance in scientific terms is much more likely for longer periods, and much less likely for shorter periods...

Russ Roberts knows as well as I do--as well as anybody who has taken even one semester of statistics does--that "no trend" does not mean the same thing as "no statistically significant trend," that you are unlikely to find statistical significance when you restrict your attention to a short period because your statistical tests then lack power, and that everyone literate in statistics asked for their point estimate of the warming trend since 1995 would say that it is almost as much as the overall trend since 1860: 0.012C per year as compared to 0.015C per year.

Comments