But reducing uncertainty about prices by keeping the inflation target at 2% or more might actually increase a sense of uncertainty about real things like home values or investments. While it is right to worry about massive deflation, the historical relationship between deflation and recession is not all that strong. In a 2004 paper, the economists Andrew Atkeson and Patrick Kehoe concluded that most of the evidence of a relationship comes from just one case: the Great Depression of the 1930s.
Sometimes, a viewpoint is particularly interesting because of who holds it. In this case, it is Robert Shiller, arguing from his vantage point as a behavioral finance theorist.
Yet more evidence that credentials corrupt.
“That will make numbers measured in currency look a lot bigger over time, even if nothing real is changing.
It is a lot worse if one considers a 6% inflation rate. ”
Oh the depth!…
The lurking dangers:
“If one is not careful to remember the effects of inflation on all prices, it might seem that we are living in a magnificently successful new era.”
Although Rober Shiller is a great economist, I find this extremely specious reasoning here and we have times of wild price inflation in the past with wild increasing and decreasing asset prices. (Gold in the 1970s and early 1980s for example. And is housing outside of coastal cities seems fairly consistent the last 10 years.)
1) This puts to much on the Fed and not enough on private sector solutions. When I hearing people complaining about Wal-Mart and Amazon, I think they were a lot of the solution is their ability to manage inventory and prices from their vendors. Or China manufacturer has both controlled the price of labor and increased the economies of scale. Tech companies and tech system has really allowed large companies to better take advantage of economies of scale.
2) I believe the problem is the AD is growing slower than the AS curves. After the Boomers starting hitting 35 the growth of population controls the AD curve first. The burst 1970s also happened at the same time the Boomers were reaching worker status and early adulthood when consumption rates are at the highest. (Note the 1960s and 1970s were the two biggest job growth decades in Post WW2 period.)
Robert talks about silent inflation.
What is inflation? If silent inflation means that mis-pricings are carried on the books as a loss, then we got big trouble. So we better have a complete understanding of currency, then a specific definition of inflation, then we can talk. Until then we are not even sure if ‘general price rise’ has any meaning.
The central bank is the ultimate currency issuer, it has not issued currency in 35 years, it can’t, its against the law they cannot carry actuarial gains and losses. So if they aren’t losing money to inflation, then who is? The last time the CB lost money to inflation was 1972, by my definition.
All other mis-pricings are carried on accurate double entry accounting systems and folks plan on making up for the losses. How? The hidden plot is to foist it all on government, put government in such a difficult spot that it will devalue. Either someone find where all that inflation was sterilized, or we are in big trouble.