Saturday, January 25, 2014

Stanley Fischer versus Paul Krugman on High Inflation

On New Year's Paul Krugman ended the year with a bang. He wrote this absurdity:
Don’t governments with the power of the printing press universally abuse that power?
Well, no. That sounds like cynical realism, but it’s actually cynical fantasy.
Yes, Weimar. Also Zimbabwe. And, in recent decades, who else? Actually, nobody. The real track record of fiat currencies is that most of them are run responsibly except in the aftermath of political chaos. If you look at the actual facts, you discover that episodes of high inflation have become quite rare, even though nobody is on the gold standard or (except in the euro area) anything like it.
At the time I read the post, I realized it was absurd, but I didn't really have the time to look up all the data to disprove Krugman's crazy assertio. My time is limited partly because I am reading up, mostly for the EPJ Daily Alert, papers and speeches by the incoming Fed vice-chairman Stanley Fischer. I believe he will be the intellectual powerhouse of the post-Bernanke era.

While doing the reading, I came across some gems from Fischer that positively blow away Krugman's New Year's eve posting.

Before I quote Fischer, I won't to point out that Krugman in his post links to what he calls the "actual facts." That link goes to a post of his titled, The Death of High Inflation. In that post, he tells us:
Not only has the promised high inflation failed to appear here in America, but high inflation has largely vanished everywhere.
I did a quick calculation using the IMF’s World Economic Outlook Database, which runs back to 1980. Year by year, how many countries had triple digit inflation in any given year? [...] Basically, there was a wave of hyperinflations caused by the chaos following the breakup of the Soviet Empire, much like the wave after World War I; since then, Zimbabwe and nobody else.
Even double-digit inflation has become quite rare.[...]There are, I think, a couple of morals here. One is that economics textbooks probably talk too much about high inflation; it’s a nice pedagogical set-piece, but not something that’s a real issue in today’s world.
Here's Fischer in a 2002 paper written with Ratna  Sahay and Carlos A. Vegh for The Journal of Economic Literature (vol. XL, September 2002, 837-880) . The paper is titled, Modern Hyper- and High Inflations:
Since 1957, inflation has bee commonplace throughout the world. Based o a sample of 133 countries (for a total of 45,000 observations), we find that more than two-thirds of the countries have experienced an episode of more than 25-percent per-annum inflation; more than one-third has [sic] experienced episodes in excess of 50 percent per annum; close to 20 percent of countries have experienced inflation in excess of 100 percent ad around 8 percent experienced episodes of more than 400-percent per annum inflation.  
Also of note, Krugman has no concern with a little inflation:
On both the healthcare and inflation fronts, what you have to conclude is that there are a large number of people who find reality — the reality that governments are actually pretty good at providing health insurance, that fiat money can be a useful tool of economic management rather than the road to socialist disaster — just unacceptable.
Here, two Fischer comments to consider in contrast to the Krugman view. Fischer et al. (2002) write:
[T]here is no evidence that inflation is good for growth.
In a 2001 paper written by Fischer and William Easterly titled Inflation and the Poor and published in the Journal of Money, Credit and Banking (vol. 33, no.2, part 1, pgs 160-178) they write:
Our evidence supports the views that inflation is regarded as more of a problem by the poor than it is by the non-poor, and that inflation appears to reduce the relative income of the poor. It thus adds to a growing body of literature that on balance--but not unanimously--tends to support the view that inflation is a cruel tax.

1 comment:

  1. The western world has experienced a 'tighthly intereconnect' global economy.
    Interconnected by the widespread use of petroleum products.
    The petroleum products up until recently were only sufficiently abundant in certain areas.
    The purchase of petroleum products was only possible using US Dollars.
    The US Dollar was a trusted currency being inflated at a predictable 2% a year. (better than most countries)
    Every crook in the world has his/her stash in US Dollars. (Many are sweating bricks right now...)
    This has kept the stability of the western world for most of the 20th century.
    In 2003, the printing of US Dollars has gone off the rails. There are many schemes in motion at the moment aimed at replacing 'the reserve currency' with other, most likely a few others. A new world indeed.