"Fiscal" Inflation/Deflation Jude Wanniski January 1, 2001

From: "Angell, Wayne (Exchange)" <wangell@* * * * *.com>
To: "'Jude Wanniski'" <jwanniski@polyconomics.com>, Uramay@* * * *.com
Subject: RE: "fiscal" inflation/deflation
Date: Mon, 1 Jan 2001 21:00:59 -0500

Dear Jude and Larry,

Inflation is not due to demand side changes as taught by Keynes and Samuelson.  So called fiscal policy stimulus is no stimulus at all in the face of restrained or disinflationary tilt in monetary policy.  Witness Japan's reliance on so-called fiscal stimulus in the face of deflationary monetary policy.  Deflationary monetary policy tilts public preference to holding fixed income financial assets as compared to holding gold, other commodities, tradeable durable goods and real estate.

An increase in public or private spending relative to tax receipts and household saving will move the natural real rate of interest higher.  Only when a central bank has a target interest rate that is lower than the natural rate is there an increase in monetary liquidity relative to the supply of goods and services.  A persistent pursuit of an interest rate target lower than the natural rate is soon discovered with a shift in preference for holding gold, commodities and real estate.  We ordinarily expect the price of gold to be a leading indicator and the price of real estate to be a lagging indicator of the central bank failure to supply reliable purchasing power money.  A long period of decline in the price of gold in any currency, including Japan, is naturally follwed by a decline in real property prices.  It is not possible to produce either inflation or a growth stimulant against a decade old monetary deflation. 

Wayne

-----Original Message-----
From: Jude Wanniski [SMTP:jwanniski@polyconomics.com]
Sent: Saturday, December 30, 2000 10:44 AM
To: Uramay@* * * * *.com
Subject: "fiscal" inflation/deflation

Response to Larry Hunter...

 Dear Larry...

I could not have said it better myself. Now I can see real value in your econ PhD. But there has to be a specific term for this, no? Otherwise, how do you easily distinguish between one type of increase in the general price level via fiscal actions of the government and another via central bank errors? 

At 09:31 AM 12/30/00 EST, you wrote:

Jude,

It seems to me you confuse economists when you refer to "inflation" as anything but a monetary phenomenon.  Even Keynesians who think monetary inflation can result from non-monetary sources perceive inflation itself as a  monetary phenomenon, i.e., a devaluation of the currency.  When you speak of  a "fiscal inflation" you describe a temporary rightward shift in the government's demand curve (only partially offset by a corresponding leftward shift in the private sector's demand curve) financed by it's unlimited ability to bond-finance spending over the short run and the general  populace's willingness to run on adrelene at 100+% of capacity for the duration of the war.  Prices run up as a pure supply-and-demand response and supply and demand equilibrate at a new higher level of output and prices.

This situation is, of course, unsustainable because people can't give 150%  all of the time and eventually government's ability to borrow without really devaluing the currency is limited.  Thus, you observe what you call a "fiscal  inflation," which is not really inflation at all.  If the war is over (won)  before people's stamina and the government's ability to borrow with a sound  currency gives out, then the government's and private demand curves can shift  back to normal, people can resume their normal lives of giving only 100% and  prices will fall as supply and demand equiblibrate at the new/old point where  supply and demand intersect.

Larry

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