Home > Human Limits, Solution-Problem > 10 Reasons Why Jim Jubak is Clueless on Inflation

10 Reasons Why Jim Jubak is Clueless on Inflation

MSN Money columnist Jim Jubak has a new column up called “10 reasons to love rising prices.”  It is startlingly bad.  I haven’t seen such a monumentally mind-boggling set of ironies and ignorances in years (this side of the Huffington Post).  Let’s go through his ten reasons why inflation is good:

Inflation keeps deflation from the door. Deflation can kill an economy (just ask the Japanese). With prices going lower every day, consumers have constant pressure to put off purchases because “it will be cheaper tomorrow.” This is no way to run a modern consumer economy. Even the Chinese know it’s a bad idea to discourage consumer spending.

This is what you’d call a “false dilemma.”  If there is no inflation, Jim Jubak would have you believe that deflation necessarily takes its place.  How about a stable currency instead?  And remember that the specter of deflation is not all it’s cracked up to be.

And the crack about the Japanese shows a fundamental misdiagnosis of their problem.  Granted, the Japanese economy is multi-faceted thing, but in simple terms, their deflation was brought about by a massive corrective action in response to inflation.  Get rid of the inflation problem first, and you won’t have to deal with its aftermath.

And about the Chinese discouraging savings: by forcing consumer spending to goose your (irrelevant) GDP figures, you are forcing the natural tradeoff between investment and consumption to tip more toward the consumption end.  Rather than reflecting the true time preferences of the citizenry, inflationary actions push consumers to buy more now – right up until the point when the bubble bursts and they can’t buy anything at all.  Mark my words, China will get there.

Inflation gives us the illusion that we’re making progress in our work lives. And that illusion provides critical grease for the economic wheels. Wouldn’t a 5% raise feel good in 2011? Wouldn’t it make you feel appreciated at work?

We are honestly supposed to believe that inflation, which cancels out our savings, reduces our real purchasing power, and makes us poorer, is a good thing because it provides the illusion that we are making progress?  If you are seriously recommending that we trade real wealth for an illusion of progress, you have no business providing investment advice.

Inflation makes consumers feel richer, so they buy more. Policymakers are still trying to get the U.S. economy revving so that it produces more jobs. Waking up each morning knowing that your biggest asset, your house, is worth less doesn’t make you want to strap on that American Express card and drive to the mall. (Don’t give me this stuff about nominal versus real prices. We all live in a nominal world.)

Again, Jubak is assuming that consumer spending is an adequate proxy for wealth.  It is not.  All increased consumer spending means is that there is less for investment.  The unsustainable path leads right down American Express Lane, straight to the mall.

And don’t give me “this stuff” about a nominal world.  Is that what Jubak will tell people in the future when his stock picks produce no real return?  “Sorry, but that inflation that I advocated for ate up all your gains.  I know your paper gains won’t put food on your table, but hey, don’t blame me.  You’re the one who decided not to live in the ‘nominal world.'”

Inflation makes consumers feel that saving is worthwhile. I’ve been trying to teach my kids to save. Do you know how impossible that is when banks pay 1% or less on the traditional passbook account?

So much irony here that I find it difficult to know where to start.  Inflation quite literally reduces savings, and yet Jubak is saying that we need inflation to spur savings?  Seriously?  And regarding the 1% interest rate; it tends to be difficult for banks to offer more when the central bank is holding their interest rate target down – which causes inflation!  You want higher bank rates?  Try tightening the money supply and nipping inflation in the bud.

By eroding the value of money, inflation reinforces the value of concrete assets. That’s important in a world that needs to do a lot of investing in finding and developing new supplies of commodities such as oil and copper.

First of all, eroding the value of money does not “reinforce the value” of assets, it just makes assets go up in price (remember that money is not wealth, it is just a medium of exchange). 

And the idea that someone like Jubak can “know” whether the world “needs” more oil and copper is just ludicrous.  That allocative function is carried out by the spontaneous, impossibly complex system of market pricing, including the pricing of money.  Keep the price of money artificially low, and all you end up with is an asset bubble.  We have seen this happen just recently. 

Did holding interest rates down “reinforce the value” of housing?

Inflation is essential to ending the slump in the housing markets. Cheap mortgage money isn’t enough to get buyers into the market when they’re afraid that the price of the asset is about to slump. We need inflation’s help to get us back to the good old days when homeowners could count on their houses being worth more (in nominal dollars, I know) every year.

Aaargh!  It pains me to see someone so painfully shortsighted!  Yes, everyone would like to live in a time of constant “good old days,” but it simply is not possible.  By going back to the policies that brought us the biggest crash since the Great Depression, Jubak would be setting us up for…another monumental crash!  Brings to mind Einstein’s definition of insanity.

And while we’re at it, we need inflation to make debt loads more affordable long term. How? By shrinking the real value of that debt every year. Owing $450,000 on a mortgage is much easier if inflation is eroding the value of that debt every year by 3% or so.

Right, because creditors don’t take inflation into account or anything.  No, the only entity that inflation truly helps out in the long run is the government.  Why keep a lid on runaway debts when we can print our way out of the vig?  Inflation is gasoline on the fire of government profligacy, but real people simply do not have the option to inflate away their debts.  Which brings us to:

Without inflation we have no hope of containing the U.S. national debt. The U.S. government needs inflation to reduce the real value of the its debt even more than strapped homeowners do.

No hope?  How about we cut spending?  Total government revenue has averaged about 18% for pretty much the entire country’s history.  Despite fiddling with tax increases, decreases, loopholes, etc., revenue is remarkably stable.  If you want to reduce the debt, cut spending to a sustainable level.  Period. 

Try to inflate away your national debt and good luck getting anyone to buy your paper in the future.  In reality, there is no difference between outright default and the gradual, insidious default by devaluation.  And the movers and shakers behind the capital markets are absolutely not fooled.

Inflation is also crucial to restoring our personal and national financial discipline. At current interest rates, money is simply too cheap for the federal government and Congress to pay much attention. At current interest rates, the payment on the U.S. national debt comes to just $414 billion a year. That’s a ton of cash, but it’s not enough to crowd out spending on crucial government programs. Inflation pushes up interest rates so that we can’t afford to build that lame weapons system in some congressperson’s district. Then, whammo, we have a crisis on our hands. And we all know we’re not going to fix this problem without a crisis.

Hmmm, interesting.  This point finally admits to the real goal of inflationary policy: fomenting a crisis.  Of course, trying to fix “the problem” with an inflationary crisis becomes a little ridiculous when you realize that inflation is the crisis.

Best of all, inflation makes it easier to tell stories that begin “When I was your age . . . “

Sure, you’ll be destitute, savings all dried up, using your Social Security checks as kindling for your fire barrel under the I-35 overpass, but think of the stories!!

Mr. Jubak, you have outdone yourself.  And not in a good way.

  1. J
    February 4, 2011 at 8:06 AM

    This guy’s ideas and comments remind me of the Pluggers cartoon.
    “You know you’re a Plugger if:
    -you follow investment ideas from Jim Jubak.
    -you don’t understand why you’re losing your house after taking out a variable rate mortgage five years ago that ‘all of a sudden’ you cannot afford.
    -when given a binary choice (ie it must be deflation or inflation) you never consider that there might be another alternative.”

  2. Sergio
    June 4, 2012 at 1:28 AM

    I agree with most of the post. However the statement “If you want to reduce the debt, cut spending to a sustainable level. Period.” is obviously an over simplification. Government spending (or the lack of it) can affect the GDP and therefore its ability to repay debt. The fact is that, historically, most of the world’s countries have used inflation as way to get out of a hole of debt (external and/or domestic). You are right, this is a subtle form of default. But it’s not true that “capital markets are absolutely not fooled”. Psychologically, people accept losing money little by little through inflation better than suddenly with a straight default. It’s like boiling a frog. Thanks. Sergio.

  1. December 3, 2011 at 9:53 AM

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