Inflation Confusion: Sarah Palin Schools the Wall Street Journal

It's been a while since one of Sarah Palin's comments was taken out of context so sophisticates could chuckle over her stupidity, but some reporter at the Wall Street Journal thought he'd caught her in a "durrrr" moment regarding quantitative easing and its effect on the inflation rate. Palin took to her Facebook page to set the guy straight.

Imagine my dismay when I read an article by Sudeep Reddy in today’s Wall Street Journalcriticizing the fact that I mentioned inflation in my comments about QE2 in a speech this morning before a trade-association. Here’s what I said: “everyone who ever goes out shopping for groceries knows that prices have risen significantly over the past year or so. Pump priming would push them even higher.”

Mr. Reddy takes aim at this. He writes: “Grocery prices haven’t risen all that significantly, in fact.” Really? That’s odd, because just last Thursday, November 4, I read an article in Mr. Reddy’s ownWall Street Journal titled “Food Sellers Grit Teeth, Raise Prices: Packagers and Supermarkets Pressured to Pass Along Rising Costs, Even as Consumers Pinch Pennies.”

The article noted that “an inflationary tide is beginning to ripple through America's supermarkets and restaurants…Prices of staples including milk, beef, coffee, cocoa and sugar have risen sharply in recent months.”

I saw that article, too. You know what was frustrating about it? (and what doubtless tripped up Sudeep Reddy?) The inflation articles were on the inside in the "Marketplace" section. But, on the front page, there was a big, above-the-fold story about the Fed's launching into quantitative easing to combat deflation. All you have to do is go to the grocery store, or the coffee shop, or the gas station to know that some consumer prices are on a definite upward trajectory. But, someone in DC thinks the opposite is true.

Maybe real estate or cars or surfboards or whatever are going down in price, but the basics for which people lay out their weekly budgets are going up. (yeah, I know food and gas are not included in the "core" inflation rate. Doesn't mean people aren't seeing rising prices) And, the Fed's worried about deflation? And "journalist" Sudeep Reddy is crowing over Sarah Palin's seeing inflationary ghosts? I'm beginning to worry that "we" know more about what's going on in the world than all of the "thems" who insist they are better able to act on our behalf.

The Great Non-Learning: "Lessons" From Japan's Deflation

The NY Times published the latest in a loooooooong series of news stories, published over the years in every imaginable media outlet, about the effect of the Great Deflation in Japan and the "lessons" Japan's experience has for the West. The lesson, per the Times? American are just going to have to get used to a stunted standard of living:

Like many members of Japan’s middle class, Masato Y. enjoyed a level of affluence two decades ago that was the envy of the world. Masato, a small-business owner, bought a $500,000 condominium, vacationed in Hawaii and drove a late-model Mercedes.

But his living standards slowly crumbled along with Japan’s overall economy. First, he was forced to reduce trips abroad and then eliminate them. Then he traded the Mercedes for a cheaper domestic model. Last year, he sold his condo — for a third of what he paid for it, and for less than what he still owed on the mortgage he took out 17 years ago.

“Japan used to be so flashy and upbeat, but now everyone must live in a dark and subdued way,” said Masato, 49, who asked that his full name not be used because he still cannot repay the $110,000 that he owes on the mortgage.

Few nations in recent history have seen such a striking reversal of economic fortune as Japan. The original Asian success story, Japan rode one of the great speculative stock and property bubbles of all time in the 1980s to become the first Asian country to challenge the long dominance of the West.

The article was written by someone named Martin Fackler who, I assume, traveled to Japan to write this piece. But, he clearly came with the story already written and simply sought out Japanese who could provide him with ready quotes and sob stories. But, that doesn't mean you should confuse his story with reality. Even at the height of Japan's boom times, the vast majority of Japanese lived relatively modest lives. That was the real Japanese miracle: that a country was able to extend a comfortable middle class lifestyle to virtually its entire population. But it was not a grand life. We're talking about small cars, crowded cities, and tiny houses and apartments. Someone like Masato owning a Mercedes and traveling to Hawaii was very much the exception. (I spent the summer of 1986 in Yokohama and Tokyo. I could count the number of Mercedes, or equivalent, that I saw on one hand). And, even after 20 years of deflation and non-growth, Japan's middle class remains largely intact.

What it true is that Japan has had no real economic growth, and has begun to slip behind China according to some measures. But, if you had to choose, I guarantee you would choose life as a Japanese salaryman over that of a Chinese factory drone. Not only that, Japan's economy continues to produce advanced technology that the Chinese can never hope to duplicate, only steal.

But what's really frustrating is Fackler's profession of confusion as to how Japan's deflation has continued unabated for so long. He hints at the reasons indirectly, but the truth is he doesn't want you to know:

But the bubbles popped in the late 1980s and early 1990s, and Japan fell into a slow but relentless decline that neither enormous budget deficits nor a flood of easy money has reversed. For nearly a generation now, the nation has been trapped in low growth and a corrosive downward spiral of prices, known as deflation, in the process shriveling from an economic Godzilla to little more than an afterthought in the global economy.

Now, as the United States and other Western nations struggle to recover from a debt and property bubble of their own, a growing number of economists are pointing to Japan as a dark vision of the future. Even as the Federal Reserve chairman, Ben S. Bernanke, prepares a fresh round of unconventional measures to stimulate the economy, there are growing fears that the United States and many European economies could face a prolonged period of slow growth or even, in the worst case, deflation, something not seen on a sustained basis outside Japan since the Great Depression.

Japan hasn't just had 20 years of deflation. The deflation began with the bursting of a housing bubble exacerbated by (1) a government which propped up its financial sector, rather than allow insolvent banks to fail and (2) engaged in an epic bout of stimulus spending that left Japan with towering debts. Sound familiar? And none of it has worked. At all. In fact, the only things that worked were the Koizumi Reforms, which sought to privatize government entities like Japan Post, among other things. Privatization of government services worked?? Don't want to say that out loud!

The fact is that we know exactly what "happened" in Japan. We know that bank bailouts, excessive stimulus, infrastructure spending, and 0% interest rates did absolutely nothing to pull Japan out of its funk. The Times knows it. Yet they have been at the head of the parade calling for .... bank bailouts, excessive stimulus, infrastructure spending, and 0% interest rates to pull the US out of its deflationary spiral. Those are the preferred policy responses of liberals, and liberals clearly would rather be liberal than correct.

UPDATE 1: the Free Will mother just emailed to remind me that I was in Japan in the summer of 1987, not 1986 as I wrote above. D'oh! Then again, to paraphrase Ronald Reagan, everybody who remembers what they were doing in the summer of 1987, raise their hands.

UPDATE 2: the Free Will mother also remembers that, back when we lived in Tokyo in the go-go Seventies it was known around our apartment building (in the Azabu section of Tokyo) that there were then 12 Rolls Royces in Japan. One was in our parking garage. We never saw any others around Tokyo, but people thought there was one in Hokkaido.

UPDATE 3: also the Free Will mother thinks the reference to Chinese factory drones is inapt since "drones have no task except availability to fertilize the queen." I don't know, would a reference to "Chinese honeybees" make any more sense?

UPDATE 4: the summer of '87. If you remember it, you probably weren't there.

Good Points

A lot of good points being made across the Blogosphere today:

Republicans ecstatic over the anti-Obamacare results in Missouri should temper their enthusiasm, since the status quo was and remains unsustainable. Repeal will not be enough. If Americans want to "keep" their current health care, they need to accept that they will have to actually pay for it. (Cafe Hayek)

Just because someone is a left-wing historian with an axe to grind, doesn't mean their research lacks merit. US involvement in the Korean Peninsula during the Cold War has actually inspired some useful historical writing from progressive types, as the "official" record has been hopelessly white washed. (Marginal Revolution)

The Obama Administration's approach to the "Birther" issue - mockery, combined with deliberate opaqueness that only encourages further "questions" - has had the opposite of its intended effect. The number of people who aren't sure whether Obama was born in the US is at 58%, at least in one poll. (Legal Insurrection)

In the wake of the Crash of '08, the US needs to do more than pass regulatory "reform," or build up balance sheets. Its regulators, finance pros, and ratings agencies need to rebuild their tattered reputations, or see themselves replaced by foreign competitors more willing to make bearish (i.e. rational) calls on US financials. (Ampontan)

American media outlets may be more numerous than ever, but they keep failing to report the same stories; namely that New Age/Leftist ideas and philosophies can be just as destructive and anti-human as anything you could point to on the Right. (The Macho Response)

Liberals like Paul Krugman claim to hate deflation because it creates a "downward spiral" that is hard to get out of. The truth is they hate the benefits of deflation: debt becomes more expensive, savings increase, and private capital formation encourages self-determination. So much easier if liberals could just artificially goose the economy with "stimulus" and zero per cent interest rates, and then inflate away all of the debt that their schemes generate. (Market Ticker)

If you are in New York City and want to talk to beautiful women, you need a Vespa and some blue shoes. At least that's what you need this summer. (The Sartorialist)

There's no scandal quite like a Republican bikini scandal. Apparently, the Left thinks this will kick off some sort of hypocrisy buzz. What they don't realize is that Republican bikini scandals remind people that the hot women are all on the right side of the aisle. (The Other McCain)

"When I Paint My Masterpiece" is one of Dylan's best songs from his post-accident semi-retirement period. It's also one that isn't well understood. (Brendan Bernhard)

While we can all put on an appropriately glum face on the anniversary on Hiroshima, it's worthy of comment that civilian battlefield deaths among our allies, including one battle that took place on American soil, have been forgotten despite their exceeding the toll from the atomic bomb. (The Belmont Club)

Life Is Not Fair. (The Leader of the GOP)

Deflation Studies

Via Instapundit, here's a look at the lurking specters of inflation and deflation. Central bankers are supposedly trading copies of an old book about the Weimar Inflation in an effort to understand the forces that can be set loose if/when highly indebted governments give in to the temptation and let the printing presses rip:

As it happens, another book from the 1970s entitled "When Money Dies: the Nightmare of The Weimar Hyper-Inflation" has just been reprinted. Written by former Tory MEP Adam Fergusson -- endorsed by Warren Buffett as a must-read -- it is a vivid account drawn from the diaries of those who lived through the turmoil in Germany, Austria, and Hungary as the empires were broken up.

Near civil war between town and country was a pervasive feature of this break-down in social order. Large mobs of half-starved and vindictive townsmen descended on villages to seize food from farmers accused of hoarding. The diary of one young woman described the scene at her cousin’s farm.

"In the cart I saw three slaughtered pigs. The cowshed was drenched in blood. One cow had been slaughtered where it stood and the meat torn from its bones. The monsters had slit the udder of the finest milch cow, so that she had to be put out of her misery immediately. In the granary, a rag soaked with petrol was still smouldering to show what these beasts had intended," she wrote.

Grand pianos became a currency or sorts as pauperized members of the civil service elites traded the symbols of their old status for a sack of potatoes and a side of bacon. There is a harrowing moment when each middle-class families first starts to undertand that its gilt-edged securities and War Loan will never recover. Irreversible ruin lies ahead. Elderly couples gassed themselves in their apartments.

Foreigners with dollars, pounds, Swiss francs, or Czech crowns lived in opulence. They were hated. "Times made us cynical. Everybody saw an enemy in everybody else," said Erna von Pustau, daughter of a Hamburg fish merchant.

Great numbers of people failed to see it coming. "My relations and friends were stupid. They didn’t understand what inflation meant. Our solicitors were no better. My mother’s bank manager gave her appalling advice," said one well-connected woman.

Not sure what anyone needs to "learn" about the social and economic effects of inflation. The history of Weimar Germany is as much a part of the cultural conversation as Kristallnacht or the League of Nations. In other words, well read people know what's going on. Americans over the age of 40 should have some memory of the Great Inflation, even if it has been wiped from the history books. Profligate governments love inflation, but the voters end up hating it and finally rising up and rebelling against the elites who fanned the inflation. Often you end up with a Hitler or - more likely - Juan Peron taking power; but sometimes you get lucky and the inflation leads to Ronald Reagan. Whichever way it works, the people who start the inflation are never in charge when it ends. That's the real risk of inflation for the elites. Even if they don't say this out loud, they know this deep down.

On the other hand, there's deflation, which central bankers profess to fear, yet often fails to arise. Japan's Lost Decade has been the most compelling deflationary episode in the modern era, one that has played out in real time in the second largest economy in the world with the eyes of journalists, policy makers, economists, and the business world upon them. And yet, no one knows what's going on:

The old bogeyman of deflation has re-emerged as a worry for the U.S. economy. Here's something else to fret about: After studying more than a decade of deflation in Japan, economists have slowly realized they have no idea how it works.

Deflation is usually associated with a Great Depression-like drop in demand. Consumer prices, incomes and asset prices fall. Interest rates go to zero, as low as they can go. As prices and incomes fall, the cost to borrowers of servicing debt does not, sucking life out of the economy and pushing prices down further. A bad situation, in short, gets worse.

In 1932, U.S. consumer prices fell 10% and between 1929 and 1933 they fell 27% in all.

But Japan's experience has looked nothing like this. Rather than being deep, destructive and concentrated in a few years, deflation has been a surprisingly mild, drawn-out affair. Consumer prices have been falling in Japan for 15 years, but never by more than 2% in any single year. Japan's deflation has been a morass, but not the destructive downward spiral many economists predicted. Why? And what does it portend for the rest of the world today?

Economists don't have good answers. "We don't know how deflation works," says Adam Posen, a member of the Bank of England's monetary policy committee who has been studying Japan since 1997. "We don't have a way of rationalizing steady, several-year flat deflation," he says.

How can this be? How can we not even have an idea how deflation works? How can we not know what's happening in Japan, which is hardly a mysterious Hermit Kingdom. Where's Paul Krugman? Where's (fill in famous progressive economist here)? Sounds like a good research topic!

The problem, I suspect, is not that we don't know; but that the elites don't want to know. After all, Japan hasn't just had 20 years of deflation. The deflation began with the bursting of a housing bubble exacerbated by (1) a government which propped up its financial sector, rather than allow insolvent banks to fail and (2) engaged in an epic bout of stimulus spending that left Japan with towering debts. Sound familiar? And none of it has worked. At all. In fact, the only things that worked were the Koizumi Reforms, which sought to privatize government entities like Japan Post, among other things. Privatization of government services worked?? Don't want to say that out loud!

And given Japan's experience, isn't deflation preferable to inflation? Japan is still, after all of its troubles, the second largest economy in the world. Japan has remained a wealthy, productive society. Its heavy industries have remained prosperous and innovative (indeed some have obtained a real global reach). They're building robots, for God's sake! Most important, Japan has not suffered the economic and social upheaval that accompanies inflation. This is not to say that Japan's deflation has been a picnic. The Japanese equivalents to Generation X have had their prospects stunted to help "pay" for the profligacy of earlier decades. Jobs are not as permanent or as plentiful as they once were. But, this is not as troubling as a bout of inflation destroying the yen. At least, it shouldn't be.

I'm not going to pretend to understand what monetary policy is better than the other. But it sure is curious that inflation seems to be the default preference for the elites, and the only restraint is their knowledge that the beginning of major inflation would also be the end for them.