Looked at properly, inflation is the money getting less valuable, which shows up as rising prices. It’s opposite, deflation, is the money getting more valuable, leading to falling prices. Something that used to be very obvious, but has perhaps become less so, is that inflation sucks if you have money, whereas deflation sucks if you owe money.

TL;DR version: You can reverse inflation, as long as you’re willing to grind into the dust everyone who owes money, making them work more and more, to earn less and less, to pay back debts that get higher and higher (because the dollars it takes to pay them off are getting more and more valuable). Society has done that many times in the past. Sometimes it works out okay; other times it produces terrible impoverishment of ordinary people, leading to social unrest.

The rest of this post looks at this in a bit more detail. I was prompted to write it because recent polls have suggested that young folks—Millennials and Gen-Z—continue to be unhappy about inflation, even though the inflation rate is down a lot. When you talk to these people, it turns out what they’re unhappy about is not inflation but rather prices: They remember what things used to cost, and they cost more than that now, which they find annoying, even if the price has largely quit going up. (And of course prices change all the time, so some prices are always going up.)

Older folk—people who lived through the inflation of the late 1970s and early 1980s—have a different perspective on that, partially because their parents and grandparents lived through the Great Depression.

Basically, they remember what happens when you try to push prices back down to what they were before a period of inflation.

There’s a sense among the “hard money” types that inflation is impossible when the currency is backed by gold, but this is false. There is often inflation under a gold standard, but it (often) ended up getting undone, meaning that looked at from the perspective of a century, it looks like there wasn’t much inflation. And indeed there wasn’t much inflation on average.

This was especially true during the heyday of the gold standard, roughly the 18th and 19th centuries. In 1816 the pound sterling was defined as 113 grains of pure gold, where it remained until 1931. (Before that it was defined as 5,400 grains of silver—about a pound of silver, hence the name a pound sterling—but in terms of value it was a similar amount of purchasing power.)

A big part of the reason that people remember the gold standard fondly is that it worked pretty well, especially for people who had money. With stable prices, it was even possible to value land not at a market price (because who would sell land?) but at the income that land would produce—an income that would remain stable for generations at a time.

However, as I said, there was still inflation. Inflation came from many sources, but two important ones: new discoveries of gold, and war. When the quantity of gold increased—as during the 1840s and 1850s when large amounts of gold were found in California and Australia—the rising quantity of gold (i.e. money) would produce inflation just like rising quantities of money produce inflation now. The other common source of inflation was war, because paying for a big war without inflation is almost impossible.

For example, there was a big inflation in the U.S. during the Civil War, when the Federal Government printed “greenbacks” to pay for the costs of the war. (The Confederates did the same, but as they lost the war their Confederate dollars ended up being worthless.) Dollars, on the other hand, were gradually revalued, with greenbacks gradually being withdrawn from circulation producing a grinding deflation that went on for more than a decade.

Like always in economics, there were other things going on at the same time. Industrialization was going on at the same time, meaning that things produced by industrial firms were getting cheaper, leading to deflation, while gold discoveries were leading to an increase in the supply of gold (= money) leading to inflation.

On balance there was deflation, meaning that people who had money were getting richer, while people who owed money were getting poorer. As long as that happens only in a small way, and as long as people sense that it’s “fair”—that nobody is cheating the system to take unfair advantage—it’s kinda nice. If you don’t owe money (and most people didn’t, because there were no credit cards, and virtually no student loans), then whatever meager savings you had got gradually more and more valuable. At the same time, wages tended not to drop (for the same reasons that wages tend not to drop these days as well), so somebody with a job ended up gradually better and better off.

Of course rich people got vastly more well off, so they loved it. The main people who hated it were farmers and small businessmen, because they generally needed to borrow money (to buy seed or raw materials), so they were constantly screwed by the fact that the money they had to pay back was worth more than the money they’d borrowed.

I started this post meaning to suggest that “kids these days” just didn’t understand the dynamics of deflation, But upon reflection, I think there’s another layer to it. Kids these days (as opposed to the Gen-X kids who trusted their parents and guidance counselors, and borrowed as much money as necessary to go to the best school they could get into) don’t owe so much money, so they’re not in the position of being utterly screwed by deflation. Many of them may be in the position of ordinary people in the great post-Civil War deflation, who ended up doing pretty well, with their wages or salary rising in value, while industrialization and globalization helps hold down prices.

The fact is, though, that deflation can absolutely destroy a generation of ordinary people. After WW I, for example, Britain, having funded the war through inflation, decided to return to the pre-war gold parity, which required a grinding deflation that lasted until 1929—great for people with money, bad for people without, devastating for people with debts. France decided instead to revalue, punishing people with money, coddling people with debts (which has its own downsides in terms of social disruption). German, the loser of WW I, saddled with debts denominated in gold, made a valiant effort to pay them back, giving up and starting WW II only when that proved utterly impossible.

The lesson of that period, understood by pretty much everybody from the 1940s through the 2000s, was that the best thing to do after a period of inflation was to bring the inflation rate back down near zero, but accept the price increases that had already happened. (If the inflation rate is brought back down to, let’s say, 2%, prices will be generally stable. The slight remaining inflation will be barely noticeable, hidden amidst the ordinary rise and fall of prices due to changes in fashions, technological improvements in the means of production, depletion of resources, etc.)

It’s very interesting to see young folks returning to the instincts of the 18th and 19th century, thinking the prices should go back to what they were before the inflation. It goes very much against what I learned as an economics student, but who can say that what I learned was right and that their instincts are wrong?

Seems like a situation of “time will tell.”

Sources:

Apparently I was a lazy girl my whole life, and didn’t even know it.

The Wall Street Journal provided a fairly succinct summary of a lazy girl job in July: “one that can be done from home, comes with a chill boss, ends at 5 p.m. sharp and earns between $60,000 and $80,000 a year — enough to afford the basic comforts of young-adult life, yet not enough to feel compelled to work overtime.”

Source: The New York Times

Assets are called “safe” when they’re free of default risk. But that doesn’t mean their prices can’t drop, or that the financial system is safe if systemically important institutions buy them on margin.

What appears to be a liquidity issue will ultimately become a financial stability issue as investors discover their “safe assets” are not safe.

Source: Solvency Constraints – Fed Guy

Image source: https://www.loc.gov/pictures/item/98510133/

Very occasionally I wish I were the sort of person who kept lists.

It’s most common that I regret not being a list-keeper when someone asks for book recommendations, especially when they want something in a particular scope—the 10 best books I read this year, or three books that I’ve given as gifts.

I’m always daunted by a request like that, because I have no idea what books I read this year.

Some of my tools—in particular, Amazon and my Kindle—do some amount of list-keeping for me. The public library could, but by default it doesn’t. (For very legitimate historical reasons, librarians worry about their patrons’ privacy, and since they don’t need to keep track of what books you’ve checked out once you’ve returned them, they default to forgetting about them.)

I played around with using a little toy tool called IndieBookClub, which posts the books you enter to your site, but it didn’t do most of the things you’d actually want such a tool to do (associate the books you’re meaning to read, books you’re reading, books you’ve read, and your thoughts about them), so I didn’t find it very useful.

Some people really enjoy the process of keeping lists, but that’s not me. Basically, I don’t want to keep lists, I sometimes want to have kept lists. I sometimes regret not having a list of something, but not in a way that makes me think I should start keeping such a list.

I do track some things—money, exercise, sleep—when experience has shown me that doing so is of great value, but in most areas of life I don’t keep track of anything at all.

Just today—after a year of having this post hanging around in my drafts folder—I saw plans for folks working on IndieWeb stuff to talk about how to do personal libraries in a way that would produce decentralized Goodreads-like functionality. That would really appeal to me.

In the meantime maybe I’ll look around at some list-keeping tools (or maybe start using a few pages in my bullet journal to keep track of books and other things worth tracking).

I’ll keep you posted. Maybe next year will be the year I keep a list of one more thing!

Here’s an app that would have been worth a low-key post on @wisebread. It has a “Denomination Detector” (maybe for people with impaired vision?) and highlights security features you can use to check that the note is genuine, including a “Tilt Check Simulator” that reveals how the security features of banknotes function when in motion.

Source: Cash Assist Mobile App | U.S. Currency Education Program

On one of my top-two issues when it comes to means-testing benefits, @interfluidity gets it just right:

“Requiring demonstration of inadequate means up-front, rather than on the back-end, creates at best a delay between when a shock is experienced and when it can be ameliorated. “Delay” can mean your kid skips meals, you start rationing your insulin, or your family is evicted from its home. It’s a big deal.”