Generals and Corporals in the Inflation/Deflation Debate
Aug. 6, 2012
Generals are wise not to respond to the challenges of corporals. Generals know this. General respond to generals, and maybe an occasional bird colonel.
On August 31, 2002, I wrote an essay, "Testing the Deflationist." I began it with these words.
There are a handful of newsletter writers -- but not one economist -- who predict deflation. Why no economists? There is an old line, "where there are four economists, there will be five opinions." You would think that there would be at least one Ph.D-holding economist out there somewhere who is predicting price deflation. Maybe there is, but I have not found him yet.Note: nobody is predicting monetary deflation. The deflationists are predicting monetary inflation and price deflation.
So, when you read someone who says that price deflation is just around the corner, you can be 99% sure that he is not an economist. That doesn't mean that he's necessarily wrong. It does mean that he can't find any back-up among the hordes of specialists who are paid to forecast such matters.
I ended it with these words: "My recommendation: if you're going to plan for business as usual, plan for price inflation." The article is here: http://www.lewrockwell.com/north/north123.html.
Go to the Inflation Calculator of the Bureau of Labor Statistics. It is here: http://bit.ly.BLScalc. Note: it is not called the Deflation Calculator. You can plug in the number and dates. I suggest using 1000 ($1,000). Begin with 2002. See if prices have fallen. As of today, I find that consumer prices are slightly under 28% higher than they were in 2002.
Conclusion: the deflationists were wrong in 2002. Not a little wrong. Not just "within statistical parameters" wrong. Dead wrong. "We lost 28%" wrong.
They have been wrong ever since 1933. Test me. Go to the Inflation Calculator. Select any pair of years: 1933/1934, or 1940/1941, or whatever. Find if there was a single year in which consumer prices fell. I found one: 1954/1955. There was a decline of four-tenths of a percent.
To cling to a position that has produced false predictions for 78 of the last 79 years takes a strong degree of commitment. For anyone to structure his portfolio or his financial future in terms of someone's predictions who holds the deflationist position takes a degree of confidence that boggles my mind. I suspect that anyone who believes someone who holds to a deflationist position has only recently discovered "hard money" sites. He does not know of the 79-year prediction track record of the tiny band of deflationists.
One of the non-economists who said deflation was coming was Jude Wanniski. In 2002, he published a critique of my views. He recognized that my view of money was the same as Murray Rothbard's. Wanniski then said that I did not understand the Austrian theory of money. That really yanked my chain. So, I sat down and in five days wrote a series of five articles. They were published on Lew Rockwell's site as "Mises on Money." They are still posted: http://www.lewrockwell.com/north/mom.html. Earlier this year, I updated these articles. They are now available as a book. http://mises.org/document/6772/Mises-on-Money In the Introduction, I cite Wanniski:
Both North and Rockwell have been disagreeing with my contention that the U.S. has been in the grip of a monetary deflation for the past five years, insisting a deflation does not occur until price indices are in negative territory. And like the monetarists, they point out that the monetary aggregates have been growing, which to them is a sign of inflation, not deflation.
Wanniski did not respond. He had a young staffer reply. He died without responding.
He did not have a clue as to what was happening to money. He also did not have a clue regarding Austrian monetary theory.
I find this is the case with all self-styled deflationists. Some of them may claim to be Austrian economists, but they are neither Austrians nor economists. They do not write books on monetary theory.
There is an old slogan: "You can't change just one thing." If you re-write monetary theory, and call it Austrian, you have an obligation to re-write the whole of Austrian economic theory in terms of your insight. This is what Mises did. He challenged one aspect of Bohm-Bawerk's theory of capital. He then re-wrote Austrian economic theory.
I posted an article on deflationism. http://lewrockwell.com/north/north1180.html Within hours, two self-styled deflationist website editors attacked me in no uncertain terms. One of them is a former photographer. The other writes with a weird pseudonym. Neither has written a book on monetary theory. Both claim to be Austrians. Both claim that I was targeting them. I was not.
When I write about deflationists, I have in mind experienced men who have held the position for at least 20 years and who have gone into print with their predictions of imminent price deflation. This is a huge embarrassment for them, but it is honest. In one case, the man has held the deflationist position for 30 years. Another has held it for 40 years. Both have both written several books about markets. Neither has written a book on monetary theory. Neither is an economist, but both are careful students of markets -- and always wrong on their #1 prediction, price deflation. They are defiantly wrong. They both come before the investing public and say: "Listen to me, people. I know what I am talking about." Really? If so, this time will be the first time.
I do not mention their names. Why bother? Their readers do not read my material, and my readers do not read theirs. They do not respond to me in print. If they did, the debate would never end. They hold to their bad prediction, despite 78 years of evidence to the contrary. That does not persuade them. Why bother with me? I agree entirely. They should not bother with me.
The newcomers are obsessed with me. That actually think I care what they say. I don't. But some of my readers do. That is my problem.
What amuses me is this: none of these people have the same theory of money and markets. That's because none of them has any theory of money and markets. They have never written a book on monetary theory, monetary statistics, and markets. That is why I inserted this paragraph in my recent article on deflation:
Deflationists never respond to this argument by invoking either monetary theory or monetary history. You can and should ignore them until one of them does answer this, and all the others publicly say, "Yes. That's it! We have waited since 1933 for this argument! I was blind, but now I see! I'm on board! I will sink or swim with this."Let me know when this happens. Until then, ignore the deflationists. All of them. (There are not many still standing.)
Because none of them has a theory of money, and because none of them is in any way committed to the other deflationists' various non-theories of money, they never agree on the basis of their predictions.
The Austrians -- inflationists all -- have a consistent theory of money. They have a theory of central banking. They are in the same camp. They cite each other's books and materials. Deflationists are like prisoners locked in solitary confinement. They do not respond to each other. They target the inflationists, yet some of them do so in the name of Mises.
It's weird, I know. But it has been going on ever since John Exter launched his version of deflation.
I will not name the man in question, but he attacked my position for saying that deflation means falling prices. He announced to the world this unique theory of the relation between credit deflation and price deflation. "Prices are clearly not part of my definition, and prices can indeed rise in a credit-deflationary period."
Ah, at last I see. Deflation is inflation.
Also, war is peace, freedom is slavery, and ignorance is strength.
The other one -- a pro-tariffs "Austrian" -- has really thrown down the gauntlet:
But if we can understand Gary North's failure to rise to the challenge posed by a younger generation of right-wing economists, we cannot excuse it. No one is forcing him to remain in the ring contesting these issues, after all.
Pardon me while I get my walker and dodder across the ring to answer the challenge. I would move faster, but my catheter tube has a knot in it.
GURU REPRESENTATION
When someone attracts a following on his website, some percentage of these people become so attached to the person that they regard any attack on him as an attack on them. Why? Because if he really is as defenseless as the attackers claim, they have been sucked in. No one wants to be sucked in. So, when they read the attack, they expect their representative to respond, preferably within a few hours.
Then the ping-pong match begins. Back and forth, back and forth, with each series of responses getting more arcane.
The problem is this: the followers can't follow the arguments for very long. Long chains of reasoning lose most people. A series of back-and-forth rejoinders is even less coherent and less capable of being followed.
In 2002, when Wanniski refused to respond to Misers on Money, he was tactically wise. Why stir up a hornet's nest? I might keep writing more articles. In fact, I planned to write Rothbard on Money if he did respond. But he did not have to respond to uphold his reputation with his followers. That was because I never mentioned him in my articles on Mises. I was making a positive case for Mises' view of money. I knew Wanniski would recognize that he was the target. He surely did. So, when he got his young staffer -- a non-economist -- to write a response, I did not respond. Why bother? If I beat him up, what would that prove? Generals should not get in public debates with corporals. They will make the corporals famous.
It will not pay for me to get into a publuc debate with a pair of corporals.
What I find is this: the followers who are most agitated about attacks on their guru do not understand the debate. The competing chains of reasoning confuse him. In contrast is a follower who understands the position. He is self-confident. He is in the camp in search of concrete applications of the ideological position. He does not need the guru to fight his battles for him. He can recognize the holes in the critic's arguments. He shrugs them off. In fact, he could probably give the critic a run for his fiat money.
The person who does not understand the position is in a bad way. He thinks he has "signed on" with the guru, but then another guru or would-be guru has attacked his guru. He is disturbed. He wants his guru to respond. Any argument will do. The follower really does not understand any of it. But he does not want to be left the next-to-the-last-man standing alongside a defeated guru. He awaits the response.
Here is my advice. If you cannot verbally summarize the critic's three or four main arguments, don't worry about it. Maybe the arguments are valid. Maybe they are muddled. It makes no difference. If you cannot follow them, they are irrelevant to your decision-making. For you, the arguments are muddled. You don't need a response from your guru. You need to go back to the basics of the position. If you don't understand the basics, the verbal ping-pong match between gurus will not clarify the matter for you.
CONCLUSION
I understand that people who have signed up with a position by way of a recruiter want to know that the recruiter was telling the truth. Then comes basic training. Then comes officer candidate school. Step by step, a recruit should master the position.
This is why the Communists in free societies would assign the new member to sell The Daily Worker. The leaders knew that the challenges from the hostile public would force the serious recruit to get training in how to answer the critics. The Communist Party had lots of training programs in the years of growth: the 1930s through the early 1960s.
The sign of mastery is when the followers can spot the corporals in the other camp. They do not mistake them for generals. They can see the weakness of the corporals' arguments.
Sometimes the corporals are better than the generals. Robert Murphy will clean Paul Krugman's clock if Krugman ever decides to debate him. General Krugman knows this. He is wise in not accepting Corporal Murphy's challenge, even if by accepting, Krugman would trigger $74,000 in charitable contributions to the poor. Krugman is wise: "Let the poor take care of themselves. I have my reputation at stake." He surely does. It surely would be sandbagged by Murphy.
Still, in the grand sweep of history, generals are wise in not wasting their time responding to corporals. Responding only helps the careers of corporals.