Scott Sumner Bans Inflation

Scott Sumner, the world’s greatest economics blogger, has had it with inflation. He hates inflation so much he wants to stop people from even talking about it or even mentioning it. He has banned use of the i-word on his blog, and if Scott has his way, the i-word will be banned from polite discourse from here to eternity.

Why is Scott so upset about inflation? It has nothing to do with the economic effects of inflation. It is all about people’s inability to think clearly about it.

Some days I want to just shoot myself, like when I read the one millionth comment that easy money will hurt consumers by raising prices.  Yes, there are some types of inflation that hurt consumers.  And yes, there are some types of inflation created by Fed policy.  But in a Venn diagram those two types of inflation have no overlap.

So Scott thinks that if only we could get people to stop talking about inflation, they would start thinking more clearly. Well, maybe yes, maybe no.

At any rate, if we are no longer allowed to speak about inflation, that is going to make my life a lot more complicated, because I have been trying to explain to people almost since I started this blog started four months ago why the stock market loves inflation and have repeated myself again and again and again and again. In a comment on my last iteration of that refrain, Marcus Nunes anticipated Scott with this comment.

That´s why I think mentioning the I word is bad. Even among “like thinkers” it gives many the “goosebumps”. What the stock market loves is to envision (even if temporarily) the possibility that NGDP will climb towards trend.

And when Scott announced the ban on the i-word on his blog, Marcus posted this comment on Scott’s blog:

Scott: David Glasner won´t be allowed to place comments here. Early this month I did a post on the I word.

In DG´s latest post Yes, Virginia, the stock market loves inflation I commented:

That´s why I think mentioning the I word is bad. Even among “like thinkers” it gives many the “goosebumps”. What the stock market loves is to envision (even if temporarily) the possibility that NGDP will climb towards trend.

He answered:

Marcus, I think inflation is important because it focuses on the choice between holding assets and holding money.!

Scott replied

We’ll see how David reacts to this post.

Well after that invitation, of course I had to respond. And I did as follows:

Scott, Even before I started blogging, I couldn’t keep up with you and now that I am blogging I have been falling farther and farther behind. So I just saw your kind invitation to weigh in on your “modest proposal.” I actually am not opposed to your proposal, and I greatly sympathize with and share your frustration with the confusion that attributes a fall in real income to an increase in prices as if it were the increase in prices that caused the fall in income rather than the other way around. On the other hand, on my blog I will continue to talk about inflation and every so often, despite annoying you and Marcus, I will continue to point out that since 2008 the stock market has been in love with inflation, even though it normally is indifferent or hostile to inflation.

I also don’t think that you have properly characterized the Fisher equation in terms of the real interest rate and expected NGDP growth. As a rough approximation the real interest rate (r) equals the rate of growth in real GDP; and the nominal interest rate (i) equals the rate of growth in nominal GDP. So stating the Fisher equation in terms of GDP should give you i = r + p (where p is the rate of inflation or the ratio of nominal to real GDP).

Finally, I am wondering whether you also want to ban use of the world “deflation” from polite discourse. I think it would be a shame if you did, because you and I both think that it was an increase in the value of gold (AKA deflation) that caused the decline in NGDP in the Great Depression, not a decline in NGDP that caused the increase in the value of gold.

So what is the upshot of all this? I guess I am just too conservative to give up using a word that I have grown up using since I started studying economics. It would also help if I could make sense of the Fisher equation — think of it as Newton’s law of monetary motion — without the rate of inflation. So I am waiting for Scott to explain that one to me. And I think that we need to have some notion of the purchasing power of money in order to explain the preferences of individuals for holding money versus other assets. If so, the concepts of a price level and a rate of inflation seem to be necessary as well.

Having said all that, I would add that Scott is a very persistent and persuasive guy, so I am definitely keeping all my options open.

Update:  Thanks to the ever-vigilant Scott Sumner for flagging my mistaken version of the Fisher equation.  It’s i = r + p, not r = i + p, as I originally had it.  I just corrected the equation in the body of the post as well and reduced the font to its normal size.


11 Responses to “Scott Sumner Bans Inflation”

  1. 1 Luis H Arroyo November 7, 2011 at 3:52 am

    If we talk about deflation -and it is inevitable, regarding the Great Depression- we have to refers to the opposite phenomenum, inflation. I´ ve always criticized my European fellow for seeing only one side of the problem: inflation. It is a problem of ample vision, not of closing one of the side. Scott has a very great sense of humour.


  2. 2 Lars Christensen November 7, 2011 at 1:33 pm

    Haha…this is a fantastic discussion. I think Scott need to cool down a bit, but I can understand his point. And David, you remember I also got upset when you said the stock market love inflation – yes, for slightly different reasons, but anyway…

    Anyway, we do have a problem in terms of having terms of higher and lower NGDP growth, a drop in NGDP, deceleration and acceleration in NGDP etc. Maybe disnomina and innomina? Or maybe not…


  3. 3 Lars Christensen November 7, 2011 at 1:36 pm

    ….and by the way – David try estimate the following two equations:


    Where R is 10y UST yields and NGDP is five year moving average of NGDP growth and P is five year moving of US inflation. Lets see which model comes out with the highest R2…


  4. 4 Will November 7, 2011 at 10:44 pm

    Sumner gives a new meaning to the phrase Whip Inflation Now.

    I’m not sure that this sort of rhetorical subterfuge works if you admit up front that what you’re doing is rhetorical subterfuge. But it’s also true — as attested by the fact that you’ve had to repeat yourself again and again and again and again — that all but the most celebrated blog posts are quickly swept under the Osymandian sands and forgotten. Sumner is generally not on the radar of the bigger inflation hysterics (strangely), so his censure of the very word is likely to pass unnoticed.


  5. 5 mgaleMG November 7, 2011 at 11:37 pm

    In part, it’s a generational thing. Many of today’s old people — that is, voters — remember the ’70s, and reflexively think of inflation as bad, and are unable to see it as anything else. People learn nothing as well as something they lived through, which conditions the “common sense” demagogic politicians exploit. It doesn’t help that these are the folks who are living on relatively fixed incomes, and so have somewhat selfish reasons to abhor inflation.


  6. 6 Becky Hargrove November 8, 2011 at 5:27 am

    Why abandon the dreaded I word when there are useful graphs such as this for the cause:


  7. 7 Becky Hargrove November 8, 2011 at 5:31 am

    Since that link didn’t quite get it:
    “Can the Fed Stimulate Growth or Only Inflation” – Bruce Bartlett


  8. 8 Noah November 9, 2011 at 8:23 pm

    But apparently you can still mention RGDP.

    So instead of “inflation,” when commenting on Sumner’s blog, just say “d/dt ln(NGDP/RGDP)”. Problem solved! 😉


  9. 9 David Glasner November 9, 2011 at 10:45 pm

    Luis, You are certainly right that we need to worry about both inflation and deflation. I think that we also need to understand that inflation and deflation can both have good or bad effects that depend on the particular circumstances. So just because inflation is sometimes or usually undesirable does not mean that it is always undesirable. You are right about Scott also.

    Lars, I am glad that you are amused. And thank you for devoting a blog post to Scott and me and Machlup. It’s an honor to be included in such distinguished company. Good idea about estimating the two equations. How about you get one of your guys to do it for us.

    Will, you are right, it can get frustrating

    mgaleMG, I think that living through a serious inflation does affect people personally and in a collective sort of way. The Germans seem to have been more traumatized by the 1923-24 hyperinflation than the 1930-32 deflation. I don’t understand it, but that seems to be the case.

    Becky, Thanks!

    Noah, You are a great problem solver. Maybe you should go into politics.


  1. 1 Sumner, Glasner, Machlup and the definition of inflation « The Market Monetarist Trackback on November 7, 2011 at 2:27 pm
  2. 2 TheMoneyIllusion » Yglesias: “don’t reify the concept of an inflation rate” Trackback on November 8, 2011 at 3:12 pm

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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

Follow me on Twitter @david_glasner


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