Say hello to the inflators

There are people today screaming for inflation. They are desperate for higher prices. They are hiding their nefarious desires behind the ludicrous claim that the UK and US economies are deflating.

Here is a good example of an inflator - Jim Cramer. In this clip, he puts forward the claim that the US is deflating right now.

What is Cramer's argument? It seems to go something like this; if we take out commodity prices from the US CPI and replace it with house prices, then the CPI is actually falling. Therefore, the US is deflating and on the edge of a 1930s depression.

Is this true? Certainly house prices are falling. The non-commodity part of the CPI, which loosely corresponds to the PCE index, is not falling. In fact, it is rising. So are input prices, output prices, the GDP deflator and import prices. In fact, the only two prices that are falling right now are house and equity prices. So much for deflation.

The argument is obviously foolish. However, if we stretched the argument back to 2002-06, it must follow that the US was inflating. Back then, house prices were going up at double digit rates. So were equity prices. I don't recall Cramer raving about inflation back then.

He also launches a vicious and largely incoherent attack on the Fed. When it comes to practical policy advice, he substitutes his incoherence with silence. What should the Fed do? Jim has no idea.

The simple fact is that Cramer and his banker mates want inflation. They believe that higher prices will help out their insolvent customers, who took out loans that they can not now pay back. The losers will be savers. Since the bankers sit in the middle and make their money taking a margin, inflation will stabilise their balance sheets and allow them to keep on making money.

So, for people like Cramer, this deflation argument is really useful. However, it is a Trojan horse for inflation. It is a useful intellectual instrument in hands of self=serving self-interested bankers.

Make no mistake, inflation is the real problem. How do we know this? Because the money supply and inflation data tells us so.