The importance of inflationary expectations: The 1870s vs. the 1970s

[jon_leonard]

There's an interesting contrast between the 1870s and the 1970s. Both decades were significantly influenced by a suspension of the gold standard, and currency inflation. In the case of the 1870s, greenbacks were (temporarily) not convertible to gold as a leftover of a Civil War measure, and the price inflation that resulted from issuing paper

Comments

[theeidolon]

Perhaps a trade-off? Expectations of inflation are bad for the currency, but expectations of low inflation (Or deflation) exacerbate a financial crisis as they suggest the government is not acting actively in a way that will clear up the crisis. Kind of like a choice between the US in the 70's or Japan in the 90's. Neither choice is very appetizing... Anyway I'm sure Krugman is a fine economist, but he is also relentlessly political, which may affect which problems and cures he will emphasize.

[jon_leonard]

The trade off appears to be that they're doing wildly inflationary things (which doesn't inflate much right now), while proclaiming that they'll stop, eventually.

Unless we really, truly want inflation, that's probably about the best that can be done with the Fed's toolkit. (Congress can and should do better than it is doing.)

And deflation by itself isn't necessarily bad: The 1870s were marked by deflation as greenbacks returned to parity. But output expanded enough to make that not so painful: Prices fell, wages stayed about constant.

[mrmorse]

I certainly don't know enough about economics to evaluate his claims, but my understanding is the Krugman would say that today's economy is not comparable to the 1970's. Instead, it's comparable to the late 1930's, when concern about inflation led to behaviors which prolonged the Great Depression.

[jon_leonard]

Probably. Or some mix of that and Krugman just plain being Keynesian in outlook, so that more government spending looks like the solution to any sort of recession.

For what it's worth, I don't think either the 1970s or the 1930s are all that close a match to the current conditions. But neither situation would be all that hard to "achieve" by improper use of monetary tools.