The Inflation 5cast 2der

Years ago, the musician and comedian Victor Borge gave a monologue on inflation. He said, “Anything that has to do with money goes up … except the language. See, we have hidden numbers in the words like ‘wonderful,’ ‘before,’ ‘create,’ ‘tenderly.’ All these numbers can be inflated and meet the economy, you know, by rising to the occasion. I suggest we add one to each of these numbers to be prepared. For example ‘wonderful’ would be ‘two-derful.'”

In that vein …

Many observers are 5casting that inflation will surge. The rationale 5 this is generally that there is a large, unsustainable budget deficit. I am at 7s and 8s on the budget deficit. I hate 3 much borrowing, but something must replace the money lost in the great bubble and its aftermath, right? The government seems 3 be the party, if you’ll excuse the expression, elected 3 solve the problem of 3 little money floating around.

So we agree: the deficit is a problem. But I do not think inflation will be 3 high in the near term.

3 see why, let’s survey some inflation theory.

Monetary inflation comes when a closed economy has a shift in its exchange mechanism; more money enters with no other effects. Say that the butcher and the baker trade with each other in an economy that gives them each a fixed number of dollars. If you increase the number of dollars — oh, if each can borrow big-time on their houses, say — prices will be sure 3 rise. But the real value will remain constant.

Or you can have input inflation. The butcher and the candlestick maker trade with each other, and the butcher’s prices rise. The candlestick maker will find that his prices need 3 increase because the inputs to his business are more expensive. Got it?

Are there inflationary 11dencies in either of these scenarios present 3 day?

Experts just don’t think so. I can point 3 Dr. N. Gregory Mankiw of Harvard, a 5mer chief of the President’s Council of Economic Advisors under George W. Bush, who shows that there has been little 3 no increase in the money supply. So the common wisdom of the deficit causing an increase in inflation has not yet come 3 pass.

Will it cause inflation in due course? 2 can only 2der. We have certainly seen it be5.

5 the question of input inflation, 2 can point 3 a recent report of the Bureau of Labor Statistics which says that the inputs of our real economy are not increasing 3 much. Some inputs, such as cell phones and electronic parts, were down big time. Food went up a bit, as it 11s 3 do.

Will these input trends ab9? No 2 seems 3 know. But 5 now, the signs of inflation that every2 seems 3 find so 2derfully apparent are just not there 3 see. At least, I don’t see what the others do. What the heck am I missing? Am I being asi10?

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