#65 Phil Armstrong: Understanding Inflation

Patricia and Christian talk to author and MMT scholar Phil Armstrong about inflation, hyperinflation, the gold standard, John Maynard Keynes’ Bancor plan and more.

---

Show Notes

Phil’s recent presentation is in Episode 63 – Phil Armstrong, Prue Plumridge: The Post-Covid Economyhe Post-Covid Economy.

Phil’s book, Can Heterodox Economics Make a Difference? will be available in November.

In this discussion Phil talks about the Ruhr Valley, the industrial region of Germany which was invaded and occupied by French and Belgian troops from 1921 to 1925 as a reprisal for Germany failing to fulfil World War I reparation payments. More here.

Phil also talks about the ERM (European Exchange Rate Mechanism), which locked together the various currencies of what were to become the Eurozone member nations at fixed or semi-pegged exchange rates. More here.

---

Transcript for opening monologue

At the beginning there, you heard our guest this week, MMT scholar and author Phil Armstrong and we’re going to be talking to Phil in a moment about inflation, hyperinflation, the gold standard, John Maynard Keynes’ Bancor plan and more – but first, a bit of context for anyone new or newish to MMT. 

The framework for understanding modern money is that monetarily sovereign governments such as the US, the UK, Japan, Canada or Australia issue new currency into existence every time they spend, rather than spending what they’ve collected from taxing or borrowing. I know that’s a hard thing to swallow if this is your first time hearing it, but for a government that creates its own currency, the primary purpose of issuing tax bills is to get people to need the government’s currency, so they can then spend that currency into existence and hire people now looking to do things to get that currency. The tax bill comes first, people needing to pay the tax and therefore looking for things to do to get currency (otherwise known as unemployment) comes second, the government hiring people to provision itself comes third, and taxes being paid, ie currency being returned back to the government comes fourth – and you can listen to our first three episodes if you want more detail on that. It’s jarring the first time you hear money explained like this, but it’s not as controversial as it sounds – explanations similar to this in economic literature go all the way back to Adam Smith’s Wealth Of Nations.

Given that this is how modern money systems work, it follows that governments that issue their own currency are not revenue or borrowing constrained when it comes to spending – and this leads to concerns about inflation. The concern is that if too much money is spent chasing too few goods and services, the price of those goods and services will get bid up, and a bidding war between the private sector and the government (with its infinite chequebook) will exacerbate this trend and this pushes the buying power of the currency down – ie you need increasingly more money to buy the same basket of goods year on year – and this is what people understand as inflation, and that’s what this episode’s about. 

Just a few things before we dive in:

Regarding that basket of goods – in the interview Phil mentions CPI and RPI, and they are the Consumer Price Index and the Retail Price Index which both measure how the overall price level, that’s how much *all* prices have risen or fallen over time, by looking at prices for a given basket of goods. The CPI and RPI have different goods in their baskets and as you’ll hear, the decision about what gets left out and what stays in the basket more likely than not has an agenda-serving component to it.

Next – there are at least two types of inflation. The scenario I described earlier, the too-much-spending-chasing-too-few-goods situation, is known as demand-pull inflation, and that’s not to be confused with cost-push inflation which is where the price of an important good or service that can’t be substituted, such as oil, is raised substantially and that’s what many experienced in the 1970s when between 1973-1974 the OPEC nations restricted their supply of oil to certain nations including the UK and the US and then later in 1979 when global oil production diminished in the wake of the Iranian revolution. There’s more about this in our episode 7 with Dr Steven Hail which is a really good episode in my completely objective opinion.

The US policy response to this second oil shock in 79, led by Paul Volcker, then chair of the Federal Reserve, was to raise interest rates to an unprecedented level, peaking at 21% in 1981. The idea being that if interest rates go up, it’s expensive to borrow to invest, and this slows down economic activity and brings about disinflation. Of course, the side-effect of this was a huge recession and misery for millions, but of course those millions are not the ones deciding policy. 

If you listen to our episode 59 with MMT founder Warren Mosler, you’ll hear that the MMT view of interest rates is the other way around. Because the government is a net payer of interest to the economy, raising interest rates increases the number of dollars potentially chasing goods and services and likely adds to inflationary pressures. As Warren has said elsewhere, his view is that Volcker’s interest rate hikes likely prolonged the inflation and the deregulation of natural gas by President Jimmy Carter was, in his opinion, the thing that broke the inflation.

Also in this episode, we mention the NAIRU, not to be confused with Nauru, the small Micronesian island which is known for its large deposits of guano or, pardon my french, bat excrement. But that’s where the similarity ends. The NAIRU is the Non Accelerating Inflation Rate of Unemployment, sometimes called the natural rate of unemployment to make it sound a bit more touchy-feely and in line with God’s ineffable plan – whereas, in reality, it’s in line with Milton Friedman’s highly eff-able plan, based on an idea that there’s a rate of unemployment below which inflation will accelerate, so we need to keep the number of unemployed people above this magic number, which is estimated to be around 5-6% in the US for instance – which again is millions of people all suffering a precarious existence and early death – because of, as Keynes described it: “The Conservative belief that there is some law of nature which prevents men from being employed, that it is “rash” to employ men, and that it is financially ‘sound’ to maintain a tenth of the population in idleness for an indefinite period… the sort of thing which no man could believe who had not had his head fuddled with nonsense for years and years.” I think he would’ve been really good on Twitter, actually.

Anyway, the MMT prescription for fighting inflation, the Job Guarantee or Transition Job, delivers true full employment and we go into detail on how it also works to stabilise prices in our episode 4 with Dr Fadhel Kaboub and episode 47 with Professor Pavlina Tcherneva. I hope you get time to listen to those but the important thing to focus on is that this prescription has to be better on a point of logic than the way we control inflation now – again, by keeping millions of people involuntarily unemployed to be in accordance with people who have had their heads fuddled with economic guano for years and years.

By the way, I’m also developing my plan for price stability. My proposal is that all policy makers, intellectuals, and pundits who believe in a natural rate of unemployment should be the ones to be kept out of the workforce against their will to fight inflation – and whatever that number of people is is called the MNAIRU – the Moral Non Accelerating Inflation Rate Of Unemployment. And doing this would have two benefits. It gives the people who believe we should control inflation this way a chance to live their values and secondly, I predict it will give rise to a huge increase in academic papers arguing the scientific case for raising unemployment benefits to a level that human beings can actually live on, and maybe go skiing occasionally. 

A couple more notes: You’ll hear Phil mention the discount window, which is where member banks, commercial banks go to borrow reserves directly from the central bank to cover any shortfall they may have. As I understand it, the central bank would rather commercial banks lend to each other, rather than borrow from the central bank, so the interest rate on borrowing at the discount window is higher than the interbank lending rate. Important to know, when you borrow from a commercial bank, they are not lending you their reserves – as a bank customer, you only affect the reserve system indirectly. Your bank’s reserve account is their bank account at the central bank and it’s the account they use to settle up with other banks, if you want to know more on how that works and why it’s important, listen to our episodes 13, 30, 31 and 43 in that order.

I think that’s everything covered, there are more useful links in the show notes and there’s a link to where you can support this show financially by going to Patreon dot com slash MMT Podcast – support starts at a dollar a month which is 76 British pence at the time of recording, it really helps keep the show going and no matter what level of support you give, you get early access to all our shows and patron-only episodes where you can ask me and Patricia MMT questions.

And I know I say this every week, but I mean it every week: thanks to everybody who supports us, whether it’s financially or by listening and recommending us to other people, and thanks for the time you put into unfuddling the guano. Let’s dive in!