Inflation Paranoia Is Like Racism

For most of human history racially-based prejudice has been very common. It’s simple, easily understood, and based on deep psychological roots. Generalizing things based on how they look makes a lot of sense most of the time, but taken too far it can lead to monstrous results.

Inflation paranoia is like that, on a smaller scale. It’s a simple, intuitive, easily-understood sort of belief which can lead us badly astray. Witness this prediction from Peter Schiff, pointed out by Paul Krugman:

SCHIFF: You know, look, I know inflation is going to get worse in 2010. Whether it’s going to run out of control or it’s going to take until 2011 or 2012, but I know we’re going to have a major currency crisis coming soon. It’s going to dwarf the financial crisis and it’s going to send consumer prices absolutely ballistic, as well as interest rates and unemployment.

Though Schiff is a bit of a fruitcake this kind of mindset is common, especially in Germany. Inflation is viewed as a death threat to the economy, some kind of uncontrollable beast that will jump to a hundred million percent given half a chance, which must be avoided at all costs. Mass unemployment, on the other hand, is comparatively less worrisome.

In reality, central banks have inflation easily in hand. In the US it’s low, and has been so for years. If it were to spike up too high they could raise interest rates to tamp it down again, as Paul Volcker did back in the 80s. Not a serious worry, and certainly no reason to make hysterical comparisons to Zimbabwe, especially not in the teeth of a gigantic unemployment crisis.

But the continual failure of inflation to appear doesn’t dent the conviction of the hard money fanatics. Despite the fact that the Fed has more than tripled the monetary base, Schiff still says “Printed money merely creates inflation.” (That’s not how it works.) The European Central Bank remains obsessed with 2% inflation as the Eurozone crumbles around them.

I wouldn’t say that inflation paranoia is as morally wrong as racism. But it is morally wrong. It helps the most vulnerable—debtors and the marginal worker— when they least need it (during the boom), and punishes them when they’re already suffering (during the slump). As Krugman says, the Eurozone needs some inflation to give Spain and company even a prayer of recovery (to restore competitiveness). German paranoia is giving much of the Eurozone Depression-level unemployment and may well tear it apart.

The hard money fanatics are gripped by a cancer of the mind, but a look at the consequences hopefully will make that belief repellent for future generations.

Ryan Cooper

Ryan Cooper is Washington correspondent for The Week.