Do the inflationistas really believe what they say?

For several months I've wanted to write a post titled something like "The absolute epic crushing devastation of the inflationista worldview". But I didn't get around to it, and that is a good thing, because Matt O'Brien does it much better than I ever could. And Paul Krugman, who has basically made a sport of slaying inflationistas, chimes in, differentiating between several levels of inflationista derp. The Inflationista Hall of Shame includes New Classical economists, Austrians, conservative politicians, some Wall Street macro types, faceless European institutions, and Niall Ferguson.

Of course it isn't just people in the popular press warning about "the bond bubble", inflation, and "all this money printing". Every Wall Street guy I hang out with in New York seems to think the same thing. "We had the Tech Bubble...we had the Housing Bubble...and I tell you what," confided a stockbroker friend to me over dinner two weeks ago, "I think right now we're in the Central Bank Bubble." To which I of course replied, "If everyone thinks it's a bubble, why doesn't it pop?"

But anyway, the question is no longer whether the inflationistas have a good point. They do not. At some point in the infinite future there will almost certainly be a period of inflation, but any theories or worldviews that kept confidently predicting inflation between 2008-2013 have now been falsified by events.

So the question is: Why do people continue to profess those same inflationista views? 

I think the answer is probably different for different groups of inflationistas. For New Classical economists like Steve Williamson (Update: After an email exchange, I'm thinking that I wasn't being fair to Steve; it appears that he was merely taking the results of this model a bit too literally), it's probably just a case of investment in, and commitment to, their own theoretical paradigm. Inflation happened in the 70s, and New Classical theory won lots of plaudits because it seemed to explain what was going on. Lots of guys have made their careers working in that paradigm. To admit that the theory only "explained" the 70s, but not the current situation, would be to say "My career has been spent working with theories that are mostly wrong." Theoretically there should be no shame in such an admission; Tycho Brahe was a truly great astronomer even if his model of the solar system was wrong. The "Hall of Shame" doesn't need to actually involve real shame. But in the real world, everyone defends their paradigm with daggers drawn.

For "Austrians", we have to make a distinction between Austrian economists like Bob Murphy and "Wall Street Austrians" like Peter Schiff who cite Austrian ideas as justification for their investment decisions. The former are defending their (mostly dead) econ research paradigm. The latter, though, are probably more cynical. Guys like Schiff make their millions selling investors (mostly rich middle-aged guys) newsletters and managing their money for a hefty fee. Schiff has to convince his investors that he understands economics better than all the academics, and that this allows him to make macro predictions that will beat the market. Warnings about inflation plays well with the middle-aged rich conservative dudes who remember the 70s and identify easy money with liberalism. So that's basically an affinity con.

The hedge fund and other Wall Street guys have basically been explained by Brad DeLong. They made some "widowmaker" macro trades, and took a loss, and they're pissed. The Fed forced them to concede that it has the power to keep interest rates low without causing inflation, but they still feel like they should have been right, because dammit, they knew the fundamentals, and the Fed cheated! 

As for Europeans, I'm not sure. It might be the past experience of Weimar hyperinflation - remember that wheelbarrow full of cash! - or something having to do with the politics of debtor and creditor nations in the Eurozone. Or just stuffy bureaucratic institutional culture. Anyway, I freely admit that my understanding of Europeans is severely limited.

And as for conservative hucksters like Niall Ferguson and Erick Erickson, well, asking why those guys say anything they say is just a waste of time. Just do the sensible healthy thing, and ridicule them.

(Update: Paul Krugman points out another category of inflationistas: non-New Classical economists politically aligned with the Republican Party, such as Michael Boskin, Allan Meltzer, Martin Feldstein, and John Taylor. For these guys, Krugman says, it's all political. They perceive expansionary stabilization policy as wise and prudent when a Republican is in the White House, but as liberal folly when the president is a Democrat. This seems reasonable to me. Remember that John Taylor wrote that deficit spending exploded under Carter, when actually it was under Reagan.)

So to sum up, there are three main reasons for predicting inflation, in defiance of both market expectations and recent past experience. These are 1. Commitment to a research paradigm, 2. Emotive expressions of political and personal anger, and 3. Cynical affinity manipulation. None of these things is likely to respond to any amount of data in the short term. None of them depends on correctly predicting or understanding Extant Reality. They are, rather, artifacts of a different kind of reality than the kind that moves the planets in their orbit, lands men on the Moon, and propels cannonballs in nice parabolic arcs into the walls of Constantinople. They are artifacts of Tribal Reality, the kind of reality created by human beings repeating the same words back and forth to each other in order to confirm membership in a group. The war between Extant Reality and Tribal Reality has been raging for millennia, and it will not be resolved by a few years of low inflation.