The two questions I am asked most often (low-skilled jobs and future inflation)

The first is what kinds of jobs will be available for low-skilled Americans in the decades to come.  I’ll be writing more on that.

The second is whether inflation is due to kick up in some kind of big storm, either in the next few years or when the major bills start coming due ten or so years from now.

Probably not.  Let’s consider a few factors:

1. The future budget situation will consist, most of all, of largely of unfunded Medicare liabilities, which to whatever extent they are met must be met in real terms.  Inflation will not make that problem go away.

2. The flow of debt is large, relative to the current stock (yes, I fully agree that is a scary thought in its own right).  That means the federal government won’t gain much, and would probably lose, by trying to inflate away the value of the stock of debt.  Furthermore a lot of the current debt is quite short-term.

3. Seigniorage revenue simply isn’t a big deal these days.

4. Everything we were taught about the monetary base is wrong in a world with interest on reserves (IOR).  A large base can sit there forever.  The price level is not proportional to the base, changes in the base, etc.  It just isn’t.  The broader aggregates, such as M2, haven’t grown so rapidly.

5. If needed, the Fed could soak up lots of the monetary base by selling assets from its portfolio.  I don’t have some utopian vision of the Fed doing this remarkably well (hard to say, this is not Fed-bashing either), but of course the Fed can make mistakes in many ways and I would not focus exclusively on that way, which is in any case part of a broader program of expectations management.

6. Every market price we can possibly look at it is forecasting low to moderate inflation.  The price of gold, by the way, seems these days to be a hedge against catastrophic risk not a hedge against inflation per se.

Please do not get me wrong, it is entirely possible that inflation will go up.  Things could change.  And even if the current deck of cards is played out, I do in fact think inflation will go up somewhat, perhaps more than markets are expecting (for one thing, I am more of a pessimist on supply bottlenecks than are many observers).  That said, I do not see any ticking inflationary time bomb.  Neither market evidence nor economic theory support such a conclusion.


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