Inflation Hawks Unrepentant and Zombified Watch!: (Early) Friday Focus for October 3, 2014

My bet with Noah Smith:

“IF at any time between 7/28/2012 and 7/28/2015 core consumer prices…

…as recorded in the FRED database series CPILFESL, are up more than 5% in the preceding 12 months, and if over the same 1-year period monthly U3 unemployment (as recorded in FRED database series UNRATE) has not averaged below 6%:

THEN Brad DeLong agrees to buy Noah Smith one dinner at Zachary’s Pizza at 1853 Solano Ave. in Berkeley CA, and to pay Noah 49 times the cost–including tax but excluding tip–of Noah’s meal at Zachary’s in Federal Reserve notes, or in alternative means of payment accepted by Zachary’s should Zachary’s Pizza no longer be accepting Federal Reserve notes at the date of the dinner.

This cost will be assessed as the total cost of the dinner to all, divided by the number of people present, regardless of how much pizza is consumed by or how much alcohol is drunk by specific individuals. If however, the above condition is not satisfied, Noah agrees to buy Brad one dinner at Zachary’s.

Miles Kimball will be the judge in charge of refereeing the bet. The decisions of the judge will be final and unappealable.

Furthermore, Noah’s brave and gracious willingness to take the John Cochrane-Argentina side of this bet at odds of only 50-1 will not be construed as a statement of his confidence in or of his support for any economist or position of economic analysis that judges expansionary fiscal policy at the zero lower nominal interest rate bound to be “insane”, or that judges “1932” to currently be a less dire risk for the U.S. than “Argentina”.

In retrospect, given Bernanke’s unwillingness to split the FOMC over policy, it was grossly unfair of me to give Noah only 50-1 odds:

We now have only ten more data points to see before the bet expires, and the last two data points are now in the average that must be over 5.0%/year for Noah to win. Annualized, the two data points we have are: July: 1.2%/year; August: 0.9%/year. The ten remaining data points must thus average more than 5.8%/year for Noah to win his bet.

And, as I said before, the question remains of what wine we should brown-bag to Zachary’s: I am partial to a Chateau Mouton myself, but perhaps better values are had in Haut Medocs or in Francis Ford Coppola’s Archimedes, and we could always invite Paul Ryan to come to learn some real economics and drink an Échezeaux, if we felt like following the taste of the House of Valois-Burgogne rather than the House of Plantagenet, and going for wines descended from the Burgundy served to Duchesse Marie la Riche rather than from the Bordeaux served to King Edward IV…

But perhaps the most interesting thing I learn today about my bet with Noah is this: A bunch of the people whose astonishing unwisdom originally provoked it are not marking their beliefs to market and hedging, but rather doubling down:

Caleb Melby, Laura Marcinek and Danielle Burger: Fed Critics Say ’10 Letter Warning Inflation Still Right: “Signatories of a letter sent to then-Federal Reserve Chairman Ben S. Bernanke in 2010…

…are standing by their claims… that the Federal Reserve… risked “currency debasement and inflation”… “distort[ed] financial markets”….

Jim Grant….

I think there’s plenty of inflation–not at the checkout counter, necessarily, but on Wall Street… at the expense of other things, including the people who saved all their lives and are now earning nothing on their savings….

John Taylor…

inflation, [un]employment… destroy[ed] financial markets, complicate[d]… normaliz[ation]… all have happened….

Douglas Holtz-Eakin….

The clever thing… is never give a number and a date. They are going to generate an uptick in core inflation…. I don’t know when, but they will.

Niall Ferguson… saying his thoughts haven’t changed….

This bull market has been accompanied by significant financial market distortions, just as we foresaw. Note that word ‘risk.’ And note the absence of a date. There is in fact still a risk of currency debasement and inflation.

David Malpass….

The letter was correct”….

Amity Shlaes….

Inflation could come… the nation is not prepared….

Peter Wallison…

All of us… have never seen anything like what’s happened here. This recovery… by far the slowest… in the last 50 years.

Geoffrey Wood…

Everything has panned out…. If the Fed doesn’t ease money growth into it, inflation could arrive.

Richard Bove…

Someone’s got to prove to me that inflation did not increase in the areas where the Fed put the money….

Cliff Asness… declined to comment. Michael Boskin… didn’t immediately respond…. Charles Calomiris… was traveling and unavailable…. Jim Chanos… didn’t return a phone call or an e-mail…. John Cogan… didn’t respond…. Nicole Gelinas… didn’t respond…. Phone calls… and an e-mail… to Kevin A. Hassett… weren’t returned. Roger Hertog… declined to comment…. Gregory Hess… didn’t immediately return…. Diana DeSocio… said Klarman stands by the position…. William Kristol… didn’t immediately return a call…. Ronald McKinnon… died yesterday prior to a Bloomberg call…. Dan Senor… didn’t respond…. Stephen Spruiell… declined to comment…

I am sorry that I will never learn what Ron McKinnon would have said–the last time I talked to him, at the San Francisco Fed, he said he was working on some ideas about why and where the enormous money-printing by the Fed had been soaked up.

And I do not know which is worse and less professional:

• Asness, Boskin, Calomiris, Chanos, Cogan, Gelinas, Hassett, Hertog, Hess, Klarman, Kristol, and Spruiell; who stand mute.

• Grant, Taylor, Ferguson, Malpass, and Wood, and Bove; who claim that the letter’s warnings were prescient: “The letter mentioned several things… inflation, employment… destroy financial markets, complicate the Fed’s effort to normalize… and all have happened…”

• Holtz-Eakin, Shlaes, and Ferguson (again); who claim it was always the “there are risks!” con: “The clever thing forecasters do is never give a number and a date. They are going to generate an uptick in core inflation. They are going to go above 2 percent. I don’t know when, but they will.”

The only one who emerges from this with any credit at all is Peter Wallison:

• Wallison: “All of us, I think, who signed the letter have never seen anything like what’s happened here. This recovery we’ve had since the end of 2009 has been by far the slowest we’ve had in the last 50 years…”

But even he gives no further reflections on why the clear and present economic dangers and imminent economic threats he saw back then have shown no signs at all of any existence.

My take: Mark your beliefs to market, people! Learn from history, people! As George Santayana said: “Those who do not remember the past are condemned to repeat it.” You can argue that that is a form of justice for you. But it is not a form of justice for us–because your amnesia dooms us to repeat the bad parts of it with you sometime in the future.