Affinity and Inflation by Paul Krugman

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Brad DeLong marvels at Peter Schiff insisting to Josh Barro that US inflation is far higher than the official statistics acknowledge, and hence that the economy is actually shrinking. Incidentally, the independent Billion Prices index — which is internet-based, and places a higher weight on goods as opposed to services including housing — is actually showing deflation right now.

Brad — picking up on me, I think — suggests that it’s about affinity fraud. The picture above is from my slides for the Festival of Dangerous Ideas. The figure on the left, for those not familiar with the classics, is Snidely Whiplash, the enemy of Dudley Do-Right; I use him to symbolize the notion that bad economic ideas are propounded by people with an interest in having the government pursue bad policies. On the right is Bernie Madoff, but I’m not thinking of Madoff as much as his followers, who trusted him because they thought he was one of them. That’s what affinity fraud is all about.

I’ve been arguing for a while that inflation paranoia is best understood in affinity fraud terms. It’s true that some people benefit from deflation, but it’s hard to make a general case that this is what’s driving the phenomenon. And all the CNBC and Zero Hedge followers have been losing money if they believe what they’re hearing. To quote myself:

So who are the people who feel a deep affinity with a crotchety crank? Um, crotchety white guys feeling cranky. The whiteness is, I believe, an important part of the story, as I’ll explain in a minute.

The basic mindset of the kind of people who pay Ron Paul for his economic advice is pretty clear: they’ve made some money over the course of their lives, they believe that all of it reflects their own virtue, and they think they know from that experience what it takes to create wealth. They hear that the Fed is printing money, and it sounds to them like a violation of both the laws of economics and morality — and they surely think of it as a plot to take away their completely earned gains and give them to Those People (hence the whiteness issue).

You can try as hard as you like to tell such people that monetary policy is mainly a technical problem, that the Fed isn’t giving money away, and that predictions of runaway inflation have been utterly wrong; it will make no difference. You can point out that they would have done a much better job of investing if they had listened to the MIT gang; sorry, we’re just not their kind of people.

This stuff will never go away.