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In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time.^[1] When the general price level rises, each unit of currency buys fewer goods and services. Consequently, inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.^[2][3] A chief measure of price inflation is the inflation rate, the annualized percentage change in a general price index (normally the Consumer Price Index) over time.^[4]

Inflation's effects on an economy are various and can be simultaneously positive and negative. Negative effects of inflation include a decrease in the real value of money and other monetary items over time, uncertainty over future inflation which may discourage investment and savings, and if inflation is rapid enough, shortages of goods as consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions),^[5] and encouraging investment in non-monetary capital projects.

Economists generally agree that high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.^[6] Views on which factors determine low to moderate rates of inflation are more varied. Low or moderate inflation may be attributed to fluctuations in real demand for goods and services, or changes in available supplies such as during scarcities, as well as to growth in the money supply. However, the consensus view is that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth.^[7][8]

Today, most economists favor a low, steady rate of inflation.^[9] Low (as opposed to zero or negative) inflation reduces the severity of economic recessions by enabling the labor market to adjust more quickly in a downturn, and reduces the risk that a liquidity trap prevents monetary policy from stabilizing the economy.^[10] The task of keeping the rate of inflation low and stable is usually given to monetary authorities. Generally, these monetary authorities are the central banks that control monetary policy through the setting of interest rates, through open market operations, and through the setting of banking reserve requirements.^[11]

History[link]

Annual inflation rates in the United States from 1666 to 2004.

Increases in the quantity of money or in the overall money supply (or debasement of the means of exchange) have occurred in many different societies throughout history, changing with different forms of money used.^[12][13] For instance, when gold was used as currency, the government could collect gold coins, melt them down, mix them with other metals such a silver, copper or lead, and reissue them at the same nominal value. By diluting the gold with other metals, the government could issue more coins without also needing to increase the amount of gold used to make them. When the cost of each coin is lowered in this way, the government profits from an increase in seigniorage.^[14] This practice would increase the money supply but at the same time the relative value of each coin would be lowered. As the relative value of the coins becomes lower, consumers would need to give more coins in exchange for the same goods and services as before. These goods and services would experience a price increase as the value of each coin is reduced.^[15]

Historically, infusions of gold or silver into an economy also led to inflation. From the second half of the 15th century to the first half of the 17th, Western Europe experienced a major inflationary cycle referred to as the "price revolution",^[16][17] with prices on average rising perhaps sixfold over 150 years. This was largely caused by the sudden influx of gold and silver from the New World into Habsburg Spain.^[18] The silver spread throughout a previously cash-starved Europe and caused widespread inflation.^[19][20] Demographic factors also contributed to upward pressure on prices, with European population growth after depopulation caused by the Black Death pandemic.

By the nineteenth century, economists categorized three separate factors that cause a rise or fall in the price of goods: a change in the value or production costs of the good, a change in the price of money which then was usually a fluctuation in the commodity price of the metallic content in the currency, and currency depreciation resulting from an increased supply of currency relative to the quantity of redeemable metal backing the currency. Following the proliferation of private banknote currency printed during the American Civil War, the term "inflation" started to appear as a direct reference to the currency depreciation that occurred as the quantity of redeemable banknotes outstripped the quantity of metal available for their redemption. At that time, the term inflation referred to the devaluation of the currency, and not to a rise in the price of goods.^[21]

This relationship between the over-supply of banknotes and a resulting depreciation in their value was noted by earlier classical economists such as David Hume and David Ricardo, who would go on to examine and debate what effect a currency devaluation (later termed monetary inflation) has on the price of goods (later termed price inflation, and eventually just inflation).^[22]

The adoption of fiat currency (paper money) by many countries, from the 18th century onwards, made much larger variations in the supply of money possible. Since then, huge increases in the supply of paper money have taken place in a number of countries, producing hyperinflations – episodes of extreme inflation rates much higher than those observed in earlier periods of commodity money. The hyperinflation in the Weimar Republic of Germany is a notable example.

Related definitions[link]

The term "inflation" originally referred to increases in the amount of money in circulation, and some economists still use the word in this way. However, most economists today use the term "inflation" to refer to a rise in the price level. An increase in the money supply may be called monetary inflation, to distinguish it from rising prices, which may also for clarity be called 'price inflation'.^[23] Economists generally agree that in the long run, inflation is caused by increases in the money supply.^[24]

Other economic concepts related to inflation include: deflation – a fall in the general price level; disinflation – a decrease in the rate of inflation; hyperinflation – an out-of-control inflationary spiral; stagflation – a combination of inflation, slow economic growth and high unemployment; and reflation – an attempt to raise the general level of prices to counteract deflationary pressures.

Since there are many possible measures of the price level, there are many possible measures of price inflation. Most frequently, the term "inflation" refers to a rise in a broad price index representing the overall price level for goods and services in the economy. The Consumer Price Index (CPI), the Personal Consumption Expenditures Price Index (PCEPI) and the GDP deflator are some examples of broad price indices. However, "inflation" may also be used to describe a rising price level within a narrower set of assets, goods or services within the economy, such as commodities (including food, fuel, metals), financial assets (such as stocks, bonds and real estate), services (such as entertainment and health care), or labor. The Reuters-CRB Index (CCI), the Producer Price Index, and Employment Cost Index (ECI) are examples of narrow price indices used to measure price inflation in particular sectors of the economy. Core inflation is a measure of inflation for a subset of consumer prices that excludes food and energy prices, which rise and fall more than other prices in the short term. The Federal Reserve Board pays particular attention to the core inflation rate to get a better estimate of long-term future inflation trends overall.^[25]

Measures[link]

CPI inflation (year-on-year) in the United States from 1914 to 2010.

Inflation is usually estimated by calculating the inflation rate of a price index, usually the Consumer Price Index.^[26] The Consumer Price Index measures prices of a selection of goods and services purchased by a "typical consumer".^[4] The inflation rate is the percentage rate of change of a price index over time.

For instance, in January 2007, the U.S. Consumer Price Index was 202.416, and in January 2008 it was 211.080. The formula for calculating the annual percentage rate inflation in the CPI over the course of 2007 is

Failed to parse (Missing texvc executable; please see math/README to configure.): \left(\frac{211.080-202.416}{202.416}\right)\times100=4.28%

The resulting inflation rate for the CPI in this one year period is 4.28%, meaning the general level of prices for typical U.S. consumers rose by approximately four percent in 2007.^[27]

Other widely used price indices for calculating price inflation include the following:

• Producer price indices (PPIs) which measures average changes in prices received by domestic producers for their output. This differs from the CPI in that price subsidization, profits, and taxes may cause the amount received by the producer to differ from what the consumer paid. There is also typically a delay between an increase in the PPI and any eventual increase in the CPI. Producer price index measures the pressure being put on producers by the costs of their raw materials. This could be "passed on" to consumers, or it could be absorbed by profits, or offset by increasing productivity. In India and the United States, an earlier version of the PPI was called the Wholesale Price Index.
• Commodity price indices, which measure the price of a selection of commodities. In the present commodity price indices are weighted by the relative importance of the components to the "all in" cost of an employee.
• Core price indices: because food and oil prices can change quickly due to changes in supply and demand conditions in the food and oil markets, it can be difficult to detect the long run trend in price levels when those prices are included. Therefore most statistical agencies also report a measure of 'core inflation', which removes the most volatile components (such as food and oil) from a broad price index like the CPI. Because core inflation is less affected by short run supply and demand conditions in specific markets, central banks rely on it to better measure the inflationary impact of current monetary policy.

Other common measures of inflation are:

• GDP deflator is a measure of the price of all the goods and services included in gross domestic product (GDP). The US Commerce Department publishes a deflator series for US GDP, defined as its nominal GDP measure divided by its real GDP measure.
• Regional inflation The Bureau of Labor Statistics breaks down CPI-U calculations down to different regions of the US.
• Historical inflation Before collecting consistent econometric data became standard for governments, and for the purpose of comparing absolute, rather than relative standards of living, various economists have calculated imputed inflation figures. Most inflation data before the early 20th century is imputed based on the known costs of goods, rather than compiled at the time. It is also used to adjust for the differences in real standard of living for the presence of technology.
• Asset price inflation is an undue increase in the prices of real or financial assets, such as stock (equity) and real estate. While there is no widely accepted index of this type, some central bankers have suggested that it would be better to aim at stabilizing a wider general price level inflation measure that includes some asset prices, instead of stabilizing CPI or core inflation only. The reason is that by raising interest rates when stock prices or real estate prices rise, and lowering them when these asset prices fall, central banks might be more successful in avoiding bubbles and crashes in asset prices.^{[dubious – discuss]}

Issues in measuring[link]

Measuring inflation in an economy requires objective means of differentiating changes in nominal prices on a common set of goods and services, and distinguishing them from those price shifts resulting from changes in value such as volume, quality, or performance. For example, if the price of a 10 oz. can of corn changes from $0.90 to $1.00 over the course of a year, with no change in quality, then this price difference represents inflation. This single price change would not, however, represent general inflation in an overall economy. To measure overall inflation, the price change of a large "basket" of representative goods and services is measured. This is the purpose of a price index, which is the combined price of a "basket" of many goods and services. The combined price is the sum of the weighted average prices of items in the "basket". A weighted price is calculated by multiplying the unit price of an item to the number of those items the average consumer purchases. Weighted pricing is a necessary means to measuring the impact of individual unit price changes on the economy's overall inflation. The Consumer Price Index, for example, uses data collected by surveying households to determine what proportion of the typical consumer's overall spending is spent on specific goods and services, and weights the average prices of those items accordingly. Those weighted average prices are combined to calculate the overall price. To better relate price changes over time, indexes typically choose a "base year" price and assign it a value of 100. Index prices in subsequent years are then expressed in relation to the base year price.^[11] While comparing inflation measures for various periods one has to take into consideration the base effect as well.

Inflation measures are often modified over time, either for the relative weight of goods in the basket, or in the way in which goods and services from the present are compared with goods and services from the past. Over time, adjustments are made to the type of goods and services selected in order to reflect changes in the sorts of goods and services purchased by 'typical consumers'. New products may be introduced, older products disappear, the quality of existing products may change, and consumer preferences can shift. Both the sorts of goods and services which are included in the "basket" and the weighted price used in inflation measures will be changed over time in order to keep pace with the changing marketplace.^{[citation needed]}

Inflation numbers are often seasonally adjusted in order to differentiate expected cyclical cost shifts. For example, home heating costs are expected to rise in colder months, and seasonal adjustments are often used when measuring for inflation to compensate for cyclical spikes in energy or fuel demand. Inflation numbers may be averaged or otherwise subjected to statistical techniques in order to remove statistical noise and volatility of individual prices.^{[citation needed]}

When looking at inflation, economic institutions may focus only on certain kinds of prices, or special indices, such as the core inflation index which is used by central banks to formulate monetary policy.^{[citation needed]}

Most inflation indices are calculated from weighted averages of selected price changes. This necessarily introduces distortion, and can lead to legitimate disputes about what the true inflation rate is. This problem can be overcome by including all available price changes in the calculation, and then choosing the median value.^[28]

Effects[link]

General[link]

An increase in the general level of prices implies a decrease in the purchasing power of the currency. That is, when the general level of prices rises, each monetary unit buys fewer goods and services. The effect of inflation is not distributed evenly in the economy, and as a consequence there are hidden costs to some and benefits to others from this decrease in the purchasing power of money. For example, with inflation, lenders or depositors who are paid a fixed rate of interest on loans or deposits will lose purchasing power from their interest earnings, while their borrowers benefit. Individuals or institutions with cash assets will experience a decline in the purchasing power of their holdings. Increases in payments to workers and pensioners often lag behind inflation, especially for those with fixed payments. Increases in the price level (inflation) erode the real value of money (the functional currency) and other items with an underlying monetary nature.

Debtors who have debts with a fixed nominal rate of interest will see a reduction in the "real" interest rate as the inflation rate rises. The real interest on a loan is the nominal rate minus the inflation rate.The formula R = N-I approximates the correct answer as long as both the nominal interest rate and the inflation rate are small. The correct equation is r = n/i where r, n and i are expressed as ratios (e.g. 1.2 for +20%, 0.8 for −20%). As an example, when the inflation rate is 3%, a loan with a nominal interest rate of 5% would have a real interest rate of approximately 2%. Any unexpected increase in the inflation rate would decrease the real interest rate. Banks and other lenders adjust for this inflation risk either by including an inflation risk premium to fixed interest rate loans, or lending at an adjustable rate.

Negative[link]

High or unpredictable inflation rates are regarded as harmful to an overall economy. They add inefficiencies in the market, and make it difficult for companies to budget or plan long-term. Inflation can act as a drag on productivity as companies are forced to shift resources away from products and services in order to focus on profit and losses from currency inflation.^[11] Uncertainty about the future purchasing power of money discourages investment and saving.^[29] And inflation can impose hidden tax increases, as inflated earnings push taxpayers into higher income tax rates unless the tax brackets are indexed to inflation.

With high inflation, purchasing power is redistributed from those on fixed nominal incomes, such as some pensioners whose pensions are not indexed to the price level, towards those with variable incomes whose earnings may better keep pace with the inflation.^[11] This redistribution of purchasing power will also occur between international trading partners. Where fixed exchange rates are imposed, higher inflation in one economy than another will cause the first economy's exports to become more expensive and affect the balance of trade. There can also be negative impacts to trade from an increased instability in currency exchange prices caused by unpredictable inflation.

Cost-push inflation

High inflation can prompt employees to demand rapid wage increases, to keep up with consumer prices. In the cost-push theory of inflation, rising wages in turn can help fuel inflation. In the case of collective bargaining, wage growth will be set as a function of inflationary expectations, which will be higher when inflation is high. This can cause a wage spiral.^[30] In a sense, inflation begets further inflationary expectations, which beget further inflation.

Hoarding

People buy durable and/or non-perishable commodities and other goods as stores of wealth, to avoid the losses expected from the declining purchasing power of money, creating shortages of the hoarded goods.

Social unrest and revolts

Inflation can lead to massive demonstrations and revolutions. For example, inflation and in particular food inflation is considered as one of the main reasons that caused the 2010–2011 Tunisian revolution^[31] and the 2011 Egyptian revolution,^[32] according to many observators including Robert Zoellick,^[33] president of the World Bank. Tunisian president Zine El Abidine Ben Ali was ousted, Egyptian President Hosni Mubarak was also ousted after only 18 days of demonstrations, and protests soon spread in many countries of North Africa and Middle East.

Hyperinflation

If inflation gets totally out of control (in the upward direction), it can grossly interfere with the normal workings of the economy, hurting its ability to supply goods. Hyperinflation can lead to the abandonment of the use of the country's currency, leading to the inefficiencies of barter.

Allocative efficiency

A change in the supply or demand for a good will normally cause its relative price to change, signaling to buyers and sellers that they should re-allocate resources in response to the new market conditions. But when prices are constantly changing due to inflation, price changes due to genuine relative price signals are difficult to distinguish from price changes due to general inflation, so agents are slow to respond to them. The result is a loss of allocative efficiency.

Shoe leather cost

High inflation increases the opportunity cost of holding cash balances and can induce people to hold a greater portion of their assets in interest paying accounts. However, since cash is still needed in order to carry out transactions this means that more "trips to the bank" are necessary in order to make withdrawals, proverbially wearing out the "shoe leather" with each trip.

Menu costs

With high inflation, firms must change their prices often in order to keep up with economy-wide changes. But often changing prices is itself a costly activity whether explicitly, as with the need to print new menus, or implicitly.

Business cycles

According to the Austrian Business Cycle Theory, inflation sets off the business cycle. Austrian economists hold this to be the most damaging effect of inflation. According to Austrian theory, artificially low interest rates and the associated increase in the money supply lead to reckless, speculative borrowing, resulting in clusters of malinvestments, which eventually have to be liquidated as they become unsustainable.^[34]

Positive[link]

Labor-market adjustments

Nominal wages are slow to adjust downwards. This can lead to prolonged disequilibrium and high unemployment in the labor market. Since inflation allows real wages to fall even if nominal wages are kept constant, moderate inflation enables labor markets to reach equilibrium faster.^[35]

Room to maneuver

The primary tools for controlling the money supply are the ability to set the discount rate, the rate at which banks can borrow from the central bank, and open market operations, which are the central bank's interventions into the bonds market with the aim of affecting the nominal interest rate. If an economy finds itself in a recession with already low, or even zero, nominal interest rates, then the bank cannot cut these rates further (since negative nominal interest rates are impossible) in order to stimulate the economy – this situation is known as a liquidity trap. A moderate level of inflation tends to ensure that nominal interest rates stay sufficiently above zero so that if the need arises the bank can cut the nominal interest rate.^{[citation needed]}

Mundell–Tobin effect

The Nobel laureate Robert Mundell noted that moderate inflation would induce savers to substitute lending for some money holding as a means to finance future spending. That substitution would cause market clearing real interest rates to fall.^[36] The lower real rate of interest would induce more borrowing to finance investment. In a similar vein, Nobel laureate James Tobin noted that such inflation would cause businesses to substitute investment in physical capital (plant, equipment, and inventories) for money balances in their asset portfolios. That substitution would mean choosing the making of investments with lower rates of real return. (The rates of return are lower because the investments with higher rates of return were already being made before.)^[37] The two related effects are known as the Mundell–Tobin effect. Unless the economy is already overinvesting according to models of economic growth theory, that extra investment resulting from the effect would be seen as positive.

Instability with Deflation

Economist S.C. Tsaing noted that once substantial deflation is expected, two important effects will appear; both a result of money holding substituting for lending as a vehicle for saving.^[38] The first was that continually falling prices and the resulting incentive to hoard money will cause instability resulting from the likely increasing fear, while money hoards grow in value, that the value of those hoards are at risk, as people realize that a movement to trade those money hoards for real goods and assets will quickly drive those prices up. Any movement to spend those hoards "once started would become a tremendous avalanche, which could rampage for a long time before it would spend itself."^[39] Thus, a regime of long-term deflation is likely to be interrupted by periodic spikes of rapid inflation and consequent real economic disruptions. Moderate and stable inflation would avoid such a seesawing of price movements.

Financial Market Inefficiency with Deflation

The second effect noted by Tsaing is that when savers have substituted money holding for lending on financial markets, the role of those markets in channeling savings into investment is undermined. With nominal interest rates driven to zero, or near zero, from the competition with a high return money asset, there would be no price mechanism in whatever is left of those markets. With financial markets effectively euthanized, the remaining goods and physical asset prices would move in perverse directions. For example, an increased desire to save could not push interest rates further down (and thereby stimulate investment) but would instead cause additional money hoarding, driving consumer prices further down and making investment in consumer goods production thereby less attractive. Moderate inflation, once its expectation is incorporated into nominal interest rates, would give those interest rates room to go both up and down in response to shifting investment opportunities, or savers' preferences, and thus allow financial markets to function in a more normal fashion.

Causes[link]

The Bank of England, central bank of the United Kingdom, monitors causes and attempts to control inflation.

Historically, a great deal of economic literature was concerned with the question of what causes inflation and what effect it has. There were different schools of thought as to the causes of inflation. Most can be divided into two broad areas: quality theories of inflation and quantity theories of inflation. The quality theory of inflation rests on the expectation of a seller accepting currency to be able to exchange that currency at a later time for goods that are desirable as a buyer. The quantity theory of inflation rests on the quantity equation of money, that relates the money supply, its velocity, and the nominal value of exchanges. Adam Smith and David Hume proposed a quantity theory of inflation for money, and a quality theory of inflation for production.^{[citation needed]}

Currently, the quantity theory of money is widely accepted as an accurate model of inflation in the long run. Consequently, there is now broad agreement among economists that in the long run, the inflation rate is essentially dependent on the growth rate of money supply. However, in the short and medium term inflation may be affected by supply and demand pressures in the economy, and influenced by the relative elasticity of wages, prices and interest rates.^[24] The question of whether the short-term effects last long enough to be important is the central topic of debate between monetarist and Keynesian economists. In monetarism prices and wages adjust quickly enough to make other factors merely marginal behavior on a general trend-line. In the Keynesian view, prices and wages adjust at different rates, and these differences have enough effects on real output to be "long term" in the view of people in an economy.

Keynesian view[link]

Keynesian economic theory proposes that changes in money supply do not directly affect prices, and that visible inflation is the result of pressures in the economy expressing themselves in prices.

There are three major types of inflation, as part of what Robert J. Gordon calls the "triangle model":^[40]

• Demand-pull inflation is caused by increases in aggregate demand due to increased private and government spending, etc. Demand inflation is constructive to a faster rate of economic growth since the excess demand and favourable market conditions will stimulate investment and expansion.
• Cost-push inflation, also called "supply shock inflation," is caused by a drop in aggregate supply (potential output). This may be due to natural disasters, or increased prices of inputs. For example, a sudden decrease in the supply of oil, leading to increased oil prices, can cause cost-push inflation. Producers for whom oil is a part of their costs could then pass this on to consumers in the form of increased prices. Another example stems from unexpectedly high Insured Losses, either legitimate (catastrophes) or fraudulent (which might be particularly prevalent in times of recession).^{[citation needed]}
• Built-in inflation is induced by adaptive expectations, and is often linked to the "price/wage spiral". It involves workers trying to keep their wages up with prices (above the rate of inflation), and firms passing these higher labor costs on to their customers as higher prices, leading to a 'vicious circle'. Built-in inflation reflects events in the past, and so might be seen as hangover inflation.

Demand-pull theory states that the rate of inflation accelerates whenever aggregate demand is increased beyond the ability of the economy to produce (its potential output). Hence, any factor that increases aggregate demand can cause inflation.^[41] However, in the long run, aggregate demand can be held above productive capacity only by increasing the quantity of money in circulation faster than the real growth rate of the economy. Another (although much less common) cause can be a rapid decline in the demand for money, as happened in Europe during the Black Death, or in the Japanese occupied territories just before the defeat of Japan in 1945.

The effect of money on inflation is most obvious when governments finance spending in a crisis, such as a civil war, by printing money excessively. This sometimes leads to hyperinflation, a condition where prices can double in a month or less. Money supply is also thought to play a major role in determining moderate levels of inflation, although there are differences of opinion on how important it is. For example, Monetarist economists believe that the link is very strong; Keynesian economists, by contrast, typically emphasize the role of aggregate demand in the economy rather than the money supply in determining inflation. That is, for Keynesians, the money supply is only one determinant of aggregate demand.

Some Keynesian economists also disagree with the notion that central banks fully control the money supply, arguing that central banks have little control, since the money supply adapts to the demand for bank credit issued by commercial banks. This is known as the theory of endogenous money, and has been advocated strongly by post-Keynesians as far back as the 1960s. It has today become a central focus of Taylor rule advocates. This position is not universally accepted – banks create money by making loans, but the aggregate volume of these loans diminishes as real interest rates increase. Thus, central banks can influence the money supply by making money cheaper or more expensive, thus increasing or decreasing its production.

A fundamental concept in inflation analysis is the relationship between inflation and unemployment, called the Phillips curve. This model suggests that there is a trade-off between price stability and employment. Therefore, some level of inflation could be considered desirable in order to minimize unemployment. The Phillips curve model described the U.S. experience well in the 1960s but failed to describe the combination of rising inflation and economic stagnation (sometimes referred to as stagflation) experienced in the 1970s.

Thus, modern macroeconomics describes inflation using a Phillips curve that shifts (so the trade-off between inflation and unemployment changes) because of such matters as supply shocks and inflation becoming built into the normal workings of the economy. The former refers to such events as the oil shocks of the 1970s, while the latter refers to the price/wage spiral and inflationary expectations implying that the economy "normally" suffers from inflation. Thus, the Phillips curve represents only the demand-pull component of the triangle model.

Another concept of note is the potential output (sometimes called the "natural gross domestic product"), a level of GDP, where the economy is at its optimal level of production given institutional and natural constraints. (This level of output corresponds to the Non-Accelerating Inflation Rate of Unemployment, NAIRU, or the "natural" rate of unemployment or the full-employment unemployment rate.) If GDP exceeds its potential (and unemployment is below the NAIRU), the theory says that inflation will accelerate as suppliers increase their prices and built-in inflation worsens. If GDP falls below its potential level (and unemployment is above the NAIRU), inflation will decelerate as suppliers attempt to fill excess capacity, cutting prices and undermining built-in inflation.^[42]

However, one problem with this theory for policy-making purposes is that the exact level of potential output (and of the NAIRU) is generally unknown and tends to change over time. Inflation also seems to act in an asymmetric way, rising more quickly than it falls. Worse, it can change because of policy: for example, high unemployment under British Prime Minister Margaret Thatcher might have led to a rise in the NAIRU (and a fall in potential) because many of the unemployed found themselves as structurally unemployed (also see unemployment), unable to find jobs that fit their skills. A rise in structural unemployment implies that a smaller percentage of the labor force can find jobs at the NAIRU, where the economy avoids crossing the threshold into the realm of accelerating inflation.

Monetarist view[link]

Inflation is closely related to growth in money supply (using the M2 definition) over the long-run.

Monetarists believe the most significant factor influencing inflation or deflation is how fast the money supply grows or shrinks. They consider fiscal policy, or government spending and taxation, as ineffective in controlling inflation.^[43] According to the famous monetarist economist Milton Friedman, "Inflation is always and everywhere a monetary phenomenon."^[44] Some monetarists, however, will qualify this by making an exception for very short-term circumstances.

Monetarists assert that the empirical study of monetary history shows that inflation has always been a monetary phenomenon. The quantity theory of money, simply stated, says that any change in the amount of money in a system will change the price level. This theory begins with the equation of exchange:

Failed to parse (Missing texvc executable; please see math/README to configure.): MV = PQ

where

Failed to parse (Missing texvc executable; please see math/README to configure.): M

is the nominal quantity of money.

Failed to parse (Missing texvc executable; please see math/README to configure.): V

is the velocity of money in final expenditures;

Failed to parse (Missing texvc executable; please see math/README to configure.): P

is the general price level;

Failed to parse (Missing texvc executable; please see math/README to configure.): Q

is an index of the real value of final expenditures;

In this formula, the general price level is related to the level of real economic activity (Q), the quantity of money (M) and the velocity of money (V). The formula is an identity because the velocity of money (V) is defined to be the ratio of final nominal expenditure (Failed to parse (Missing texvc executable; please see math/README to configure.): PQ ) to the quantity of money (M).

Monetarists assume that the velocity of money is unaffected by monetary policy (at least in the long run), and the real value of output is determined in the long run by the productive capacity of the economy. Under these assumptions, the primary driver of the change in the general price level is changes in the quantity of money. With exogenous velocity (that is, velocity being determined externally and not being influenced by monetary policy), the money supply determines the value of nominal output (which equals final expenditure) in the short run. In practice, velocity is not exogenous in the short run, and so the formula does not necessarily imply a stable short-run relationship between the money supply and nominal output. However, in the long run, changes in velocity are assumed to be determined by the evolution of the payments mechanism. If velocity is relatively unaffected by monetary policy, the long-run rate of increase in prices (the inflation rate) is equal to the long run growth rate of the money supply plus the exogenous long-run rate of velocity growth minus the long run growth rate of real output.^[7]

Unemployment[link]

A connection between inflation and unemployment has been drawn since the emergence of large scale unemployment in the 19th century, and connections continue to be drawn today. In Marxian economics, the unemployed serve as a reserve army of labour, which restrain wage inflation. In the 20th century, similar concepts in Keynesian economics include the NAIRU (Non-Accelerating Inflation Rate of Unemployment) and the Phillips curve.

Rational expectations theory[link]

Rational expectations theory holds that economic actors look rationally into the future when trying to maximize their well-being, and do not respond solely to immediate opportunity costs and pressures. In this view, while generally grounded in monetarism, future expectations and strategies are important for inflation as well.

A core assertion of rational expectations theory is that actors will seek to "head off" central-bank decisions by acting in ways that fulfill predictions of higher inflation. This means that central banks must establish their credibility in fighting inflation, or economic actors will make bets that the central bank will expand the money supply rapidly enough to prevent recession, even at the expense of exacerbating inflation. Thus, if a central bank has a reputation as being "soft" on inflation, when it announces a new policy of fighting inflation with restrictive monetary growth economic agents will not believe that the policy will persist; their inflationary expectations will remain high, and so will inflation. On the other hand, if the central bank has a reputation of being "tough" on inflation, then such a policy announcement will be believed and inflationary expectations will come down rapidly, thus allowing inflation itself to come down rapidly with minimal economic disruption.

Austrian view[link]

For more details on this topic, see The Austrian view of inflation and monetary inflation

The Austrian School asserts that inflation is an increase in the money supply, rising prices are merely consequences and this semantic difference is important in defining inflation.^[45] Austrians stress that inflation affects prices in various degree, i.e. that prices rise more sharply in some sectors than in other sectors of the economy. The reason for the disparity is that excess money will be concentrated to certain sectors, such as housing, stocks or health care. Because of this disparity, Austrians argue that the aggregate price level can be very misleading when observing the effects of inflation. Austrian economists measure inflation by calculating the growth of new units of money that are available for immediate use in exchange, that have been created over time.^[46][47][48]

Real bills doctrine[link]

Within the context of a fixed specie basis for money, one important controversy was between the quantity theory of money and the real bills doctrine (RBD). Within this context, quantity theory applies to the level of fractional reserve accounting allowed against specie, generally gold, held by a bank. Currency and banking schools of economics argue the RBD, that banks should also be able to issue currency against bills of trading, which is "real bills" that they buy from merchants. This theory was important in the 19th century in debates between "Banking" and "Currency" schools of monetary soundness, and in the formation of the Federal Reserve. In the wake of the collapse of the international gold standard post 1913, and the move towards deficit financing of government, RBD has remained a minor topic, primarily of interest in limited contexts, such as currency boards. It is generally held in ill repute today, with Frederic Mishkin, a governor of the Federal Reserve going so far as to say it had been "completely discredited."

The debate between currency, or quantity theory, and banking schools in Britain during the 19th century prefigures current questions about the credibility of money in the present. In the 19th century the banking school had greater influence in policy in the United States and Great Britain, while the currency school had more influence "on the continent", that is in non-British countries, particularly in the Latin Monetary Union and the earlier Scandinavia monetary union.

Anti-classical or backing theory[link]

Another issue associated with classical political economy is the anti-classical hypothesis of money, or "backing theory". The backing theory argues that the value of money is determined by the assets and liabilities of the issuing agency.^[49] Unlike the Quantity Theory of classical political economy, the backing theory argues that issuing authorities can issue money without causing inflation so long as the money issuer has sufficient assets to cover redemptions. There are very few backing theorists, making quantity theory the dominant theory explaining inflation.^{[citation needed]}

Controlling inflation[link]

A variety of policies have been used to control inflation.

Monetary policy[link]

The U.S. effective federal funds rate charted over fifty years.

Today the primary tool for controlling inflation is monetary policy. Most central banks are tasked with keeping their inter-bank lending rates at low levels, normally to a target rate around 2% to 3% per annum, and within a targeted low inflation range, somewhere from about 2% to 6% per annum. A low positive inflation is usually targeted, as deflationary conditions are seen as dangerous for the health of the economy.

There are a number of methods that have been suggested to control inflation. Central banks such as the U.S. Federal Reserve can affect inflation to a significant extent through setting interest rates and through other operations. High interest rates and slow growth of the money supply are the traditional ways through which central banks fight or prevent inflation, though they have different approaches. For instance, some follow a symmetrical inflation target while others only control inflation when it rises above a target, whether express or implied.

Monetarists emphasize keeping the growth rate of money steady, and using monetary policy to control inflation (increasing interest rates, slowing the rise in the money supply). Keynesians emphasize reducing aggregate demand during economic expansions and increasing demand during recessions to keep inflation stable. Control of aggregate demand can be achieved using both monetary policy and fiscal policy (increased taxation or reduced government spending to reduce demand).

Fixed exchange rates[link]

Under a fixed exchange rate currency regime, a country's currency is tied in value to another single currency or to a basket of other currencies (or sometimes to another measure of value, such as gold). A fixed exchange rate is usually used to stabilize the value of a currency, vis-a-vis the currency it is pegged to. It can also be used as a means to control inflation. However, as the value of the reference currency rises and falls, so does the currency pegged to it. This essentially means that the inflation rate in the fixed exchange rate country is determined by the inflation rate of the country the currency is pegged to. In addition, a fixed exchange rate prevents a government from using domestic monetary policy in order to achieve macroeconomic stability.

Under the Bretton Woods agreement, most countries around the world had currencies that were fixed to the US dollar. This limited inflation in those countries, but also exposed them to the danger of speculative attacks. After the Bretton Woods agreement broke down in the early 1970s, countries gradually turned to floating exchange rates. However, in the later part of the 20th century, some countries reverted to a fixed exchange rate as part of an attempt to control inflation. This policy of using a fixed exchange rate to control inflation was used in many countries in South America in the later part of the 20th century (e.g. Argentina (1991–2002), Bolivia, Brazil, and Chile).

Gold standard[link]

Under a gold standard, paper notes are convertible into pre-set, fixed quantities of gold.

The gold standard is a monetary system in which a region's common media of exchange are paper notes that are normally freely convertible into pre-set, fixed quantities of gold. The standard specifies how the gold backing would be implemented, including the amount of specie per currency unit. The currency itself has no innate value, but is accepted by traders because it can be redeemed for the equivalent specie. A U.S. silver certificate, for example, could be redeemed for an actual piece of silver.

The gold standard was partially abandoned via the international adoption of the Bretton Woods System. Under this system all other major currencies were tied at fixed rates to the dollar, which itself was tied to gold at the rate of $35 per ounce. The Bretton Woods system broke down in 1971, causing most countries to switch to fiat money – money backed only by the laws of the country.

According to Lawrence H. White, an F. A. Hayek Professor of Economic History “who values the Austrian tradition”^[50], economies based on the gold standard rarely experience inflation above 2 percent annually.^[51] However, historically, the U.S. saw inflation over 2% several times and a higher peak of inflation under the gold standard when compared to inflation after the gold standard.^[52] Under a gold standard, the long term rate of inflation (or deflation) would be determined by the growth rate of the supply of gold relative to total output.^[53] Critics argue that this will cause arbitrary fluctuations in the inflation rate, and that monetary policy would essentially be determined by gold mining.^[54][55]

Wage and price controls[link]

Another method attempted in the past have been wage and price controls ("incomes policies"). Wage and price controls have been successful in wartime environments in combination with rationing. However, their use in other contexts is far more mixed. Notable failures of their use include the 1972 imposition of wage and price controls by Richard Nixon. More successful examples include the Prices and Incomes Accord in Australia and the Wassenaar Agreement in the Netherlands.

In general wage and price controls are regarded as a temporary and exceptional measure, only effective when coupled with policies designed to reduce the underlying causes of inflation during the wage and price control regime, for example, winning the war being fought. They often have perverse effects, due to the distorted signals they send to the market. Artificially low prices often cause rationing and shortages and discourage future investment, resulting in yet further shortages. The usual economic analysis is that any product or service that is under-priced is overconsumed. For example, if the official price of bread is too low, there will be too little bread at official prices, and too little investment in bread making by the market to satisfy future needs, thereby exacerbating the problem in the long term.

Temporary controls may complement a recession as a way to fight inflation: the controls make the recession more efficient as a way to fight inflation (reducing the need to increase unemployment), while the recession prevents the kinds of distortions that controls cause when demand is high. However, in general the advice of economists is not to impose price controls but to liberalize prices by assuming that the economy will adjust and abandon unprofitable economic activity. The lower activity will place fewer demands on whatever commodities were driving inflation, whether labor or resources, and inflation will fall with total economic output. This often produces a severe recession, as productive capacity is reallocated and is thus often very unpopular with the people whose livelihoods are destroyed (see creative destruction).

Cost-of-living allowance[link]

The real purchasing-power of fixed payments is eroded by inflation unless they are inflation-adjusted to keep their real values constant. In many countries, employment contracts, pension benefits, and government entitlements (such as social security) are tied to a cost-of-living index, typically to the consumer price index.^[56] A cost-of-living allowance (COLA) adjusts salaries based on changes in a cost-of-living index. Salaries are typically adjusted annually in low inflation economies. During hyperinflation they are adjusted more often.^[56] They may also be tied to a cost-of-living index that varies by geographic location if the employee moves.

Annual escalation clauses in employment contracts can specify retroactive or future percentage increases in worker pay which are not tied to any index. These negotiated increases in pay are colloquially referred to as cost-of-living adjustments or cost-of-living increases because of their similarity to increases tied to externally determined indexes. Many economists and compensation analysts consider the idea of predetermined future "cost of living increases" to be misleading for two reasons: (1) For most recent periods in the industrialized world, average wages have increased faster than most calculated cost-of-living indexes, reflecting the influence of rising productivity and worker bargaining power rather than simply living costs, and (2) most cost-of-living indexes are not forward-looking, but instead compare current or historical data.^{citation required}

See also[link]

Notes[link]

References[link]

• Abel, Andrew; Bernanke, Ben (2005). Macroeconomics (5th ed.). Pearson 
• Barro, Robert J. (1997). Macroeconomics. Cambridge, Mass: MIT Press. p. 895. ISBN 0-262-02436-5 
• Blanchard, Olivier (2000). Macroeconomics (2nd ed.). Englewood Cliffs, N.J: Prentice Hall. ISBN 0-13-013306-X 
• Mankiw, N. Gregory (2002). Macroeconomics (5th ed.). Worth 
• Hall, Robert E.; Taylor, John B. (1993). Macroeconomics. New York: W.W. Norton. p. 637. ISBN 0-393-96307-1 
• Burda, Michael C.; Wyplosz, Charles (1997). Macroeconomics: a European text. Oxford [Oxfordshire]: Oxford University Press. ISBN 0-19-877468-0 

Further reading[link]

• Auernheimer, Leonardo, "The Honest Government's Guide to the Revenue From the Creation of Money," Journal of Political Economy, Vol. 82, No. 3, May/June 1974, pp. 598–606.
• Baumol, William J. and Alan S. Blinder, Macroeconomics: Principles and Policy, Tenth edition. Thomson South-Western, 2006. ISBN 0-324-22114-2
• Friedman, Milton, Nobel lecture: Inflation and unemployment 1977
• Hazlitt, Henry, What You Should Know About Inflation
• Laguerodie, Stephanie and Vergara, Francisco, The Theory of Price Controls (from Review of Political Economy)
• Mishkin, Frederic S., The Economics of Money, Banking, and Financial Markets, New York, Harper Collins, 1995.
• Murphy, Robert P., Is Inflation Harmless or Even Good?, Mises Institute
• Nenovsky. N, (2007). „Exchange Rate and Inflation: France and Bulgaria in the Interwar Period and the Contribution of Albert Aftalion (1874–1956)“.Bulgarian National Bank,(2006)
• Vasudevan, Ramaa, "What is the relation between inflation and unemployment?," in Dollars & Sense, September/October 2006
• Federal Reserve Bank of Boston, "Understanding Inflation and the Implications for Monetary Policy: A Phillips Curve Retrospective", Conference Series 53, June 9–11, 2008, Chatham, Massachusetts. (Also cf. Phillips curve article)

External links[link]

• NASA inflation calculator
• United States Bureau of Labor Statistics Consumer Price Index homepage
• Inflation 1290–2006 – Based on the historical Consumer Price Index of the Swedish Riksbank
• Inflation Calculator
• Summary of current international inflation figures – CPI and HICP
• Summary of current inflation in Euro Area – CPI and HICP

David Stockman
David Stockman (front)
25th Director of the Office of Management and Budget
In office January 21, 1981 – August 1, 1985
President	Ronald Reagan
Preceded by	James T. McIntyre
Succeeded by	James C. Miller III
Member of the U.S. House of Representatives from Ohio's 4th district
In office January 3, 1977 – January 21, 1981
Preceded by	J. Edward Hutchinson
Succeeded by	Mark D. Siljander
Personal details
Born	David Alan Stockman (1946-11-10) November 10, 1946 (age 65) Fort Hood, Texas
Political party	Republican
Spouse(s)	Jennifer Blei Stockman
Profession	Businessman

David Alan Stockman (born November 10, 1946) is a former U.S. politician and businessman, serving as a Republican U.S. Representative from the state of Michigan (1977–1981) and as the Director of the Office of Management and Budget (1981–1985).

Early life and education[link]

Stockman was born in Fort Hood, Texas, the son Allen Stockman, a fruit farmer, and Carol (née Bartz).^[1] He is of German descent and his family's surname was originally "Stockmann".^[2] He was raised in a conservative family and his maternal grandfather, William Bartz, was a Republican county treasurer for 30 years.^[3][4] Stockman was educated at public schools in Stevensville, Michigan. He graduated from Lakeshore High School during 1964 and received a B.A. from Michigan State University, East Lansing, during 1968. He performed graduate studies at Harvard University, 1968–1970 and 1974–1975. He attended Harvard Divinity School.^[5]

Political career[link]

He served as special assistant to United States Representative and 1980 Presidential candidate John Anderson of Illinois, 1970–1972, and was executive director, United States House of Representatives Republican Conference, 1972–1975.

Congress[link]

Stockman was elected to the United States House of Representatives for the 95th Congress and was reelected by two subsequent elections, serving from January 3, 1977, until his resignation January 21, 1981, to accept appointment as Director of the Office of Management and Budget for U.S. President Ronald Reagan.

Office of Management and Budget[link]

Stockman became one of the most controversial OMB directors ever during a tenure that lasted until his resignation during August 1985. Committed to the doctrine of supply-side economics, he assisted the approval of the "Reagan Budget" (the Gramm-Latta Budget), which Stockman hoped to be a serious curtailment of the "welfare state", gaining a reputation as a tough negotiator with House Speaker Tip O'Neill's Democratic-controlled House of Representatives and Majority Leader Howard Baker's Republican-controlled Senate. During this period, although only in his early 30s, Stockman became well known to the public during the contentious political wrangling concerning the role of the federal government in American society.

Stockman's influence within the Reagan Administration decreased after the Atlantic Monthly magazine published the famous 18,246 word article, "The Education of David Stockman",^[5] in its December 1981 issue, based on lengthy interviews Stockman gave to reporter William Greider. The White House's public relations team thereafter attempted to limit the article's damage to Reagan's perceived fiscal-leadership skills. Stockman was quoted as referring to Reagan's tax act as: "I mean, Kemp-Roth [Reagan's 1981 tax cut] was always a Trojan horse to bring down the top rate.... It's kind of hard to sell 'trickle down.' So the supply-side formula was the only way to get a tax policy that was really 'trickle down.' Supply-side is 'trickle-down' theory." Of the budget process during his first year on the job, Mr. Stockman is quoted as saying: "None of us really understands what's going on with all these numbers," which was used as the subtitle of the article.

After Stockman's first year at OMB and after "being taken to the woodshed by the president" due to his candor with Atlantic Monthly's William Greider, Stockman became inspired with the projected trend of increasingly large federal deficits and the rapidly expanding national debt. On 1 August 1985, he resigned OMB and later wrote a memoir of his experience in the Reagan Administration titled The Triumph of Politics: Why the Reagan Revolution Failed (ISBN 0060155604), in which he specifically criticized the failure of congressional Republicans to endorse a reduction of government spending as necessary offsets to the large tax decreases, in order to avoid the creation of large deficits and an increasing national debt.

Fiscal legacy[link]

President Jimmy Carter's last signed and executed fiscal year budget results ended with a $79.0 billion budget deficit, ending during the period of David Stockman's and Ronald Reagan's first year in office, on October 1, 1981.^[6] The gross federal national debt had just increased to $1.0 trillion during October 1981 ($998 billion on 30 September 1981). By 30 September 1985, four and a half years into the Reagan administration and shortly after Stockman's resignation from the OMB during August 1985, the gross federal debt was $1.8 trillion.^[7] Stockman's OMB work within the administration during 1981 until August was dedicated to negotiating with the Senate and House about the next fiscal year's budget, executed later during the autumn of 1985, which resulted in the national debt becoming $2.1 trillion at fiscal year end 30 September 1986 and becoming $2.6 trillion at fiscal year end 30 September 1988.^[8]

Business career[link]

Having left government, Stockman joined the Wall St. investment bank Salomon Brothers and later became a partner of the now very successful New York–based private equity company, the Blackstone Group.^[9] His record was mixed at Blackstone, with some very good investments, such as American Axle, but also several large failures, including Haynes International and Republic Technologies.^[10] During 1999, after Blackstone CEO Stephen A. Schwarzman curtailed Stockman's role in managing the investments he had developed,^[11] Stockman resigned Blackstone to start his own private equity fund company, Heartland Industrial Partners, L.P., based in Greenwich, Connecticut.^[12]

On the strength of his investment record at Blackstone, Stockman and his partners raised $1.3 billion of equity from institutional and other investors. With Stockman's guidance, Heartland used a contrarian investment strategy, buying controlling interests in companies operating in sectors of the U.S. economy that were attracting the least amount of new equity: auto parts and textiles. With the help of about $9 billion in Wall Street debt financing, Heartland completed more than 20 transactions in less than 2 years to create four portfolio companies: Springs Industries, Metaldyne, Collins & Aikman, and TriMas. Several major investments performed very poorly, however. Collins & Aikman filed for bankruptcy during 2005 and when Heartland sold Metaldyne to Asahi Tec Corp. during 2006, Heartland lost most of the $340 million-plus of equity it had invested in the business.^[13]

Collins & Aikman Corp.[link]

During August 2003, Stockman installed himself as CEO of Collins & Aikman Corporation, a Detroit-based manufacturer of automotive interior components. He was ousted from that job days before a Chapter 11 filing on May 17, 2005.

Criminal and civil charges[link]

On March 26, 2007, federal prosecutors in Manhattan indicted Stockman in "a scheme ... to defraud [Collins & Aikman]'s investors, banks and creditors by manipulating C&A's reported revenues and earnings." At the same time, the Securities and Exchange Commission brought civil charges against Stockman related to actions he performed while CEO of Collins & Aikman.^[14] Stockman suffered a personal financial loss, estimated at $13 million, along with losses suffered by as many as 15,000 Collins & Aikman employees worldwide. Stockman said in a statement posted on his law company's website that the company's end was the consequence of an industry decline, not fraud.^[15] On January 9, 2009, the U.S. Attorney's Office announced that it did not intend to prosecute Stockman for this case.

Personal life[link]

Stockman lives in Greenwich, Connecticut.^[12] He is married to Jennifer Blei Stockman and is the father of two children, Rachel and Victoria. Jennifer Blei Stockman is a chairperson emeritus of the Republican Majority for Choice,^[16] and President of the Solomon R. Guggenheim Foundation Board of Trustees.^[17]

Quotes[link]

“I invest in anything that Bernanke can’t destroy, including gold, canned beans, bottled water and flashlight batteries."^[18]

"(Extending the Bush tax cuts is) rank demagoguery. We should call it for what it is. If these people were all put into a room on penalty of death to come up with how much they could cut, they couldn't come up with $50 billion, when the problem is $1.3 trillion. So, to stand before the public and rub raw this anti-tax sentiment, the Republican Party, as much as it pains me to say this, should be ashamed of themselves."^[19]

"The Republican Party has totally abdicated its job in our democracy, which is to act as the guardian of fiscal discipline and responsibility. They're on an anti-tax jihad -- one that benefits the prosperous classes."^[20]

References[link]

External links[link]

• Biography at the Biographical Directory of the United States Congress
• Voting record maintained by The Washington Post
• Appearances on C-SPAN programs
• Ronald Reagan, Ron Paul, & the Fed: Q&A with David Stockman, Reason.tv
• Fixing America’s Finances interview on On Point.

v t e Private equity and venture capital investors Investment strategy Buyout · Venture · Growth · Mezzanine · Secondaries History History of private equity and venture capital · Early history of private equity · Private equity in the 1980s · Private equity in the 1990s · Private equity in the 2000s Investor types Private equity investors · Venture capitalists · Corporate raiders

v t e Directors of the United States Office of Management and Budget Dawes Lord Roop Douglas D W Bell Smith Webb Pace Lawton Dodge Hughes Brundage Stans D E Bell Gordon Schultze Zwick Mayo Shultz Weinberger Ash Lynn Lance McIntyre Stockman Miller Wright Darman Panetta Rivlin Raines Lew Daniels Bolten Portman Nussle Orszag Zients (Acting) Lew Zients (Acting)

Peter Schiff

Austrian School
Born	(1963-03-23) March 23, 1963 (age 49)
Nationality	United States
Field	Financial Economics
Alma mater	U.C. Berkeley (B.B.A.), 1987[1]
Opposed	John Maynard Keynes,[2] Alan Greenspan,[3][4][5] Ben Bernanke,[6][7][8] Paul Krugman,[9] Christopher Dodd,[10] Barack Obama,[11]
Influences	Irwin Schiff, Ludwig von Mises, F.A. Hayek, Murray Rothbard

Peter David Schiff (pronounced /ˈʃɪf/; born March 23, 1963) is an American businessman, investment broker, author and financial commentator. Schiff is CEO and chief global strategist^[1] of Euro Pacific Capital Inc., a broker-dealer based in Westport, Connecticut^[12] and CEO of Euro Pacific Precious Metals, LLC, a gold and silver dealer based in New York City.^[13]

Schiff frequently appears as a guest on financial television and is often quoted in major financial publications. He is host of The Peter Schiff Show, a radio show broadcast on terrestrial and internet radio. He is a frequent guest on internet radio^[14][15][16] as well as the host of the former podcast Wall Street Unspun.^[14][17] In 2010 Schiff ran as a candidate in the Republican primary for the United States Senate seat from Connecticut.^[18]

Schiff is known for his bearish views on the dollar and dollar denominated assets, while bullish on investment in tangible assets as well as foreign stocks and currencies.

Early life and education[link]

Peter Schiff was born and raised in New Haven, Connecticut. His father, Irwin Schiff, is a prominent figure in the U.S. tax protester movement, currently serving a 13-year sentence for tax evasion.^[19] Peter Schiff attended Beverly Hills High School in California,^[20] and graduated from the University of California, Berkeley in 1987 with a Bachelor's degree in finance and accounting.^[1]

Financial career[link]

Schiff began his career as a financial consultant at a Shearson Lehman Brothers brokerage.^[1] In 1996 Schiff and a partner acquired a small brokerage firm that had been founded in 1980, reincorporated it in California and renamed it Euro Pacific Capital.^[21][22] The company today has more than 15,000 clients^{[citation needed]} and six offices nationwide, with its headquarters in Westport, Connecticut.^[12][21][23]

According to a 2005 article in The Advocate of Stamford, Connecticut Schiff relocated the firm to Darien, Connecticut to find brokers "who think like him". The New York Metropolitan Area, Schiff says, has the biggest concentration of brokers in the country, making it easier to recruit employees.^[24] The company has offices in Newport Beach, California as well as in Scottsdale, Arizona, Palm Beach, Florida, Los Angeles and New York City. Euro Pacific Capital also holds the exclusive rights to broker some Perth Mint gold products in the United States.^[25]

Economic forecasts[link]

Peter Schiff voices strong support for the Austrian School of economic thought, first introduced to him by his father.^{[26][27][28][29]}

2002–2008[link]

In his 2007 book Crash Proof, Schiff wrote that United States economic policies were fundamentally unsound, and predicted that the United States dollar would lose much of its value.^[3] Schiff believed that the imbalance between the amount of goods the U.S. consumed and what it produced would eventually lead to problems for the U.S. economy.^[30][31] As a remedy Schiff favored increased personal savings and production which he said would stimulate economic growth.^[32] Schiff cited the U.S.'s low personal savings rate as one of the causes of its transformation from the world's largest creditor nation in the 1970s to the largest debtor nation in the year 2000.^[33] Schiff attributed the low savings rate to higher inflation and the artificially low interest rates set by the Federal Reserve.^[34]

In a May 2002 interview with Southland Today, Schiff predicted that the economic downturn triggered by the bursting of the dot-com stock market bubble, an event that he had also forecast well in advance, would lead to a bear market likely to last "another 5 to 10 years."^[35][36] Later that year, following a 30% decline in the Dow Jones, Schiff reversed his call, and became bullish on U.S. stocks in nominal terms. However, he remained bearish in gold terms. In November 2002, as Schiff predicted, US stock indexes began a nominal bull market uptrend that held steady for five years,^[37] until reversing course in 2008, when they began a decline to less than half of their peak 2008 values,^[38] followed in 2009 by the Dow climbing 61% from its low point over the following year.^[39] However, priced in gold, U.S. stocks remained in a bear market the entire time. In May of 2002, the date of the Southland Today interview,^[40] the Dow Jones was worth over 34 ounces of gold. By 2011 the Dow fell below 6 ounces of gold, a nine-year decline of over 80%, in line with Schiff’s 2002 forecast.^[41]

In an August 2006 interview he said: "The United States economy is like the Titanic and I am here with the lifeboat trying to get people to leave the ship... I see a real financial crisis coming for the United States."^[42] On December 31, 2006 in debate on Fox News, Schiff forecast that "what's going to happen in 2007" is that "real estate prices are going to come crashing back down to Earth".^[42]

As part of these exchanges on Fox News and his repeated appearances on financial news network CNBC, Schiff had mentioned factors such as speculators and "the absence of lending standards" which are now seen by many^[43][44] to indeed be contributing factors to the housing crisis which began in 2007. On December 13, 2007 in a Bloomberg interview on the show Open Exchange, Schiff further added that he felt that the crisis would extend to the credit card lending industry.^[45] Following this observation, it was soon reported on December 23, 2007 by the Associated Press that "The value of credit card accounts at least 30 days late jumped 26 percent to $17.3 billion in October from a year earlier at 17 large credit card trusts examined by the AP... At the same time, defaults -- when lenders essentially give up hope of ever being repaid and write off the debt -- rose 18 percent to almost $961 million in October, according to filings made by the trusts with the Securities and Exchange Commission."^[46]

Since 2007, Schiff has stated many times that if the government doesn't change course there will be hyperinflation in the US.^[3] Schiff is one of a minority of economists credited with accurately predicting the financial crisis of 2007–2010 while "nearly all [macroeconomists] failed to foresee the recession despite plenty of warning signs".^[47][48] In his book Crash Proof, he described several aspects of the U.S. economy that would lead to a recession.^[3]

A YouTube video entitled "Peter Schiff was right" became popular in late 2008 and 2009.^[49][50] The video consists of a compilation of clips of his many appearances on various financial news programs from networks including CNBC, Fox News, MSNBC and Bloomberg, most of which took place from 2005 to 2007. In the video segments Schiff explains the fundamental problems he saw with the United States economy at that time. Schiff's warnings of a coming economic collapse earned him the moniker "Dr. Doom."^[22][51][52]

2009–present[link]

Despite predictions regarding the housing bubble and automotive industry difficulties coming to fruition, as early as 2009 Schiff was receiving criticism due to the performance of some of his client's accounts in 2008, as well as controversies over the predictions themselves. In January 2009, economic blogger and investment adviser Michael Shedlock reported, "I have talked with many who claim they have invested with Schiff and are down anywhere from 40% to 70% in 2008."^[53] Later that week an article appeared in the Wall Street Journal reporting that Schiff's broker-dealer firm, Euro Pacific Capital Inc., "advised its clients to bet that the dollar would weaken significantly and that foreign stocks would outpace their U.S. peers" and that instead, the dollar advanced against most currencies, "magnifying the losses from foreign stocks Mr. Schiff steered his investors into."^[54]

The Director of Communications at Schiff's investment firm responded to the original Shedlock piece by saying, "While it is true, that our accounts have suffered badly in 2008, a fact that we have never disputed or ran from, [Shedlock's] estimates for the size of our typical client losses are exaggerated and unfair."^[55][56] Schiff personally responded to Shedlock's criticism by saying, "to examine the effectiveness of my investment strategy immediately following a major correction by looking only at those accounts who adopted the strategy at the previous peak is unfair and distortive" and called Shedlock's blog entry "nothing more than an overt advertisement (and a highly deceptive one at that) to use my popularity to advance his career," adding that losses were felt mostly by recent clients and not by others.^[57]

Schiff responded similarly to criticisms made by Wade Slome of Sidoxia Capital Management, LLC. in a September 2009 blog entry entitled, "The Emperor Schiff Has No Clothes."^[36] Schiff stated not only were the losses suffered by his clients in 2008 highly exaggerated, but also that most of those losses have already been recouped, stating that many who were down then are now up, and most long-term clients were never down at all, but merely temporarily lost some of the profits they had earned over the years.^[36]

The January 2009 Wall Street Journal article discussed the value of Schiff's predictions, and stated how deficiencies "made mincemeat of investors who took his advice in 2008."^[54] In an interview the following week Schiff likened himself to billionaire investor Warren Buffett, saying they were both "buy and hold" long-term investors. Contrasting his negative press he compared claims about accounts managed under Schiff's firm to the stock market value of Buffett's company, saying: "His approach is you buy stocks and you never sell them—you hope to never sell them—and Berkshire Hathaway is down 40% in the last thirteen months; I don't see the Wall Street Journal saying 'Warren Buffett made mincemeat out of his clients.'"^[58] The Wall Street Journal also published a letter written by Schiff in response to his critics saying: "My central investing premise, a weakening dollar and safety in gold, commodities and foreign stocks, didn't materialize in 2008. But all the ingredients were (and remain) present for those movements to occur. Over the past year, market reactions that I didn't foresee—massive global deleveraging, a knee-jerk 'flight to quality' into U.S. Treasuries and a sharp counter trend rally in the U.S. dollar—have kept the scenario from playing out."^[59]

In a November 2009 videoblog, Schiff said that five stocks he picked for Fortune Magazine in January 2009 had gained a total of 360%.^[60][61]

In a March 2009 speech Schiff said that it would be impossible for the U.S. debt to China to be repaid unless the U.S. dollar's value is substantially diluted through inflation. In September 2009 Schiff said that "I would not be surprised to see [gold] at $5,000 over the next several years" and that the 2009 stock market rally was a "bear market rally".^[62]

According to economist Paul Krugman, Schiff's Austrian approach to economics led him to incorrectly predict hyperinflation in the United States.^[63]

Political career[link]

Schiff was an economic adviser to Ron Paul's 2008 presidential campaign. In support of Paul's economic revitalization plan, he said: "We need a plan that stimulates savings and production, not more of the reckless borrowing and consumption that got us into this mess in the first place. Ron Paul's plan is the only one that amounts to a step in the right direction. If you want meaningful change—for the better that is—Ron Paul is the only candidate capable of delivering it."^[64]

In 2008, Schiff also endorsed Murray Sabrin for the U.S. Senate seat in New Jersey.^[65]

In an interview in February 2009, Schiff's position was summarized as a nonpartisan critique of American policymakers, comparing former presidents George W. Bush to Herbert Hoover and President Barack Obama to former president Franklin D. Roosevelt, with neither of the more recent incumbents comparing favorably to the earlier ones.^[66]

Schiff supports the reduction of government economic regulation, and is concerned that President Obama's administration may increase such regulation.^[67] Schiff says that the economic crisis of the late-2000s provides an opportunity to transition from borrowing and spending, to saving and producing. He is critical of the U.S. government's efforts to "ease the pain" with economic stimulus packages and bailouts. According to Schiff, the U.S. government's approach of replacing "legitimate savings with a printing press" could result in hyperinflation.^[68]

2010 U.S. Senate campaign[link]

In December 2008, Connecticut citizens created a website encouraging Schiff to campaign against the incumbent Senator Christopher Dodd.^[69][70] Approximately 5,000 people made campaign contributions using the web site.^[69] On February 21, 2009, a moneybomb raised over $20,000 for Schiff's campaign.^[71] In a May 2009 video blog, Schiff said that he was seriously considering a run for the senate and when questioned by a Washington Post reporter, he said the chance of him entering politics was "better than 50-50".^[72] In June 2009 Schiff commissioned a poll of likely voters which indicated that he trailed Dodd in popularity by four percentage points.^[73] On July 9, 2009, Schiff launched an exploratory committee and an official campaign website.^[69] He began accepting donations in an attempt to see if "people who really believe in freedom, liberty, sound money and the constitution are prepared to support that with an actual political contribution or to volunteer their services and work on this campaign." He received over 10,000 donations and many e-mails from around the world.^[69]

After giving some hints on The Daily Show^[74] Schiff officially announced his candidacy for the Republican nomination on September 17, 2009, during the MSNBC Morning Joe show.^[18][75][76] By October 2009 Schiff had received more than 10,000 telephone calls and letters^[69] and raised over $1,960,000 (USD) in campaign contributions.

At the May 2010 Republican convention, Linda McMahon received the most delegate votes but not enough to prevent an August primary election. U.S. Rep. Rob Simmons received more than the required 15 percent of the total votes necessary to force the primary. Schiff then collected the signatures necessary to earn a position on the August 2010 GOP primary ballot, submitting at least 400 signatures over the state requirement.

In July 2010, Schiff's campaign received endorsements from Steve Forbes and Ron Paul.^[77][78]

In the Republican primary, held on August 10, 2010, Schiff lost the nomination to Linda McMahon.^[79] McMahon collected 49% of the vote, with Simmons on 28% and Schiff 23%.^[80]

Ultimately, the election was won by the Democratic Party primary winner, Richard Blumenthal.^[81]

Broadcasting[link]

From 2005 to 2010 Schiff hosted a weekly podcast named Wall Street Unspun. In October 2010 Schiff began hosting a new radio show named The Peter Schiff Show. The show is broadcast weekdays from 10am-noon ET on internet and terrestrial radio. The show has featured guests such as Ron Paul, Rand Paul, Niall Ferguson, Dennis Kucinich, Rick Santelli, and others.^[82]

Books[link]

Peter Schiff is the author of six books published by John Wiley & Sons. His book, Crash Proof 2.0, appeared on both the New York Times and Wall Street Journal bestseller lists.

• Crash Proof: How to Profit From the Coming Economic Collapse, February 2007, ISBN 978-0-470-04360-8 1
• The Little Book of Bull Moves in Bear Markets: How to Keep your Portfolio Up When the Market is Down, 2008, ISBN 978-0-470-38378-0 2
• Crash Proof 2.0: How to Profit From the Economic Collapse, 2nd Edition, September 2009, ISBN 978-0-470-47453-2 3
• The Little Book of Bull Moves, Updated and Expanded: How to Keep Your Portfolio Up When the Market Is Up, Down, Or Sideways, 2010, ISBN 0-470-64399-4 4
• How an Economy Grows and Why it Crashes, 2010, ISBN 978-0-470-52670-5 5
• The Real Crash: America's Coming Bankruptcy---How to Save Yourself and Your Country, 2012, ISBN 978-1-250-00447-5

References[link]