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Six Things To Consider About Inflation


As an economic term, “inflation” is shorthand for “inflation of the money supply.”

The general public, however, usually takes it to mean “rising prices” which is not surprising since one of the common effects of an increase in the money supply is higher prices. However, supporters of government policy often say, “If quantitative easing (QE) and its terrible twin, fractional reserve banking, are so awful, why have we got no inflation?”

To address this conundrum, there are six related factors that are noteworthy:

Number One: we need to be clear about the terms we are using. Instead of talking about “inflation” in the loose sense, as above, it is more accurate to speak of currency debasement, which is the real impact of fiat money creation by any means. We experience currency debasement as declining purchasing power. Two sides of the same coin: one reflects the other.

Number Two: the above question overlooks the fact that the measures used in this process are inherently unreliable. The decline in purchasing power is most evident when objectively measured by reference to an essential commodity such as oil — rather than against the Consumer Price Index (CPI). The CPI purports to reflect the prices of ingredients selected by government statisticians in what they consider to be a typical, but notional, basket of “consumer goods and services.” This basket, whose contents are varied periodically, results in an index that cannot be trusted as an objective barometer. It supports the wizardry of non-independent Treasury statisticians, and relates to goods that scarcely feature in your shopping basket or mine.

Number Three: newly created fiat money must go somewhere — and so it goes into the grasp of its first receivers, the banks, the financial institutions, government institutions, and urban moneyed classes who least need it — widening the gap between rich and poor — and thereby building asset bubbles in property, luxury cars, yachts and the myriad baubles that only the very rich can afford to acquire. So never say that “there is no price inflation” — it’s just that those asset prices don’t figure in the official CPI stats.

Number Four: The European Central Bank (ECB) is no slouch when it comes to money creation out of thin air, and banks within the euro zone have therefore come to rely on it for survival. The solvency of Southern EU countries is dependent on the promise of limitless — thanks to Mario “Whatever it takes” Draghi — fiat money bailouts from the ECB. But, until the next bailout arrives, governments of Europe will do their coercive best to prop up their insolvent banks by any means, fair or foul. In Italy, for example, the government has now “invited” the country’s pension funds to invest 500 million euros in a bank fund called “Atlante,” which has been formally set up as a buyer of last resort to help Italian lenders (whose bad debts equate to a fifth of GDP) reduce their toxic burden. Having run out of other people’s money the Italian government is now trying to raid the nation’s pension funds.

Number Five: In the same vein, you have no doubt heard reference to “helicopter money.” This is a variant of QE favored by certain politicians who talk blithely about the need for “QE for the people.” The idea is to by-pass the treasury mandarins by dropping newly printed money directly to the people via government spending, so that they (rather than the already-rich classes) can benefit from the bonanza and aid the economy by spending their new-found wealth. Again, this notion commits the fundamental error of equating “money” and “wealth.” If everyone suddenly finds that free handouts have swelled their bank accounts, how long will it be before prices follow? (And since even helicopter money originates at the central bank, you can be sure that the financial sector will somehow get its hands on it first anyway!)

Number Six: the final point concerns the corrosive effect of the deliberate and utterly misguided suppression of interest rates which, if they were allowed to find their own market level, would represent the time-value of money, or what the private sector is prepared to pay for liquidity — either for spending now or saving for future spending.

The suppression of interest rates is yet another desperate attempt to stimulate demand, hoping that it will lead to productive economic activity. But it flies in the face of Say’s Law, which holds, correctly, that we produce in order to consume. Reversing these leads to the idiocy of “demand management” — as if stimulating demand will magically generate the production needed to satisfy that demand. If that were true, Venezuela and Zimbabwe would be vying right now for the title of the world’s most prosperous economy.

Suppressing interest rates destroys the natural measure of time preference. It leaves many long-term infrastructure investment plans on hold, simply because no private sector producer of capital projects will commence a venture that cannot be reliably costed. After all, who knows when interest rates will rise? And at what economic cost to the project? Uncertainty stifles action.

The risk of misallocation of capital resources is simply too great for the private construction sector. Just look at the many public sector cock-ups: there are Spanish airports at which no plane has landed, and Portuguese motorways on which there are no cars. And here in the UK? Just wait for HS2, new airport runways, Hinckley — and all the other mammoth “interest-free” projects that get the go-ahead, having never been subjected to any reliable economic calculation.

So what do we finish up with in the productive sector? The near-zero interest rates favor short-term production schedules with minimal capital requirements, resulting in low-risk production lines of cheap goods. That’s why we have “pound- shops” and 99p shops and all the other shabby outlets that now litter every suburban high street — creating the illusion of zero inflation. Which is where we came in.

The Mises Institute

7 Comments on "Six Things To Consider About Inflation"

  1. Davy on Mon, 24th Oct 2016 7:47 am 

    We are in a time of economic flux. A more proper understanding of this is not inflation or deflation but both. Hyperinflation lurks beneath the global economy. Hyperinflation in this modern global sense would be the sudden and unpredictable loss of confidence in money and economies with corresponding deflationary fear and inactivity. Along with this deflationary hyperinflation would be the inflation effects of panic driven irrational movements of money and dysfunctional activity.

    What this could be characterized as is simply a global economic crisis along with a breakdown of production and distribution. This could lead to food and fuel shortages causing more deflation and inflation in the mix. Money will flood into safe havens that may or may not be safe. This will inflate values but also improperly allocate important resources. Critical activities may stop for want of money. In a sense this will be metered chaos. How quickly can and will this unfold? Will it be a smooth cycle, a jagged drop and or both? Likely both and likely dispersed globally with varying degree by location combining much as the global winds combine only this will be the winds of destructive change. We are surely in the vicinity to some kind of economic disruption. We are nearly 10 years from the last major change which itself indicates a cycle potential.

    What can come after QE? We have seen multiple forms of QE from rate repressions to the talk of direct injections of liquidity. We surely are near the end of the QE spectrum? Diminishing returns and systematic turbulence is the results of extended QE in it many forms being applied too long. It appears ever more likely QE should never have become a policy tool. It should never have been more than a crisis measure. Will this lead to the end of a market based economy and suspension of democratic institutions? I would not rule that out. Who would have thought we would be where we are now in 2007? We are in uncharted water but that does not mean we cannot see the bottom. A clear view of what is going on indicates decline. What is uncertain is the rate of change of an unknown type of change. IOW the rate of change of a spectrum of possible destructive changes.

  2. joe on Mon, 24th Oct 2016 8:33 am 

    Good article. Sadly inflation is winding up like a spring. The FED wont move on interest rates until it knows that the price rises wont simply be passed in full to the masses who have hardly had a wage rise for almost a decade (productivity gains). Now that more than half of humans live in urban areas we need to focus on that aspect, the true cost of living does not need to include house prices a hundred miles outside cities. In the globalising world, experiences are coalescing in terms of economic life, and while US banks pat themselves on the back and say thank God for tarp and write off EU banks, they need to consider their positions carefully. The free money ride that TARP gave to them along with bank reforms have made the dollar a safe haven for a world gone mad. Good right? Sure except some point the greed cycle takes over and these banks will want to push their limits. Cycle spins out again.
    Reading a bank balance sheet makes you think that strong loan interest income and lots of cash on deposit means a strong bank, right. No, loan interest income in a low interest environment means its got lots of debt out there, and interest rate hikes can easily destroy cash income from loan interest, like say big loans to tight oil companies who need low interest rates to keep paying for the big debts that they have from high oil prices.
    Inflaton is a huge factor, so are interest rates. If ever Saudi and Russia conspire to cut oil supplies and cause price inflation, without a FED rate hike there would be a race to the dollar not seen in a generation, it would ruin domestic business as asset prices rise and force deflation ie another recession or a continuation of the same one began in 07. All the helicopter money on earth wont save the US domestic consumer in price inflation spike. This is Saudi Arabias secret weapon to keep America in its pocket.

  3. Davy on Mon, 24th Oct 2016 8:42 am 

    “This is Saudi Arabias secret weapon to keep America in its pocket.” LOL

  4. joe on Mon, 24th Oct 2016 8:48 am 

    Yeah, didnt you read the 9-11 report, Saudi attacks America, and they dont even open an investigation, man, thats a long way from Roosevelt Americans who would simply have send in the Rough Riders to tear the rags off their heads, Bush attacked an innocent country to keep the heat off Saudi. Now look at the ‘choice’ there is between Billary Trumpton, so sad and fallen so far. Poor Davy can only lol.

  5. Cloud9 on Mon, 24th Oct 2016 10:47 am 

    As posted in another thread with an addendum: Fiat paper is scrip printed for the benefit of banks. It is conjured out of thin air at nominal costs and enables banks to charge rent on money they never possessed and allows governments to spend beyond their means. This system of frauds has existed in governments ancient and modern.

    All of these frauds run the same cycle with the eventual debasement of the currency and the resulting collapse of the political system. A great read on this process can be found in the book When Money Dies by Adam Fergusson.

    The American system of frauds was perfected with the creation of the Federal Reserve in 1913. Consequently, America has been on this trajectory for over 100 years. The dollar as a system of frauds is long in the tooth.

    We have been successfully conditioned by the oligarchs that control the system to believe that Constitutional money, gold and silver are barbaric relics with little or no use. The physical gold and silver markets are rigged by the sale of paper promises that like fiat are conjured out of thin air. This process has been so successful that the general public fails to recognize the true value of precious metals. Meanwhile, oligarchs from around the world continue to accumulate it. You must remember that what they say in public and do in private are two separate things.

    When money dies, it tends to do so rather rapidly. At some point, in the world of transactions a noticeable change occurs. People come to realize that their money loses value over time. They come to understand that efforts to save money become a losing proposition. The velocity of money picks up. Then hyperinflation kicks in and faith is lost in the currency.

    I have on my desk two Zimbabwe bank notes. The first is a one dollar bill with a security strip printed in 2007. The second is a fifty trillion dollar bill printed in 2008. In less than 24 months the Zimbabwean currency died.

    If you want to understand the end result of monetary collapse look at this video on Zimbabwe after the collapse.
    I have a pretty good financial advisor and he urges everyone to keep 15 to 20% of their wealth in precious metals. Portable wealth is always a good idea. I am reminded of a scene in Schindler’s List where Schindler bought passage for his Jews with a hand full of diamonds.

    When our currency collapses, cash may in fact retain some value at least in the short term. A trillion dollars is a Walmart parking lot filled with hundred dollar bills stacked eight feet high. That’s a lot of money.

    In our current system most of that money in circulation is virtual it resides on a J.P. Morgan hard drive. Physical cash is rare. I am usually walking around with less than $20 in my pocket. Almost all of my transactions are on credit cards.

  6. Davy on Mon, 24th Oct 2016 11:00 am 

    GB Joe, I gave you a LOL because I am not sure you have anything figured out except being good at rambling about what-if’s, deflation, inflation, with an Anglo anti-American touch. You are “LOL” material Joe that’s all. We all do it sometimes. I just called you out on a bad job at connecting dots.

  7. penury on Mon, 24th Oct 2016 11:21 am 

    I presume that there is as many opinions on inflation versus deflation as there are people experiencing it. The U.S. is going thru an election cycle, always a fake time in this country. World wide there is a slow down in manufacturing, a sloow down in trade inter nationally. What is being hidden behind the curtain? We should know before U.S. Black Friday.

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