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The True Challenge With Inflation Is That So Few Know What It Is.

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Radio Garden is a website that can be accessed through Google, or in app form through the supercomputer in your pocket that is your smartphone. Radio Garden allows you to “explore live radio by rotating the globe.” In other words, if you’re interested in what they’re saying in Russia’s Moscow, you can listen to the broadcasters there very clearly from Moscow, ID, or anywhere else where you have a worthy internet connection. For those who are wondering, you can do all this for free.

Contrast this with how things were 100 years ago. It was in the 1920s that radios became a thing. They were very expensive, must-have gadgets. RCA (Radio Corporation of America) was the Apple, Amazon, or Google of its day by virtue of it bringing to market what for its time was a technological marvel.

So what happened in the last 100 years? How is it that in 2021 crystal clear radio connections from around the world cost nothing, but radios that broadcast very few local stations very badly were so expensive in 1921? The simple, truthful answer is economic growth.

Economic growth isn’t consumption as economists and their media enablers tell you; rather it’s a consequence of investment. Investment springs from unspent wealth, which means that the more wealth created, the more investment there is. Thanks to copious investment over the last 100 years, the cost of communicating has plummeted, and so has the cost of accessing information from around the world. Curious what’s on the mind of radio hosts in Sydney? Just turn on your computer. It’s that simple. When capital that is always and everywhere a consequence of economic activity is matched with talent, productivity subsequently increases and prices fall. The savings left over after we meet our unmet needs relentlessly rush the future into the present. Economic growth is all about falling prices that we enjoy alongside progress.

But wait a minute, some will say, economists believe that booming economic growth causes economies to “overheat,” with inflation the result. Jeanna Smialek and Jim Tankersley at the New York Times, contend that economic growth has a downside. According to the reporters, too much economic growth causes “overheating,” and yes, inflation. In the defense of each, it could be that they’re just being polite. Figure that their beat is frequently the Federal Reserve, and the Phillips Curve dominates thinking inside the central bank. It’s accepted wisdom inside the Fed that economic growth causes prices to rise.

Quoting Smialek and Tankersley in a recent A1 piece titled “Inflation Fears Fall By the Wayside In the Biden Era,” they indicated a fear among some economists that “overheating” could be a consequence of the $1.9 trillion stimulus bill due to “so many dollars chasing a limited supply of goods and services.” Maybe they’re being too polite? Indeed, their expressed analysis of what inflation is fails in at least three ways.

For one, there’s no “stimulus” to begin with. Governments only have money to spend insofar as they arrogate to themselves a percentage of the growth already taking place in the U.S. economy. Translated for those who need it, the economic growth already occurred; hence the $1.9 trillion for Congress to redistribute. This won’t be $1.9 trillion plucked from Pluto or Mars, rather it will be $1.9 trillion taken from one set of pockets and placed in another set. Which means it won’t be $1.9 trillion in new consumption as much as Congress will depress the stimulated to the tune of $1.9 trillion in order to stimulate the depressed.

And then let’s never forget that all demand begins with production, which is why economies can’t overheat. For there to be $1.9 trillion in consumption, there must be $1.9 trillion in production. These things balance, not to mention that the only closed economy is the world economy. Even if the “output gap” economists obsess over were real, it would be of no consequence in an economically interconnected world.

After which it’s worth re-stating that actual economic growth is a consequence of savings and investment that render the individuals who comprise any economy quite a bit more productive. Which is why economic growth is a sign of falling prices. Individuals don’t “overheat.” By extension, economies don’t.

Still, economists have conveyed to Smialek and Tankersley that inflation is what follows growth, and that fighting it is some brutal slog. Writing about new Treasury secretary Janet Yellen in the aforementioned A1 article, they somewhat fawningly reported that “Yellen spent the bulk of her career fighting in a war against inflation that economists have been waging for more than a half-century.” Battle scars for Yellen? Suffering? No.

Back to reality, inflation is a choice. So is a lack of inflation. There’s no fight about it. After World War I, Germany faced war debts and reparations that its political class didn’t want to pay back. So they foisted it on the citizenry by devaluing the mark. By 1923, $1 bought 4,200,000,000,000 marks. The devaluation was once again a choice. So was the currency reflation. When Germany decided the devaluation was a disaster, it ended it within a week through a reversion to currency-price stability. Inflation is devaluation. Exiting inflation isn’t a war, or a long, brutal battle on some imaginary battlefield. Ending inflation is as simple as monetary authorities reversing currency devaluation.

In short, Yellen’s fight has been an imaginary one. In the 1970s there was a devaluation. That was President Nixon’s intent in severing the dollar’s link to gold. The devaluation of the dollar was decade-long, which was why the stock market and economy stagnated in a relative sense. Investors are buying future returns in currency when they invest, but in the 70s, dollar policy was all about a shrinking of the unit. In the Reagan 80s and Clinton 90s, the malaise-filled dollar policy that had defined the 1970s was reversed. The economy and stock market boomed. This wasn’t a fight. It was just a change in policy.

No doubt there’s lots of mythology about what Fed Chairman Volcker did in the early 1980s, but it’s just that: mythology. It’s rooted in this Phillips Curve misunderstanding that says growth causes inflation, so a lack of inflation must be about central-bank engineered contraction. Nonsense. The mis-named “Volcker recession” was in reality a sign of growth as wealth moved out of inflation hedges (think land, rare art, commodities, rare stamps, etc.) and back into actual investment.

Smialek and Tankersley add somewhere in their report that the 1970s inflation was a consequence of things like wage increases and an “oil embargo.” Of course, to blame inflation for rising prices is like blaming wet pavement for rain. The reporters reverse causation. The dollar was devalued in the 1970s, which meant wages denominated in soggy dollars crept up as dollars were exchangeable for fewer goods and services. As for the oil embargo, no. “Arab oil” flowed to the U.S. just as much after the embargo as before. Rising oil prices were a consequence of a falling dollar, which was what the Nixon administration wanted in the 70s. Same with the Carter administration. When the dollar’s devaluation was reversed in the 80s and 90s, the price of oil plummeted.

All of this speaks to the problem with inflation today. Few know what it is. It’s currency devaluation, which means there’s no inflation fight to speak of. Just don’t devalue, but if you’re devaluing, stop. Reverse course. Inflation will cease. There are no wars to fight. The reporting by Smialek and Tankersley borders on hagiography.

Socialism, Not Debt, Causes Economic Collapse.

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In 1819, England’s debt-to-GDP ratio reached 261%. Think about this number for a moment. And in particular, think about it through the prism of accepted economic wisdom today… It’s a reminder that when we focus on debt and deficits, we’re very distracted. It’s what we’re notthinking about that threatens us.

As an example of thinking the wrong things about debt and deficit, take Carmen Reinhart and Kenneth Rogoff, authors of This Time Is Different (which is the “Bible” of sorts for the debt- and deficit-obsessed)… According to their analysis, England’s gargantuan debt signaled looming economic and currency collapse for the global power. They claim that countries tend to tip toward decline once their debt/GDP ratios pass over the 100% line. England was, I repeat, at 261%.

Yet England’s economy soared in the 19th century. It was the country’s Golden Age. Good policy tends to have that kind of positive effect. England broadly pursued good ones. Rather than erect barriers to foreign goods and services, the political class shrunk them. Most notably, England abolished its Corn Laws in 1846 that had artificially propped up grain prices through barriers to foreign imports of the commodity. The economic impact of this wise policy decision was profound.

Indeed, when countries are open to the world’s plenty, it’s a sign that their people are availing themselves of the genius of divided labor. Most point to lower prices to make a case for free trade, but its greatest attribute is that it frees its beneficiaries to do the work that is most commensurate with their productive talents. The latter can be translated with “if you get to do what you do best, I’ll get to do what I do best.” Open country borders to goods and services elevate the workers on the open side whose enhanced production commands more abundance from outside the country. Raises and increased productivity beget more of the same.

After that, it cannot be stressed enough that investment is what powers economic growth – despite what consumption-focused economists tell you. And when investors put wealth to work, they are buying future currency income streams and future returns denominated in money. In England’s case, the pound was the world’s most trusted currency. The faith in the pound’s strength as a stable measure of value proved a magnet for devaluation-averse investors around the world, plus it arguably factored in England running up so much debt in the first place. (But that’s another column.)

For now, it should be said that whatever one’s views of government debt, it doesn’t automatically foretell economic and currency collapse. But what about Reinhart and Rogoff, some might ask? What about the 100% line? The answer is that it’s rather meaningless…

Economies aren’t singular machines turned on and off by central planners, rather they’re just collections of individuals. The individuals who comprise any economy tend to be better off economically when the penalties (taxes) levied on their work are low, when market forces as opposed to bureaucrats regulate their activities, when they’re actively dividing up work with individuals around the world (free trade), and when the money they earn in return for their work is not being devalued. Capitalism works… Freedom works… Insert your wise platitude here.

Quoting the great George Gilder on the matter, “History tells us that the threat to capitalism is not debt, but socialism.” What’s crucial about this is that currency devaluation is an embrace of socialism, and it’s one that England’s Chancellor of the Exchequer chose to avoid. The protection of the pound was a wise policy choice.

Which brings us to a brief but important digression into currency, or monetary policy. Economics would be much better understood by the various economic religions if congregation members grasped that no one exchanges money, is paid with it, invests with it, etc. Money is merely an agreement about value that facilitates the exchange of real things. It’s products for products when you, the reader, purchase a breakfast taco at Whataburger, a flat-screen TV at Best Buy, or a house in your favorite neighborhood. You’re exchanging your production, or the fruits of your labor, for food, appliances, and shelter.

The only thing is that most restaurants, retailers, and homeowners won’t accept your brilliance as a salesman, barista, or banker as payment for various market goods. The agreement about value that is money renders moot the previous problem. We work for “money,” but we’re really working for what money can be exchanged for. Just the same, we don’t save and invest “money” as much as we shift the economic resources that money can be exchanged for to others in return for more expansive resource access in the future when we choose saving and investment over immediate consumption.

All of which explains why currency devaluation is just another word for socialism. Paraphrasing the Robert Bartley quote that begins this piece, currency devaluation is wealth redistribution. Governments sometimes employ it to shrink the value of the debt they owe, or the cost of their spending in the first place. Sadly, the socialism doesn’t stop there. It redistributes wealth in society, too.

To see why, it’s useful to travel ahead in time almost exactly 100 years after England wisely chose to avoid socialism. Germany didn’t. It turns out policy matters…

In 1914, World War I began. That same year, German monetary officials decided to suspend the mark’s link to gold with an eye on sharing some of the war’s costs with the producers of armaments and other goods and services necessary to go to war. Arms producers (among others) would take a “haircut” for the alleged betterment of Germany. For those a bit slow on the uptake, German monetary officials chose to devalue the mark. It began slowly in the war years, only to pick up rapidly after the fighting ended.

Facing debt related to war costs, along with reparations owed to victor countries, Germany’s political class chose socialism. A massive devaluation of the mark began as a way of eviscerating all debts.

As Adam Fergusson explained it in his classic 1975 book, When Money Dies, the head of Germany’s Reichsbank (Dr. Rudolf Havenstein) held firmly to his view that rampant creation of marks “was unconnected with either price levels or exchange rates.” Germany owed, so it printed away its obligations. By 1923, $1 bought 4,200,000,000,000 units of Germany’s near-worthless currency. Which means German government debt was shifted to the people who suddenly saw their wealth vanish.

Germans who owned bonds and stocks that returned marks were wiped out so that the debts incurred by Germany’s political class could be erased via devaluation. As one German remarked about the evaporation of her savings…

A housewife who has had no experience of the horrors of currency depreciation has no idea what a blessing stable money is, and how glorious it is to be able to buy with the note in one’s purse the article one had intended to buy at the price one had intended to pay.

And the wealth redistribution didn’t just stop there…

When governments devalue, they don’t just shrink their own debts on the backs of businesses and citizens who see the value of their savings shrink. The massive tax that is devaluation also redirects precious capital away from investments in wealth that doesn’t yet exist (think stocks and bonds), and into wealth that already exists. Yes, socialism logically fosters economic stasis as savers and investors seek certainty over the progress that is a consequence of intrepid investing. Writing about post-WWI Germany, Fergusson noted that the citizenry sought to insure themselves against paper currency losses through the purchase of “assets which would maintain their value: houses, real estate, manufactured goods, raw materials and so forth.”

Germany’s tragic lurch toward redistributionist policies isn’t just useful as a way of explaining why currency devaluation is a particularly odious form of socialism. The story of post-WWI Germany is also useful as a reminder that devaluations don’t just happen. They’re not a consequence of debt/GDP ratios, sunspots, or anything else thought up by the philosophers who populate the economics profession. They’re a choice. Germany is instructive on the matter.

As Fergusson observed, Havenstein’s successor as Reichsbank president, Dr. Hjalmar Schacht, managed with U.S. support to transform “the German financial system from chaos to stability in less than a week” after waving the “magical wand of currency stability.” Monetary authorities who believed devaluation was the path to economic nirvana were replaced by individuals with an actual clue. Just as devaluation was a choice, so was a return to stable money. A focus on government debt as the catalyst for economic and currency collapse misses the point. U.S. history is instructive in this regard.

To see why, let’s now travel ahead in time to the U.S. in 1933, a little less than a decade after Germany’s tragic blunders. Franklin Delano Roosevelt had just replaced Herbert Hoover in the White House after Hoover chose policy that was inimical to economic growth. You guessed it! Taxes went up, so did regulation, and tariffs on 20,000-plus foreign goods were raised to record levels.

The problem was that rather than learn from Hoover’s mistakes, FDR doubled down on them while committing new ones. One of his most egregious occurred during his first year in office. It was a substantial dollar devaluation. A dollar formerly exchangeable for 1/20th of an ounce of gold would now be worth 1/35th. Government debt that had been soaring (FDR himself promised deficits of $7 billion-plus) would be shrunken by the president, and the bill would be left at the doorstep of American individuals and businesses, along with investors whose capital commitments are the drivers of growth.

Then Federal Reserve Chairman Eugene Meyer was so incensed by FDR’s decision that he resigned. Reinhart and Rogoff described what happened as “a restricting of nearly all the government’s domestic debt.”

No doubt some who should know better correlate soaring government debt with devaluation, but they’re mistaking causation. Sometimes governments choose socialism whereby they transfer their borrowing to workers, businesses, and savers. That’s devaluation in a nutshell. But what requires stress is that there’s no logical chronology that begins with debt incurrence and ends with socialistic devaluation.

We know this because U.S. federal debt soared well above 100% of GDP during WWII, but this in no way led to a falling greenback. In truth, U.S. Treasury officials traveled to Bretton Woods, New Hampshire in 1944 to participate in what became the Bretton Woods Agreement. The latter was a currency system that the dollar was at the center of. The dollar would be defined as 1/35th of a gold ounce, and currencies around the world would peg to the dollar. With massive amounts of debt to pay back as WWII was nearing its end, the U.S. chose currency stability over socialism. The post-war U.S. economy predictably boomed…

Which brings us to modern times. In 1980, total U.S. federal debt was $900 billion. At the same time, the 10-year Treasury note yielded 11%. Forty years later, total U.S. debt is $27 trillion-plus, but the 10-year yields just 0.9%. Translated for the half-asleep, the cost of borrowing for the U.S. has plummeted amid soaring total debt.

Despite how the dollar has endured stretches of weakness that had a Nixonian (Richard Nixon severed the dollar’s link to gold in 1971 – an explicit, economy-wrecking devaluation), 1970s quality to them (see Jimmy Carter, see George W. Bush), it remains the world’s de facto currency. This wouldn’t be true if the U.S. had chosen socialism, which is all currency devaluation is.

So while it’s accepted wisdom among self-styled “deficit hawks” that the bill for excessive government borrowing is inflation and recession, there’s really no “there” behind all the emotional ranting. More realistically, it’s much easier for governments to borrow if the country currency is trusted. Wait a second… what? That can’t be! Actually, it can. And it is. But that’s another column…

 

John Tamny is editor of RealClearMarkets

The 2% Inflation That Central Banks Target Is Simply A Wealth Redistribution Scam.

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The world over people are told that central banks pursue “price stability” by making sure that consumer goods prices do not rise by more than 2 percent per annum. This is, of course, a big sham. If the prices of goods rise over time, it does not take that much to understand that prices do not remain stable. And if the prices of goods increase over time, it necessarily means that the purchasing power of the money unit declines.

As money loses its purchasing power, income and wealth are stealthily redistributed. Some individuals and groups of people are enriched at the expense of others. Savers and workers are swindled out of their deserved income and retirement benefits, while those who own goods that rise in value or who borrow money typically reap a windfall profit. Clearly, the banking industry is a major beneficiary of monetary debasement.

“Inflation” Is a Rise in the Quantity of Money

Central banks are the very source of the phenomenon that all prices of goods tend to rise over time. They hold the money production monopoly and increase — in close cooperation with commercial banks — the outstanding quantity of money through credit expansion, an increase in the supply of credit that is not backed by real savings. It goes without saying that it is rather profitable to be active in the money-production business.

The increase in the quantity of money results, and necessarily so, in higher prices compared to a situation in which the quantity of money has not been increased. This is no arbitrary assertion but stems from logical reasoning: a rise in people’s money holding lowers the marginal utility of the additional money unit, meaning that the marginal utility of other goods that can be exchanged against money rises.

Consider the case in which the quantity of money in the hands of market agents rises. People will then exchange money balances (which have, from the viewpoint of the money holder, lost in marginal utility) against other vendible items (which have gone up in marginal utility). As people exchange money units against other goods, money prices go up (compared to a situation in which the quantity of money has not been increased).

The Mainstream Explanation and Its Problems

Of course, in real life additional factors (such as, for instance, demand changes, market introduction of new products, etc.) interfere with the link between the increase in the quantity of money and the rising prices of goods. This, however, by no means refutes the economic insight that a rise in the quantity of money in the economy leads to goods prices that will be higher than if the quantity of money not been increased.

The increase in the quantity of money is what deserves to be called inflation; rising prices are just a possible symptom of an increase in the quantity of money. However, mainstream economists typically define inflation as rising consumer goods prices. This, however, is problematic for at least two reasons. First, by equating inflation with rising prices, the real reason for higher prices, namely the rise in the quantity of money, is obscured.

This, in turn, gives rise to arbitrary explanations of why goods prices may go up: sheikhs who force up oil prices, unions that cause wages to rise, an overall buoyant economy that creates shortages in production factors, and so forth. All these pseudo-explanations deflect from the real culprit — the central bank, in cooperation with commercial banks, which issues new money, so that people no longer understand who, in fact, harms them.

Asset Price Inflation

Second, changes in consumer goods prices do not tell us the entire story, for they do not take into account asset prices such as, for instance, stock prices, housing prices, and land prices. However, the newly injected money can be expected to not only push up consumer goods prices, but also drive up asset prices. And like rising consumer prices, rising asset prices diminish the purchasing power of money.

In other words: asset price inflation destroys the purchasing power of money in the same way that price inflation of consumer goods does. Take, for instance, stock market prices. If prices rise from, say, $100 to $200, the purchasing power of the money unit would drop by 50 percent. The owner of the stock becomes richer, while the holder of dollars become poorer. In fact, this is precisely what has been happening in the last decades.

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For illustrative purposes, let us take a look at the chart above. It shows the development of the US quantity of money, nominal GDP, and stock prices from 1996 to autumn 2019. In the period under review, the US nominal GDP increased by 4.3 percent per annum on average. The quantity of money rose by 6.1 percent, while stock prices expanded by 8.1 percent. To the attentive observer, these numbers contain an important message.

The increase in the money supply does not only raise prices of consumer goods, but also tends to raise all prices. For instance, in the period under review, on average, the real GDP in the US rose around 1.9 percent per year while prices of goods and services that are included in US GDP went up by 2.4 percent. The remaining “excess money” obviously pushed up stock prices and other asset prices such as for instance, housing prices.

Don’t Put Your Trust in Today’s (Fiat) Money

The lessons to learn are these: always think of inflation as a rise in the quantity of money. Be aware that central banks and commercial banks provide a kind of money that does not keep its purchasing power — that most people suffer losses when holding it for the purpose of storing wealth. Better not to put your trust in today’s money and keep your transaction balances as small as possible. Don’t be taken in by the inflation sham.

The insights outlined above should encourage all of us to join the call for better, sound money — money that lives up to the highest economic and ethical standards. This can be achieved by simply creating a free market in money, where people are free to choose the kind of money they would like to use, and where entrepreneurial spirits are free to make their fellow people sound-money offers.

A free market in money — which would be tantamount to putting an end to central banks’ money production monopolies — is actually easy to establish. Just strip the official currency of its privileged “legal tender” status and remove all capital gain and sales taxes on all media that stand an excellent chance to compete for becoming currency — most notably gold and silver but potentially also crypto units.

A free market in money will work wonders. Many of the evils that haunt our world today — be they chronic price inflation, financial and economic crises, boom-and-bust cycles, and even over-funded governments and aggressive wars, would be greatly reduced. One of the biggest challenges of our time is to reform our money. The solution is to open up the market in money.

Dr. Thorsten Polleit is Chief Economist of Degussa and Honorary Professor at the University of Bayreuth. This article appeared at mises.org.

There Is Inflation Everywhere Government Gets Involved: Housing, Healthcare, Education.

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In my days before I worked for the Mises Institute, I had a colleague who knew I associated with Austrian school economists. In the wake of the bailouts and quantitative easing that followed the 2008 financial crisis, he’d sometimes crack, “Where’s all that inflation you Austrians keep talking about?”

But then, in the very same conversation, he’d remark with dismay on how much housing-price increases had outpaced household income in the region.

He didn’t need an answer from me. He’d found some of “that inflation” all on his own.

Price Changes Are Not Homogeneous

These exchanges illustrated some of the blind spots we repeatedly find among economists and pundits who insist there is no inflation, or that there’s even deflation. (In this article, I’m talking only about price inflation, and not money-supply inflation.) But whether or not one is experiencing an inflationary economy can vary widely on socio-economic status, location, life stage, and age. For those who need higher education services, housing, health care, and savings for retirement, the current inflationary economy could be problematic indeed.

This isn’t to say that price inflation is increasing everywhere. Oil prices are down by nearly half since 2014, for instance, which means lower transportation costs for most of us.  Apparel prices have been declining for decades.

Nevertheless, the official measure of inflation — the Consumer Price Index (CPI) — does show an increase over the past decade. Over the ten years from 2009 to 2018, the CPI value rose 15 percent. It has risen 50 percent in the twenty years since 1999.

No Deflation Here: Housing, Healthcare, and Education

Yet, the CPI increase has been significantly outpaced by prices in a number of sectors.

For example, the price of higher education increased 30 percent over the past decade.1At the same time, health care spending per capita increased 27 percent.

Even bigger increases are found in asset prices. According to Case-Shiller, for example, the twenty-city housing index rose 50 percent from 2009 to 2018. During the same period, the Dow Jones rose 108 percent.

Just because price inflation is showing up more in some assets and services than in others doesn’t mean it’s not there.2

inflation

Supporters of the status quo tend to defend housing-price increases on the grounds that rising housing prices are good for people who own those assets. This is true. Unfortunately, not everyone is a homeowner.

Those who wish to dismiss the possibility to significant price inflation might also claim the CPI is reflective of the real-world situation because not everyone buys a college education, and not everyone needs sizable medical services. That’s true, and averages could be used in these cases to portray that increases in spending in these areas are more muted than the experience of many individuals suggests.

But this ultimately just shows the problem with using broad aggregate numbers and averages to represent the cost of living.

In practice, increases in asset prices hurts first-time homebuyers, and low income households who have so far been unable to afford a down payment and the elevated asset prices we’re now seeing. Nor is everyone in the market to buy real estate soon. Or ever. Real estate price increases drive up rents as well, and this is a problem for both young consumers and low-income ones. Over the past decade in the metro Denver area the average rent increased 60 percent in contrast to the CPI increase of 16 percent. In Phoenix, the average rent increased 7 percent from 2018 to 2019.

The CPI might tell us that inflation is “subdued,” or “muted,” there are plenty of people whose budgets are taking big hits anyway. Moreover, home prices are a big part of most households’ monthly expenses. Combined with healthcare spending and higher education, the increases in the cost of living — reflected in price increases — we’ve seen over the past decade are hardly something we could describe as “deflationary.”

Defenders of the there’s-no-inflation position might claim “but these price increases are moderated by price declines in other places!” That may be true, but housing, healthcare, and education make up a pretty sizable portion of a family’s expenses. Are declines in prices for apparel and gasoline so sizable that they cancel out increases in housing and medicine? This appears to be unlikely for an average person. Thus, we can’t simply assume the CPI’s basket of goods necessarily reflect the day-to-day economic realities that ordinary people face.  For many people who don’t fit the profile of the “average,”  generic, or aggregated American, the official numbers may not reflect reality at all. Indeed, it appears that lower-income, younger, and more elderly consumers are the ones who suffer the most. For example, elderly retirees on fixed incomes can’t just increase their incomes by working more to keep up with price increases. And young people with no assets will have a much harder time acquiring assets if prices are relentlessly speeding upward. Mid-career people with flexible incomes and with assets are one thing. Everyone else is more likely to encounter trouble.

Low Inflation Is Not “No” Inflation

Finally, it’s important to keep in mind that what’s routinely touted as “low inflation” isn’t all that low.

For example, even though we’re told we live in an age of exceptionally low inflation, the CPI measure shows that a dollar’s worth of goods and services twenty years ago requires about $1.50 today. Even over just the past decade, what one dollar once bought then requires $1.17 today.

The much-vaunted 2 percent inflation standard shows similar results. If central banks are able to nail the “low” 2 percent inflation level, we’d still end up with a dollar that loses nearly half its value in 20 years. In this scenario, a dollar would lose nearly one-fifth of its value in just a decade.

For regular people who can’t count on a 4 percent return on their investments, and who rely on banks which pay around 1 percent, this means a lot of lost wealth in spite of these households’ best efforts at saving.

Although central bankers insist a 2 percent inflation rate offers “price stability” the reality is one of significant depreciation in wealth for those who are struggling to acquire assets and who may be facing medical problems, high rent, and college bills.

This may account for some of the growing divide between higher-income investors and middle- to low-income Americans. They often can’t take advantage of the higher-yield options enjoyed by those who already have high incomes and portfolios packed with assets.

As shown by Karen Petrou in recent research, many regular people have placed more of their wealth in real estate, but often real estate in less inflationary markets in middle America. The result has been a class of wealthier investors in expensive coastal cities who own a lot of stocks and own real estate in stylish markets. But there are also many Americans who have smaller portfolios and own real estate in markets that have seen far less appreciation. Inflation is by no means uniform nationwide and it’s more benign in some places — and in some socioeconomic groups — than in others.

None of this shows up in the official aggregate data, but the results are real. Some benefit greatly from the asset price inflation. Others aren’t benefiting nearly as much.

We Can All Buy Much More With Our Earned Incomes Than Ever Before: The Myth Of American Middle Class Stagnation.

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For a quarter century now there has prevailed the myth of American middle-class economic stagnation. Specifically, this myth holds that ordinary Americans’ living standards hit a peak in the mid-1970s and have remained stagnant ever since.

As with many myths, this one rests on a superficially plausible foundation. Adjusted for inflation using the Consumer Price Index (CPI), the average real hourly wage earned by workers classified by the Bureau of Labor Statistics as “production and nonsupervisory” peaked in January 1973 and did not again hit that height until December 2018. But at the most recent reading, June 2019, this hourly wage is again below, by two cents, its January 1973 level.

On its face, this statistic does indeed seem to reveal economic stagnation for ordinary Americans.

Truthful Statistics Can Easily Mislead

But as careful critics have pointed out, this statistic (and each of the many others used to tell the stagnation myth) is seriously flawed. For example, these wage data do not include fringe benefits.

More fundamentally, these data create a statistical illusion. The average wage can remain unchanged or even fall even though each individual’s wage rises. As women and immigrants have entered the workforce in greater numbers over the past several decades, their doing so pulled down the average wage because the wages of a disproportionately large number of these workers are below the average.

It’s as if you calculate the average height of your children each January 1st and discover, when you include in this year’s calculation the height of your bouncing baby girl born on December 31st, that your children’s average height is lower than it was on January 1st of last year. You obviously don’t call the pediatrician in a panic to report that your children are shrinking. You understand that the average height is pulled down by the addition of a new, below-average-height child to the population for which the average is calculated.

Everyone is taller than they were last year (including, by the way, the newborn), yet the average height is lower. At least some of the apparent stagnation of real wages is a mere statistical illusion of this sort.

An even deeper problem with this statistic is that the CPI overstates inflation. And in overstating inflation, too much of the rise over time in nominal wages is classified as mere inflation rather than recognized as a real increase in pay.

One way to get around this problem is to use a more accurate inflation adjuster. Yet a more radical means of avoiding the problem is to do away altogether with the need to adjust for inflation.

Work-time Costs

Michael Cox and Richard Alm, in their still-relevant 1999 book, Myths of Rich & Poor, reasoned that a good measure of changes in real wages is the amount of time a person must work to earn the income necessary to buy goods and services. If the amount of work time required to earn the income necessary to buy a representative bundle of household goods and services is today the same as it was decades ago, then the stagnationist tale is true. But if the amount of work time required has fallen, then there is very good reason to doubt claims of economic stagnation.

And so Cox and Alm went to work. They, for example, divided the nominal price of a pair of jeans in 1973 by the nominal wage earned by an ordinary worker in 1973 to determine how much time that worker had to toil back then to earn enough money to buy a pair of jeans. Then making the same calculation for a pair of jeans today, Cox and Alm determined if jeans became more expensive or less expensive when measured by the amount of work time a typical worker must work in order to acquire a pair of jeans.

Doing this calculation for a number of ordinary consumer goods and services, Cox and Alm found that the typical American worker in 1999 earned real wages much higher than were earned by his or her counterpart a quarter-century earlier.

Impressed by this simple but brilliant method of measuring changes in real wages, a few years ago I purchased – using eBay – a Fall/Winter 1975 Sears catalog. (Readers who, like me, were born before the mid-1970s will remember that Sears back then was the great retailer to middle America. Its motto was “Sears has everything!” which wasn’t much of an exaggeration.) Using the nominal average hourly wage of production and nonsupervisory workers in 1975 – $4.73 – I divided the price of each of hundreds of the products offered for sale in the 1975 Sears catalog by this wage.

While I didn’t perform this calculation for all of the thousands of goods listed in the catalog, I did do so for a sample of over 400 goods. In my large sample I found only one good that costs more work time today than in 1975: men’s work boots. For all of the other goods in my sample – including, but not limited to, clothing, household appliances and furniture, recreational equipment, and auto supplies – the amount of time that a typical American worker today must work to earn enough income to buy those goods is less than in 1975, and in most cases it is much less.

Here’s a small sampling of my findings done a few years ago (which you can explore in more detail here). I have since updated these findings to 2019; the trend of falling work-time costs continues.

– In 1975 a ten-cup drip coffee maker cost the ordinary American worker almost 8 hours of work time; today it costs that worker only 45 minutes.

– In 1975 a pair of all-cotton jeans cost 1.5 hours of work time; today it costs 20 minutes.

– In 1975 a car battery cost 9 hours of work time; today it costs 3.6 hours.

– In 1975 a microwave oven cost 93 hours of work time; today a microwave oven of similar size and power costs 6 hours.

– In 1975 an automatic dishwasher cost nearly 50 hours of work time; today a dishwasher costs 12 hours.

– In 1975 an exercise bike cost 16 hours; today it costs 5 hours.

– In 1975 a low-priced standard-size electric washer-dryer combo cost 70 hours of work time; today this combo costs about half that, at 36 hours.

What’s even more revealing about browsing today the 1975 Sears catalog is what is not in it – such as, for example, a television with a remote control. there are lessons to be drawn from what that catalog from middle-class Americans’ alleged golden age does not contain.

Donald J. Boudreaux is a senior fellow with American Institute for Economic Research

Devaluing The Dollar Is A Horrible Tax On The Investment That Spurs Economic Progress. Facebook’s Libra May Be A Significant Step Forward.

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Though politicians and economists continue to presume otherwise, money is a veil. Changes in its value cannot change the real price of anything. That’s one of many reasons why the devaluation so routinely cheered by politicians and economists brings certain pain beyond the loss of purchasing power for everyone who is paid in the devalued currency.

Considering the dollar, when Treasury makes devaluation its policy, it’s explicitly shrinking what the dollar can command in the marketplace. This harms typical earners, but also corporations when it’s remembered that global cooperation is required for the production of anything, including the prosaic pencil. If the currency is debased, imported inputs increase in currency cost, thus erasing any supposed “export advantage.”

But the much bigger story concerns investment. Stating the obvious, investment, not currency devaluation, is what renders businesses most competitive globally. Investment is the failure-laden process whereby businesses learn what does and doesn’t work when it comes to producing more and more goods and services with fewer and fewer hands. Investment is expensive precisely because it generates so many proverbial dry holes. But there’s no progress without those dry holes, which speaks to the horrors of devaluation.

Specifically, investors who invest dollars in intrepid fashion hope to achieve impressive dollar-based returns in the future. More on this in a bit, but when it’s understood how investors seek returns in currency, it’s hopefully understood that devaluation exists as a horrid tax on investment. Why put money to work if the exchangeable value of future (if any) monetary returns is being shrunken by monetary authorities?

Yet economists say devaluations make country economies more competitive. Yes, economists believe what is absurd. Let’s just say that this near monolithic view within economics says a lot about the economics profession, and very little about prosperity other than how to shrink it.

Which brings us to Facebook’s recently announced crypto or private currency, the Libra. Time will tell, but currency types may look back on this development as the beginning of something much bigger.

It could be simply because no one trades money. Please read on. With trade it’s always and everywhere products for products. We can’t eat money or sleep with it, rather we can just hope that “money” will maintain its reputation in the marketplace so that it’s exchangeable for something else.

I make bread, I want the vintner’s wine, but the vintner looks longingly at the butcher’s meat. Money can’t alter the terms of trade for the three producers mentioned as much as it, in its proper form, is an agreement about value that facilitates exchange among producers with varying wants.

Crucial here is that producers logically don’t want to exchange their real production for money that floats around in value. To do so would be for a producer to occasionally get ripped off, or alternatively, for the buyer to be ripped off. With money that’s no longer an agreement about value top of mind, is it any surprise that trade disputes among countries have soared since the 1970s when money’s (specifically the dollar to which global currencies were pegged) commodity link was severed?

That’s what’s so intriguing about the Libra. Facebook seems to be acknowledging that floating money can’t as effectively serve its sole purpose as a medium of exchange precisely because its value is a moving target. Let’s once again never forget that it’s products we’re exchanging, not money. So long as the currency varies in terms of value, losers are needlessly created even though trade is all about both sides entering a transaction in order to improve themselves. Similarly, and when money floats, losers are needlessly created with the investment process as investors get back soggy dollars, or those invested in give up more of what they’ve created thanks to monetary uncertainty.

Facebook’s answer is pegging the Libra to a basket of currencies. That it’s doing so is very important in consideration of the company’s implicit acknowledgment that money isn’t very useful if its value is once again indeterminate. At the same time, there are obvious problems with the currency basket peg. For one, all major currencies float today. For two, despite the dollar’s own unfortunate volatility since the ‘70s, it remains the world’s currency. Every other currency has at least a vague peg to the greenback, and in some instances an explicit one. Translated, the Libra likely won’t get too much of a stability advantage from its basket peg. Better yet, the only peg that matters is the one to the currency that factors into just about every global trade. And the dollar’s value is very much a moving target.

But that’s nitpicking at this point. To see why, let me offer you 1 bitcoin per month over the next year – 12 in total – to remodel my kitchen. Your response will logically be “which Bitcoin? The one that traded for $5,000 a month or two ago, the one that trades for $9,000 at present, the one exchangeable for under $1,000 a few years ago, or the one that fetched $22,000 in early 2018?” Since Bitcoin has no peg, it’s not very useful as a currency except for in the most short-term of transactions. Facebook should be cheered for once again acknowledging the importance of stability.

Will it succeed? It’s hard to know. Exciting is that given the global nature of the Facebook brand, it’s not unreasonable to foresee a future in which Libra is an increasingly accepted and circulated medium of exchange. Even better would be if Facebook eventually jettisoned floating money for currency definers known for even greater stability. One can dream.

Still, Facebook’s announcement speaks to progress about private measures used to facilitate exchange, along with acknowledgment that money is best and most circulated when its value is broadly agreed to thanks to stability of the value. The Libra has the potential to mark the start of something because if widely used, it will open the eyes of the global population to a truth about money: it works best when its value is stable, plus it needn’t be a government creation.

A version of this piece ran at Forbes.

John Tamny is editor of RealClearMarkets. A version of this piece ran at Forbes.com.

This Central Banker Is Certain That All Other Central Bankers Are Deluded, Dangerous, And Wrong.

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Central Bankers know less than they think they do, and their ignorance imposes huge costs on the rest of us. Their economic theories offer little meaningful guidance for how to sustain growth and they actively undermine financial stability.

Says who? Claudio Borio, who heads the economic-research department at the Bank for International Settlements. The BIS is an informational clearinghouse for the world’s central banks, in possession of more data and more analytics than any other single Central Bank. Since Mr. Borio is not tied to any nation, political viewpoint or policy dogma, he can be a producer of objective and practical insights – giving him a distinct advantage over all the academic economists who work, directly or indirectly, for nation-based Central Banks.

What does he think of the standard of knowledge at all the Central Banks, universities and think tanks. They are, he says, “all struggling!” In other words, they don’t know much.

Here’s what mainstream monetary economists think they know: Inflation, employment and economic growth change in relation to each other in predictable ways. As unemployment falls, inflation rises. Deflation – which the Central Bankers have defined as a “bad thing”, since they seek 2% inflation every year – is a result of economic slack.

Central Banks can’t tolerate deflation because, in their minds, it signifies slower-than-natural growth in which too few people have jobs. When it occurs Central Banks have only one simple tool at their disposal: to provide limited jolts by tweaking short-term interest rates. Mr. Borio describe this thinking as “very, very simple”.

Economists need to go back to the drawing board, says Mr. Borio. The financial system is much more complicated than Central Bankers can appreciate, and much less amenable than they think when using their simplistic models and tools. “One needs to examine how resources are allocated across different sectors in ways that may not be optimal.” It’s very different from the simple-minded orthodox view that a rising tide of new money lifts all boats.

First, they need to realize that deflation is a good thing- it typically brings lower prices to both consumers and producers, and it is associated with economic growth.

“The main drivers of deflation at the moment are good forces,” Mr. Borio says. “They improve the capacity of the economy to produce and boost growth. Think of it as a benign increase in supply.”

In a 2015 paper Mr. Borio and colleagues examined 140 years of data from 38 countries and concluded that consumer-price deflation frequently coincides with healthy economic growth. If he’s right, central banks have spent years fighting disinflation or deflation when they shouldn’t have, and in the process they’ve endangered the economy more than they realize.

“By keeping interest rates very, very, very low,” he warns, “you are contributing to the buildup of risks in the financial system through excessive credit growth, through excessive increases in asset prices, that at some point have to correct themselves. So what you have is a financial boom that necessarily at some point will turn into a bust because things have to adjust.”

By slashing rates in pursuit of that hard-to-attain inflation target, Central Bankers create imbalances in the financial system that lead to crises like the one in 2008. They actually know this, but they’re just strangely unconcerned about it. They believe that Central Banks must set ultralow short-term rates to support economic growth—and if that destabilizes the financial system, it’s the will of the economic gods. In this way, they unleash financial crises deliberately. (Emphasis added.)

Central Bankers were able to observe the effects of their delusion in the global crash of 2008. Central Bankers, says Mr. Borio, actively create macroeconomic instability and financial market instability inevitably follows.

Mr. Borio, in contrast, can explain exactly where dangerous financial imbalances come from: the incentives policy makers  create for bad decisions on Main Street about borrowing and investment. The misallocation of resources during the booms requires a prolonged and miserable process of reallocation during and after a recession.

“You know, in many of these models, how do they explain the Great Financial Crisis? They explain it as a meteorite coming from nowhere—it’s an exogenous shock, it’s productivity that all of a sudden for some unexplained reason collapsed, or people all of a sudden decided to save more, but without an explanation. I say ‘shocks’ are a measure of our ignorance, not a measure of our knowledge.”

“95% of the time Central Bankers carry out their policy as if these factors didn’t matter, and then when they see that the economy is running red hot and they see obvious signs of financial imbalances, they start moving.”

Mr. Borio’s work amounts to an argument that Central Bankers and monetary economists need to acknowledge how little they know about the economies they seek to manage, and how weak their models are. They need to become more modest, and appreciate the limitations of the current simplistic theories and the need to rethink them.

Based on The Weekend Interview that appeared in the November 17, 2018, print edition of the Wall Street Journal. Illustration by Ken Fallin.

Innovation And Freedom Are The Cure To The Fed’s 2% Solution Addiction.

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On September 26th, Federal Reserve Bank (Fed) Chairman Jay Powell announced that the Fed Funds target rate is being raised above 2% for the first time since the Great Recession of 2008. The Fed uses this rate to steer monetary policy toward their favorite inflation, employment, and economic growth targets. The consumer price index and the unemployment rate are published by the US Bureau of Labor Statistics, and Gross Domestic Product (GDP) is published by the US Bureau of Economic Analysis. You get the connection.

Besides the 2% Fed funds interest rate, there is the 2% GDP growth number that is interesting. On October 29, 2012, the chief economist at Wells Fargo Securities, John Silvia, told the Risk Management Association that “Banks need to adapt to an economy in which 2% annual GDP growth is the new standard.” Then on June 11, 2014, Treasury Secretary Jacob Lew told the Economic Club of New York “Many wonder whether something that has always been true in our past will be true in our future,” referring to the Congressional Budget Office’s 2% annual GDP growth forecast.

And here it is four years later, and the most recent GDP growth calculation came in above 4% annually. What has changed? How could these public and private bank economists be so wrong? And what are they going to do about it?

4% Is the New Optimal Rate of Inflation

According to the Wall Street Journal, the 2% inflation target, another interesting coincidence, has been “a Holy Grail for the world’s major central banks. That is no longer the case given deep changes that have since reshaped the global economy.” Are they saying that corporate income tax reform and the political rejection of heavy handed regulation in the US and Britain have reshaped the global economy? Is 4% GDP growth merely an example of the Keynesian “animal spirits” that must be corralled by cooler heads at the Fed and the European Central Bank (ECB)? And what does a change in the inflation target accomplish?

Olivier Blanchard of the Peterson Institute for International Economics in Washington is calling for a 4% inflation target because in the event of a recession, it would be easier to cut interest rates. With a 2% target, it’s more difficult to cut interest rates, especially below zero. And sub-zero interest rates would be silly, right? Second, it would reduce the need for wage cuts in the event of a recession, but not for government employees. But what causes these anticipated downturns? If it’s not the government policies themselves, it must be these pesky animal spirits that caused 4% GDP growth in the first place.

Regarding debt, a higher inflation target makes it easier for borrowers to pay it off with cheaper money than what they borrowed, especially the government and their debt. The heck with the lenders and savers. And lastly, it would reduce the government’s debt to GDP ratio. The thinking here is that higher inflation means higher GDP growth, and this is true, except when its not, like in the 1970s. More realistically, its just another way to hide massive government debt accumulation.

0% is the New Optimal Rate of Inflation

According to Federal Reserve economist Anthony Diercks, “a mildly negative inflation rate would also have benefits, such as eliminating the cost of holding cash.” This idea may be a little harder to grasp, but it goes like this – when there is inflation, the cost of holding cash is its decreased purchasing power. One way to relieve all of us poor dumb slobs of our purchasing power risk (because of our large cash hoards) is deflation, meaning falling prices.

An added benefit of deflation would be negative interest rates. Meaning that if f you keep your cash hoard in a bank for safekeeping, it will earn a negative rate of interest, and you’ll have the privilege of paying the government bank interest on your deposits. But it doesn’t end there, the next likely step in helping with your cost of holding cash problem is to outlaw cash. This way your financial assets are always on deposit at a government bank, and only bank secured electronic purchases and sales will be legal. Otherwise, the central bankers would lose the interest income they’re charging depositors and the income taxes on the greedy capitalists. After all, its for the common good.

According to former Fed Chairman Ben Bernanke, “negative rates would be temporary and deployed only during severely adverse economic conditions.” Caused by what? And Vitor Constancio, Vice President of the ECB (where inflation and short-term rates have been zero or negative for about 3 years) says he has “no theoretical objections to a mild upward revision of the inflation target, however moving to a new target could undermine central banks’ hard won credibility.” Yes, credibility.

The Age of Complexity Worship

In all seriousness, fixing the price of money, setting inflation targets, government monopoly currencies, and measuring the wealth of an economy with Gross Domestic Product serves only one purpose – to expand the power of the Fed. This is because central bank governors are central planners, meaning self-proclaimed experts who disavow the productivity of free people and free markets. They believe themselves to be indispensable. Their rationale is that life has become too complicated for us poor dumb slobs.

To the Trump administration, raising the Fed Funds rate stifles economic growth. All administrations think that way. To the banks, higher rates mean higher net interest margins. They always think that way. Pundits defending the Fed’s move claim it leads to more normalized bond markets after ten years of artificially low rates. And normalized markets would be a great thing if that meant markets were free to float without interference from government econometric models.

For example, a huge flaw in these models is that they can’t anticipate innovation and the connectivity it inspires. The most recent inflation numbers came in a little lower than expected at 2.3%. This is because innovation is fueling even greater productivity, and helps keep prices stable, even in a hot economy. In other words – more and better and cheaper. It always works that way, and that bodes very, very well.

 

Federal Reserve Economists Don’t Know What Inflation Is. Brazilians and Venezuelans Do, And Only Too Well.

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“At age 10 in 1980s Brazil, my job was to run around the aisles of the supermarket trying to beat adults, who walked around raising prices throughout the day with comically large label guns. Since I was good at math, my mother would hand me our monthly grocery budget, and I would run through the supermarket filling our shopping cart — not having to stop to input values on a calculator saved us precious time against the labelers.” Those are the recollections of Brazilian economist Rodrigo Zeidan in a recent edition of the New York Times.

Inflation Is The Currency’s Loss Of Purchasing Power.

Zeidan was describing what life was like in the hyperinflationary Brazil of the late 20th century. With the value of the country’s currency in rapid decline, the ability to quickly exchange what was losing value for goods that were real and edible was essential to the wellbeing of his often lower-middle class family.  Such is life when there’s inflation. Inflation doesn’t cause prices to rise as much as inflation is a direct effect of a currency losing value such that the prices of most goods and services persistently rise. When there’s inflation, saving logically declines simply because any returns on investment will come back in “money” that is exchangeable for quite a bit less than it commanded at the time that the investment was made. Think about the latter for a moment. It’s an important input to this discussion.

 What Is The Fed Thinking?

Fast forward to the present, a recent report from the Washington Post’s Rachelle Krygier revealed a similar hyperinflationary event taking place in Venezuela. With the bolivar in freefall, business owners are constantly adjusting prices to reflect this brutal reality. Krygier relayed how restaurant owner Freddy DeFreitas, responding to prices of restaurant items that had doubled in a week, “turned to a computer screen and started adjusting the prices of 100 menu items on a spreadsheet.”

Crucial here is that whether in Brazil or Venezuela, what’s just been briefly described is inflation. Plain and simple. What’s sad is that what’s obvious rates a column. But it does, and it does given the desire of modern American economists to redefine inflation altogether.

Indeed, as readers of this column know very well, economists at the Fed no longer view inflation as evidence of a decline in the exchangeable value of the currency. As they see it, inflation is an effect of too much economic growth. Yes, you read that right if you’re new to this column. Fed officials believe that too many people working and prospering is a perilous sign of inflation on the way. But as the sad stories of inflation in Brazil and Venezuela make rather clear, the Fed’s definition of inflation is 100% backwards. Think about it.

A Collapsing Currency Means Too Little Growth, Not Too Much Growth.

To understand why, consider what’s taking place in Venezuela now, and what happened in Brazil in the 1980s. A collapsing currency in both instances was and is the surest sign of slim to non-existent growth. The reason why runs counter to the droolings of an economics profession that grows more ridiculous by the day: to economists, consumption is a sign of economic growth. That’s why real inflation (currency devaluation) doesn’t bother them very much. Since they worship at the altar of consumption, currencies that are exchangeable for less and less are just what the faux doctor ordered for the falling currency stimulating spending right here and now.

We Must Save To Produce, Before We Can Consume. Keynesians Hate That.

Of course, the problem with the assumptions of economists is that consumption doesn’t power economic growth as much as it’s an effect of growth. Obviously. All consumption springs from production first, so if production is the goal, it’s only logical to conclude that the latter can’t happen in ever growing amounts without rampant saving. Yes, you read that right. Contrary to the consensus of economists, the act of saving is the biggest (and nothing else comes remotely close) driver of economic growth. Figure that growth is an effect of production, and surging production springs from savings and investment that enable the creation of more and more goods and services with fewer and fewer inputs.

What all of this tells us is that economic growth is greatest when inflationary pressures are least evident. The economics profession has turned upside down what is simple. As the examples from Brazil and Venezuela make rather clear, inflation is always and everywhere evidence of a currency losing value such that those who have “money” do everything possible to exchange it for something of tangible value as quickly as possible. Why hold onto – as in save – money that will purchase fewer and fewer goods and services? Except that economic growth is driven by the act of saving. Imagine how unproductive we would be, and now primitive our living standards would be, if all of us (and all of our ancestors) relentlessly consumed? It’s no exaggeration to say we’d still be living in caves. It can’t be stressed enough that savings are what make possible the productivity increases that enable the production of more and more goods and services with fewer and fewer inputs.

All of this isn’t to say that economic growth drives down the price level as much as it is to say that economic growth drives down the prices of countless goods and services, thus enabling growing demand for goods and services formerly out of reach. The latter is evidence of rising living standards. When there’s growth, the cost of living declines thanks to copious saving and investment driving productivity increases such that we’re able to attain the necessities of life increasingly cheaply while having the means to buy more and more of what was once well beyond our station.

The Economists’ View That Growth Causes Inflation Is Dumb And Dangerous.

Bringing this all back to the views of modern economists, they should hang their heads in shame. Economic growth causes inflation? Such a view isn’t serious, and is more realistically dangerous. Inflation is easily the greatest enemy of growth for it making the investment that lifts us all a fool’s errand. To understand what is simple, economists should quietly leave their well-appointed offices in order to see Venezuela’s inflation up close, and in doing so, see how wrong they and their biggest employer have long been about the biggest barrier to economic progress of all.

John Tamny is editor of RealClearMarkets, Director of the Center for Economic Freedom at FreedomWorks, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). His new book is The End of Work, about the exciting explosion of remunerative jobs that don’t feel at all like work.  He’s also the author of Who Needs the Fed? and Popular Economics. He can be reached at jtamny@realclearmarkets.com.  

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