Thursday, January 7, 2016
From Mises "Human Action"
terms inflationism and deflationism, inflationist and deflationist, signify the poIitica1 programs aiming at inflation and deflation in the sense of big cash-induced changes in purchasing power. The semantic revolution which is one of the characteristic features of our day has also changed the traditional connotation of the terms inflation and deflation. What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexo- rable consequences, the general tendency toward a rise or a fall in com- modity prices and wage rates. This innovation is by no means harmless. It plays an important role in fomenting the popular tehdencies toward in- flationism. First of all there is no longer any term available to signify what inflation used to signify. It is impossible to fight a policy which you cannot name. Statesmen and writers no longer have the opportunity of resorting to a ter- minology accepted and understood by the public when they want to ques- tion the expediency of issuing huge amounts of additional money. They must enter into a detailed analysis and description of this policy with full particulars and minute accounts whenever they want to refer to it, and they must repeat this bothersome procedure in every sentence in which they deal with the subject. As this policy has no name, it becomes self- understood and a matter of fact. It goes on luxuriantly. The second mischief is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation-the rise in prices-are disguising their endeavors as a fight against inflation. While merely fight- ing symptoms, they pretend to fight the root causes of the evil. Because they do not comprehend the causal relation betw-een the increase in the quantity of money on the one hand and the rise in prices on the other, they practicalIy make things worse. The best example was provided by the sub- sidies granted on the part of the governments of the United States, Canada, and Great Britain to farmers. Price ceilings reduce the supply of the com- modities concerned because production involves a loss for the marginal producers. To prevent this outcome the governments granted subsidies to the farmers producing at the highest costs. These subsidies were financed out of additional increases in the quantity of money. If the consumers had
lndirect Exchange 42 1
had to pay higher prices for the products concerned, no further inflation- ary effects would have emerged. The consumers would have had to use for such surplus expenditure only money which had already been issued pre- viously. Thus the confusion of inflation and its consequences in fact can directly bring about more inflation. It is obvious that this new-fangled connotation of the terms inflation and deflation is utterly confusing and misleading and must be unconditionally rejected.
I realize that is long, but I think it important to grasp the various confusions about the terms inflation or inflationary and deflation / deflantionary.
The prime distinction is really between cash (forcible government money supply changes) induced price movements up or down of commodities and wages, or what I call 'natural' causes.
Prices of particular commodities rise and fall naturally due to all sorts of specific changes in supply and demand and the prices of other competing commodities, etc. These are beneficial in that they allow trade to occur justly. These do not cause shifts of wealth - meaning gains by one person or group do not come at the expense of another person or group.
It is the forcible government tinkering with the money supply through a variety of methods that leads to what should be termed inflation or deflation (although deflation is rarely done.) There are several things to note here. 1) resulting commodity prices or wage rates do not all happen at once. Sometimes it takes years for prices of particular commodities to rise in response to a particular inflationary expansion of the money/money substitute/credit supply. This is useful to know as this or that blow hard bloviates about some commodity the price of which has not risen or has fallen by some natural cause.
2) This forcible injection of concocted fiat money / credit into the system does go somewhere FIRST. Here is the list of primary dealers through which the newly fabricated fiat 'money' goes first -
Bank of Nova Scotia, New York Agency
BMO Capital Markets Corp.
BNP Paribas Securities Corp.
Barclays Capital Inc.
Cantor Fitzgerald & Co.
Citigroup Global Markets Inc.
Credit Suisse Securities (USA) LLC
Daiwa Capital Markets America Inc.
Deutsche Bank Securities Inc.
Goldman, Sachs & Co.
HSBC Securities (USA) Inc.
J.P. Morgan Securities LLC
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Mizuho Securities USA Inc.
Morgan Stanley & Co. LLC
Nomura Securities International, Inc.
RBC Capital Markets, LLC
RBS Securities Inc.
SG Americas Securities, LLC
TD Securities (USA) LLC
UBS Securities LLC.
These agencies and their clients / and those they loan the money to, can then of course bid up the (typically) capital investments needed to expand and grow. THIS is a forcible shift in real wealth - real ownership of actual stuff, or services, or land, or machines, etc. The losers are those competing business that could not bid as high in competition with the government fiat money padded agencies, AND eventually every actual person producing anything of trade value, as the value of the fabricated fiat 'money' comes from the dilution of value of all the fiat 'money' previously in existence. Inflation.
It is theft, sanctioned by our government, by force of 'law', and the politicians that have continually allowed it to go on are supported directly or indirectly by the beneficiaries of the theft.
It is evil. Wrong. It is the use of 'law' for crime.
Do not tell me it is 'good' for 'the economy.' What rot!.
As for the 'measurement' of inflation, nothing could be more misty voodoo hocus pocus, for the above reasons, as well as the very questionable motivations of our legislator and the fed, as they 'select' the commodities to use in measurement.
ANY artificial forcible expansion of the fiat money /money substitute / credit supply IS inflation, and will, over variable time, lead to lower purchasing power than what would have been the case otherwise. This in itself is a good point to keep in mind. Real 'inflation' is like an iceberg. We only see the price rises of some commodities - the tip of the ice berg poking out of the water. Do not forget that prices of a wide assortment of items tend to fall as production becomes more efficient / refined / transportation plans improve / technology advances to provide components more cheaply, etc. etc. These natural forces driving prices downward is like the ocean hiding the huge inflationary forces either keeping prices steady or just a few percentage points / year.
The screwing that the average productive laborer is being subjected to year after year is of truly horrifying proportions. And he is told he is being 'cared for' by his benevolent philanthropic government... mmm.. more like cared for as a jackal cares for a downed gazelle. He is being consumed.
Posted by William at 7:21 AM