Posted on 09/09/2009 5:55:11 PM PDT by Kaslin
With the massive increases in federal spending, inflation is one of the risks that await us. To protect us from the political demagoguery that will accompany that inflation, let's now decide what is and what is not inflation.
One price or several prices rising is not inflation. Increases in money supply are what constitute inflation, and a general rise in prices is the symptom.
As the late Nobel laureate professor Milton Friedman said, "Inflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output."
Thinking of inflation as rising prices permits politicians to deceive us and escape culpability. They shift the blame, saying that inflation is caused by greedy businessmen, rapacious unions or Arab sheiks.
Instead, it is increases in the money supply that cause inflation, and who is in charge of the money supply? It's the government operating through the Federal Reserve Bank and the U.S. Treasury.
Our nation has avoided the devastating hyperinflations that have plagued other nations. The world's highest inflation rate was in Hungary after World War II, where prices doubled every 15 hours.
The world's second-highest inflation rate is today's Zimbabwe, where last year prices doubled every 25 hours, a rate of 89 sextillion percent. That's 89 followed by 23 zeros.
Continental Dollars
Our highest rate of inflation occurred during the Revolutionary War, when the Continental Congress churned out paper Continentals to pay bills. The monthly inflation rate reached a peak of 47% in November 1779.
(Excerpt) Read more at townhall.com ...
Some prices even go down in an inflation as people alter their buying habits. Some products disappear. If gasoline doubles in price and the stock market goes way up with lots more participation, most other prices might rise only a little, stay level or even decline a bit as the extra money flows to oil and equities. A paycheck will still not go so far as it did before, maybe the week before.
Inflation is when the RATIO of money supply to available goods to spend it on is increasing.
Therefore, falling productivity(ie less “stuff” being manufactured) is also inflation...assuming money supply remains constant. Rising unemployment seems to me like it would produce the same effect.
Don’t know about that.
Sales taxes, fuel taxes, property taxes...increase the price of “stuff”.
Income taxes decrease income.
I guess it all depends on who owns the debt and what they are doing with their “profits”.
IMO, The net effect will eventually be to create a master-slave kind of relationship between two different classes of citizens...those that do “business” with the government and those that pay for it.
Also, the misleading aspect of the article in the insinuation that increasing money supply in itself means inflation. It doesn't, because output value increases. Increase in narrow money faster than output increases, does cause inflation. Broad money always increases faster, because overall wealth does and people keep a roughly fixed portion of their wealth in savings forms of broader money. If prices increased as fast as money supply did, there would be no real economic growth, but of course there is.
Demand for money is not a constant. Not even remotely.
Also, little empirical fact. The Fed's balance sheet peaked April 23rd of this year, and has shrunk 5% since then - in 4 1/2 months - as everyone repays their emergency loans from the Fed at the height of the crisis. The Fed has been buying longer term bonds, but not even as fast as it is being repaid for the crisis-period loans.
It would be more accurate to say any populist government that spends beyond its own will to tax, in doing so tends to undo the populist thrust of its policies in the longer term, as men pay their taxes in capital parked under public direction, rather than in ongoing income.
The middle class beneficiaries of systematically reckless federal largesse are not a virtuous yeomenry but precisely the thieves robbing everyone else, and the pols all work for them. Cry me a river over their gravy running out. They never earned a lick of it to start with.
The “gravy” is merely the baksheesh.
Your Econ 101 thinking is too simplistic in this case. The productivity enhancement you are referring to often comes from companies disinvesting in their future and liquidating productive capital. During contractions, firms will often severely curtail research and development and other investments in their futures. In addition, companies commonly will engage in other unsustainable and self-destructive behaviors in order to survive a downturn such as selling off necessary resources and terminating valuable employees. Far from quickening a recovery, these difficult decisions can contribute to a prolonged contraction and a weaker recovery. Productivity in the short term is generally a poor economic metric and frequently indicates counter to the actual situation.
"Inflation is just one effect of massive increases in spending. Some might argue that future generations of Americans will pay for today's massive budget deficits. But is there really a federal budget deficit? The short answer is yes, but only in an accounting sense -- but not in any meaningful economic sense. Let's look at it. Our GDP this year will be about $14 trillion. If 2009 federal expenditures are $3.9 trillion and tax receipts are $2.1 trillion, that means there is an accounting deficit of $1.8 trillion. Is it the Tooth Fairy, Santa or the Easter Bunny who makes up the difference between expenditures and revenue? Is it a youngster who is born in 2020 or 2030 who makes up the difference? No. If government spends $3.9 trillion of our $14 trillion GDP this year, of necessity it has to force us to spend privately $3.9 trillion less this year. One method to force us to spend less privately is through taxation. Another way is to enter the bond market and drive up the interest rates, which put a squeeze on private investment in homes and businesses. Then there is inflation, which is a sneaky form of taxation."
Inflation is taxation without legislation.
Milton Friedman
Thank you for posting this.
You are welcome
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