Source: Jim Hollingsworth
There seems to be a lot of confusion today about inflation. Pick up the paper or follow an internet site and you will read that the inflation rate this year is expected to be 2% or 3%. What they really mean is that prices are expected to rise 2% or 3%.
But is that inflation?
Inflation is an increase in the money supply. So why is the difference in definition critical? Prices rise because of inflation; they are the result of inflation but they are not inflation, nor are they the cause of inflation.
This is important because the government is the only one that can increase the money supply. This is done in a number of ways, but for the moment just think of it as printing more money. That is what countries have done when they ran out of money; they just printed more money until it came to the point where their money was almost worthless, where a wheelbarrow load of money would just barely purchase a loaf of bread.
Prices rise as a result of inflation. But if we just think of prices rising, we are apt to blame different vendors who we think are just getting rich off of circumstances. We recently had a gasoline shortage and politicians wanted to be sure that there was “no price gouging.” As prices rise, we tend to blame people rather than the government.
We have had a number of “gifts” from the government. The last one was $1,400 per individual, or $2,800 for each couple. But with more money in circulation, prices tend to rise. Thus, though all of us got the “free money” it is the middle to lower class who actually pay for that money in the rising cost of gasoline, food and other required expenses.
Here is just one writer who understands inflation.
The supply of money governs inflation. Print it without either greater productivity or more goods and services, and the currency cheapens. Yet, America apparently rejects that primordial truism.
That’s Victor Davis Hanson on inflation. (Read the rest of the article.)
But what is inflation, actually? Few subjects are more misunderstood by the general public, which tends to view inflation as “rising prices.” This mistaken view, shared and promoted by many economists, obscures the true nature and origin of inflation. First of all, rising prices are the effect of inflation, not inflation itself, which is simply an expansion of the money supply via money creation, resulting in diminishing purchasing power of the money already in circulation.
Governments have often resorted to inflation–printing money–to pay off debts. This generally leads to soaring prices and devaluated currency.
Here is just one example of what we read daily in the paper: rising prices is simply called inflation.
So what’s the difference, or is it just a matter of semantics? The difference lies with who is responsible. As prices rise we have a tendency to blame the “greedy” vendor. He raised prices to make another buck. But is that necessarily the case? More likely he raised his prices because his costs have gone up; both labor and materials.
So, how about price-gouging? Here is one definition from Wikipedia:
“Price gouging is a term referring to when a seller spikes the prices of goods, services or commodities to a level much higher than is considered reasonable or fair, and is considered exploitative, potentially to an unethical extent.”
But, who decides what is reasonable or fair? And, further, what is considered exploitative?
Maybe we cannot provide a legal definition of price-gouging, it is just that we will know it when we see it.
But, here is a factor we often do not think about: Commodities are scarce; all commodities. So the price rises until supply and demand tend to meet. If a “disaster” causes supply to be interrupted, and supply is reduced the only choices are to raise prices or to limit demand by some process.
Think about long lines at gas stations. That is something that we have not seen since the ‘70s. Now if the vendor had raised his price to meet his supply lots of people who decided they just needed to fill up to be sure they did not run out would decide they could wait a little longer and leave the gasoline for those who really need it, like taxis, etc.
So, we blame the vendors when prices rise, but if inflation is actually caused by government “printing” more money, then we may more realistically blame the government. I know this may be a subtle difference, but it is an important one. When we place the blame where it belongs, with the government, then we are less apt to blame the particular vendors and work to reduce government hand outs.
This distinction is rarely made in the popular press. More often than not the press only talks about rising prices and calls that inflation of two or three percent, when in fact prices rise because when the government prints more money, with no additional product, more dollars for the same product simply means rising prices. Every economist knows this, yet few bother to make the distinction clear.
Even the White House appears to be confused on what is inflation.
The White House admitted Friday they were surprised by the rise in consumer prices in March, the largest jump since 2008. “So we hadn’t forecasted that. The forecasters hadn’t expected that,” White House Chair of the Council of Economic Advisers Cecilia Rouse said, adding the Federal Reserve was also “a bit surprised by the jump.”
We must remember what Ludwig von Mises, the great economist of the last century, wrote.
“What people today call inflation is not inflation, i.e., the increase in the quantity of money and money substitutes, but the general rise in commodity prices and wage rates which is the inevitable consequence of inflation. This semantic innovation is by no means harmless.”
Just one more headline showing the public’s view of what is inflation.
You would think that governments would have learned from history. Truly they have not. We see many stories of men with a wheelbarrow full of dollar bills going to the store for a loaf of bread. Governments, especially socialist governments, have often resorted to printing money to get what they wanted rather than just raising taxes. The only way to stop the rise in prices is simply to only spend the money on hand and stop just printing more money to pay for government services.
Jim Hollingsworth has written three books: Cortez: A Biography; Climate Change: A Convenient Truth; and The Ancient Culture of the Aztec Empire. All available at Amazon.com and Barnes and Noble.