Is the Fed an Inflation Fighter or Creator?
Every few days, a senior Fed official expresses concern regarding the effect of high gasoline prices on inflation. These comments are always phrased in the way a meteorologist would report on the weather, as if the phenomenon in question is an act of nature. In fact, it is the Fed that creates, not cures, inflation. The surest way to stop it is to stop the printing presses--something that a government with massive debt and the desire to sustain a boom is not likely to do. [Full Article]
Comments (45)
If one assumes the basic premise that it is the job of the government to create jobs and security, then the fed is doing its job. Of course, the printing press cannot create wealth but that is really besides the point.
Published: October 25, 2005 8:46 AM
I assume you're being facetious, Phillip, so i'll second your comment with the following:
"If one assumes the basic premise that it is the job of the government to create rain and sunshine, then the fed is doing its job."
Economic activity and weather both continue on despite, rather than because of government and the fed. I guess it's lucky they can't meddle with the weather isn't it. (Or we'd all be dead by now.)
Published: October 25, 2005 10:51 AM
The reason the printing press cannot create wealth is that money isn't wealth. It is the float (same as the time between writing a check and the bank debiting the account) between production and consumption.
The concept of money as a "good" may be convient to economists but economists havn't produced much good over the years.
All my life I have been able to work 40 hours a week and procure my needs with a little left over. Now days I am retired, live on 60% pay, and still have a little left over. My personal money inflation over the last 40 years has averaged zero.
Another example, My Old Man always said that an ounce of gold buys a good man's suit. It still does.
In the 50's it took a half year's pay to buy a basic family car. It still does. Inflation since WW2 has been basically zero or less, considering product improvments.
Published: October 25, 2005 10:55 AM
Excellent article Dr Shostak
The use of examples such as as John the baker exchanging 10-loaves of bread for 20-tomatoes very clearly illustrates the fundamentals of economic. I hope that Dr Shostak will someday write an introductory book on the foundations of economics. It could be a companion to Henry Hazlitt's ECONOMIC IN ONE LESSON and would be a great economics introductory book for the growing band of homeschooled kids.
One note that I will add regarding the reference to Charlie the counterfeiter . . . merchants haggle prices in markets and try to get the highest possible price for their wares. When counterfeiters increase the supply of money, they distort the price establishment process and the market testing done by businesses that re-adjusting prices to test market demand. The extra counterfeit currency in circulation causes prices to rise far in excess than they would in an undistorted market.
I have found that students can become confused when told that extra money in circulation causes prices to rise, or that higher market demand for a scare product causes its price to rise. When they're told about the price haggling done in traditional markets and market demand testing done by re-adjusting prices, then they begin to understand market dynamics.
Harry Valentine
Published: October 25, 2005 12:45 PM
I thought this article was right on. I've written on this same topic myself on two previous occassions ( and here. The Fed does not create jobs or produce security or stability. It does the opposite. It undermines wealth creation and produces economic instability by distorting prices and disrupting the production structure. The fact that many have not noticed or felt the effects of inlfation does not mean that it inflation is not occurring. And if it is occuring you can bet we will eventually feel its effects. The real job of the fed is to provide cover for the theft that is inflation by confusing us with math and economics and by trying to control and stifle general price rises. In the long run they will fail as all their predecessors have.
Published: October 25, 2005 1:03 PM
billwald,
How about the taxes? Does that take as much of a mans income as it did 50 years ago?
Published: October 25, 2005 1:10 PM
Frank Shostak's article on the Fed needs telling in different ways every day, until the mainstream journalists get the truth to the people. How about sending these articles to the mainstream newspapers every time you write them?
and to the Wall Street Journal and Time and Newsweek?
sooner or later the truth will out.
what we really need is a constitutional amendment that limits federal outlays.
hang in there with your messqage.
Published: October 25, 2005 1:13 PM
I'm not convinced by the article that the Fed is the major cause of inflation. "Money" amounts to more than just paper currency. There is not enough currency in existence to represent the total amount of "wealth" which "exists" in the minds of the people who inhabit this nation. Did the Fed print $200,000 worth of currency to represent the increase in "wealth" a typical homeowner experienced in SoCal over the past few years because of a booming real-estate market? Did the Fed print enough to keep pace with the increase in total market value of all stock shares in existence listed on the NYSE, NASDAQ, etc.. ? What causes THESE prices to increase? Surely the FED is not yet in control of our minds, our emotions, our expectations. Why is the effect of Fed policy on the bond markets usually the exact OPPOSITE of what the Fed is actually doing with regard to interest rates? Why do banks lend money and extend credit so easily despite Fed attempts now to slow the expansion of money by increasing interest rates? Why is Fed policy ineffective in achieving its goals? No. I don't believe the Fed is any more capable of causing inflation than it is in influencing market interest rates. Inflation certainly has causes, but they can't be explained solely by the existence of the Fed. Indeed, the Fed is a participant, but so are we all.
Published: October 25, 2005 2:09 PM
I think Steve's comment is very revealing. Despite reading the article (at least I'm assuming he did,) he still uses the word inflation to mean a general rise in prices, which the article clearly shows it is not. This can be demonstrated simply by looking the word up in Webster's dictionary. Inflation is an increase in the money supply, not a rise in prices. It results in a rise in prices, but how, when and where those results show up is unpredictable, varied and dependent on many other factors. The Fed is most definitely not a market participant in any rational sense of the word. You and I are market participants. Participating in the market means producing, consuming and trading what we have produced. The Fed does not produce, it simply steals the production of others and redistributes it by printing money "out of thin air." As for the part where Steve mentions the Fed printing money because someone's house went up in value, you've got it completely backwards. Take that process, reverse it, and then you're on track. There are many factors that cause these prices to increase, but they are just that, prices, they are not money. The stock market is not made up of money and neither is the real estate market. I think a study of what money actually is and what its functions are would help clear up that problem. There doesn't have to be money in existence for all newly created "wealth." If I make a house out of dirt and rocks, I don't also need to produce money to represent the value of my home. If the stock of money is stable, new production will cause a general decrease in prices over time.
Published: October 25, 2005 2:28 PM
First :
Mirriam-Webster OnLine
Main Entry: in·fla·tion
Pronunciation: in-'flA-sh&n
Function: noun
1 : an act of inflating : a state of being inflated : as a : DISTENSION b : a hypothetical extremely brief period of very rapid expansion of the universe immediately following the big bang c : empty pretentiousness : POMPOSITY
2 : an increase in the volume of money and credit relative to available goods and services resulting in a continuing rise in the general price level
Now that that's out of the way. Where does the money come from. The money supply is governed by many sources, velocity of money, discount rate (for fiat money/current banking system), printed cash etc. Irrational exuberence in the markets, particularly stock and Real Estate markets, can cause large inflations via wealth effect. Interest rates dominate the Real Estate market, at least as it is played in San Francisco where I live, the stock market on the other hand can, under the right circumstances trancend competion from the bond markets and free value from reality. This is in part because both stock prices and Real Estate are in a market that is thin in the sense that velocity of sales is very slow, most of the items that will eventualy be sold aren't sold in any particular year, they are held for mostly speculative reasons. This allows relatively small amounts of money to effect very large fluctuations in nominal value.
Certainly the article begs the question and assumes that the Fed prints money, which would be irrelevant if no one then spent the money!
Published: October 25, 2005 3:28 PM
"Inflation is an increase in the money supply, not a rise in prices." Yes. The point I was making was that the article did not convince me that "money supply" is determined solely by the Fed. The only way to do that is to restrict the definition of "money" to "the paper stuff printed by the Federal Reserve". Unless I'm mistaken, "money" is more than just that, and it's supply or abundance is dependent upon on other factors beyond the control of the Fed. If "money" is only that which the Fed manufactures out of thin air, then to say the Fed causes inflation is merely stating the obvious.
Published: October 25, 2005 3:35 PM
Excellent points Roger. Thank You.
Published: October 25, 2005 3:41 PM
This should be required reading for every economics student.
During my college days in 1990, when I first read "A New Dawn for America" by Roger MacBride at the Cañada College libarary, I discovered for the first time Mises' analogy of the professional counterfeiter. This analogy turned me on to Libertarianism as an economics student.
The consequence of inflation (general price rise) has been happening for decades. The question is always how much is reasonable? 3% every year?
This ignores the fundamental questions. Namely, why do we put up with inflation, at all? Doesn't a gold standard keep inflation in check? Does the misery person or the cash hoarder make a contribution to us by deceasing the general stock of money in circulation? How can the Fed possibly know the adequate, reasonable level of interest rates and money supply at an given time, when billions of transactions are being made.
Get Samuelson out of the economics classroom. For God's sake, put Mises and Hayek in there! Even Heilbronner admitted that Mises was right.
Published: October 25, 2005 3:51 PM
Steve Pilotte,
Prices for everything are variables with respect to time. Indeed, prices are influenced by things other than the Fed. Decreases in supply or increases in demand for an item can raise the price even if the monetary base remains constant, but this is the point- these rising prices are offset by the fall in the price of something else, as long as everything else remains a constant. The increased demand for houses can raise the price of houses if the supply comes up short, or lags. However, without monetary pumping or credit expansion, this increased demand must be met with a decreased demand of something else, or an increase in actual real output. With such pumping or credit expansion we get higher home prices without the corresponding decrease in other prices or the corresponding increase in output. This leads to a general rise in the price level, eventually, in terms of the monetary unit under consideration.
Published: October 25, 2005 3:55 PM
Steve Pilotte,
Generally speaking, money is indeed restricted to the dollar and government fiat currencies. However, while Greenspan recently testitified, in truly Orwellian fashion, that "since the late ’70s, central bankers generally have behaved as though we were on the gold standard," the truth is that as first the dollar, then other fiat currencies, collapse under their own weightlessness, gold -- real commodity money -- will reassert itself, this time, hopefully, for good.
If so, then the modern nation-state will finally be on the run, and a new era of freedom will be on the rise.
Published: October 25, 2005 4:13 PM
Yancey and David,
I agree with your points and observations. I also agree with most of the article. The problem I still have is that the article fails to demonstrate a direct correlation between inflation (an increase in money supply and credit) and Fed policy, which it claims is largely responsible for it. What about instances where the CPI and money supply falls at the same time that the Fed pursues expansionist policies?
In the early 30's the Fed lowered the discount rate dramatically, yet failed to stave off a deflationary depression?
Seems to me that the credit expansion side of inflation is influenced by factors other than just the Fed. Perhaps the Fed's role is more like that of an enabler for us.
Published: October 25, 2005 5:13 PM
Steve,
Fed policy during the depression was highly inflationary, but the public and the banks were deflating the money supply better than the Fed was inflating the supply. If you listen to the lecture by Joseph Salerno titled "Money and Gold in the 1920s and 1930s: Defending the Rothbardian Position" in the audio section, he demonstrates that throughout the 1920s and during the contraction in the early 30s, the Fed did everything it could to inflate its controlled reserves. The Fed can only really control only a part of the money supply by buying up government securities through open market operations. During the 1930s, the Fed tried its darndest to inflate the portion of the money supply that it controlled (exact numbers in the lecture), but it could not overcome numerous uncontrollable deflationary actions by private citizens, foreign investors, and banks. Listen to the whole lecture to get a better picture of how the Fed was powerless to prevent the deflation (of course, it could have just run the printing presses nonstop, but that would've been just damaging).
"What about instances where the CPI and money supply falls at the same time that the Fed pursues expansionist policies?" -- Please tell me, post-1973, where these instances occur? I'm pretty sure they don't exist. With the Fed in total control after Nixon closed the gold window, if the Fed is expansionary, then the money supply will expand and prices will go up.
Published: October 25, 2005 7:48 PM
The CPI does not measure inflation. Heck, it doesn't even measure rising prices. Does the CPI adjust for substitution, introduction of new goods or services, discontinuation of old goods or services, quality changes, etc in any proper or effective manner?
Never forget that the demand for money is just as important and the supply of it. There are other uses for money than buying goods and services. My personal definition of inflation is the alteration of the supply of and/or the demand for money such that its perceived purchasing power declines. You can have inflation in the face of declining prices. The definition of deflation is the converse of the inflation definition. You can have deflation in the face of rising prices.
That said, governments have an institutional bias toward inflation, gold money, fiat money, whatever kind of money.
Published: October 25, 2005 8:07 PM
I think that colleges and universities show quite accurately the effects of inflation in their inevitable annual tuition increases. Of course, a lot of times the public institutions are responding to different stimuli than the private ones. The latter, I feel most supports my point.
Published: October 25, 2005 9:00 PM
For an interesting article on the core rate and how it truly calculated, read the following: http://www.financialsense.com/stormwatch/2005/0624.html
Published: October 25, 2005 10:31 PM
Logan,
Beginning in January, 2001 The Fed cut rates 13 times ending in June, 2003. During that time the 3 month % change in M2 and M3 declined from 6% to LESS than 0% during the 4th QTR of 2003 when M2 and M3 actually contracted briefly. During Nov and Dec 2003 (at the same time) the CPI declined for two consecutive months. All this despite a Fed Funds rate of 1.00% at the time.
Published: October 26, 2005 12:39 AM
Correction. The CPI declined for three consecutive months (Oct-Dec 2003) when at the same time the money supply contracted briefly.
Published: October 26, 2005 12:48 AM
Money ("real" money) is created by liberating it from the ground and fabricating it into a useful shape, like a coin.
"Money" (phoney money) is created by signature. The signature of the appropriate official(s) on a government bond, your signature on a check or a note, the signatures of the secretary of the treasury and the treasurer on a United States note or a Federal Reserve note all create "money."
Money ("real" money) is not immune from inflation, such as resulted from Spain's looting of the Inca empire. The massive spending of gold robbed from the Incas caused a tremendous rise in prices in Europe. The Spaniards enjoyed the benefit by getting to spend it for goods at the current prices, then watched the prices rise after they gained the benefits.
Phoney money, like real money, is not only not immune from inflation, it is inflation. Every unit created increases the "money" supply by that much. The first unit created increases the supply of that kind of phoney money by an infinite percentage. The next unit spent into circulation increases the "money" supply by 100%. And so on.
Now, government raises almost all its revenues by stealing...er, taxing to get it. Some government revenues have been raised by selling stolen...uh, annexed land, but most comes from taxing of some sort.
In the US and other nations the government does not directly create "money." Here of course the Bureau of Printing & Engraving does the printing of federal reserve notes and Treasury bonds, but the government does not spend it directly into circulation. It gives the paper to the federal reserve system, which loans it back to the government (simplified, I know).
This worsens the effect. Not only does the government "create" "money" out of "thin air," it borrows it out of "thin air" at usury...uh, interest. No more US Notes.
Now, as the only place to get the interest is to borrow at least that amount from the federal reserve, the inflation, to keep up with the interest payments due, must be at least equal to the rate of interest, unless taxes are raised enough to retire part of the principal amount borrowed.
But if taxes are raised and the increased revenues are spent by paying them to the federal reserve, the people squawk. Their supply of goodies must decrease. politicians respond to squawking. More free cheese! (Remember the "free" cheese some years ago?) Everyone who benefits from the goodie handouts, the government contracts, like the $200 or something hammers, etc. the entitlement recipients, the government employees, and so on, all scream. Just like a baby who has had the nipple yanked from its mouth.
Some ancient sage said, "When the voters of a democracy discover they can vote themselves goodies from the public treasury, that democracy is doomed." Or something like that. Well, that's where we are now. People will always try to vote themselves more goodies than they have to pay for themselves. "Don't tax you, don't tax me...tax that fellah over by the tree." America is a nation of pickpockets, each trying to pick more out of others' pockets than gets picked out of each one's own pocket.
Enough for now.
Published: October 26, 2005 1:30 AM
Expectations are not irrelevant to inflation.
The Fed can set rates but it is up to individuals to decide whether or not to take on credit which is the process by which fractional reserve banking etc 'works'. If they have expectations that house prices will rise more than the cost of servicing the mortgage for example, they may decide to take out the loan and so affect money supply and create inflation.
I have not seen a mention of money velocity here and although I have read Frank's previous articles on velocity, they don't discount the cold logic that an increased monetary velocity is likely in a time of increased perceived inflation. I believe Mises used the concept of housewives swapping money for frying pans which to me is the same as saying velocity goes up.
Published: October 26, 2005 2:55 AM
Steve,
The Austrian money supply data supplied by Fred Shostak in appendix 2 located at http://www.mises.org/journals/qjae/pdf/qjae6_4_8.pdf shows no money supply contraction in 2003 (for a detailed look at what goes into the Austrian money supply, visit http://www.mises.org/journals/scholar/TMS.pdf). If you want to use M2 or M3, that's your perogative. Also, I got different views of the CPI looking at the FRED data. All items CPI indeed went down, but the All items minus energy and the All items minus food went up during the period you cited. Of course, none of those figures factored in asset price increases or the fact that foreign governments are holding our currency in their reserves. And the base years for comparison are 1982-1984. Do you think that the CPI basket has changed quite a bit in 20 years?
The point is that we cannot really know whether the CPI and money supply went down together during an expansionary Fed period because the CPI and money supply do not have universal agreed-upon data sets. What I do know is that if you look at history, long-term periods (not a 3 month hiccup period) of inflation were associated with big gold discoveries, war, or the replacement of the gold standard with a quasi-fiat (Bretton Woods) and then a full fiat money (post-1973). If we abolished the Fed tomorrow, I can guarantee that we would not see peacetime price inflation ever again.
Published: October 26, 2005 2:55 AM
Also, Steve, if the article didn't convince you that the Fed is behind 100% of the inflation, then what other things are driving inflation? I really hope you don't trot out some discredited "cost-push" doctrine like you did in your first post. Gee you guys, there were price increases for houses and stocks and this was the cause of... price increases!
Published: October 26, 2005 3:14 AM
If inflation = "...increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check.", and the Fed stops increasing those quantities, then by that definition, there is no inflation--irrespective of what individual or aggregate prices do. And if there is no decrease in those quantities, there is no deflation--irrespective of what prices do.
Yet the article ends by saying: "The main source of inflation is the Fed itself."
Why isn't the Fed the only source? What are the others? Do they share the blame for the pernicious effects of the business cycle?
Published: October 26, 2005 5:00 AM
The main source of inflation are the banks
that create 50 times the money that the FED
create through the fractional reserve:
- 2% of newly created money: FED notes and US coins;
- 98% of newly created money: fractional reserve.
There will be soon a 'REDDE FRACTIONEM'.
It is true that the first part of the job is done by the FED.
I hope terrorists didn't bomb ever any central bank - like 9/11 - because so doing they will save the economy of the country.
Published: October 26, 2005 5:07 AM
This is very troubling.
"...a strengthening in inflationary expectations cannot by itself set in motion a general increase in prices."
Are "inflationary expectations" referring to the expectations of price increases, or of the Fed increasing money and credit? If the former, shouldn't they be called "price increase expectations" or something like that?
And this: "So irrespective what people’s expectations are, if the money supply hasn’t increased then peoples monetary expenditure on goods cannot increase either."
Wouldn't their monetary expenditure increase if they cracked open the piggy bank, or not saved some portion of their paycheck that they otherwise would have? No IRA contribution for this year, as an example. No expenditure increase there? "cannot"?
Published: October 26, 2005 5:28 AM
And now we are told that the new Chairman of the Fed is to be a man (B.B.) who is an ardent credit-money bubble fan even by modern standards.
As long as the "price level" is under control is does not matter how much the funny money is put into the system - sure this worked so well in the late 1920's, it did not lead to a boom-bust at all.
I know that sarcasm is the lowest form of wit, but (with the news about B.B.) I am not in a witty mood.
Published: October 26, 2005 5:55 AM
Billwald:
Go to this address http://www.westegg.com/inflation/ or any cpi calculator and put in $100. Now start with 1914 and end with 2005. 1914 is when the Federal Reserve started.
Results:What cost $100 in 1914 would cost $1866.20 in 2005. This dilution of the value of US dollars is the result of the fed printing more money relative to the amount of goods and services produced.
Over the years the fed has destroyed the value of our money as a result of having a monopoly on money printing. If you or I print money its a crime, however its legal for the Fed to counterfeit as much as they like and buy gov. bonds with the currency. This monopoly was bestowed onto to the fed by congress in exchange for always being there to buy U.S. gov. bonds in order to finance the U.S. warfare/welfare state.
Of course, they could not do it on taxes alone.
If they tried, their heads would be rolling in the street.
Published: October 26, 2005 10:42 AM
The BLOG comments on this article are at least as informative as the article. Thank you all with special thanks to Al Grayson.
Can any of you direct me to information on when and why, particularly why, the government starting keeping the statistics with which they produce the CPI?
It would also be interesting to read about the relative impact of OTA money produced by the FED and consumer produced -- credit card -- OTA money.
Published: October 26, 2005 11:07 AM
- The Shostak article written in the style of the National Inquirer;
"Greenspan caught in an act of inflatio...."
Published: October 26, 2005 12:13 PM
I don't get the whole "inflationary expectations" argument. I can expect that gas prices will increase sometime in the future. But unless there is less supply, more demand, or more money created to purchase the gas, then the price will not increase. Society cannot just expect price increases in the psychic sense, it must put its money where its mouth is. If it directs more resources into gasoline, the price of gas will go up while drying up demand for other items, causing their price to go down. But if the Fed expands the money supply, more can be spent on gas without a corresponding decrease in demand for other products.
I would say the Fed is the source of the inflation because it is the head of the banking cartel responsible for issuing fiduciary media beyond its specie reserves. Without the Fed to guarantee the banking system's deposits as the "lender of last resort," then the banks would be less inflationary to the point at which overall price inflation would vanish like in the late 19th century.
Published: October 26, 2005 12:14 PM
Logan,
The Money Supply chart in the Appendix you cited only goes up to the first half of 2003, so I'm not sure what the data for the last quarter really was. I do appreciate the references regarding Austrian Money Supply though.
Published: October 26, 2005 12:36 PM
"How about the taxes? Does that take as much of a mans income as it did 50 years ago?"
Probably more, but the level of service we receive from the taxes has increased. The issues should be does the general population want the services and is there a more effecient way to provide the services?
"Money ("real" money) is created by liberating it from the ground and fabricating it into a useful shape, like a coin."
Money was invented as a an accounting crutch before accounting and book keeping were developed.
"Results:What cost $100 in 1914 would cost $1866.20 in 2005."
In 1914 the typical worker earned less than $100/month and now a good union job pays over $3,000 a month. Second, we do not now buy comparable consumer goods to what was purchased in 1914.
Back then at least half of one's life energy went to obtaining sufficient calories to stay alive and now we pay closer to 5% of gross income for basic foods.
"I think that colleges and universities show quite accurately the effects of inflation in their inevitable annual tuition increases."
No, supply and demand. When I graduated from high school in' 55 the majority of the available jobs could be done by a high school graduate. These days one needs at least two years of college to obtain a comparable. Not because the jobs are more complex but because the typical HS grad can't add a column of single digit numbers without a calculator.
There never was a society that used 100% metallic money that didn't have half the population living in poverty.
Published: October 26, 2005 12:57 PM
This is one of the most facinating blogs I have read on this site. Thank you all. I think that many of the points are valid in a micro sense and fall apart in a macro view. Inflation of the U.S. money supply cannot be executed by anyone or any entity other than the Fed. Prices will rise and fall and stay level. Mining can dillute the money supply. But only the Fed can casue system-wide, perpetual inflation.
The problem we face is that not only is the average HS gradutate incapable of adding a clumn of single digit numbers, they and their over-educated counterparts are incapable of understanding themselves as an economic actor. Not becasue they are dumb -- it is because they are addicts. Addicted to the warm, fuzzy, safe, guiltless feeling they get from knowing they don't have to do much to be taken care of better than anyone else in the hsiotry of humankind. Hell, we take better care of foreign welfare recipients 'illegally' residing by invading our public (government property) than the average person anywhere else in the world.
Why shoudl I sell my labor in an effective and efficient manner or risk my capital if I can just take it ftom everyone else through my elected representatives? And since its legal to do so becasue I vote, i don't have to feel guilty about it.
The elite power structure has us all right where they want us -- lazy and addicted. Until we can wake people up -- the Fed will continue to inflate no matter which wind-bag is king, er chairman or whatever title you give to the Chief of Theft that makes the masses feel good about stealing.
This article clearly adds to the Austrian volumes that leave only one true statement.
THE FED IS SOLELY RESPONSIBLE FOR INFLATION OF THE MONEY SUPPLY AND THE EROSION OF WEALTH IT FOSTERS.
Published: October 26, 2005 1:50 PM
"but the level of service we receive from the taxes has increased"
1. Who demands to be taxed? 2. Are you suggesting services have improved like the failure of the most powerful government on earth to secure NY during 9/11 or for that matter to protect New Orleans from flooding? If that is the case, I would like to sue the feds for breach of contract. However it is not a contract, because the feds have to threaten me with violence in order to get me to pay for so called "service" that never arrives or is negligent.
"a good union job pays over $3,000 a month" Unions are job and business killers, see delphi Gm etc.
In the private sector, the unions are finished. The only place the union is strong is with the government. But if government service is so great, why do gov. workers need unions in the first place?
What is the point of employment if you cannot exchange the proceeds for more goods and services? Consumers want their money to rise in purchasing power not fall. The nominal wage means nothing. Money cannot be consumed by itself, one must exchange money for real goods and services in order to consume. Therefore, if the nominal wage that is paid is in the form of watered down money, then the money will buy less goods and services than that which honest money would buy. In this case, you can actually be poorer in real terms even though you have a higher nominal salary.
Published: October 26, 2005 3:22 PM
M. Johnson,
"Inflatio," I love it!...especially with the Treasury Secretary giving the Chinese a "Snowjob."
But we all know, do we not, that the state sucks!?!
Published: October 26, 2005 6:08 PM
"There never was a society that used 100% metallic money that didn't have half the population living in poverty."
Mr. Wald has a penchant for confusing causation and correlation.
The remarkable improvements in agricultural and manufacturing methods that have raised our standards of living in the 20th century happened in spite of, and not because of, the abandonment of silver and gold monetary standards. They happened in spite of, and not because of, the growing limits placed on the market by the state. Think of how much even better off we'd be now if a quarter of the population wasn't dead weight - sucking off the government's teat, happily spending its fiat currency hand-outs without producing anything of value for the rest of society.
Published: October 27, 2005 7:03 AM
Shostacks article-
insightful, terrorfying
with Bernake (sp?) now "chosen" to be the latest
currency debaucher, I am changing my investments accordingly.
R&R's,
JZ
Published: October 27, 2005 8:07 AM
Billwald, When I graduated from high school in' 55 the majority of the available jobs could be done by a high school graduate. These days one needs at least two years of college to obtain a comparable. Not because the jobs are more complex but because the typical HS grad can't add a column of single digit numbers without a calculator.
And prior to your graduation, say by 50-75 years, comparable jobs (if any) were available to people who either had no "formal" education or who had attended to at most the 8th grade.
The slide is perfectly predictable. You graduated after compulsory government schooling had been in place only a couple of generations. What was a "highschool" education 125 years ago is now 4-year college. At least.
What is compulsory schooling for? It's first purpose is to teach obedience to arbitrary authority. Second, keep a large pool of individuals out of employment and thereby dependent, maintaining the largest welfare program in the entire nation, the "school system" and drawing down the savings of their guardians. Third, to weed out those who will not be moulded by the first two by making them into criminals and unemployable outcasts.
I recommend the writings of John Taylor Gatto, available through a Google search at your fingertips.
There is only one rational first step in raising a healthy child: Get them the %^&* out of public school. Everything else is easy in comparison.
Published: October 27, 2005 9:41 AM
For the Fed to be an "inflation fighter" would require Alan Greenspan to walk around the corner to the White House and give George Bush a big old sock in the mush! Needless to say, the likelihood of this even threatening to occur is less than zero, since the system is set up to reward the Fed chairman for obliging the White House and the congress by providing whatever supply of counterfeit money is needed.
Published: October 27, 2005 11:29 AM
"Consequently, a strengthening in inflationary expectations cannot by itself set in motion a general increase in prices. After all the realization of expectations has to go through the monetary channel. So irrespective what people’s expectations are, if the money supply hasn’t increased then peoples monetary expenditure on goods cannot increase either"
I think Mr Shostak has overstated the case here by the confusion of a necessary condition with a necessary AND sufficient one.
Let's quote Mises at length on this to see what this analysis skips over:
"He who believes that the prices of the goods in which he takes an interest will rise, buys more of them than he would have bought in the absence of this belief: accordingly he restricts his cash holding. He who believes that prices will drop, restricts his purchases and thus enlarges his cash holding. As long as such speculative anticipations are limited to some commodities, they do not bring about a general tendency toward changes in cash holding. But it is different if people [p. 427] believe that they are on the eve of big cash-induced changes in purchasing power. When they expect that the money prices of all goods will rise or fall, they expand or restrict their purchases. These attitudes strengthen and accelerate the expected tendencies considerably. This goes on until the point is reached beyond which no further changes in the purchasing power of money are expected. Only then does this inclination to buy or to sell stop and do people begin again to increase or to decrease their cash holdings.
"But if once public opinion is convinced that the increase in the quantity of money will continue and never come to an end, and that consequently the prices of all commodities and services will not cease to rise, everybody becomes eager to buy as much as possible and to restrict his cash holding to a minimum size. For under these circumstances the regular costs incurred by holding cash are increased by the losses caused by the progressive fall in purchasing power. The advantages of holding cash must be paid for by sacrifices which are deemed unreasonably burdensome. This phenomenon was, in the great European inflations of the 'twenties, called flight into real goods (Flucht in die Sachwerte) or crack-up boom (Katastrophenhausse). The mathematical economists are at a loss to comprehend the causal relation between the increase in the quantity of money and what they call "velocity of circulation."
"The characteristic mark of this phenomenon is that the increase in the quantity of money causes a fall in the demand for money. The tendency toward a fall in purchasing power as generated by the increased supply of money is intensified by the general propensity to restrict cash holdings which it brings about. Eventually a point is reached where the prices at which people would be prepared to part with "real" goods discount to such an extent the expected progress in the fall of purchasing power that nobody has a sufficient amount of cash at hand to pay them. The monetary system breaks down; all transactions in the money concerned cease; a panic makes its purchasing power vanish altogether. People return either to barter or to the use of another kind of money.
"The course of a progressing inflation is this: At the beginning the inflow of additional money makes the prices of some commodities and services rise; other prices rise later. The price rise affects the various commodities and services, as has been shown, at different dates and to a different extent.
"This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the [p. 428] country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.
"But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against "real" goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.
"It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German Mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last."
Human Action XVII. INDIRECT EXCHANGE
8. The Anticipation of Expected Changes in Purchasing Power
Expectations, DO matter - though, conversely, simply trying to keep expectations low through statistical massaging and by blatant propaganda, while continuing to inflate, is also not a sufficient means of averting the blight entirely.
Published: October 28, 2005 3:00 AM
Sean, all that I have suggested that by itself expectations cannot set a general rise in prices. The citation of Mises is with regard to expectations on account of monetary pumping.
All the best,
Frank Shostak
Published: October 28, 2005 1:16 PM