GUEST POST: What is inflation—and why Matt Nolan should care. [Updated]
Last weekend I read an article in the Saturday's DomPost entitled, "What is inflation and why should people care?" by Matt Nolan from Infometrics and the Visible Hand blog.
After a couple of introductory paragraphs Matt states, "By definition, inflation is an increase in the general level of prices, independent of economic fundamentals."
At no stage did he mention the money supply which I thought might be an "economic fundamental". It is quite obvious that prices cannot rise across the board unless the money supply is rising. If the money supply is static then when people pay more for some items they are automatically forced to buy less of other items which will cause the sellers of those items to reduce the price to meet the reduced demand. So changes in the money available effect changes in the price of goods. So prices will change up and down if the money supply is static but there can be no general increase in all goods unless the money supply increases.
Therefore increased money supply must come first followed by a general price rise.
Increasing the money supply CAUSES price inflation in goods and services.
Sounds fundamental to me.
But never mind, Matt is in good company. In Thursday's DomPost Ben Bernanke is quoted on page 2 as saying, "an increase in US inflation had been driven primarily by rising commodity prices globally, and was unlikely to persist."
So Ben Bernanke tells us that rising commodity prices causes inflation. Perhaps he didn't notice the 2 or 3 Trillion dollars he produced from thin air recently.
I wonder if Matt and Ben are using the same definition of inflation? It is difficult to construct a logical line of thought when one defines effects rather than the cause of those effects. But, then Keynes was not known for his logic either.
Saying that inflation causes inflation doesn't seem particularly helpful in educating the public.
My very good friend Hugh Templeton who was recently honoured by the Australian government for his work in starting up Closer Economic Relations (CER) recently borrowed my book, Human Action by Ludwig von Mises. He informed me that this book is the best book on economics he has ever read. [He’s right you know – Ed.]
Ludwig thinks that changing the money supply causes changes in prices of goods. In fact he starts at the logical place - the cause - and defines inflation as an increase in the money supply.
This allows him to construct a logical and true framework for economics which clearly demonstrates cause and effect and explains economics so there are none of the current logical inconsistencies which so plague current "Keynesian" thinking.
I have tried to describe how Austrian economic thinking describes reality in the section of our web site called REAL Economics. Perhaps Ben should have a look!
UPDATE: Keith Weiner points out, correctly, that
It's not an increase in money supply per se. For example, in a gold standard gold miners do not create inflation (or rising prices).
It is an increase in counterfeit credit.
But that might be going one concept too far for most mainstreamers to get their heads around!