Thursday, June 21, 2012

The “Great Moderation” has been robbing us blind

Recently a slew of commentators and Reserve Bank governors have been heard praising the Reserve Bank arrangement in place since 1992, put in place to moderate things on the basis of “a little bit of inflation does you good.”  Over those last twenty years, our Reserve Bank and every other central bank in the developed world praised each other for “conquering inflation” and producing “price stability”—a conquest overcome by the simplistic stratagem of encouraging a certain amount of inflation every year.  (Not so much these days however about how they conquered the business cycleI wonder why.)

Anyway, even if we don’t talk about the malinvestments caused by the deluge of counterfeit capital with which the developed world’s central banks flooded the place over most of the 2000s, the “gentle inflation” they unleashed has been destructive enough.

It’s been a killer. A silent killer.

The Silent Killer
Guest post by Jeffrey Tucker

I WAS JUST READING about how the median American wage is lower today than it was a decade ago, and the median net worth no more than two decades ago. Ouch. The cause, says the US Federal Reserve itself, is inflation.

Inflation? That's interesting. Hardly anyone talks about that anymore. I can't remember the last time I read a mainstream article that so much as mentioned it as a problem. There is public consciousness about rising prices in specific sectors like education and health care. But is there really a general problem with inflation?

The central bank spokesmen all speak about a different thing: the great fear of deflation. So long as that monster is kept at bay, we are all supposed to sleep soundly at night.

Yet the data are in: Inflation is killing wages, one grueling step at a time.

So let me ask you the following: How much is the US dollar worth today compared with the year 2000? These are years in which inflation has been supposedly crushed. What's your best guess?

The answer is 75 cents. Imagine that. For every four quarters you owned, one was stolen in secret over the course of the last 12 years. Keep in mind that this is a period in which the price of many things we love like computers and software have dramatically fallen in price.

Falling prices for things mean that the value of the dollar has increased. We see this in only a few sectors. Rising prices for things mean that the value of the dollar (its purchasing power) has fallen, and we see this in most sectors. A total inflation rate averages out both trends.

Yes, this is methodologically suspect. What can it mean to average the falling price of one good and the rising price of another good? Well, the method does illustrate the big picture trend: toward a relentless decline of the dollar.

Let's extend it further back in time, to, say, 1980. Today, the dollar is worth one-third of what it was then. Going back further by another 20 years, we find that the dollar today is worth only 13 cents today compared with 1960.

Inflation is adding to the growing despair in the American workforce. Wages are falling. College has become unaffordable; forget working your way through school. Net worth of households is falling in real terms. There is no relief in the terrible employment situation, and there is plenty of misery aside from what the numbers reveal.

People are experiencing a job lock, unable to exercise their basic human right to leave a bad job for a good one, simply because they fear the effects of losing health care and losing whatever financial security they have.

This is why we are seeing ever fewer people quit their jobs, no matter how bad they may be and no matter how despotic their bosses become or how dreary their work lives. This is not a functioning, competitive market. This is a major source of human misery, and one brought on by bad monetary policy.

The money people do have earns next to nothing at the bank, and the value is being stolen bit by bit every day. It's become nearly impossible for people to stay ahead, which is why half of Americans today believe that the future is going to be worse than the present.

In the 1970s, there was near panic about 4% per year inflation. I don't get why extending the effects of that rate over 18 or 24 months somehow means that the problem has gone away. It hasn't. It's just been slowed, like a knife that goes in slowly, instead of all at once. It is still a disaster and nothing that a real free enterprise system can really tolerate. Sound money is as much a pillar of freedom as private property.

And money is not sound. It is nationalized and wrecked by the central bank and its money creation powers. 

The relationship between higher prices and money creation is not difficult to understand. Murray Rothbard liked to use the analogy of a tooth fairy who tried to help the world by doubling the money stock and putting the new money under everyone's pillow. It seems like a wonderful idea, until you realize that every existing unit of money would become worth half of what it used to be. The people would be no better off than they were before.

Analogies like this are useful. Think of a children's party in which there is only enough lemonade for 10 kids. Thirty kids show up, so the host waters down the juice. Have you really made more lemonade? No, you have just divided the lemonade among more people, giving each kid more water and less flavor.

I would like to make a book recommendation that addresses this very point. Hans Sennholz's Age of Inflation is the first book I read on this topic. It blew me away. If you haven't read this book, I urge you to do so.

SO IF A FALLING dollar kills the economy, why does the Fed do it?

It's not rocket science. The money enters into the economy through a circuitous route, starting with the government's favored bond dealers and then through the banking system. The main beneficiaries are the government's friends, while the rest of the population pays the price.

And rising prices are not the only consequence of bad monetary policy. There are other effects, such as booms and busts, massive government debt, the leviathan out of control and the enslavement of the working class to debt and economic cycles.

There was a time following the great double-digit inflation of the late 1970s that there was a new awareness of the inflation threat and its cause. All throughout the 1980s, traders watched money supply data to assess the risk going forward.

This often happens after inflationary disasters. In Germany after Weimar and the war, an ethos of sound money was everywhere alive in Germany. Even today, Germany maintains a more sound policy than other European states, for fear of ever repeating that mistake.

But today in the U.S., it is widely believed that new money creation is the solution to all problems. This is Ben Bernanke's religion. He believes that the whole of the Great Depression was caused by tight money, and he is determined not to repeat that supposed experience (actually, he is wrong even about the policies of the 1930s, but that's another subject).

The worse the economic data, the more the prospect of even more reckless Fed policy. Retail sales are falling again, and rather than reassess the whole "stimulus" idea, the Fed is expected to unleash even more hell and try to convince us that this is good for us.

Inflation is the silent killer of economic recovery, the quiet source of death for the American middle class. Yet what do the market watchers recommend? More of the same.

You know this quote: "Insanity is repeating the same mistakes and expecting different results." It is wrongly attributed to Albert Einstein. It is actually from the 1981 basic manual for Narcotics Anonymous. That's fitting: Inflation is nothing if not a failed form of economic narcotic.

Sincerely,

Jeffrey Tucker
Executive editor
Laissez Faire Books
Primus inter pares, Laissez Faire Club

P.S Future generations will be amazed, observing that while inflation ate away our currency, our elites worried about stopping deflation! It's nuts and a diversion.

Labels: , , ,

0 Comments:

Post a Comment

Respond with a polite and intelligent comment. (Both will be applauded.)

Say what you mean, and mean what you say. (Do others the courtesy of being honest.)

Please put a name to your comments. (If you're prepared to give voice, then back it up with a name.)

And don't troll. Please. (Contemplate doing something more productive with your time, and ours.)

<< Home