Wednesday, 24 August 2016

Prices are stable?


The idea of a general price level is as stupid as the idea that inflating credit and the money supply with it doesn’t create inflation, yet the ‘Consumer Price Index’ that measures this imaginary figure has achieved virtual Holy Writ status, and is written into laws, contracts, and payment plans.

For Ludwig Von Mises, any decent analysis of this “inflation figure” would begin by “decomposing” the so-called macroenomic aggregates “into their micro-economic components by rigorously analysing the ‘transmission mechanism’ of a monetary injection.’”

But this is precisely what mainstream commentators wish to avoid. It would demand they recognise that the figure itself is illusory, and their practice credit injection damaging.

Let’s see what the aggregate figure of the general price level hides:


Quite some disparity, eh?

Anybody who thinks there is such a thing as a single inflation figure should be warned. And anyone who reifies it should not be in charge of a baked bean, let alone of being any kind of bean counter. Especially one who constantly “warns” that we have no inflation in New Zealand.

The big lesson, as Hayek once explained: “Mr Keynes’s aggregates hide all the mechanics of change.” In this case, of destructive change.

There’s another important lesson to draw here. The items below the “index bar” all represent the result of of invention, of innovation, of productivity—of everything that makes real wages higher – of the Hank Rearden effect that makes prosperity more widespread and abundant -- all the things the central banks rely on to keep their own phony inflation figure down while their monetary inflation goes through the roof, all while screwing the Hank Reardens around.

Whereas the items in the top of the index bar represent things that the government subsidises, or heavily regulates.

Mind you, the graph is only for the US, although doing one for NZ would look very much the same.

And just to make ours more realistic, I added in the results of our rampant house-price inflation (taken from REINZ figures). Which puts a whole lot of things in perspective, don’t you think?


[Hat tip Catallaxy Files]


  1. Great article... shows the limitations of aggregated indexes ... ( GDP index comes to mind )
    I love the Hayek quotes..
    John williams keeps track of inflation indexes as it was measured in 1980 and also as it was measured in 1990
    see the charts in this link.

    Makes me realize that inflation targeting , using a contrived CPI index, is a kinda fanciful thing...

    In terms of first principles, a CPI index should only be one of varied different ways to measure how the effects of Money supply growth manifests in an economy..
    Inflation targeting, as we have it , seems to be Barbaric and archaic ...Dumb.

    Just my view

  2. If you separated out House price Auckland from New Zealand average, and again maybe general Rural and South Island House, the graph might jump right off the screen.

  3. Inflation is exactly equal to the increase in the money supply. It can be nothing else.

    Which is why communists like Key, Englush, Greenspan, Merkel etc hate the single most important economic principle: to return to the Gold standard, fixing the money supply once and for all, preventing inflation, government borrowing, and communism, in one fell swoop.

    1. I assume from this AT [ 22.18] that the great Creators would no longer be able to create. They would almost then be dispensable. Imagine the joy of having the discretion to discreate the creators.

  4. The heading on this piece and the very first sentence talk about different things. To ask are prices stable is a different question than asking about the price level. The first question is about relative prices, is the price of A going up compared to other prices in the economy. The second is about the general level of price and requires the creation of an index of prices. This index is not unique, there are many different measures of the general level of prices. You have the CPI, CPIH, PPI, RPI, GDP deflator etc. Each of these are useful is some situations, less useful in others. The CPI is the most often talked about since it is the nearest measure of how households (consumers) are affected by price level increases. Now obviously it is not a perfect measure because no household buys exactly what it in the basket of goods that is used to calculate the CPI. Every household has its own bundle of goods it purchases so it has its own personal CPI. But no household wants to go to the cost and trouble of calculating that CPI, so a general measure is used. But his doesn't mean that the idea of the general level of prices is not useful. I mean what do you make of the Fisher Equation if there is no price level?

    One of the big problems with inflation is that it adds noise to the measurement of relative price changes. When you see a price change producers and consumers need to know if its a true relative price change, in which case they should take it into account in their decision making, or does it just reflect a change in the general level of prices, in which case it should be ignored. For example if all prices went up by, say 30%, there would be an 30% increase in the general price level but no relative price changes and so the price change should be ignored. But if only the price of a good you make or use goes up by 30% you really want to take that into account.

    So having a, albeit imperfect, measure of the increase in the general level of prices, is useful to try and sort out just how much of price changes that we see around us are in fact relative prices changes. Knowing this makes for better decision making by both firms and households.

    1. The heading and the first sentence are directly linked, Paul. It's the idea we can measure a "general price level" that underpins the idea that central banks can "make prices stable." (And don't forget that in both the 1920s and 2000s boom this supposedly useful measure allowed the central banks to blow up without even noticing what was going on.)

      But it's an illusion; and not just imperfect, but highly damaging -- partly because of the malinvestment it allows, and partly because the monetary inflation it underpins disallows productivity gains to fully feed through into real wages, i.e., into the increasing amount of goods and services that could be bought with the same money wage.

      So what do I think of Fisher's Quantity Equation? Mechanistic, simplistic, and as Mises said, it glosses over the real "step-by-step" analysis of price changes that would bring real understanding.

      So is it useful? In the present context, and what it's allowed to happen (not least to cast the illusion that the central bankers have real levers to pull: No. It's bloody damaging.

    2. And unsurprisingly, I agree wholeheartedly with Mises on the naive Quantity Theory of Money.

    3. As an expression of an idea .... I love Fishers MV =Pt equation.

      With this in mind, and with the current Monetary system, I agree with Ray Dalios' view that the traditional perspective in which supply and demand are measured in quantity , and the price relationship between them is described in terms of elasticity needs to be modified to include CREDIT as seperate variable. ie.. the availability and cost of credit plays a BIG role .. credit worthy borrowers... willing lenders etc.

      ie. information transmitting ability of price in regards to supply/demand is distorted.. credit creates a , kind of, artificial demand.... Malinvestment results.

      ie... Neutrality of money theory is a nonsense.

      ie. Central Banks and Banking system play a BIG role in an economy.

      ie.. Become a "credit watcher" if you want to get a sense of the economic and financial cycles.. ie. analyzing supply/demand by itself is not enuf .. ( Fonterra found that out with China in 2014 )

  5. It would be interesting to see some lines on there for wage and salary levels - perhaps by sector or educational achievement etc.

  6. An excellent graph - that illustrates very simply and clearly what is happening. There is inflation (despite what central banks are telling us) - but it's being masked by constant improvements in technology and productivity, that makes the cost of many consumer good cheaper in spite of the inflation.


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