Saturday 8 June 2024

"To repeat, inflation is a purely monetary phenomenon."

"Unfortunately, the entire edifice of the government’s theories [on the causes of inflation] — the assumption of discretionary power, the administered-price theory, the wage-price spiral, the exogenous shocks, the self-sustaining expectations, the idea of 'cost-push' — all of it is the rankest nonsense as an explanation of inflation....

"Inflation occurs, by definition, when the economy’s aggregate volume of money expenditure grows faster than its aggregate real output. The excessive growth of money expenditures can have, again by definition, only two sources: either the velocity of monetary circulation grows excessively or the money stock itself grows excessively (or both). Our current inflation is attributable almost entirely to excessive growth of the money stock.
    "Because the excessive growth of the money stock and the inflation it causes do not happen simultaneously, some people always fail to perceive the relationship. Increases in the money stock take some time before their effect on the volume of expenditure becomes significant. But once the actual lag is recognised, the relationship is seen to be very close....
    "In short, inflation is not caused by cost-pushes, wage-price spirals, depreciation of the dollar on foreign exchange markets, regulatory constraints, minimum wage laws, or lagging productivity growth. Inflation is a purely monetary phenomenon: when the purchasing power of the dollar falls steadily and persistently over many years, it is because dollars have steadily and persistently become more abundant in relation to the total quantity of real goods and services for which they exchange. Inflation, in sum, is caused by excessive growth of the money stock. Period.

"As the [central bank] authorities can control the rate of growth of the money stock, they clearly are to blame for its excessive expansion....
    "[Government] deficits, in the absence of excessive monetary expansion, can not cause inflation. Clearly, the deficits, working through the political process as it influences the [central bank], encourage a loose monetary policy. But it is essential to recognise that it is the excessive growth of the money supply, whether to finance deficits or for some other reason, that causes inflation. Conversely, with a sufficiently slow growth of the money stock, there can be no inflation, no matter what is happening to the [government] budget, labour costs, regulatory standards, minimum wages, and so forth. To repeat, inflation is a purely monetary phenomenon.

"It hardly needs to be added that once excessive monetary expansion has been halted, inflation cannot be kept alive merely by expectations of inflation. People will find that, in the absence of continuing monetary stimulation of aggregate expenditures, the inflation they expected just doesn’t happen. If they are obstinate and continue to act as if inflation is not abating, they will simply price themselves out of their markets in the same manner as the conspiring firm in the example above. It is far more likely, however, that they will adjust their expectations as the rate of inflation falls.
"Expectations cannot sustain an inflationary process unless they are validated by the actual course of inflation; and that validation can occur only so long as the growth of the money stock remains excessive."

~ Robert Higgs, from his article 'Blaming the Victims: The Government’s Theory of Inflation'


And/orsum said...

Peter Stevens
A slight caveat on the *always* regarding 2008 and the Great Finacial Crisis, and absence of inflation.
investopedia article
Fraser Institute article

Anonymous said...

wrong ,my god you are uneducated Fagwell ! Does an Increase in the Money Supply Lead to Inflation? The old idea that inflation is created by an increase in money supply has distorted the minds of many people. Inflation is caused by numerous factors for it is not a one-dimensional aspect. For example, say a bird flu has rendered half of the egg production to be worthless, which would send egg prices soaring. This would have nothing to do with the quantity of money. So, obviously, a decline in the supply of some service or commodity can also lead to rising prices. Supply and demand.

Then there can be cost-push inflation as we saw during the 1970s due to OPEC. The first OPEC price shock was October 1973 from where we should see the next low in 2016 (43 years later). The sudden rise in oil sent a shockwave through the economy, driving up prices because the entire economy had to readjust to higher energy. This was not the result of an increase in demand nor an increase in the money supply.

When gold was used for money during the 19th century, it fell sharply in value with each new discovery from California, Australia, and Alaska. Inflation rose because of a dramatic increase in the money supply, which is exactly what took place in Europe when Spain brought back ship after ship of gold from the New World. The sudden dramatic rise in the supply of money unleashed inflation, and during both periods, money (gold) failed to provide a store of value.

Steady, slow growth in the supply of money does not lead to inflationary waves. We find that major waves of inflation are often tied to waves of speculation, which differ with each wave moving from real estate, commodities, stocks, or bonds, constantly rotating over decades within a domestic economy and then this movement of capital takes place internationally.

Inflation is not a single one-dimensional aspect. It moves up and down between the rise and fall in the demand for private assets vs. hoarding and uncertainty.

Anonymous said...

Deflation v Inflation v Stagflation – Misconceptions Clarified

Some people have a very hard time understanding that we are in a massive deflationary spiral; they think that rising prices simply means it is inflation and not deflation. Then they mistake stagflation for deflation and wonder why people are spending more on less. They only see prices, not disposable income, and certainly not economic growth and unemployment.

Prices rose sharply following the OPEC oil price hikes of the 1970s, but the sharp rise in energy crowded out other forms of spending, resulting in rising prices that had nothing to do with a speculative economic expansion but a deflationary contraction they called STAGFLATION occurred with rising prices and declining economic growth.

This is like Biden saying vaguely that he will press corporations to raise wages and lower prices. Great plan, which, as always, means absolutely nothing and illustrates that he has nothing to offer. Biden revealed his position that government is never the problem. If you want to raise NET DISPOSABLE INCOME, lower taxes! Raising wages, as he argues corporations should do, will escalate people to higher tax brackets, and soon, all benefits will come into play with these socialistic programs. As always, nobody in government ever talks about reducing the size of government waste and corruption.

Household income will soon be defined as everyone living in the same house – kids and all. Perhaps you will have to pitch a tent and make the kids sleep outside with the dog to avoid “household” income tax increases. Deflation is not the lowering of prices, it is the lowering of economic activity that can also include STAGFLATION, which occurs when prices rise but there is no economic growth.

Now, stagflation is not exactly the same as deflation, where the price of goods and services do decline. For example, prior to World War II, the US experienced a massive deflationary environment where GDP fell 30% between the crash of 1929 and 1933. A quarter of Americans were unemployed. Prices plummeted, and consumers were not spending because they had very little, if anything, to spend. Panics erupted, and people hoarded; the Second World War brought America out of that economic downfall.

During periods of stagflation, the prices of goods and services increase while buying power decreases. Consumers end up spending more on less. As we are seeing now, for example, retail sales on items such as clothing have declined, but people are spending more on gas and groceries. People feel as if they are earning less despite earning more because their buying power has been drastically reduced. Companies will suffer as consumers spend less, as we are seeing at restaurants, as one example, and this will lead to reductions in the workforce. Unemployment during the OPEC crisis of the 1970s was not nearly as drastic but unemployment did rise to 7.2% by 1980. Inflation went from around 1% in 1964 to 14% in 1980, and GDP growth went from 5.8% to -0.3% during that same period.

So be very careful. If you only look at prices rising and ignore the fact that your disposable income is declining, you will be in for a very rude awakening.

Peter Cresswell said...

@Unknown: Inflation is not a rise in the price of one commodity. It is a *general* rise of prices across the board. That’s a different thing.

Despite what you might have learned as ‘partial equilibrium,’ supply and demand for *one* commodity is linked to demand and supply for every other commodity. Without a rise in the quantity of money, higher prices being paid for eggs (and so an increased monetary demand) must lead to a correspondingly lesser monetary demand, in aggregate, for *other* commodities. It is *only* a rise in the quantity of money that would allow monetary demand for *all* commodities to rise while prices rise for eggs.

Likewise, in the absence of a rise in the overall quantity of money — allowing *extra* spending that would not otherwise have happened — extra monetary demand for oil would lead to a lesser monetary demand for other commodities. It is *only* a rise in the total quantity of money that would allow monetary demand for *all* commodities to rise while the price also rises for oil.

To repeat, inflation is a purely monetary phenomenon. (Which is to say that ‘cost-push’ is a nonsense, as explained in the link in the OP.)

Note however @and/orsum, that this does not say the reverse; i.e., that monetary inflation will always and everywhere lead to price inflation. That’s a different proposition.

It’s different, because it *depends where most of the newly-created money is going.* Yes, helicopter money going to buy consumer goods will lead to consumer price inflation; money borrowed into existence to buy assets (houses, shares etc.) will likely lead to asset-price inflation (all else being equal); but money borrowed into existence to finance *production* will (in excess, and depending where in the business cycle it happens) encourage either a false boom, deflation, and/or the ongoing existence of zombie businesses that should be long dead, but will instead help kill off those who aren’t.

PS: To say that "prices are rising" is also to say that "your disposable income is decreasing." They're two sides of the same thing.

Peter Cresswell said...

NB: Comments here at NOT PC must not be copied-and-pasted from elsewhere without quotation marks, without attribution, and especially not at a length that violates the copyright of the original author — which in the case of the stolen words above is a fellow called Martin Armstrong. I will leave up the above comment for a day or so (it's by an anonymous commenter, of course), so that my reply makes some sense, then it will will be deleted.

Tom Hunter said...

I see we have a Socialist visitor from The Daily Blog, or as I call it over at No Minister, The Psychic Scream. :)

Peter Cresswell said...

@TomHunter: I was going to leave the comment up just for laughs, but looks like they deleted their own tripe themselves.

MarkT said...

@ And/orsum - I think we can reconcile that by saying that increases in money supply will lead to increases in prices, all other things being equal, and always in the long run. Following the GFC the volume of money went up, but the velocity of money went down, somewhat neutralising the effect in the short-medium term. But it allowed a head of steam to be built up that ensured the next cycle of price inflation.