Opinion from a Libertarian ViewPoint

Are We at the Inception of an Inflationary Depression? – International Man

Posted by M. C. on June 28, 2021

It is an acknowledged fact within the circle of Austrian Economists that the Central Banks have to continuously rely on and actively indulge in the propaganda of Voodoo Economics to hide the extreme imbalances that they have created in the world economy.

by Shanmuganathan Nagasundaram

It is an acknowledged fact within the circle of Austrian Economists that the Central Banks have to continuously rely on and actively indulge in the propaganda of Voodoo Economics to hide the extreme imbalances that they have created in the world economy.

What lies in the decade ahead for much of the Western economies and most parts of the world is a prolonged period of high inflation combined with an economic depression. I should add that if one were to account for inflation correctly, even today, we are probably in stagflation (inflation + recession) already in most parts of the world.  But the sleight of hand of Central Banks in the way they underreport consumer price inflation (CPI) will allow them to hide the reality for a few more months. If we draw a comparison between the stagflationary seventies (1970’s in which gold went from $35 to $850/oz, Oil from $3 to $40/barrel, etc.) and what lies ahead. In that, it’s a given that inflation is going to be substantially higher than what we had in the 1970s and the economic recessions much deeper.

Before I proceed further, it would be useful to clarify the term “Depression” used above. Most Economists confound Depression with Deflation. These are two different economic phenomenon – the former refers to the condition of GDP growth, and the latter refers to a monetary phenomenon. Depression denotes a prolonged period of rapid economic declines and a steep fall in the living standards of most people. It relates primarily to negative GDP growth by a substantial degree over at least a few years. On the other hand, deflation is a monetary phenomenon that refers to a condition of falling prices of consumer goods.

Depressions can be either deflationary or inflationary – in fact, more often than not, most depressions are inflationary. The 1930’s “The Great Depression” was deflationary, and the one we are living in the early stages of is going to be inflationary.

Does deflation lead to Depressions?

Most Economists think that deflation caused the 1930’s Great Depression, and this is a myth that the US Fed has entirely propagated. As Murray Rothbard explains in his book “America’s Great Depression,” Deflation (or falling prices) made the depression a lot more tolerable than would otherwise have been the case. The entire century before the formation of the US Fed (from 1815 to 1914), when the US was on the classical gold standard, was deflationary. This was the period in which the US economy transitioned from a primitive agrarian society to the world’s leading economic powerhouse with an estimated CAGR of more than 4% (with real growth being even higher due to falling prices) for a century.

If deflations result in a depression, the US ought to have been a basket-case with a century of deflation leading up to 1914. Ironically, with more than a century of inflation since then, courtesy, the US Fed, the US Economy is indeed a basket-case today, and the unraveling of the currency and the economy when it happens in the years ahead will be swift and decisive.

Now that a fundamental but important distinction has been made, we can expand on the theme of the Inflationary Depression ahead.

So how did we reach this precipice…?

Well, for the world to have reached such a precarious situation as I have painted above, the problems have to be deep-rooted, fundamental, and long-standing. That is the case, and as Mises said during 1951, the origins can predictably be traced to the Central Banks.

“There is nowadays a very reprehensible, even dangerous, semantic confusion that makes it extremely difficult for the non-expert to grasp the true state of affairs. Inflation, as this term was always used everywhere and especially in this country [the United States], means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term “inflation” to refer to the phenomenon that is an inevitable consequence of inflation: the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. It follows that nobody cares about inflation in the traditional sense of the term. As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are, in fact, only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil.”

What Mises rued above is commonly referred to as “Inflation is too much money chasing too few goods.” Or, as Milton Friedman said, “Inflation is and everywhere a Monetary Phenomenon.” What Mises spoke of in 1951 today is ubiquitous. It would be almost impossible to spot a single economic commentator (other than the handful of Austrian Economists) who would distinguish the cause from the effects when talking about inflation. To add insult to injury, most mainstream economic commentators believe that consumer price inflation is caused by growth and that “some” inflation is indeed good/desirable / required for economic progress.

The above US Fed propaganda of the witchcraft Keynesian economics has indeed been extraordinarily successful – so much so that after a century, even they seem to believe in it themselves. The last US Fed Chairman who understood the distinction between propaganda and the truth was Alan Greenspan. His essay “Gold and Economic Freedom” remains one of the best expositions written to date on this topic. The subsequent ones have been thoroughbred Keynesians, who pretty much subscribe to the above ridiculous notion as gospel truth.

So under the garb of promoting economic growth, we have just allowed the central banks around the world to print money with impunity. This has long been the case since 1971 when the last vestiges to Gold and Currency were removed. After Richard Nixon closed the Gold Window “temporarily” in 1971, the Central Banks have had little reason to restraint themselves. But they have indeed gone berserk after 2008, and even more so in the last year or two. Each transgression makes the erstwhile felony look like a misdemeanor.

Where has all the inflation, since 2008 – Gone?

See the rest here

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