MCViewPoint

Opinion from a Libertarian ViewPoint

Posts Tagged ‘Falling Prices’

Even When There Is Inflation, the Fed STILL Fights Falling Prices

Posted by M. C. on June 15, 2022

 Instead, the central scenario is surely that the Fed has flooded the system with so much money (only some of the excess removed during the period of hawkish turn and taking account of cumulative price rises) that the natural downward rhythm of prices will not show up in outward reality. Rather, the Fed will use the relief from symptoms of inflation in the consumer price data to double down on monetary inflation. This would show up at first in a new episode of asset inflation.

The more government helps…

https://mises.org/wire/even-when-there-inflation-fed-still-fights-falling-prices

Brendan Brown

Under any remotely sound money regime the aftermath of war and/or pandemic is highly likely to feature a sharp decline in the prices of goods and services on average. Even under unsound money regimes there are powerful forces operating towards lower prices once the war/pandemic recedes. Strong injections of monetary inflation, however, can overpower them.

The Fed and all the foreign central banks which follow its lead and/or doctrines are apparently of the intention that this time the decline in prices will not take place. Instead, they state the aim of their monetary policies, to be achieved within two years, as a decline of the inflation rate from present near-term highs to 2 percent.

In combatting the powerful “natural rhythm” of prices downwards in the aftermath of pandemic and war we should expect the Fed and foreign central banks to marshal a tremendous amount of monetary power. That will occur beyond an intermission where central banks are ostensibly trying to rein back the monetary inflation which has reached its peak virulence in 2021–22. 

Precise measurement of monetary inflation, including its stages, is impossible under the present monetary regime where the supply and demand conditions for monetary base—and the attributes of base money—have been deeply corrupted. In thinking about the next monetary inflation injections, history provides considerable insight.

The aftermaths of supply shocks are full of inflation danger, even though recession intervenes and mitigates this for some time. Monetary inflation has accompanied all the great supply shocks and sometimes preceded them as in the present case of pandemic and war. Here monetary inflation stretches all the way back to 2012/13.

In the aftermath of World War I and the Spanish flu pandemic (1918–19), US consumer prices fell by around 20 percent (from mid-1920 to end-1921). The fall in prices stemmed both from deliberate monetary deflation (starting in late 1919 as the Benjamin Strong–dominated Fed sought to reverse the monetary inflation in the half-year following the armistice) and the easing of supply restraints (with huge gluts developing for many primary commodities). 

After World War II there was an almost 5 percent decline in CPI from mid-1948 to the end of 1949, overlapping the recession of November1948 to October 1949. There was no sudden substantial monetary policy tightening during that time. But the around 30 percent rise of consumer prices during 1946–47 coupled with the constancy in outstanding supply of high-powered money stock meant this shrunk far in real terms. Accordingly, the overhang of excess money supply dwindled. 

Towards the end of the Korean War (1950–53) and into its aftermath consumer prices were relatively flat (mid-1952–55), having risen by almost 12 percent between mid-1950 and the end of 1951. That was despite the McChesney Martin Fed following an inflationary monetary policy as evident first in asset inflation and later in an eruption of consumer price inflation (the second half of the 1950s). In effect the “natural rhythm” downward of prices as wartime constraints eased and a sustained leap in productivity growth got under way meant that monetary inflation did not produce at first the symptom of consumer price inflation.

See the rest here

Be seeing you

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Prices rising? Guess whose fault it is

Posted by M. C. on March 24, 2022

It’s worth recalling: the United States became the world’s greatest industrial power at a time of generally falling prices.

Incidentally, don’t let them convince you that the rise in other prices is being caused by the rise in oil prices. That’s an easy fallacy to fall into, and (not coincidentally) it serves to divert responsibility away from them.

Here’s why it’s wrong.

Tom Woods

Now that prices are rising, the lizard people are devoting time they once spent writing nonsensical things about COVID to writing nonsensical things about price inflation.

Of course they’re blaming it on anyone and everyone but themselves. Oh, it’s Russia (even though these price trends began before Russia had taken any military action in Ukraine), or it’s corporate greed, or it’s actually a sign of a robust economy!

Actually, falling prices generally indicate a robust economy.

In an economy with a stable or slowly increasing money supply, this is what happens:

Business firms invest profits into capital goods, which make possible the production of an ever-greater quantity of consumer goods.

This greater productivity, yielding a greater supply of consumer goods, pushes prices down and increases everyone’s real incomes as a result.

That ten dollars of yours, instead of buying a hat, now buys you a hat and some socks.

We don’t observe this phenomenon of productivity-driven price decreases anymore (except in particular sectors like consumer electronics) because it is obscured by the constantly increasing supply of money, thanks to the Fed.

The point is: falling prices are generally a sign of a progressing economy that is investing in capital goods, becoming more productive, and producing more goods less expensively. A general rise in the price level, by contrast, doesn’t necessarily indicate any such thing. It indicates only that the central bank is creating money, which in itself doesn’t improve our standard of living at all.

It’s worth recalling: the United States became the world’s greatest industrial power at a time of generally falling prices.

Incidentally, don’t let them convince you that the rise in other prices is being caused by the rise in oil prices. That’s an easy fallacy to fall into, and (not coincidentally) it serves to divert responsibility away from them.

Here’s why it’s wrong.

People have only so much disposable income. If prices at the gas pump go up, people don’t suddenly have extra money to pay those higher prices and also keep up the rest of their usual consumption. Something has to give. If they continue to buy as much gas as before, then they have less money now to spend on other things, and that in turn puts downward pressure on the prices of those other things. So it’s a wash.

The only way for all prices to rise, therefore, is for there to be an increase in the supply of money that can keep all those prices high simultaneously — and in the present system, only the Federal Reserve can do that.

So the present problem is caused by the Fed, period. No other alleged cause makes any sense. (If “corporate greed” were the issue, why weren’t those companies greedy a year ago? Why do they suddenly stop being greedy?)

Bloomberg is recommending, as advice for navigating rising prices, “Don’t buy in bulk.”

Now that’s some dumb advice.

If you expect the price inflation to continue, of course you want to buy in bulk in order to lock in present prices. Better to be in real goods (i.e., not money) than in a money you expect to keep losing its value.

We went from “there is no inflation” to “there’s inflation but it’s ‘transitory'” to “inflation is good for you” to “inflation is caused by Russia” pretty fast.

As always, the regime wants to divert the blame from itself onto something else, and it’s hoping you’re enough of a dope to blame “greedy rich people” instead of them.

The best rule of thumb, as we have learned through hard experience, is: don’t trust a word these people say.

Even better than that: don’t trust them even when they’re silent.

This week I’ve been on an Internet privacy kick — I’m the exact kind of person the bad guys would want to destroy, so why hand them what they want on a silver platter?

There are simple things you can do to improve your privacy right away, and our old friend Glenn Meder is going to walk us through five of them tomorrow night.

Don’t trust these people. Reserve your spot at the link below, and I hope to see you there:

http://www.tomwoods.com/privacy
Tom Woods

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Why Government Should not Fight Deflation | Mises Wire

Posted by M. C. on November 9, 2019

Thus attempts to reverse price deflation by means of a loose monetary policy (i.e., by creating inflation) is bad news for the process of wealth generation, and hence for the economy. On the other hand, in order to maintain their lives and well-being, individuals must buy goods and services in the present. So from this perspective a fall in prices cannot be bad for the economy.

https://mises.org/wire/why-government-should-not-fight-deflation

For most experts, deflation is considered bad news since it generates expectations of a decline in prices. As a result, they believe, consumers are likely to postpone their buying of goods at present since they expect to buy these goods at lower prices in the future.

This weakens the overall flow of spending and in turn weakens the economy. Hence, such commentators hold that policies that counter deflation will also counter the slump.

Will Reversing Deflation Prevent a Slump?

If deflation leads to an economic slump, then policies that reverse deflation should be good for the economy. Or so it is held.

Reversing deflation will simply involve introducing policies that support general increases in the prices of goods, i.e., price inflation. With this way of thinking inflation could actually be an agent of economic growth.

According to most experts, a little bit of inflation can actually be a good thing. Mainstream economists believe that inflation of 2 percent is not harmful to economic growth, but that inflation of 10 percent could be bad for the economy.

There’s good reason to believe, however, that at a rate of inflation of 10 percent, it is likely that consumers are going to form rising inflation expectations.

According to popular thinking, in response to a high rate of inflation, consumers will speed up their expenditures on goods at present, which should boost economic growth. So why then is a rate of inflation of 10 percent or higher regarded by experts as a bad thing? Clearly there is a problem with the popular way of thinking.

Price Inflation vs. Money-Supply Inflation

Inflation is not about general increases in prices as such, but about the increase in money supply. As a rule the increase in money supply sets in motion general increases in prices. This, however, need not always be the case.

The price of a good is the amount of money asked per unit of it. For a constant amount of money and an expanding quantity of goods, prices will actually fall. Prices will also fall when the rate of increase in the supply of goods exceeds the rate of increase in the money supply. For instance, if the money supply increases by 5 percent and the quantity of goods increases by 10 percent, prices will fall by 5 percent.

A fall in prices however cannot conceal the fact that we have inflation of 5 percent here on account of the increase in the money supply.

The reason why inflation is bad news is not because of increases in prices as such, but because of the damage inflation inflicts to the wealth-formation process. Here is why.

The chief role of money is the medium of exchange. Money enables us to exchange something we have for something we want. Before an exchange can take place, an individual must have something useful that he can exchange for money. Once he secures the money, he can then exchange it for the goods he wants.

But now consider a situation in which the money is created “out of thin air,” increasing the money supply. This new money is no different from counterfeit money. The counterfeiter exchanges the printed money for goods without producing anything useful. He in fact exchanges nothing for something. He takes from the pool of real goods without making any contribution to the pool.

Note that as a result of the increase in the money supply what we have here is more money per unit of goods, and thus, higher prices.

What matters however is not that prices rise, but the increase in the money supply that sets in motion the exchange of nothing for something, or “the counterfeit effect.” The exchange of nothing for something, as we have seen, weakens the process of real wealth formation. Therefore, anything that promotes increases in the money supply can only make things much worse.

Why Falling Prices Are Good

Changes in prices are just a symptom, as it were — and not the primary causative factor — of a falling growth momentum.  Thus attempts to reverse price deflation by means of a loose monetary policy (i.e., by creating inflation) is bad news for the process of wealth generation, and hence for the economy. On the other hand, in order to maintain their lives and well-being, individuals must buy goods and services in the present. So from this perspective a fall in prices cannot be bad for the economy.

Furthermore, if a fall in the growth momentum of prices emerges on the back of the collapse of bubble activities in response to a softer monetary growth, then this should be seen as good news. The fewer non-productive bubble activities we have, the better it is for the wealth generators, and hence for the overall pool of real wealth.

Likewise, if a fall in the growth momentum of the CPI emerges on account of the expansion in real wealth for a given stock of money, this is obviously great news since many more people could now benefit from the expanding pool of real wealth.

We can thus conclude that contrary to the popular view, a fall in the growth momentum of prices is always good news for the wealth generating process and hence for the economy.

 

 

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