Inflation: The Health of the State (Doug French)
Tuesday November 5th, 2013
The average Joe and Jane have not been sitting around thinking "You know what we need is more inflation." The millions out of work and being fed by Uncle Sam have enough sense to know higher prices don't help them.
Meanwhile, the PhD economists at the Fed don't think cheap food and goods are good ideas. They figure increasing prices will help company profits and encourage individuals and businesses to borrow and spend money. "Weighed against the political, social and economic risks of continued slow growth after a once-in-a-century financial crisis, a sustained burst of moderate inflation is not something to worry about," Kenneth S. Rogoff, a Harvard economist, wrote recently. "It should be embraced."
Binyamin Appelbaum writes for the New York Times, "The Fed, in a break from its historic focus on suppressing inflation, has tried since the financial crisis to keep prices rising about 2 percent a year."
"Historic focus on suppressing inflation?" Is Applebaum kidding? The dollar has lost 95 percent of its value since the Fed's creation, even if we use the government's inflation numbers.
Since Nixon snipped the last ties the dollar had to gold, the dollar has lost 83 percent of its value. The Fed has not exactly been diligent in protecting the dollar's value. This reminds me of Economist Murray Rothbard's comparison of central bankers who talked about suppressing inflation to arsonists who would run down the street yelling 'fire' after setting a building ablaze.
The fact is, Inflation is rearing its ugly head at places like the Golden Arches. McDonald's will no longer provide price relief. The company has had to ditch its "Dollar Menu" for an "Extra Value Menu" that includes $5 options.
Professor Rogoff has criticized the Fed for being too wimpy. "He says that inflation should be pushed as high as 6 percent a year for a few years, a rate not seen since the early 1980s," writes Appelbaum. Imagine, retirees, using the Rule of 72, at 6 percent the spending power of money would be cut in half in a dozen years.
Economists George Akerlof, William Dicken and George Perry make the case in a statistic-addled paper published in 1996 that inflation helps employment because wages can't be lowered. Higher prices increase profits and wage increases lag profits and other prices, making labor more competitive.
Costco CFO Richard Galanti also thinks a little inflation is good. He says his company can expand profit margins and sales with rising prices. Galanti doesn't realize profits are overstated with inflation because of the understatement of inventory values. As prices increase, Costco will be paying more and more to replace its inventory leading to a profit squeeze instead of expansion.
Firms are also fooled by the under-depreciation of plant and equipment, because depreciation allowances are based on original cost rather than replacement cost. The taxman also doesn't care about inflation. Capital gains and interest income are taxed at nominal amounts, not inflation adjusted.
Keynesians believe inflation increases profits. Inturn, as profits increase, firms hire more workers and unemployment goes down. This might work if there was just a temporary inflation. However, government is incapable of engineering such a precise operation. As inflation continues, everyone compensates and, as Henry Hazlett said, "The 'stimulus' of inflation becomes a deterrent."
Hazlett further explained businessmen eventually begin to realize their profits have been an illusion when all costs increase around them.
It's hard to believe the CFO of a company the size of Costco would complain to analysts, "sluggish inflation was one reason the company had reported its slowest revenue growth since the recession." He's not alone. The brass at Walmart, Rent-A-Center and Spartan Stores have complained about the lack of inflation recently.
While these corporate titans bellyache about the lack of inflation, their customers would actually benefit from deflation. There is nothing about the quantity of money that improves prosperity. Economist Jörg Guido Hülsmann points out, "The ultimate springs of human wellbeing are savings, technology, and entrepreneurship -- not money supplies and price levels."
The ability of the Fed and the commercial banking system to create money doesn't benefit all of society but changes "the distribution of resources among the members of society," writes Hülsmann.
It is the people who get the money first who benefit. Is it any wonder Wall Street and Washington D.C. prosper while the rest of America stagnates? Stock prices and food stamp use are soaring at the same time. Municipalities are going broke while real estate prices in the Big Apple and the Capitol soar. Millions remain under-water on their homes while the art market sets new records.
Inflation harms savers and aids the indebted. No country in history has ever been indebted like the United States government. Applebaum writes, "The federal government expects inflation to ease the burden of its debts."
It is only through the Fed's monetary monopoly that persistent inflation can exist. The weight of U.S. government debts and obligations would have crushed any entity operating in a free market a long time ago.
Indebted corporate America also depends on the Fed's inflation. Today's corporate leaders have become what Hülsmann calls "false elites" or "political entrepreneurs." True elites have no fear of deflation because they provide useful entrepreneurial services and are not dependent on rising price levels.
If deflation were allowed the playing field would be leveled and the best entrepreneurial talent would win out. Resources would be utilized in the most efficient ways. It is not price levels that matter to businesses but the margin between receipts and costs.
Hülsmann explains, "inflation constantly lures capital into investment projects that do not find the spontaneous support of other members of society -- capitalists, workers, and customers -- but which are feasible only because they are financed, directly or indirectly, with money from the printing press. The most glaring example is the welfare state..."
Forget about inflation helping workers and real entrepreneurs, inflation is the State's best friend. It can't live without it. That is why governments everywhere want control of the printing press, to take care of the State and its friends.
As Hülsmann concludes, "In short, paper money is monopoly money; it enriches the happy few at the expense of all others."
Douglas E. French writes for Casey Research and is the author of three books; Early Speculative Bubbles and Increases in the Supply of Money, The Failure of Common Knowledge, and Walk Away: The Rise and Fall of the Home-Owenrship Myth. He is the former president of the Ludwig von Mises Institute in Auburn, Alabama.