Your Right to Deflation

[Bono]

LewRockwell.com

Your Right to Deflation
by Llewellyn H. Rockwell, Jr.

In addition to big government, debt, and war, let us add one more item to the list of wicked legacies that the Bush administration has given to this country: inflation. The newest price data raise serious concerns that we are being robbed (that is what inflation is) by this government more than we know.

In some ways, the return of constant upward price pressures on a level exceeding economic growth is a telling act of destruction, and a testament to the power of government to create messes where none need exist.

We have been robbed of our right to deflation by a massive countervailing force.
   
     

We've all been stunned at the price increases in tuition, medical care, housing, and energy. And yet not all prices are rising and no prices rise in tandem. In fact, we can all think of recent times when we've experienced reverse sticker shock. "Only $35 for a CD player?" "This huge jar of olives for only $4?" "This set of screwdrivers and sockets for only $10?"

Those of us with access to Wal-Mart, Sams, Big Lots, or any number of other large discounters experience this sense every time we shop. Low prices impart optimism about the future, and somehow provide a glimmer of the prelapsarian might-have-been, with all goods and services priced at zero: a world in which scarcity imposes no barriers to all-round prosperity.

Hurrah! Our intuition tells us that falling prices are great for our pocketbooks because they leave more left over for savings or other forms of consumption. It is just as good for society at large. Our money becomes worth more and more, and hence our remunerative labors grow in value too. If inflation works as a stealth tax, deflation works as a tax refund. (For more on the issue of definition, see Mises on inflation, Salerno on deflation, and the special issue of the QJAE on these questions.)

Falling prices are a gift that the free market grants to all people, provided that the market's natural benevolence is not thwarted by central bankers and government officials. The market does this through technological innovations that make production more efficient, and a widening division of labor due to the much-derided phenomenon of globalization. We all benefit from computers and from trade with newly opened economies in Europe and Asia.

Socialists used to talk about working together as a community but global trade shows that the best way to work together as a community is to work separately and exchange to our mutual benefit. In this way, all people of the world can unite in the effort to raise productivity, increase efficiency, and – hugely important – drive down prices now and forever.

Sadly, in our times, we are being robbed of our right to deflation by a massive countervailing force: the central bank. Thanks to the Federal Reserve and its monetary spigot, the value of our money continues to decline overall rather than increase as it should. We now face the largest increase in consumer prices in 2.5 years. The Fed promptly assured everyone that it would swing into action to prevent inflation from getting out of control. But it said nothing that would indicate that it might bear the responsibility for existing inflation. This familiar posture has been compared to the driver who watches only the rearview mirror but assures his passengers that all is well up ahead.

In the most recent inflation report, overall prices are climbing: 7.5 percent annualized for May and 5.5 percent in the last quarter. Within the structure of the index itself, however, we find wide variety, with many prices falling but enough rising to generate a rapidly rising index (there is no such thing as an "inflation rate" as a scientific measure).

The big increases were in food and energy, particularly dairy and gasoline. So getting from place to place costs 5 percent more now than it did the same time last year (12.4 percent annualized from 3 months ago!). Medical care is still outpacing everything but food and energy. Housing too is rising.

Given productivity increases, globalization, technological improvements, and the world dollar standard that permits a seemingly limitless export of paper, it is darn difficult these days to cause across-the-board price increases. All pressures run the other way. These very pressures have enabled the Fed to keep interest rates at rock bottom, pump the money supply whenever they saw the need, and otherwise provide backup for the massive amount of debt that is being created by the federal government.

Food and apparel are two sectors that have benefited enormously from the impact of globalization, with constantly falling prices, despite monetary pressures for higher prices. Housing can't benefit from globalization, energy production is hugely shackled by state controls, and everyone knows how viciously government intervenes in medical markets.

The point is not to say that regulations and market impositions cause inflation, but rather that inflation will tend to hit sectors the least where free markets are working to push prices down, as they have in the apparel industry. The more the pressure for lower prices, the less impact the Fed's relentless inflation will have on the industry (at least in the short term).

In the same way, there are additional factors contributing to the high price of medical services and energy. Socialism has inflated the demand for medical services and government restrictions have artificially limited supply. The insane War on Iraq, coupled with sanctions before that, has had a lot to do with restricting supply relative to demand for oil – and this exists alongside environment regulations, government land and water ownership, and taxes that limit profit opportunities from production.

And yet, despite all of this, the real culprit behind the price increases that have stolen your right to deflation is the Federal Reserve. The bout of money-supply increases began after September 2001 and soared above trend line for the two years following. Finally, late last year, the Fed pulled back a bit and the money supply even fell for a time. But now we look again to find that this real deflation was only temporary. The money supply is currently rising again. Since 2001, the money supply has risen above its trend by more than $400 billion.

 

Inflation robs us of our savings, redistributes wealth from savers to debtors, reshuffles property from consumers to those connected to the government, makes conducting business more difficult, and subsidizes short-term thinking at the expense of long-term planning. It drives people into the workforce who would otherwise not be there of their own choosing, and prevents the market economy from working its magic of raising living standards every year.

So how do we guard our future against future inflation? We could wish for better central-bank managers and more responsible presidents, but our founders hoped that we would not become a government of men. Instead consider again the ideal method for securing the value of money against the depredations of state power: the gold standard. It takes away from the state the right to create money and forces those who rule to live according to their means.

June 24, 2004

Llewellyn H. Rockwell, Jr. is president of the Ludwig von Mises Institute in Auburn, Alabama, editor of LewRockwell.com and author of Speaking of Liberty. See What has Government Done to Our Money?, and the Austrian Study Guide on Money and Banking.

Copyright © 2004 LewRockwell.com

[angus]

Big Lots.  Yeah, we used to go to one of those in Oakland.  Now we have discovered one in Columbus.  I still like Wal-Mart better.

anyway, what's the CPI over last year?  five percent!?!  ouch.  yeah, it's worth bitching about.  How do you "control" deflation?  by increasing employment.  On one of those silly tests there's a question which reads, "Which is more important, controlling inflation or controlling unemployment?"  and you choose to strongly or weakly agree or disagree.  and it plugs that into some algorithm, along with other answers to arbitrarily selected questions, and spits how far Left or how far Right you are.  Well, we used to think that inflation and unemployment were mutually defeating.  But in the 90s we learned that in a disequilibrium market it was possible to have our cake and eat it too.  Yeah, the problem is that disequilibrium doesn't last forever.  That's why it's called disequilibrium, not equilibrium.  Anyway, I think Rockwell's analysis is a little superficial, but it does make a good point:  the more the pressure for lower prices, the less short-term impact the Fed's inflation will have on an industry, so why does the Fed keep it up?  it's a losing game, and we are the losers. 


      Low prices.  Everyday. 

That's the Wal-Mart difference! 

[JohnFKennedy]

Big Lots.  Yeah, we used to go to one of those in Oakland.  Now we have discovered one in Columbus.  I still like Wal-Mart better.

anyway, what's the CPI over last year?  five percent!?!  ouch.  yeah, it's worth bitching about.  How do you "control" deflation?  by increasing employment.  On one of those silly tests there's a question which reads, "Which is more important, controlling inflation or controlling unemployment?"  and you choose to strongly or weakly agree or disagree.  and it plugs that into some algorithm, along with other answers to arbitrarily selected questions, and spits how far Left or how far Right you are.  Well, we used to think that inflation and unemployment were mutually defeating.  But in the 90s we learned that in a disequilibrium market it was possible to have our cake and eat it too.  Yeah, the problem is that disequilibrium doesn't last forever.  That's why it's called disequilibrium, not equilibrium.  Anyway, I think Rockwell's analysis is a little superficial, but it does make a good point:  the more the pressure for lower prices, the less short-term impact the Fed's inflation will have on an industry, so why does the Fed keep it up?  it's a losing game, and we are the losers. 


      Low prices.  Everyday. 

That's the Wal-Mart difference! 

Take it you've studied economics at at least some level .

The Philips curve did break down in the nineties, but I should imagine the trade off between inflation and employment will be back sooner or later, hopefully later rather than sooner.

[David S]

LewRockwell.com

Instead consider again the ideal method for securing the value of money against the depredations of state power: the gold standard. It takes away from the state the right to create money and forces those who rule to live according to their means.

When I say this you guys think I'm crazy.

[A18]

As if no one thinks Bono's crazy. Go to the fantasy forum.

Anyway, deflation is terrible for an economy. We need price stability.

[David S]

As if no one thinks Bono's crazy. Go to the fantasy forum.

Anyway, deflation is terrible for an economy. We need price stability.

Where do you see greater stability, in the years before the fed or after? While we were on a precious metal standard, prices were fairly constant except during war time when prices would rise temporarily. Since the Fed was born and the counrtry abandoned the gold standard, inflation has been chronic. That is not stability.


HMMM looks like the image will not display on this page so here's the linkhttp://oregonstate.edu/Dept/pol_sci/fac/sahr/pl1665.htm

[True Federalist (진정한 연방 주의자)]

As I’ve said before when you’ve posted that picture, since stability is relative instead of absolute, you’d need to use a logarithmic scale to determine relative stability. All that image shows is that we’ve had inflation which is a totally sperate councept from stability.

Basically, we diagree over which derivative of the CPI it is more important to keep close to zero.  You argue the first while I argue for the second.

Also, that page still doesn’t work on browsers that follow industry standards instead of requiring people to use Microsoft’s Internet Virus Explorer.

[bullmoose88]

A little bit of inflation is a good thing.

Since wages are downward rigid, some inflation leads (even coupled with a modest increase in pay) to lower real wages.

But people still read that Rockwell guy?

Geez.

[David S]

Also, that page still doesn’t work on browsers that follow industry standards instead of requiring people to use Microsoft’s Internet Virus Explorer.

So sue them.

[David S]

Ok let’s try an example. Let’s say you’re Rip Van Winkle and the year is 1792.   As I read the graph the CPI in1792 is about 5. You put ten $10.00 coins in your pocket and go for a little window shopping at your favorite Wal-Mart’s to see what you could buy with your $100. On the way home you fall asleep and awake to the sound of gunfire.

Its now 1812 and the country is in another war with jolly old England. THE CPI is now about 10. You head back to Wal-Mart’s and are saddened to see prices have doubled so you can only buy half as much as you could before. Being distraught over that you go back out in the woods and go back to sleep.

When you wake up again its 1830. The CPI is back to 5. This time Wal-Mart’s prices are back to what they were in 1792. Since the war ended prices are back to normal. Feeling very relieved you decide to go back to sleep.

Next you wake up in 1913. The CPI is about 6. Prices at Wal-Mart’s are up a bit. Now it would take 120 bucks to buy what you could have bought for $100 back in 1792. Looks like a bit of inflation, but not too bad considering 120 years have passed.  Time for another nap.

You wake up in the present day. The CPI is now 105. Upon making your trip to Wal-Mart’s you are absolutely shocked to discover that prices have skyrocketed. It would now cost $2100 to buy what you could have purchased for only $100 in 1792.

Realizing that $100 is almost worthless you become so depressed that you decide to commit suicide by jumping off the roof of Wal-Mart’s. Fortunately a good Samaritan happens by and asks what the problem is. You show him your coins and explain that the $100 bucks is nearly worthless and you are now destitute. Good fortune is with you again because this particular good Samaritan is also a Libertarian who understands the value of gold. He explains to you that the gold in your coins is worth far more than the face value. In fact the $10 Gold Eagle contains 247.5 grains of pure gold or .515 troy ounces. As of 4/14/2005 the price of gold is $423.4 per ounce so your ten coins are actually worth $2180.51.

So while the dollar value of the merchandise at Wal-Mart has risen to $2100, the value of your gold coins has climbed to $2180.51. Luckily for you the wisdom of the founders in making gold currency has preserved the value of your savings, for 213 years. If you had paper currency instead it would have lost 95% of its value.

OK the story is silly, but the numbers I used are correct. So do you want gold or suicide?

[A18]

My advice: if you intend to fall asleep for 200 years, spend all your money on gold, and in another 200 years you'll have a pretty nice return.

If you don't, then quit worrying about small amounts of inflation, and buy stock instead.

[jokerman]

A little Deflation is ok, but it's not worth what it would take to get it.  Also, deflation tends to favor those who hold wealth.  Let's remember that it was deflation that in part caused the great depression.

[David S]

My advice: if you intend to fall asleep for 200 years, spend all your money on gold, and in another 200 years you'll have a pretty nice return.

If you don't, then quit worrying about small amounts of inflation, and buy stock instead.

Without a doubt the stock market outperforms gold or other commodities over the long term. But Stocks aren't currency.

BTW most of that inflation occurred not over 200 years, but over 75 years, about  a normal life span.

[A18]

What's important is that they outperform inflation, so even though the money you get back is worth less, you have even more of it.

[○∙◄☻¥tπ[╪AV┼cVê└]

If you ever start getting deflation, print some more money.

[opebo]

If you ever start getting deflation, print some more money.

Excellent answer.  And just to be safe err on the side of caution by printing more if inflation ever falls below what our crude measurents would call say 2%.

Why does the trade of between inflation and unemployment have to be so bad, when we can simply provide an extremely generous and comfortable welfare state for those sacrificed on the alter of monetary stability?  Assuming such a sacrifice is required, why  shoulnd't the beneficiaries of Capitalism (the owners) pay for those who suffer the ill effects?

[DanielX]

Waitasec.. in case of inflation, should the US government simply print less money?

[A18]

Waitasec.. in case of inflation, should the US government simply print less money?

Yes, but they never do.

[bullmoose88]

Waitasec.. in case of inflation, should the US government simply print less money?

Yes, but they never do.

They just raise the interest rate, I believe.

[opebo]

Waitasec.. in case of inflation, should the US government simply print less money?

Yes, but they never do.

They just raise the interest rate, I believe.

I think that means exactly the same thing, as the interest rate determines the 'demand' for money.

[○∙◄☻¥tπ[╪AV┼cVê└]

I think that means exactly the same thing, as the interest rate determines the 'demand' for money.

They tend to be correlated, but they're not the same. Interest rates have been artificially low recently. They were artifically high in 2000. I think it's Greenspan trying to hurt Clinton/Gore and help Bush.

[opebo]

I think that means exactly the same thing, as the interest rate determines the 'demand' for money.

They tend to be correlated, but they're not the same. Interest rates have been artificially low recently. They were artifically high in 2000. I think it's Greenspan trying to hurt Clinton/Gore and help Bush.

Obviously.