The economist Milton Friedman has said that his deepest regret was suggesting withholding to the Federal government. Time was that each of us used to have to write a check to pay our income taxes. That stings. When, however, someone takes our money before we see it, not only does it sting less, but we face the temptation to blame our employer who signs our checks. Weirder still, we face the temptation on tax day to thank the government for our return. Employers take our money; government gives some back.
Inflation, as defined by the government, follows the same rhetorical deception. What the government regularly reports as our “inflation” rate is actually the Consumer Price Index. It is the measure of the change in price over time for a particular set of goods and services. If a gallon of milk, a gallon of gas and a gallon of Dapper Dan pomade cost $12 this month last year, but costs $13.20 this month this year we have an annual inflation rate of 10%.
When that happens we get angry at the oil companies, the grocery stores and the stockholders at Dapper Dan for being greedy. We blame them for inflation. The truth is higher prices are the fruit of inflation rather than inflation itself. Not surprisingly the real culprit is the federal government. What is inflated in inflation isn’t prices, but the supply of money. It’s the number of dollars chasing the goods and services in the economy.
Imagine if you will a mythical country we’ll call Mythical Economic Lesson Land. The only goods and services in this tiny land are ten loaves of bread. The only money in this tiny land are ten one dollar bills. How much does a loaf of bread cost? Those of you who said anything other than $1, please try again. Ten dollars in an economy which has only ten loaves of bread. A dollar a loaf, ten out of ten times.
Now imagine that a nefarious Dr. Evil type shows up on the scene. We’ll call him John Maynard Keynes. He flies his plane over our country and drops out ten more crisp dollar bills. What happens? Has anyone gotten any richer? The economy still only has ten loaves of bread in it. Now answer this question- how much is a loaf of bread? Ten loaves, twenty dollars. Each loaf is now $2. Ten pieces of paper hasn’t grown the economy one bit. It’s merely changed the price.
Qui bono? Suppose you were in this mythical land and needed to borrow a loaf of bread before Keynes showed up. You would owe the lender $1, or the equivalent of a loaf of bread. After the airdrop, however, you still owe $1, but that’s now half a loaf of bread. You’d benefit from this inflation. But what if you had been wise, scrimped and saved and had $1 in the bank before the new money showed up? You had the future promise of a loaf of bread. After the new money, you have a future promise for half a loaf of bread.
You can complicate things all you like. But it won’t change any of the above. You can inflate through fractional reserve banking, through deficit spending, even through a massive goldrush. You can add or subtract changes in efficiency. It still doesn’t change the facts, nor the mechanism. Economics doesn’t care how the money supply is inflated. It will still react the same way.
Inflation, at the end of the day, is the government stealing the purchasing power of our money to finance their agenda. Blame Uncle Sam.
Excellent! I am shocked how few people know what inflation really is. (Even fewer call it by its real name, theft)
Thanks for your daily thoughtful emails!