Inflation

Have you heard of inflation? Chances are you have, and chances are that there is always some politician in the Ivory City talking about inflation and slowing it down.

For those who paid attention in 9th grade history class, the word inflation might bring to mind the example of post WWI Germany, in which the German Deutsch Mark went from 4 marks per dollar to over 4 billion marks per dollar in just two years. That is inflation in its grossest form, but let us define our terms as something more simple: inflation is an increase in the money supply of a country. It can be artificial, natural, or both.

What is natural inflation? Well, there is always some small amount of inflation in any economy. There is always some demand for more money in the economy, or a need for money that has been worn out, lost, or destroyed to be replaced. Such small inflation is natural and quite acceptable (especially when on something like the gold standard), and we have no intention of arguing against that type of inflation.

Artificial inflation, however, is not caused by demand, but by a man-made forcing of large amounts of new money into the money supply. In most cases, it is the government that has the ability to inflate the supply quickly.

Money is the medium of exchange. It is a common product that is easy to carry, rare, valuable, and easily exchangeable. Salt, gold, water, virtually any commodity can and has served as money. By definition, the less of a commodity you have, the more valuable it is, and the more of a commodity you have, the less valuable it is. We practice this everyday: when you’re a kid, and you have a very small to non-existent income, a penny, or a nickel, or gasp a five pound bill can seem like a million dollars to them! But get someone like Bill Gates, who has billions of billions of dollars in his pocket and handles that everyday, to look at five dollars, and he’ll turn away and get into his mansion.

It even applies to gold. If you have never seen a gold bar in your life, and suddenly you are given one, after years of buying stuff with grain, you gaze at it with Bambi eyes and in a gold-drunken stupor idiotically shout to your fellow tribesmen, who equally ogle over it and eventually stab you with spears to get that gold bar. It is so rare that it is priceless. But what if you have been surrounded by gold your whole life and you’ve billions of gold coins just lying around. If a gold bar gets lost, will you care? No. You’ve got so many, why the heck does one matter?

This concept of money is hardly foreign, so simple and evident that it might be incomprehensible to some that many forget about it when talking about money and inflation. However, this is what happens every time when we talk about inflation. All those who advocate inflation forget this principle one way or another, from economically illiterate myrmidons in Connecticut to Nobel Prize winners in California. Their arguments are varied on every level, but their skeleton is the same. The following arguments chronicles those who advocate government inflation to fix problems and their reasons for such beliefs.

The most illogical think that if we have twice as much money, we can buy twice as many things (and so forth), so the government should print until all the Redwood forests are cut down and everyone has a billion dollars in their bank accounts, and everyone will be rich and happy. These are the Workers.

Going up one step, some are smart enough to realize that the problem is not that simple. They see the problem as a leak or gap in the money supply: the economy isn’t putting out enough money and the government must issue enough money, but only enough money, to correct said gap. Since they criticize the market and say it fails, these are the Critics.

The top of the inflationists know the negative effects of inflation, and embrace them wholeheartedly. They know that pumping money into the economy only decreases the purchasing power of the money and they want that to happen, wanting to “help the poor” and “make the rich and poor equal”, “fixing unemployment,” or for a gazillion zillion reasons we’ve all heard before. These are the Planners.

The first two, the arguments of Workers and Critics, say that all we have to do to fix poverty, the market gap, and other economic problems in the world by printing more Lincolns and Jacksons and Grants and Benjamins and Washingtons and all that other fiat money we so love. Say we do just that. We double the money supply and everyone has twice as much money. You suddenly have $2000 instead of $1000. We can buy more stuff, until we realize that because of the principles of money, that car you wanted is now 75,000 dollars instead of 50,000 yesterday, and probably more. Hazlitt explains the details:

“Suppose, for example, that the government prints money to pay war contractors…the war contractors and their employees, then, will have higher money incomes. They will spend them for the particular goods and services they want. The sellers of these goods and services will be able to raise their prices because of this increased demand…Let us call the war contractors and their employees group A, and those from whom they directly buy their added goods and services group B. Group B, as a result of higher sales and prices, will now in turn buy more goods and services from a still further group, C. Group C in turn will be able to raise its prices and will have more income to spend on group D, and so on, until the rise in prices and money incomes has covered virtually the whole nation. When the process has been completed, nearly everybody will have a higher income measured in terms of money. But prices of goods and services will have increased correspondingly. The nation will be no richer than before.”

In other words…we haven’t done a thing, except demolish a nice forest and give some local middle-class businessmen more wealth. While the prices of stuff might not have doubled, the cost and value of the economy is exactly the same. We have only switched around the wealth, as such things do. We’ve only increased one man’s wealth at the expense of another, while the market could have increased both men’s wealth by choice. We’ve just killed all two arguments with one stone. For both the Workers and the Critics, if we have managed to do something, we have only made the problem worse. This leads us to the third argument of the Planners.

Artificial inflation has one other side effect: it is unsustainable. The money has no basis for existing in the marketplace as far as it is concerned. The only reason it is there is because of the misguided whim of some Ivory Lord. Sooner or later, the inflation either collapses due to the market or is brought to a halt by some logical politician. What happens? The money supply deflates due to natural market pressures: the market place has no need for this excess money, so it dumps it. A large amount of money exits the money supply, and all the stuff based on that artificial money goes splat! People lose jobs, bad businesses started on that bad money go out of business, the economy loses a lot of value, and the people are no better off. We’ve defeated our own purpose, our own cause, our own compassion, by inflating the money supply.