THE BASICS OF INFLATION
Webster’s defined inflation as “a persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.” In common discussion, inflation is thought of as an increase in prices, although in economics it previously was defined as an expansion of credit and the money supply. Over time, the definition has moved from the cause to the effect. But this lack of understanding only serves the cause of the government and the Federal Reserve.
To better illustrate what I mean, simply examine this passage from John Maynard Keynes’ “The Economic Consequences of the Peace”
“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become "profiteers," who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”
If you listen to the major news networks, you’ve likely noticed the nearly universal belief that “inflation” is simply price increases of consumer goods. They completely ignore price increases in equities and real estate when discussing inflation. The extent of these price increases is directly correlated to the velocity of the currency. And a good deal of the increases for equities and real estate is because of the various Quantitative Easing programs put into effect, as nearly all that money went directly into those asset classes.
Inflation is the legal printing of the U.S. currency - “money” – in the form of Federal Reserve Notes. The price increases are the result of that printing. The Federal Reserve does not want attention focused on the true reasons behind the price increases, for fear of being blamed by the public, or seeing their power lessened. So, it is in their best interest to perpetuate the fallacy that increases in consumer prices is “inflation.” That also allows them to take the credit for appreciation in equities and real estate, both of which are always presented as “good.”
There is no such thing as “demand pull” or “cost push.” Without the expansion of the money supply (M1, M2, and M3) none of these fallacious explanations could take place. These are nothing more than Keynesian-coined slogans – economic propaganda – used to distract from the real cause of the problem: printing money from nothing, without the backing of real assets such as gold and silver.
LESSONS IN DISHONESTY
Even if one were to accept the position that inflation is simply an increase in consumer prices, the most common measuring stick – the Consumer Price Index (CPI) – isn’t even meant to do that. The Bureau of Labor Statistics (BLS) themselves admitted as much in the August 2008 issue of the Monthly Labor Review in an article entitled “Common Misconceptions About the CPI.” It was there that you could find the statement:
“The CPI’s objective is to calculate the change in the amount consumers need to spend to maintain a constant level of satisfaction.”
First of all, this reveals that – despite common belief otherwise – that the CPI is not an index of a fixed group of consumer products. In many ways, it isn’t an index at all. A true index is a rules-based measurement of something. The CPI’s contents are not static, and the “rules” change arbitrarily.
Rather than measure a fixed basket of goods, the CPI has developed into a Rubik’s Cube of subjective confusion, intended to create a controllable outcome. There are two main ways the Orwellian phrase “constant level of satisfaction” is bastardized to maintain the deception. First are the way changes in consumer purchasing are assumed and adjusted for. If beef prices rise, but pork prices do not, it is assumed that to “maintain your satisfaction” you will buy less beef and more pork, and buy cheaper cuts of beef as well. The twisted logic is that if you spent more money on beef, you’d have less money for other necessities, and therefore this would lower your “level of satisfaction.” After all, starvation or eviction aren’t enhancements to your satisfaction. There is a common term for this: it’s called a scam. If you buy the same items, week after week, and discover you can’t afford to do so any longer, the BLS suggests you must be stupid because you did not substitute cheaper items. It’s your fault, not the Fed’s, that prices are rising.
The second way the BLS adjusts the CPI to meet a desired outcome is by adjusting prices based on “quality.” Car prices go up? No matter; they get better gas mileage, so you’re getting better “quality” and those increases are actually a decrease. Your new refrigerator costs $200 more than your last one? It’s more energy efficient, so you’re getting better “quality.” A recent article even pointed out that they offset increases in the price of beef by calling a lower fat content as an increase in “quality.” The objective is clear: minimize or offset price increases, in order to keep CPI changes to a minimum. After all, if the CPI isn’t moving up, the cost of living must not be increasing. Government “statistics” become “reality” instead of the day-to-day experiences of the common people.
THE COST OF THE FED
“Paper money currency eventually returns to its intrinsic value – zero.” - Voltaire (1729)
The Federal Reserve System was originally said to be created in order to stop the economic booms and busts of capitalism and free markets. The Fed was merely supposed to be the lender of last resort, and this idea was sold as a method to stabilize and smooth out the economy. Therefore, the question should be asked: how has the Fed done in its performance? Or, put in a more direct way: what has been the cost of the Fed?
The two dynamics to judge this answer are the duration of recoveries (and lack of recessions), and comparing that to the extent of price increases from inflation, which the Fed is directly responsible for by expanding the money supply.
For this I will be using the classifications of recessions and recoveries developed by the National Bureau of Economic Research (NBER), who have measured and recorded every economic swing since 1854. From December 1854 through January 1913 (which is when the U.S. Federal Reserve began) the nation experienced 315 months of recessions and 382 months of recoveries. In other words, the economy was in declining growth 45.2% of the time and expanding growth 54.8% of the time. Using gold as the measuring stick (as the Gold Standard was still in effect), inflation was about 7.2% overall during this period or an annual rate of 0.12%. Or, if you choose to use the data supplied by the Bureau of Labor Statistics, overall inflation was 18% during this period, annualizing out to 0.28%. Either way, while year to year prices would increase or decrease due to short-term issues, prices as a whole were incredibly stable.
Compare that to the period in which the Fed took the reins of the economy and the money supply. From 1913 through February 2020, the economy experienced 261 months of recession and 1,024 months of recovery. Broken out in percentages, that’s 20.3% of the time in declining growth, and 79.7% of the time in expanding growth. On these terms, the Fed has been a huge winner, greatly increasing the amount of time spent in recovery. Assuming economic results would have been equal in both periods if no Federal Reserve existed, the U.S. has experienced an extra 26.7 years of expanding economies (320 months) as a result of their actions.
Now let us measure the offsetting cost of than benefit: price increases. Over the same 1913 to February 2020 period, the admittedly-understated CPI has gone from 10.00 to 258.678. (I’m ending at February 2020 because the NBER has not yet listed an official end date of the recession that began then). That comes out to an annual inflation rate of 3.08%. Compare that to the 0.12% rate during the period before the Fed came into power. At that prior rate, the CPI would have been at 11.37 in February 2020; that’s a 2,275% difference to the actual CPI level. That is the cost, in terms of price increases, for the 320 months fewer of declining economic growth. And remember, the CPI vastly understates the true level of price increases the public experiences.
I leave it to you, dear reader, to decide if the trade-off was worth it. Render your own verdict.
Allow me to refocus on the present-day economic situation. Money supply has dramatically increased more than 20% year-over-year, so the Fed’s suggestion that inflation is transitory cannot be true. Although price increases may slow a bit, in July they will begin to surge again. One reason rarely talked about is the hoarding of the existing supply of goods. Modern Monetary Theory does not account for such practices, nor the lack of investing in production that will also cause a rise in prices. Most people don’t “invest” in inflationary environments; they speculate on prices. The government does not understand this distinction, and so-called economists never understand why people produce for profits in the first place. This is why you see so many businesses buying back their own shares in recent months, rather than building new manufacturing facilities.
I’ll close with a meaningful quote by Andrew Jackson:
“Every man is equally entitled to protection by law. But when the laws undertake to add... artificial distinctions, to grant titles, gratuities, and exclusive privileges—to make the rich richer and the potent more powerful— the humble members of society—the farmers, mechanics, and laborers, who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their government.”
The statements in this communication are the opinions of its author, Victor Sperandeo, and are not to be relied upon by anyone as the basis for an investment decision. Any investments made by a party in reliance thereon are made at such party’s sole risk. No guarantee of any kind is implied or possible where opinions as to past or future market conditions/events are provided. Past performance is not necessarily indicative of future results.