The View From 1776

Commentary on ‘The Inflation Nobody Knows’
By Robert Stapler

In ‘Understanding the Nature of Inflation’ proprietor Thomas Brewton argued few people really understand inflation (including many in high office), and it is this that leads to bad policy.   Commenter ‘J. Jay’ challenged Brewton, absurdly claiming there hasn’t been any inflation under Obama.  Besides being hopelessly muddled, J. Jay’s rebuke so completely misses Brewton’s point as to validate it (i.e., J. Jay doesn’t know much about inflation, so defends what are patently inflationary policies).   To be honest, I am neither economist nor financial-wizard sufficient to judge a policy is inflationary (in the long term), but I am enough of an [amateur] historian to see parallels with past inflationary policies and intelligent enough to do the necessary research a topic like this deserves before risking an opinion.   Despite the title, I did not get enough from the article with which to either contest or defend, so I did the rational thing – I sought out greater knowledge.    Specifically, I Googled “what is inflation”, plus the forms inflation might take besides the obvious one of ‘annualized consumer price comparisons’.
 
I began my quest with a search ( http://www.ask.com/web?q=what+is+inflation&qsrc=0&o=0&l=dir ) from which I reaped a large number of hits; of which, I read several, and herein present what I regard three of the best.   Wikipedia provides a good (if slanted) presentation comprehensible to anyone capable of understanding the basics http://www.ask.com/web?q=types+of+inflation&qsrc=0&o=0&l=dir  ).  While not as rigorous as scholarly sources, I regard this one accessible to the casual reader.   It also presents a background on a variety of views or ‘economic schools of thought’ regarding inflation all in one place; which is convenient.   A slightly more in-depth tutorial (Keynesian view) is given by Investopedia ( http://www.investopedia.com/university/inflation/inflation1.asp ).   While un-compelling (because it leaves out competing forms), it is written for the lay reader.   For a more expansive rendering, I submit Tom Au’s (The Daily Reckoning http://www.dailyreckoning.com.au/what-is-inflation/2007/06/15/ ) description of five types of inflation (commodity, wage, monetary, fiscal, & foreign-exchange); which pretty much explodes the notion inflation consists only of CPI, PCE and/or PPI models.  It also shows how inflation can grow over long periods ‘below the common radar’ (tsunami-like) before it wreaks havoc.    He also discussed the way government deliberately excludes certain commodities from its calculations precisely because it knows including those would yield a higher inflation statistic; proving reliance on government to report the effectiveness of its own policies is misplaced.   Finally, I submit John Williams’ hyperinflation report 2011 update (http://www.shadowstats.com/article/hyperinflation-special-report-2011.pdf ).   While Williams tends a bit to alarmism, he has invested enormous time and energy to this subject, and into making his site factually bullet-proof.  So, while I cannot fault his data, I don’t know I would so endorse his conclusions as to admit to panic.   I note Williams has been predicting economic crises (with minor variations) since 2004.  So, while the analysis is excellent, it is not a crystal ball, and ought not to be credited as such.   Overall, however, I find this site excellent at debunking myths and exposing the outright hoodwinking by our political-class.
 
Perhaps the most disturbing/confusing aspect of the current fiscal situation is our insolvency and its relation to money-supply versus GDP.   Most other aspects of inflation are comprehensible to lay folk, but money-supply is one subject area that apparently eludes even those classed as ‘professionals’ as is evidenced by widely conflicting opinions regarding its nature and what should/shouldn’t be counted in the M1, M2, M3 money-metrics.  Among the skeptical/alarm-bell camp I found the following explanation of money-supply, and why it portends calamity: http://nowandfutures.com/key_stats.html , http://www.marketskeptics.com/2009/03/fed-is-planning-15-fold-increase-in-us.html .   How far we should credit such alarmism, I am unequipped to say, but neither are those who naysay the deep hole we have plainly dug for ourselves.
 
Even the liberally slanted Wikipedia admits “high rates of inflation and hyperinflation are caused by an excessive growth of the money supply.”   If high-rates of money-supply-growth lead to hyperinflation and bureaucrats acknowledge having significantly increased this supply through taxing, spending, credit-schemes, borrowing and unbridled money printing, why does the government, liberal-media and Wikipedia go to such lengths downplaying any inflation whatsoever.  For example, the Wiki link above includes a graph ( http://en.wikipedia.org/wiki/File:US_Inflation.png ) implying inflation has gradually and greatly fallen (all but eliminated) over the past 100 years, even as it calculates a [higher than normal] 2010/2011 inflation rate of 4.28%.   This sleight of hand ignores any intelligent reader can readily calculate decadal, GDP adjusted rate of inflation has been relatively flat with inflation mostly increasing for her/him-self.   By failing to adjust for GDP, this chart hides what we observe independently, that prices are no less volatile than they were in 1910 and that, whereas we pay $2.00 for a loaf of bread, in 1910 our grandparents paid $0.10 for a similar loaf.   What this shows is the way inflation as oft expressed is misleading, and this is by design. In fairness, Wikipedia merely replicates what government presents in its official communiques; and, overall, spins perception leftward (unsurprising).
 
Before leaving this topic, I want to mention this is not the first time J. Jay has argued simplistic representations of inflation, nor the first time I and others have tried correcting his distortions, patiently explaining there is more to this inflation business than meets his eye.  But, J. Jay takes no notice, and blithely continues commenting on matters for which he is unequipped as though armed with ultimate truth as transcends mere fact.  In the comments section of Brewton’s ‘Government’s “Inflation” Boondoggle’ ( http://www.thomasbrewton.com/index.php/weblog/comments/2821/ ), I offered the following insight:
 
“CPI and PCE are not the only measures of inflation, despite they are the only measures government considers relevant.  ...  Inflation is an elastic measure easily manipulated to mislead, so any claim of ‘zero inflation’ is immediately suspect. ”
 
This is a simple, obvious truth anyone can observe, one that does not need a PhD in economics to quantify.   In the same commentary, I made the following additional, commonsense observation:
 
“One out of five Americans are [currently] out of work, many for so long they’ve given up; and for those inflation has little to do with metrics.  For those, hyper-inflation has simply and incontestably arrived because when you have nothing, inflation is infinite.”
 
We don’t need a government controlled statistic to see 401K’s have imploded, and for many months have fluttered between recovery and obliteration like a patient on life-support.  Nor do we need it to see there are more rather than fewer ‘bums’ standing at street-corners begging, or that some of these are so well-heeled (haven’t acquired the costume and cunning of long practice) as shocks us into realizing their poverty is unaccustomed.  Nor do we need it to see many a company is laying workers offs in the face of market instability, plunging sales, bankruptcy threats, and cash-flow issues.   Nor do we need it to understand something truly ‘fundamental’ is broken, and must be fixed if we are to recover.   J. Jay thinks because a loaf of bread cost $2 two years running that proves there isn’t any inflation, or is entirely in our heads; all the while ignoring other retail items have soared in price or fluctuate wildly (where before were highly stable).   Inflation doesn’t necessarily touch everyone equally or all at once.  In every recession there are always some who are insulated from its humbling effects (at least for a time).  As shown above, inflation approaches from below our radar (tsunami-like); and, it is only those who study the economy with a keen, skeptical eye or a view to particular markets who see its approach.   It may hit us in waves; crippling first one sector, then another, and another.  Just as with individuals, there are some sectors and certain jobs that are insulated from the general calamity.  Most notable among these is government. 
 
In this and other article response-sections, J. Jay consistently reveals he regards inflation non-existent so long as it does not touch him personally, does not exist so long as authoritative Democrats promise him otherwise, or does not so long as he can field a suspect statistic.   J. Jay honestly disbelieves the evidence of his eyes so long as the New York Times refutes inflation’s existence because his judgment is seriously compromised by slavish party fealty.   Possibly, J. Jay has one of those safe government jobs or belongs to a ruling-elite (e.g., minor local bureaucrat); and, this explains the disdainfully insular attitude.   So, while others are clearly reeling from the effects of the [non-existent] inflation, J. Jay blithely advises we pay it no mind.   So, ignore that charlatan behind the curtain – Oz (at least) is safe from the storm ragging outside its comforting walls.  Let them eat cake, eh, J. Jay?
 
Additional Reading: 
http://mises.org/books/inflation.pdf - Hazlit - ‘What You Should Know About Inflation’
http://mises.org/books/economicsofinflation.pdf - Brusciani-Turroni, ‘The Economics of Inflation’
 
Money Supply
http://mises.org/rothbard/austrianmoneysupply.pdf - Rothbard: definitions of money supply
http://mises.org/journals/qjae/pdf/qjae3_4_3.pdf - clarification on what is/isn’t counted in money-supply, and why
http://mises.org/rothbard/money.pdf - Rothbard: Austrian theory of money