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Doable Economic Solutions |
 AUGUST 2010 Folks, we should always have a "plan B." We are beginning to see "latent" inflation and sadly more to come, along with deflation. |
InflationWhen we think of inflation - when we define inflation - we think of rising prices instead of actual causes of inflation. This is reasonable, since the ultimate outcome of inflation is always a general and sustained increase in price levels. So then, what is the proper definition of inflation? Inflation is a process, not a thing. The real problem is thus to define those factors that cause inflation - those factors that are inflationary. "Monetary inflation" is simply the artificial expansion of the money supply, and is historically the primary engine of inflation. It enables demand to increase before any increase is produced in supply. This "cause is so dominate that it should be the first thing that comes to mind when referring to "inflation during peacetime. "Clipping the coinage" was, historically, the first method used, followed shortly by "debasing the coinage". In the 1960's, the United States substituted baser metals for the traditional silver content in its coinage. "Running the printing presses" arose with the advent of paper money. This was practiced most notoriously by the central bank of the Weimer Republic, which tried to stay ahead of the loss of purchasing power caused by price inflation by "maintaining liquidity balances". Today, under Keynesian "monetary policy". The money supply is easily expanded through open market purchases of government short term obligations - a "monetization of debt" - usually involving nothing more than the changing of notations on financial accounts from government bills to cash - and by shortening the average term of government debt and other modern credit based methods of expanding the money supply. "Price inflation" is the markets natural "deflationary" reaction to monetary inflation. By reducing the purchasing power of all currency in circulation, and by reducing the purchasing power of credit based on assets, rising prices powerfully, if somewhat belatedly, counteract the artificial increase in purchasing power that is the purpose of monetary inflation. Price inflation tends to reduce demand and increase supply. The delay between the cause (monetary inflation) and this effect (price inflation) can be extended by expending financial reserves of gold and hard currencies to support the value of the inflated money. After WWII, the United States expended most of its huge hoard of monetary gold to extend this period for two (2) decades. "Real inflation" is the rate at which inflationary causes would impact price levels if all inflationary causes were considered and the time gap were eliminated. Since precise measurement is impossible, this is essentially an evaluative process, producing a figure or range of figures that constitute fairly inexact estimates. Among other inflationary causes - besides monetary inflation - are price controls and the expenditure of monetary reserves - both of which ultimately inhibit the growth of supply and sustain the period of artificially expanded demand. "Inflationary forces" are what we really should be talking about when we speak of "inflation". These include all forces that increase demand without relationship to supply, or that decrease supply without any relationship to demand. In addition to the expansion of the money supply, this includes such factors as price controls, and expenditure of substantial percentages of monetary reserves (which tends to immediately hold down price increases, and to ultimately increase financial risks and interest rates throughout an economy). Business taxes and import tariffs have an inflationary impact because they directly decrease the productive efficiency with which the economy produces goods and services. General increases in price levels can occur as a result of normal temporary cyclical upswings and the higher credit utilization levels that normally accompany prosperous times. General increases in price levels can also occur as a result of supply disruptions caused by labor unrest, political turmoil, or war, which can increase prices only temporarily unless "accommodated" by an increase in the money supply - which frequently happens. After an initial period of increased demand and broad economic stimulation, inflation manifests itself not just in rising prices, but in an increase in economic dependency on continual inflationary stimulation, and a decrease in the purchasing power of credit. It may induce the imposition of price controls and the expenditure of reserves. The increasing economic dependency on continued inflationary stimulation begins long before prices start rising. Even when inflation manifests itself in rising prices, the measurement of the general impact is far from simple. Rising interest rates - reduced price/earnings ratios for equity investments - increasing international payments and trade deficits - the loss of economic flexibility, stability and resiliency - the growth in debt levels and a shift from long term to short term financing - the perception of a general increase in financial risks - the emphasis on short term results - all significantly reduce a nations financial health and economic prospects in ways that can't be precisely measured. They are all among the many faces - the many effects - of inflation. The economy can not improve until employment increases. If there is no purchasing power, the surplus goods will remain in inventory. If stimulus money is utilized, the money needs to go to the place(s) where the most jobs can be created. That is the public sector, since government does not create any products, it just spends money. And with unemployment also comes lower taxable income which results in more money printed (inflation) and higher taxes on those who are still employed, or even retired. The solution is smaller government, less Government spending, as well as a reduction in business and personal taxes. Recommended sources and references:
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Paid for by Jackie Miller for Congress |
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