A free, competitive market economy is always rewarding successful entrepreneurs with profits for having made new, better and less expensive goods to earn consumer business. Thus, the normal trend in a free, competitive market is a world of gently falling prices as innovative businessmen bring improved and less expensive goods to consumers.
A truly free market economy, therefore, is one that tends to have the “good deflation,” and we should look forward to it, if only government intervention and central banking would get out of the way.
In 1979, when the minimum wage was $2.90, a hard-working student with a minimum-wage job could earn enough in one day (8.44 hours) to pay for one academic credit hour. If a standard course load for one semester consisted of maybe 12 credit hours, the semester’s tuition could be covered by just over two weeks of full-time minimum wage work—or a month of part-time work. A summer spent scooping ice cream or flipping burgers could pay for an MSU education. The cost of an MSU credit hour has multiplied since 1979. So has the federal minimum wage. But today, it takes 60 hours of minimum-wage work to pay off a single credit hour, which was priced at $428.75 for the fall semester.
You can thank federal student loans and the Federal Reserve for this.
We keep hearing about the Federal Reserve “tapering” its quantitative easing exercise in money creation. But a tweet from the St. Louis Fed says: “adjusted monetary base rises by more than $65 billion over the past two weeks to $3.963 trillion.” The sum of currency in circulation plus deposits held by banks at the Federal Reserve, this measure of money supply stood at less than $900 billion before the financial crisis. What will happen to prices in the economy once banks start lending this money out to customers?
Did you get that? Our money supply increased from around $900 billion to almost $4 trillion in the last few years. This goes beyond tinkering—it has been and will continue to be hugely disruptive to our economy and standard of living.
The Fed has created more money in the past five years than in the 100 years since its creation. And somehow this isn’t going to cause inflation.
Fed Chair Janet Yellen thinks the US economy is under-performing because we don’t have enough inflation:
“Inflation has continued to run below the committee’s 2 percent objective… the FOMC continues to expect inflation to move gradually back towards its objective….(but)… is mindful that inflation running persistently below its objective could pose risks to economic performance.”
This is not simply another case of “Let them eat iPads” cynicism. Hitting the wholly arbitrary 2% inflation target is sacred doctrine inside the Eccles Cathedral, and Yellen takes her scriptures, along with her money printing, every bit as literally did as the legendary William Jennings Bryan. Indeed, failing the inflation target “from below” amounts to a Cardinal Sin.
So not surprisingly, during the past 168 months running the rate of inflation according to the Fed’s preferred measure called the PCE deflator has come in exactly at a 2.0 CAGR—the annual rate embedded in the 14-year index gain of 31.65% shown in the table [above]. You might think the paint-by-the-numbers Keynesians who run the Fed would be thoroughly satisfied with their inflation targeting performance—even if, as Paul Volcker cogently noted, it does mathematically result in the theft of half of a working man’s savings over his lifetime.
Not exactly. The monetary politburo has been gumming about periodic bouts of too-low inflation and even “deflation” ever since Bernanke arrived in 2002. Yet unless the Fed’s unrelenting pursuit of “mission creep” has led it to the conclusion that its mandate under the wholly elastic and content-free Humphrey-Hawkins Act requires hitting its quantitative targets on an annualized seasonally-maladjusted basis every week, there is not a hint of inflation shortfall during the entire 21st Century to date.
In fact, the table [above] presents the cost-of-living increases that have been endured by that substantial share of the public which has eaten food or consumed fuel sometime during the past 14 years. At best, according to the official CPI—which is apparently good enough for 50 million Social Security recipients— the cost of living has actually risen by 2.4% per year or 39 percent over the period.
And even that’s got some self-evident understatement to it. Fully 25% of the CPI is accounted for by “imputed rents” on owner-occupied homes. This figure is obtained by a BLS survey of approximately 0.0002% of the nation’s 75 million homeowners asking what they would charge to rent their homes to a stranger each month. Needless to say, the tens of millions of households who have struggled with mortgage foreclosures, delinquencies and under-water loans since the housing bust have undoubtedly not been very bullish about their rental market prospects—even as their actual cash expenses for property taxes, utilities and household repair and maintenance expenses have continued to surge.
So when you get by the rent imputations and the ”hedonic adjustments” for cars, toasters, big screen TVs and iPads— the rest of the cost-of-living menu has been downright inflationary. Renters’ costs have risen one-third faster than the Fed’s target; electricity bills rose by double; college tuition is up by 2.3X and ground beef, eggs, movie tickets and health care by three-fold. And, of course, hydrocarbon-based energy is not even in the Fed’s zip code: Gasoline prices have out-run the target by 5X since January 2000 and home heating oil in places like the Northeast by 6X.
In short, the idea of “under-shooting inflation from below” is just ritual incantation. It provides the monetary central planners an excuse to keep the printing presses running red hot, but the true aim is not hard to see. After a 30 year rolling national LBO that has taken credit market debt outstanding to $59 trillion and to an off-the-charts leverage ratio of 3.5X national income, the American economy is saddled with $30 trillion of incremental household, business, financial and public debt compared to its historically sound leverage ratio of 1.5X GDP.
We are at peak debt. Household, business and government balance sheets are tapped-out. The problem is not too little CPI inflation, but the unavoidability of a pay-back era of sustained debt deflation. Yet the entire purpose of the Fed’s money printing regime—ZIRP, QE and all the rest—-is to force more debt into an economy that is already saturated. And as I have demonstrated elsewhere, the end result is that the Fed’s massive liquidity injections do not flow into the busted and exhausted Main Street credit channel, but only into the “Wall Street Bubble Channel” where they fund endless carry trades, speculations and eventually rip-roaring bubbles.
Nor has the picture changed since the 2008 financial crisis—that is, there exists no newly threatening deflationary bias, as shown [above]. Officially measured inflation continues to oscillate in a narrow band around 2% like it has since the late 1990s. The idea of missing the inflation target from below is just central bank jabberwocky—-a lie that actually harms the vast portion of Main Street America where incomes have lagged behind actual inflation for most of the 21st Century.
In order for people to put themselves to work, what do they need? They need to have wants to fulfill and they have to have a good idea of what these wants are. Check. This condition exists all the time. People need time, resources and know-how of how to produce goods. Check. People have these all the time. In an exchange economy, it helps to have money, especially a money whose supply doesn’t alter in a volatile way, for that causes changes in prices that can disrupt the productive activities of those producing, transporting, selling, and buying the goods. Before there were central banks throughout the world, gold and silver performed that function and prices were stable.
My point: Inflation is not a precondition or a lever to produce strong labor markets. All it takes is human wants and capabilities combined with a stable money. We do not need a FED buying mortgages or any other financial assets. We do not need a FED bailing out the institutions whose policies [led] them to failure.
The central bank cannot be an employer of last resort. In order for a production cycle to be complete, the work that was done to produce the goods has to be compensated and paid to those workers who then take the goods off the market and consume them. The goods must be wanted by those buying them, and they must be capable of buying them. They cannot indefinitely increase their debts so as to be able to buy what is produced.
When the FED buys securities, it disrupts this cycle in several ways. It alters asset prices, so that they provide false signals to everyone. This alters what is produced, moving it away from what people would otherwise be producing and buying. Debts are created that otherwise either would not exist or would be held by a different set of persons. This enables transactions based on a higher level of debt in the economy, but this is unsustainable. Uncertainty rises. Financial institutions are incentivized to make loans of lower credit quality. This endangers them and eventually leads to a recession, depression or crash.
We do not need a central bank. We do not need a FED.
I write today to express my concerns about United States dollar bills. The exchange of dollar bills, including high denomination bills, is currently unregulated and has allowed users to participate in illicit activity, while also being highly subject to forgery, theft, and loss. For the reasons outlined below, I urge regulators to take immediate and appropriate action to limit the use of dollar bills.
By way of background, a physical dollar bill is a printed version of a dollar note issued by the Federal Reserve and backed by the ephemeral “full faith and credit” of the United States. Dollar bills have gained notoriety in relation to illegal transactions; suitcases full of dollars used for illegal transactions were recently featured in popular movies such as American Hustle and Dallas Buyers Club, as well as the gangster classic, Scarface, among others. Dollar bills are present in nearly all major drug busts in the United States and many abroad. According to the U.S. Department of Justice study, “Crime in the United States,” more than $1 billion in cash was stolen in 2012, of which less than 3% was recovered. The United States’ Dollar was present by the truck load in Saddam Hussein’s compound, by the carload when Noriega was arrested for drug trafficking, and by the suitcase full in the Watergate case.
Unlike digital currencies, which are carbon neutral allowing us to breathe cleaner air, each dollar bill is manufactured from virgin materials like cotton and linen, which go through extensive treatment and processing. Last year, the Federal Reserve had to destroy $3 billion worth of $100 bills after a “printing error.” Certainly this cannot be the greenest currency.
Printed pieces of paper can fit in a person’s pocket and can be given to another person without any government oversight. Dollar bills are not only a store of value but also a method for transferring that value. This also means that dollar bills allow for anonymous and irreversible transactions.
The very features of dollar bills, such as anonymous transactions, have created ubiquitous uses from drug purchases, to hit men, to prostitutes, as dollar bills are attractive to criminals who are able to disguise their actions from law enforcement. Due to the dollar bills’ anonymity, the dollar bill market has been extremely susceptible to forgers, tax fraud, criminal cartels, and armed robbers stealing millions of dollars from their legitimate owners. Anonymity, combined with a dollar bills’ ability to finalize transactions quickly, makes it very difficult, if not impossible, to reverse fraudulent transactions.
Many of our foreign counterparts already understand the wide range of problems that physical currencies can have. Many physical currencies have enormous price fluctuations, and even experience deflation. 20 years ago Brazil had an inflation rate of 6281%. In 4 years (2001 to 2005), the Turkish Lira went from 1,650,000: $1 to 1.29 to $1. In 2009, Zimbabwe discontinued it’s dollar. Before it was eliminated, the Zimbabwe dollar was the least valuable currency in the world and their central bank even issued a $100 trillion dollar banknote. A person would starve on a billion Zimbabwe dollars and it took an entire wheelbarrow full of $100 billion dollars in notes to purchase a loaf of bread.
The clear use of dollar bills for transacting in illegal goods, anonymous transactions, tax fraud, and services or speculative gambling make me wary of their use. Before the United States gets too far behind the curve on this important topic, I urge the regulators to work together, act quickly, and prohibit this dangerous currency from harming hard-working Americans.
— Rep. Jared Polis (D-CO) offers this satirical response to Sen. Joe Manchin’s (D-WV) call to ban bitcoins.
Here’s how it works. The Treasury sells bonds at interest. Some of these bonds are bought by private citizens, governments, or other central banks, and some are bought by the Federal Reserve. The Treasury pays interest on all these bonds, but the Fed sends the payment right back at year end. It’s like a free lunch.
But one of the certainties in economics is that “there ain’t no such thing as a free lunch.” Loosely stated, there is always a cost to an action. So who pays in the case of the Fed’s remittances?
If Congress is making money, you better believe it is coming from the pockets of Americans. The Fed earned the money it remitted back to Congress by buying bonds. The offsetting transaction is issuing money. Since 2008, a period during which the Fed remitted $400 billion back to the Treasury (probably more than it has remitted over its whole 100-year existence), the Fed increased its holdings of U.S. Treasuries from $800 billion to over $2.2 trillion. It paid for these bonds by, effectively, issuing money. …
As the old saying goes, the best way to make money is in the money business. Actually, this is only half true. The best way to make money is to be the institution that grants (and gets the kickback from) the monopoly powers over the nation’s money supply. Over the past ten years the U.S. Treasury has received over a half trillion dollars in distributions remitted back to it from the Federal Reserve.
This fetish for rules-based Fed policy (e.g. inflation targeting) and obsession with the Taylor Rule serve as the rightwing, “free market” response to substantive and populist criticism of the Fed itself. We don’t want to end the Fed, the Kudlows tell us, but we do want to keep it in check and maintain the dollar’s lofty status. It just needs a firm hand. After all, as Mr. Greenspan famously told Ron Paul in 2005, the Fed can essentially mimic a gold standard. But how long has it been since the Fed restrained itself in the face of public and political pressure (think Volcker)? And can central banks truly be constrained by rules at all?
To the degree that the new money does get out into the economy, it will flow in different directions and have different effects. If it reaches the average consumer, it will produce consumer price inflation. This does seem to be happening. Consumer price inflation calculated as it was in the past would be much higher than today’s reported 1%.
If the new money reaches rich people, it will drive up the prices of what rich people buy. We see this today when a single townhouse in Manhattan is listed for over $100 million. If it flows into the stock market, it will raise stock prices. If enough flows in this direction, it will create an asset bubble, which seems to be happening once again today. Asset bubbles are followed by crashes, which in turn bring recession and unemployment.
Wherever the new money flows, it may increase demand in the short run, only to reduce it in the long run. This is because the new money created by the Fed is not just given away. It is made available to banks to lend, which means that it enters the economy as debt. A little debt, especially if spent or invested wisely, may help an economy. But too much will strangle it.
As consumers, businesses, and governments become weighed down with more and more debt from the past, especially debt that was spent unwisely, the interest and principal payments become increasingly burdensome. Dollars that might have been spent on new investments with the potential to create new jobs and new income are instead siphoned off to pay for past mistakes. We end up with a zombie economy, still breathing, but just barely.
Historically we can measure how many dollars of economic growth we get from each new dollar of debt. At the moment, it seems to be negative. In other words, more new debt makes it worse, not better.
Despite this plain evidence, the Fed continues to try to persuade consumers and businesses to increase their borrowing and spending and also underwrites government borrowing and spending. It holds interest rates very low, which for now keeps the debt house of cards from tumbling down.
Will the Fed’s feckless money creation end in inflation or depression? It could go either way, which is potentially confusing. Insofar as it stokes demand, it could lead to inflation. Insofar as it increases an already too heavy debt burden, it could lead instead to recession, joblessness, and depression. Or it could lead first to the one and then to the other.
It could also lead to a third possibility: stagflation. In this scenario, consumer prices advance even while unemployment increases. We had this in the 1970’s. If we measured inflation as we did in the 1970’s, it would be apparent that this already exists today.
An economy works right when the prices are telling the truth, and things go badly when the prices get distorted. When a central bank starts playing fast and loose with the money supply, price distortions are an inevitable result. These distortions in turn lead to the kinds of problems we call on central banks to fix—problems we wouldn’t have if central banks hadn’t created them in the first place.
— Art Carden, “Anatomy of a Credit-Induced Boom-and-Bust Cycle”
As Chairman Bernanke’s reign at the Fed comes to an end, the Wall Street Journal provides its assessment of “The Bernanke Legacy.” Overall the Journal does a reasonable job on both Greenspan and Bernanke, especially compared to the “effusive praise from the usual suspects; supporters of monetary central planning. The Journalargues when accessing Bernanke’s performance it is appropriate to review Bernanke’s performance “before, during, and after the financial panic.”
While most assessments of Bernanke’s performance as a central banker focus on the “during” and “after” financial-crisis phases with much of the praise based on the “during” phase, the Journaljoins the Austrians and John Taylor in unfavorable assessment of the more critical “before” period. It was this period when the Fed generated its second boom-bust cycle in the Greenspan-Bernanke era. In the Journal’s assessment, Bernanke, Greenspan, and the Fed deserve an “F.” While this pre-crisis period mostly fell under the leadership of Alan Greenspan, the Journal highlights that Bernanke was the “leading intellectual force” behind the pre-crisis policies. As a result of these too loose, too long policies, just as the leadership of the Fed passed from Greenspan to Bernanke, the credit boom the Fed “did so much to create turned to mania, which turned to panic, which became a deep recession.” The Journal’s description of Bernanke’s role should be highlighted in any serious analysis of the Bernanke era:
His [Bernanke’s] role goes back to 2002 when as a Fed Governor he gave a famous speech warning about deflation that didn’t exist [and if it did exist should not have been feared]. He and Mr. Greenspan nonetheless followed the advice of Paul Krugman to promote a housing bubble to offset the dot-com crash.
As Fed transcripts show, Mr. Bernanke was the board’s intellectual leader in its decision to cut the fed-funds rate to 1% in June 2003 and keep it there for a year. This was despite a rapidly accelerating economy (3.8% growth in 2004) and soaring commodity and real-estate prices. The Fed’s multiyear policy of negative real interest rates produced a credit mania that led to the housing bubble and bust.
Given this and other strong evidence of the Fed’s role in creating the credit driven boom, theJournal faults “Mr. Bernanke’s refusal to acknowledge that the Fed made any mistake in the mania years.” …
While a defense of some Fed action could be found in Hayek’s 1970s discussion of “best” policy under bad institutions (a central bank) where he argued that during a crisis a central bank should act to prevent a secondary deflation, the Fed actions went clearly beyond such a recommendation. Better would have been an immediate policy to end the credit expansion in its tracks. The Fed’s special guarantee programs and movement toward a mondustrial policy should be a great worry to anyone concerned about long-term prosperity and liberty. Whether any human running a central bank could have done better is an open question, but other monetary arrangements could clearly have led to better outcomes.
The Journal’s analysis of post-crisis policy, while not as harsh as it should be, is critical. Despite an unprecedented expansion of the Fed’s balance sheet, the “recovery is historically weak.” At some point “a Fed chairman has to take some responsibility for the mediocre growth — and lack of real income growth — on his watch.” Bernanke’s policy is also rightly criticized because “The other great cost of these post-crisis policies is the intrusion of the Fed into politics and fiscal policy.”
Because the ultimate outcome of this monetary cycle hinges on how, when, or if the Fed can unwind its unwieldy balance sheet, without further damage to the economy; most likely continuing stagnation or a return to stagflation, or less likely, but possible hyper-inflation or even a deflationary depression, the Bernanke legacy will ultimately depend on a Bernanke-Yellen legacy. Given, as the Journal points out, “Politicians — and even some conservative pundits — have adopted the Bernanke standard that the Fed’s duty is to reduce unemployment and manage the business cycle,” the prospect that this legacy will be viewed favorably is less and less likely. Perhaps if the editors joined Paul Krugman in reading and fully digesting Joe Salerno’s “A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis,” they would correctly fail Bernanke and Fed policy before, during, and after the crisis.
But what should be the main lesson of a Greenspan-Bernanke legacy? Clearly, if there was no pre-crisis credit boom, there would have been no large financial crisis and thus no need for Bernanke or other human to have done better during and after. While Austrian analysis has often been criticized, incorrectly, for not having policy recommendations on what to do during the crisis and recovery, it should be noted that if Austrian recommendations for eliminating central banks and allowing banking freedom had been followed, no such devastating crisis would have occurred and no heroic policy response would have been necessary in the resulting free and prosperous commonwealth.
Many economists disagree with the “Austrian” definition of inflation because it lacks a few important considerations. Before defining inflation, it is important to define relative prices.
The scare quotes around “Austrian” clue me in on what kind of discussion this will be. You mention monetarist, Keynesian, and neo-classical later - with no scare quotes around those. Noted.
There seems to persist some confusion on the definition of “inflation,” and an assertion that it is the Austrians who are “demanding” a redefinition of the word. In fact, it is the Austrians who understand that language is a tool - and it is important to use this tool to reveal truths, not conceal them.
Inflation, always and everywhere, is primarily caused by an increase in the supply of money and credit. In fact, inflation is the increase in the supply of money and credit. If you turn to the American College Dictionary, for example, you will find the first definition of inflation given as follows:
Undue expansion or increase of the currency of a country, especially by the issuing of paper money not redeemable in specie.
In recent years, however, the term has come to be used in a radically different sense. This is recognized in the second definition given by the American College Dictionary:
A substantial rise of prices caused by an undue expansion in paper money or bank credit.
Now obviously a rise of prices caused by an expansion of the money supply is not the same thing as the expansion of the money supply itself. A cause or condition is clearly not identical with one of its consequences. The use of the word “inflation” with these two quite different meanings leads to endless confusion.
The word “inflation” originally applied solely to the quantity of money. It meant that the volume of money was inflated, blown up, overextended. It is not mere pedantry to insist that the word should be used only in its original meaning. To use it to mean “a rise in prices” is to deflect attention away from the real cause of inflation and the real cure for it.
Here’s Mises in 1951:
Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation… .
As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.”
So to reiterate, as I’ve noted before: inflation was always defined as an increase (inflation) of the currency or increase (inflation) of the money supply. Even Keynes himself defined inflationism as “debauch[ing] the currency” and “print[ing] notes.”
In fact, from 1864-2003, that’s exactly how Webster’s defined inflation: “undue expansion or increase, from over-issue; — said of currency.”
Frank Shostak explains why it is important to not concede the redefinition of this word:
When inflation is seen as a general rise in prices, then anything that contributes to price increases is called inflationary. It is no longer the central bank and fractional-reserve banking that are the sources of inflation, but rather various other causes. In this framework, not only does the central bank have nothing to do with inflation, but, on the contrary, the bank is regarded, against all evidence, as an inflation fighter.
That this definition is less common today is a direct consequence of what can only be considered many years’ worth of Orwellian language restructuring. As I previously explained, “Inflation was and is definitionally printing money, or more specifically inflating the money supply. By divorcing the word from its literal origins, [central planning apologists] cloud the direct effect between money printing and the value of money.”
This is not unlike suddenly using the word dog to instead refer to dog piss.
Here’s Mises again, this time in Human Action:
The semantic revolution which is one of the characteristic features of our day has also changed the traditional connotation of the terms inflation and deflation. What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates. This innovation is by no means harmless. It plays an important role in fomenting the popular tendencies toward inflationism.
So yes, this conflation causes undue confusion. But it is not the Austrians who wish to fuse the terms. Instead, as Bob Murphy briefly explained a few months ago, “I routinely see people claiming that [Austrians] are “moving the goalposts” etc. with this allegedly wacky definition of inflation, and I want to emphasize that in our minds, we are trying to undo a deliberate semantic revolution that has had pernicious consequences and has served to confuse the public about what’s going on.”
All that said, Austrians do sometimes* use the term “inflation” when referring to a price increase as a result of an increase in the money supply (without demand increasing commensurate to the new supply). But since language is a tool - and the point is to be clear and not to obscure - I and many other Austrians will typically qualify what we mean by clarifying the terms as “price inflation” and “monetary inflation.”
*ADDED, FOR CLARITY: perhaps even often or typically. Austrians do use the mainstream definition in a similar concession as libertarians with regards to using the word “liberal” to describe their philosophy. As previously stated, when Austrians today use the term in its two separate forms, it is typically qualified with descriptors (“price”/”monetary”). Furthermore, when inflation is used in its original form, it’s typically precisely in the context of how the term has evolved. We prefer that the original definition be recognized, for the reasons stated above. But the intransigence often attributed doesn’t hold up, particularly in the sense that we demand the change or that we purposefully and regularly use the original meaning without any sort of clarification.
After reading what Dan linked, I realized that at the root of the Austrian definition of inflation is their belief that an increase in M necessarily leads to increases in prices.
Again, if I print up a bunch of currency and sit on it, there has been an increase in the money supply but there would be no increase in the general level of prices.
So if an increase in the money supply (inflation) doesn’t lead to a general increase in prices (price inflation) then inflation doesn’t actually seem bad because price inflation is what erodes real savings, wages, and creates other intertemporal distortions.
Austrians do not claim that an increase in M necessarily leads to price inflation under any and all conditions. Instead, we assert that it tends to. But if - like you explain - the new money is not actually introduced into the economy (which includes even non-circulated money since there would be a reasonable expectation that it eventually will be. After all, what purpose is served by money that earns no interest, is not counted as a store of value, and is never exchanged?) or if demand for the money increases enough to offset the new supply, then that may not necessarily lead to price inflation.
Mises, in his Theory of Money and Credit, built that demand caveat right into his definition of inflation:
In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur.
Hazlitt, in What You Should Know About Inflation, offered this caveat by framing it in terms of the supply of goods that money would be used to exchange for:
When the supply of money is increased, people have more money to offer for goods. If the supply of goods does not increase — or does not increase as much as the supply of money — then the prices of goods will go up.
Indeed, Hazlitt later stated as true that “to attribute [price] inflation solely to an increase in the volume of money is ‘oversimplification.’” And went on to provide other means with which money can be made to change in value.
The value of money, like the value of goods, is not determined by merely mechanical or physical relationships, but primarily by psychological factors which may often be complicated.
Also, Hazlitt noted that an expectation in a change in the supply of money can also lead to changes in prices:
It is also an oversimplification to say that the value of an individual dollar depends simply on the present supply of dollars outstanding. It depends also on the expected future supply of dollars. If most people fear, for example, that the supply of dollars is going to be even greater a year from now than at present, then the present value of the dollar (as measured by its purchasing power) will be lower than the present quantity of dollars would otherwise warrant.
Rothbard, in What Has Government Done to Our Money?, explained that the process of new money entering and circulating through the economy is what drives price inflation:
[After the first creators] take the newly-created money and use it to buy goods and services… The new money works its way, step by step, throughout the economic system. As the new money spreads, it bids prices up—as we have seen, new money can only dilute the effectiveness of each dollar.
So it is only under certain conditions (which, ultimately, are nearly all real-world conditions) in which monetary inflation “necessarily” leads to price inflation. When Austrians use the terms inevitable and necessarily, as Mises does here, it is by implicitly assuming - as all economists tend to - ceteris paribus conditions:
Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation… . As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.
Again, the new money must be introduced into the economy (or recognized to exist and therefore expected to be used) and demand for this new money must not increase commensurate to the new supply. Only under these conditions can the “Austrian definition of inflation” be said to state that an increase in the money supply necessarily leads to an increase in price inflation.
What we do explain is that price inflation is a primary consequence of monetary inflation and, conversely, that monetary inflation is the true cause of price inflation (Austrians are usually careful to distinguish between such inflation and mere changes in prices). Not many years ago, this was mostly an uncontroversial and pretty universally accepted truth. Indeed, many Keynesians and Monetarists today will claim a “target” for price inflation (usually 2% or 4% or some ostensibly innocuous - and ultimately dubious - figure) and flatly recognize that the central bank’s mechanism for monetary expansion is precisely the primary means to that end. Austrians, like other economists, understand that price inflation is the goal of monetary policy.
The puppet masters who control the system have managed to convince people that deflation = bad, and inflation = necessary evil. Perhaps the even bigger lie is that of the actual inflation statistics. They tell us that there’s no [price] inflation… or minimal inflation. And they tell us that the ‘target’ rate is 2%. Bear in mind that 2% annual inflation means your currency will lose over 75% of its value during the course of your lifetime.
The puppet masters who control the system have managed to convince people that deflation = bad, and inflation = necessary evil.
Perhaps the even bigger lie is that of the actual inflation statistics. They tell us that there’s no [price] inflation… or minimal inflation.
And they tell us that the ‘target’ rate is 2%. Bear in mind that 2% annual inflation means your currency will lose over 75% of its value during the course of your lifetime.