Inflation Brief #1: Can Inflation Be Reversed?
[This is the first of several briefs in which I expand on my articles and videos already posted regarding inflation. Each is an attempt to clarify my assertions regarding this subject.]
The short answer to this question is, “Definitely no.”
Prerequisite Definitions
I have previously explained in the several previous articles my rejection of the common definition of inflation, that it is the increase in prices as noted on the Consumer Prices Index (CPI). I will avoid that previous detail herein other than to provide the following brief review of three of the definitions acceptable in my milieu.
Inflation defined: The expansion of the money supply by the federal government with empty money.
Empty Money defined: Money that does not represent the production of goods and services.
Full Money defined: Money that DOES represent the production of goods and services.
Also, I herein use a new term: Veteran Money defined: Money already in the economic system before being contaminated with the latest empty money.
Note: Veteran money is almost never really uncontaminated with empty money. Such non contamination would assume that a given currency had never experience inflation, the injection of empty money. Money is only deemed “veteran” with respect to a current or ongoing injection of empty money.
Another Note: Veteran money is never purely full money.
Contamination and Contamination Blending
Empty money contaminates veteran money and is analogous to someone urinating into one end of a swimming pool. The entire pool is thus eventually contaminated.
And this contamination is equal throughout the pool once it is thoroughly blended. But blending occurs unevenly. Some parts of the pool remain unaffected by the contamination for while longer than those parts initially injected with the urine. But eventually, the entire volume of water is spoiled, especially if it is vigorously stirred.
With an injection of empty money into the money supply, such stirring of the economy (increased economic activity) accelerates the blending. Perhaps this is what economists mean by “the velocity of money.” It seems to fit, but I don’t trust much of what these people say on the subject as they have truly bungled the inflation framework.
Slowing the economy—mostly a bad thing—is the only possible result of the Fed raising interest rates ostensibly to slow inflation. The inflation does not slow or reverse by raising interest rates.
And once all the commodities experience a cross-the-board increase of their prices, the blending of the contamination has already occurred. Raising the interest rates might slow the blending of the contamination of new empty money but it will not affect the already blended empty money or reverse the prices on the CPI. In fact, by crippling certain economic sectors with businesses that need to borrow money to operate, some prices may actually increase.
For example, if a corporation encounters a higher interest rate to borrow money for a new oil refinery, the loan will cost the corporation more and thus be factored into the the cost of the refined fuel. And this must me passed on to the consumer.
Another convenient analogy is to compare the raising of interest rates to the amputation of a gangrenous leg. If the leg is amputated before the gangrene is spread to the remainder of the body, the leg’s owner can be saved, and the demise of the patient might be slowed. The loss of the leg will hobble the patient’s ability to survive in the world, but the amputation might prolong his life for a while.
However, amputation after the entire body is septic serves little purpose other than to cause more blood loss and hasten decline.
Inflation as a Wave Form
I wanted to express inflation as a wave but I find that I am unable to do this in a way that I can graphically present. Perhaps others more gifted can lift this duty from me to represent what I’m trying to describe.
However. I envision a substantial injection of empty money as a kind of wave that ripples through the veteran money. If this injection is 100% helicopter money that is instantly dropped straight into consumers’ bank accounts, the money on the street instantly swells and devalues. But then the prices on the street take time to be bid up relative to the devaluation.
Therefore, we have two events separated by time, and as Milton Freidman explains, this time is typically about two years.
Wave #1 is the injection of empty money.
Wave #2 is the bid-up.
And note (VERY IMPORTANT) that the bid-up is NOT an alteration in the “rate of exchange” BETWEEN COMMODITIES as in a barter-only system. With this specific across-the-board bid-up, the relative intrinsic value between commodities DOES NOT change!
Any change in the relative intrinsic values of commodities is outside the influence of inflation. For example: In Pugsley’s fisherman-baker demonstration, the relative intrinsic value of a loaf of bread and the fish changed due to a drought, but no inflation occurred.
Another Note: Wave #1 ALWAYS precedes Wave #2. This sequence can never reverse.
Another Note: If deflation is taken to mean a reversal of inflation, then deflation is a myth. I have mentioned this before from different perspectives.
And what about stagflation. It is often defined as: sluggish economic growth coupled with a high rate of inflation and unemployment. How do we determine a “high” rate of inflation when we can’t measure inflation. (See Inflation Brief #2), although we can use the CPI as a measure of general price increments. And much of these assessments are subjective and extremely prone to manipulation and spinning of interpretation.
Another Framework
If we consider the empty money injection wave as the actionary event, we must expect the reactionary event (price increases) pursuant to the actionary. These two events are coupled but non-proximate. Neither can occur without the other. And the only way to prevent the reactionary event is to prevent the actionary (causal) event. This cause-effect relationship is not reversed by changing the effect (price controls).
A commodity price decrement can never be due to the injection event or any other manipulation of the money supply. Any and all decrements must be due to other economic forces. They might be due to cheaper labor, more efficient manufacturing or farming, gluts, boycotts, better weather, decreased demand, reduced governmental constraint of trade*, tax relief, etc., but not due to a phantasm called “reversal of inflation.” The deficit spending cannot be unspent. One might suppose that the money supply could be shrunk, but that would be to destroy full money.
[*I once whined that the government’s intrusion into the practice of exercise instruction was “constraint of trade.” My listener responded, “But Ken, everything the government does is constraint of trade.”]
Revaluing the Devalued Money
Once money has been devalued, it can never be revalued. Money is not like a person who has redeemed himself by good deeds. Since fiat currency has no intrinsic value and its value is based on systemic faith, the erosion of this faith is always declining at the rate of empty money injection.
Contaminated money cannot be cleansed. And the notion of “laundering money” is a totally different concept of the present meaning of cleansing, although its popular naming literally means what we fantasize.
Chelation therapy is a medical procedure to remove heavy metals from the blood. Revaluing the devalued money (reversing inflation) is to suggest that we can perform a similar procedure on the money supply. Dream on!
Re-coining
Perhaps, in a theoretical sense, the inflation caused by ancient rulers was reversible, though I strongly doubt this. If gold (or some other precious metal with intrinsic value) was the currency, perhaps a denominational size might be increased rather than the number of units of that denomination.
Characteristically, ancient (before the invention of the printing press) rulers taxed their citizenry twice. The obvious tax was an overt tax. The unobvious tax was the covert approach (theft) via coinage.
As explained before by Pugsley via me, a denomination steadily grew smaller over time. This often began with small chips of the gold (in this example) harvested from the edges of previously minted coinage of that denomination. These chips were melted and then pressed into additional coins. Once this process played out, the ruler just retreated to a smaller coin for that denomination throughout the economic system. This was the primitive inflation process.
With this theft, the ruler purchased goods and services that the commoners could not afford. Some of these commodities had intrinsic value that could have been converted back into gold to bolster the buying power of the coinage.
Again, I’m confident this recoining to reverse the inflation never occurred and would never have worked.
Recalling and Destroying the Currency
A supposed technique to reverse inflation is to shrink the money supply by methodically recalling currency and destroying it. Note that this is to destroy full money, not the empty money already unleashed into the system. This is more nonsense.
But Inflation Can Be Stopped?
Inflation cannot be reversed, but it can be stopped.
As already explained, each injection of empty money is followed by a corresponding bid-up.
Stop the empty money injections and the bid-upping will stop. It’s that simple. And nothing else will ameliorate the inflation effect on the CPI.
Addendum
In reviewing presentations by the late Milton Friedman, we see that he faulted the Fed for its failure to reverse deflation as the major cause for the Great Depression of the 1930s. My only bone to pick with Friedman is the use of this word for an inadequate volume of currency.
While inflating the money supply increases its volume AND devalues it, I fail to see that shrinking it—so-called deflation—will revalue it. I admit that I may be missing something in this regard, but it escapes me.
For example, let’s consider a closed market of 1,000 producers and consumers. If one of us prints a sizeable quantity of empty money and surreptitiously spends it among the rest of the market, the entire currency is devalued. But if that same person steals the same amount of whole money and takes it home and burns it, the rest of the currency is unaffected. Correct?
If I’m correct, we do need a word—a different word from deflation—for what Friedman and other economists describe. And this brings us back to the requirement that for a consistent economics framework, we are dependent on the consistency of the linguistics.
I believe that economics is closer to being a philosophy than being the science it is held out to be. In this regard, I recently found the following quote from by Nobel Prize winning economist Friedrich Hayek, taken from his lecture “The Pretense of Knowledge” which can be found in the book “The Essential: F. A. Hayek” (free download):
On the other hand, the economists are at this moment called upon to say how to extricate the free world from the serious threat of accelerating inflation which, it must be admitted, has been brought about by policies which the majority of economists recommended and even urged governments to pursue. We have indeed at the moment little cause for pride: as a profession we have made a mess of things.
It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences—an attempt which in our field may lead to outright error. It is an approach which has come to be described as the “scientistic” attitude—an attitude which, as I defined it some thirty years ago, “is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed.” I want today to begin by explaining how some of the gravest errors of recent economic policy are a direct consequence of this scientistic error.