Please watch the interview before reading the following.
I’m not an economist nor do I have any formal coursework in economics as many business people do. This is fortunate. I’m one of those creatures who has developed his own insights without the helpful guidance or the crippling bias (depending on one’s perspective) of specialty nuance in the educational system.
I do acknowledge the work of John Pugsley, who I’ve not heard about in decades. And although I extend my thinking from his brilliant analysis of a simple barter-only economy model, I cannot be sure that my recent assertions are perfectly in line with his. So please take my statements about this subject as grist for study and recreation as I do.
For those readers who cannot access the associated YouTube video, I provide the following synopsis of the all-important barter-only analysis.
A Barter-Only Economy Model If a fisherman trades two fish for a baker's one loaf of bread, that is their rate of exchange. And although their rate of exchange (relative prices) can alter, neither of them can effect inflation. Inflation can only occur with the introduction of the third factor that we call money.
Note that both the fisherman and the baker produce more than they need. Their first purpose is to feed themselves with their production. And then, if there is a surplus of they can exchange some or all of that surplus with someone else.
If a drought occurs such that the baker’s output is significantly reduced, thus making the bread more valuable, he raises his price. He demands four fish for a loaf. The baker, thus, has raised his relative rate of exchange to that of the fisherman. But this is not inflation. It is an adjusted rate of exchange.
This barter-only economic model (courtesy of John Pugsley 40 years ago) provides the fundamental basis of the following points about inflation. As Pugsley said, “Find the people who print the money and you will have the source, the only source, of inflation.
Definition My definition of inflation is not necessarily Pugsley’s. I might find his in his materials but I prefer to spring mine from his barter-only analysis. In this way, mine launches purely from the fundamental grounding of the barter-only analysis. So, if I miscalculate or illogically extend from this foundation, don’t blame Pugsley.
Firstly, I believe that the common dictionary definition of inflation (I assume the one used by economics professors and textbooks) is inappropriate and causes misunderstandings about the source and effects of inflation. The common definition is that inflation is the rise in consumer prices due to several factors that include banking activities, scarcities, production, and government increases in the money supply. This definition is inconsistent with the imagery of the word, inflation, and is inconsistent with the barter-only analysis. In my opinion, Pugsley’s barter-only analysis completely determines what is and what is not inflation and completely undermines the conventional definition. And I state this, again, without conferring with Pugsley.
My definition is that the government increases in the money supply IS the inflation. In other words, government increases in the money supply does not cause inflation because it IS the inflation. (Additionally, we can’t have a word that denotes the cause and its effect at the same time.) Hence, inflation possesses the proper imagery (expansion, ballooning, swelling) and fits the barter-only analysis.
I suppose it is useful to say that the overspending causes the monetizing of the created debt, and this monetizing (creation of more money) IS the inflation.
People much more schooled than me assert that my definition of inflation “is not useful.” I certainly don’t know how they mean this statement. Useful for what? I’m sure that it’s not useful for their ilk to extend their idea for the term into the economics theory that I would probably regard as their worthless mumbo jumbo if I was so schooled in it.
[I recently heard Alexander Mercouris refer to the political games our governments play by duping their constituents that they are experiencing prosperous times with excessive money printing without the foreknowledge that this looseness will haunt their future. Mercouris referred to this as “witchcraft economics.” By the way, I would be surprised if Mercouris agreed with my framework of inflation. He seems confused on this. And I assume he is well school in conventional economics jargon.]
The academics also accuse me of redefining inflation to suit myself. I’m sure that this is correct. I admit it. I desire, require, a definition that fits consistently with my view of how inflation works. It is consistent, as far as I can tell, with itself. And this is all important to me. So don’t be surprised if any or all of my assertions about inflation raise the ire of the formally schooled majority. I would be disappointed if it did not. I hope it sets them back on their heels to defend their positions and to bolster or to re-assess or even to overturn their framework. And, of course, there remains the real possibility that I’m all wet on all this. [If one thinks about it, why would I endeavor to say anything about this subject if my message was to reaffirm the already obvious?]
Although, I don’t consider myself an economist, I guess anyone who thinks about the economy in the least way, be they Milton Friedman or Karl Marx or Thomas Sowell or any nameless clerk at the convenience store, might satisfy the label. My grandmother spoke authoritatively about the benefits of swimming and bicycle riding. I guess she was an exercise physiologist… right? Ha!
The bottom line is that I find this topic entertaining to me in the late days of my life. If some of my audience derives some insight and amusement from it, I’m happy to share.
Notation #1
Economists often speak of "stagflation" and "deflation" or "negative inflation" or "reverse inflation." Since these notions arise, not from assessing inflation but from assessing the fluctuations in downstream Consumer Price Index (CPI) behavior, these terms are inappropriate word forms of ***flation. Additionally, they are also predicated on the false assumption that inflation can be measured. The CPI is an extremely sloppy estimate of inflation, although it is useful to gauge price fluctuations.
Stagflation is an amusing one. It suggests a stagnation of inflation, which cannot truly be known. However, I might accept economic stagnation if it is strictly defined.
Also common are phrases like rent inflation" and food inflation or fuel inflation. For instance, food does not inflate. And the food prices do not inflate. Prices go up or down or remain static as a rate of exchange is achieved, but they do not inflate like the term is used as I do to represent the expansion of the money supply with empty money by the federal government. The language works only when it is applied consistently.
Amazingly, inflation is a great descriptor for what happens to the money supply when the government overproduces it. But then conventional economics applies it to the effects of this overproduction. The language requires overhauling. And this further requires that the economics textbooks be corrected.
Notation #2
In addition to the inflation and the scarcity factors affecting CPI, there is also monopolistic price fixing. Big companies who are buying up real estate and pricing out lower income consumers are such, but they do not and cannot affect inflation. And we might also consider this monopolistic activity just another form of scarcity.
Notation #3
This topic is all very simple, and it has been over-complicated by the economists. [Some stalwarts to the conventional framework say that I’m over-complicating it.] I suppose that if someone wanted a degree in economics and understood these simple principles, he might be wise to remain silent about them until he obtained his degree.
Notation #4
I've heard some economists say that it's a good thing to have a little bit of inflation. Why would any sane person propose that devaluation of money was somehow beneficial? Nuts!
However, I now see that I MIGHT not appreciate the possibility that as the economy grows the money supply must also. Is this a real need? Perhaps. I just don’t trust anyone formally schooled in economics to explain it to me.
When playing a game of Monopoly, each player initially gets $1,500 to apply around the board. This begs the question of how did/do we transition from a purely barter economy to our present fiat-currency-based economy?
Notation #5
Note that—as I define inflation—all commodities on the CPI are affected by the inflation EQUALLY. But then their prices do not increase or decrease equally. In fact, some may decrease as others decrease. This is because inflation is only one of the factors (economic forces) affecting the CPI. And these other factors affect the commodities UNEQUALLY.
Some of these non-inflaton economic forces (I term outflation), depending on their strength, act in concert with the inflation to amplify some price increases on the CPI. Other outflation forces work against inflation to damp, neutralize, or reverse the increases of commodity prices.
In either case, a deception is created for those who erroneously equate the CPI as inflation. In the first case, the CPI is used to say that inflation is greater. And in the second case, the CPI is used to say that inflation is less. Either usage is a misrepresentation.
And this misrepresentation begs a few questions that I cannot answer. Is this misrepresentation deliberate? Is it nefarious? Is it contrived by the economists from within the government and/ or by the economists who are granted research monies in the universities to couch language as the government prefers? Or is the misrepresentation merely the result of poor thinking and writing?
Notation #6
Bear in mind that economists are the experts who advise our government. And just like with exercise and many other topics, economics information is only as good as the distinctions in the language used to describe it.
Notation #7
At 00:36:45 in the YouTube video, I mention my friend’s theory that inflation might result from drastically reducing the population while the money supply remains static. After some reflection, I dismiss this notion. Such residual money would fail my “empty money” test as that money would indeed represent the production of goods and services. Also, such money would not be created out of thin air by the government as Milton Freidman insists inflation exclusively occurs. Michele’s idea still deserves reflection I suppose, if only to demonstrate the principle of empty money.
Empty money—money not representing the production of goods and services either produced by the Federal government (as in the United States) or a counterfeiter.
Notation #8
At 00:25:08, I compare governments to protection rackets. A great illustration of a protection racket is the arrangement between the stranger and the townsfolk in the movie, High Plains Drifter. As you recall or view this movie, note the mechanism of how such arrangements lead to dictatorships. You might also imagine from this that some (perhaps all) democratic governments might degenerate to dictatorships.
Notation #9
Although I have listened to the provided clip of Milton Friedman many times, I just recently realized a connection between what he says about inflation and Pugsley’s barter-only analysis that corroborates my definition of inflation. This also underscores that the CPI cannot represent inflation.
[Of course, my reverence for Friedman might be construed as cherry picking my economists. So be it. That’s fair. And I’m sure he was despised by many other economists who were jealous of his fame. The academic world is a viciously competitive and political place and everyone therein is vying for research funds and notoriety.]
In the clip Friedman states:
“…inflation is made in Washington because only Washington can create money and any other attribution to other groups of inflation is wrong. Consumers don't produce it. Producers don't produce it. The trade unions don't produce it. Foreign sheiks don't produce it. Oil imports don't produce it. What produces it is too much government spending and too much government creation of money and nothing else.”
He does not exactly define inflation, but then he does say what it is not. And saying what something is not is great delimiting as I do with my definition of exercise. However, he does not literally say, as I emphasize, that the government deficit spending IS the inflation.
And if we connect Friedman’s partial clarification to Pugsley’s barter-only analysis, we can safely conclude that the CPI is NOT a measure of inflation and that my definition is well supported by the logic.
In summary, if the CPI is affected by a host of factors that include inflation and if government overspending leading to increased money supply is the only source of inflation, then the CPI is an aggregate, a soup if you will. And it is a soup that perpetually changes in recipe. The recipe is in constant flux and makes factoring out the specific factor of inflation like expecting a pig to fly.
In early August 2022, the US Congress passed a tax-and-spend bill that was called the Inflation Reduction Act. Over 230 economists signed a letter to the administration saying that the bill would only increase inflation. Of course, they were correct. But then they, some who are Nobel Prize laureates like Friedman, went on in the letter to say the bill:
“… would create immediate inflationary pressures by boosting demand, while the supply-side tax hikes would constrain supply by discouraging investment and draining the private sector of much-needed resources.”
These academicians can’t divorce themselves from the erroneous idea that supply-demand has anything to do with inflation, although it does affect the CPI. In another clip Freidman does admit that production does affect inflation, but that it is of little practical meaning. He characterized it as a “bit player.”
Notation #10
In his The Alpha Strategy, Pugsley explains how government debt is monetized through issuance of treasury bills and the like. 40 years ago, I studied his explanation repeatedly and admit that I never mastered understanding it.
Notation #11
As I state in the interview, I believe that the current (September 2022) CPI for the United States represents relatively little inflation. Inflation holds a minority position as an economic force on the CPI and the remainder is due to scarcities and gluts. And as the CPI increases due to inflation are delayed by months and years, this could flip to the extent that inflation becomes the overwhelming economic force.
Wait I am sorry