Every high school or university student who studies economics and even the average layman who reads or listens to the media and the politicians is of the belief that inflation is a price phenomenon. They’re told that higher inflation and, consequently, higher interest rates are the result of higher prices – a nice little semantic trick, a renaming of terms which leads people to believe exactly what the government wants them to.
The “official” definition of inflation is akin to putting the carriage in front of the horse: a general increase in the price level occurs because of inflation, not the other way around. Prices don’t just rise for no reason; they rise because of unforeseen events (e.g. a natural disaster or drought causing a supply shortage or government regulation/price controls) or through the debasement of the currency – otherwise known as monetary inflation.
What I want to know is why so many smart people never ask the question: where do higher prices come from? To put it more succinctly, how is it that, with technology and productivity improving on a daily basis, prices go up rather than down?
The answer is in fact quite simple: prices rise year after year because the government (through their agency the Reserve Bank) increases the quantity of money in circulation. Let’s have a quick look at the data and see how much the money supply (M3) has increased since 1982 relative to Total Average Weekly Wages and the Price Level.
Quite staggering indeed. Over almost thirty years the government has increased the money supply by a whopping 1,363%. Wages, on the other hand, have only increased by 276% - but does that mean we’re 276% wealthier today than in 1982? Hardly. If you take a look at the increase in prices, they’ve risen by 193%. Yes, we are all wealthier today than we were in 1982, 78% wealthier in fact [1], and I should hope so too!
The issue I have is the endless improvements in technology and productivity are not being transferred entirely to the consumer, to the average Australian. The government, through the constant debasement of the dollar, takes a large percentage of the said gains for their excessive existence, wasteful ventures and to fund the welfare nanny state. This is effectively a hidden tax on everyone who is paid in Australian Dollars.
Not only that, but there are countless other problems caused by debasing the money supply aside from just theft, it: encourages malinvestment by suppressing interest rates and thus unemployment and wasted resources; keeps the poor poor (more on that in a bit); creates dependency on the state by eroding savings; encourages improvidence; and many, many more, including the eventual collapse of the monetary system itself (e.g. Germany, Zimbabwe). As Ludwig von Mises said,
“With regard to these endeavours we must emphasize three points. First: Inflationary or expansionist policy must result in overconsumption on the one hand and in mal-investment on the other. It thus squanders capital and impairs the future state of want-satisfaction. Second: The inflationary process does not remove the necessity of adjusting production and reallocating resources. It merely postpones it and thereby makes it more troublesome. Third: Inflation cannot be employed as a permanent policy because it must, when continued, finally result in a breakdown of the monetary system.”
So how do they do it? When the Reserve Bank increases reserves the new money has to flow somewhere. That ‘new money’ usually enters through the financial services industry through favourable credit conditions allowing them to lend to households, or invest on the stock market, real estate, and so on. If that doesn’t work, the government can always increase its deficit and oblige banks to monetise government debt (like they just did). The increased spending through “stimulus” and “infrastructure investment” enables the newly created money stock to enter the economy and therefore drive up prices [2].
As the first recipients of the new money, the banks and government are still buying at ‘normal’ prices – prices that haven’t yet adjusted to account for the recent increase in supply. This is how they secretly tax anyone earning or holding Australian Dollars – the increase in prices caused by the new money filters its way through the economy and the people who receive wage increases last – usually the poor – are the ones who are taxed the most. The financial sector, as early recipients – and usually the rich – benefits the most (after the government).
“To cover the fact that a central bank is merely a cartel which has been legalized, its proponents had to lay down a thick smoke screen of technical jargon focusing always on how it would supposedly benefit commerce, the public, and the nation... there was not the slightest glimmer that underneath it all, was a master plan which was designed from top to bottom to serve private interests at the expense of the public... the system is merely a cartel with a government facade,” G. Edward Griffin
Next time you hear a politician spouting off about how they’ll “fight inflation”, remember that they’re the ones who are causing it. All they would have to do if they honestly cared about lower prices and helping the 'battlers' would be to stop creating money, to cease deficit spending and to return to sound money. Unfortunately most, if not all politicians in Australia, don’t actually care about the 'battlers' so long as their own taxpayer-funded trough is kept full. So what’s the solution going forward? There are lots of ideas out there, from a return to a gold standard to free banking (i.e. banks being allowed to issue their own currencies) among others – but at the end of day the only thing that really matters is that ability to manipulate the money supply is taken away from the government as soon as possible.
“A private central bank issuing the public currency is a greater menace to the liberties of the people than a standing army...We must not let our rulers load us with perpetual debt,” Thomas Jefferson
We can always dream.
[1] Issues with the wage and CPI data aside (e.g. average wage may be higher but there may also be more unemployment. Likewise the CPI excludes a lot of 'everyday' items that may have risen significantly more than the figure suggests).
[2] There are other ways too – e.g. the Reserve Bank could always simply buy up assets for itself.
