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Archive for the ‘Inflación’ Category

United States House of Representatives

Statement on Federal Reserve Board Abolition Act

February 3, 2009

Madame Speaker, I rise to introduce legislation to restore financial stability to America’s economy by abolishing the Federal Reserve. Since the creation of the Federal Reserve, middle and working-class Americans have been victimized by a boom-and-bust monetary policy. In addition, most Americans have suffered a steadily eroding purchasing power because of the Federal Reserve’s inflationary policies. This represents a real, if hidden, tax imposed on the American people.

From the Great Depression, to the stagflation of the seventies, to the current economic crisis caused by the housing bubble, every economic downturn suffered by this country over the past century can be traced to Federal Reserve policy. The Fed has followed a consistent policy of flooding the economy with easy money, leading to a misallocation of resources and an artificial “boom” followed by a recession or depression when the Fed-created bubble bursts.

With a stable currency, American exporters will no longer be held hostage to an erratic monetary policy. Stabilizing the currency will also give Americans new incentives to save as they will no longer have to fear inflation eroding their savings. Those members concerned about increasing America’s exports or the low rate of savings should be enthusiastic supporters of this legislation.

Though the Federal Reserve policy harms the average American, it benefits those in a position to take advantage of the cycles in monetary policy. The main beneficiaries are those who receive access to artificially inflated money and/or credit before the inflationary effects of the policy impact the entire economy. Federal Reserve policies also benefit big spending politicians who use the inflated currency created by the Fed to hide the true costs of the welfare-warfare state. It is time for Congress to put the interests of the American people ahead of special interests and their own appetite for big government.

Abolishing the Federal Reserve will allow Congress to reassert its constitutional authority over monetary policy. The United States Constitution grants to Congress the authority to coin money and regulate the value of the currency. The Constitution does not give Congress the authority to delegate control over monetary policy to a central bank. Furthermore, the Constitution certainly does not empower the federal government to erode the American standard of living via an inflationary monetary policy.

In fact, Congress’ constitutional mandate regarding monetary policy should only permit currency backed by stable commodities such as silver and gold to be used as legal tender. Therefore, abolishing the Federal Reserve and returning to a constitutional system will enable America to return to the type of monetary system envisioned by our nation’s founders: one where the value of money is consistent because it is tied to a commodity such as gold. Such a monetary system is the basis of a true freemarket economy.

In conclusion, Mr. Speaker, I urge my colleagues to stand up for working Americans by putting an end to the manipulation of the money supply which erodes Americans’ standard of living, enlarges big government, and enriches well-connected elites, by cosponsoring my legislation to abolish the Federal Reserve.

Visto en: RonPaul.com

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P.S.: Es la entrada 500 del Blog, sabía que faltaba poco y el plan era hacer algo alusivo, pero no hubo suerte, pasó sin que me diera cuenta.

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Daily Article by | Posted on 7/24/2008

An audio version of this article, read by Ron Jennings, is available as a free MP3 download.

A debate has been raging for some time among those in the finance industry about whether the United States is currently experiencing inflation, deflation, stagflation, reflation, hyperinflation, or maybe even some other sort of «-flation» that only Dr. Seuss could imagine.

Unfortunately, much of this debate is unproductive because the participants use varying definitions of these terms, and even when they use the same ones, deciding on one simple label might not be sufficient to describe the deeper economic forces at work and what their effects are likely to be. Given the confusion, this article will add some color to the debate by offering usable definitions of the terms inflation and deflation and then attempt to show what is occurring in today’s economy.

What Is Inflation?

The most commonly used definition of inflation — a general increase in the prices of goods and services — is probably the least descriptive, and it is certainly the most misleading. By no coincidence, this is the definition used by politicians, major financial newspaper columnists, and CNBC pundits; and it is the one taught in public high schools and colleges. The reason that this definition is misleading is because, as described in a recent article, it detaches the cause of the phenomenon (an increase in the money supply) from its eventual effects (an increase in the prices of goods and services).

Furthermore, use of this definition also leads to such ridiculous terms as «food inflation» to describe price increases in a few specific agricultural commodities. The absurdity of this notion can be seen when one realizes that nobody ever complains of «stock inflation» or «housing inflation» and that no economics textbook contains a case study that explains how monetary policy caused «Beanie Baby inflation» from 1995 to 1999.

If we agree with Milton Friedman’s famous dictum that «inflation is always and everywhere a monetary phenomenon,» then we should adopt a definition that explicitly acknowledges this point. Prominent Austrian economists such as Ludwig von Mises, Henry Hazlitt, and Murray Rothbard have presented definitions that vary slightly from one another, but one aspect common to all of them is an increase in the money supply.[1] Accordingly, I will adopt that simple definition. Deflation will be defined conversely as a decrease in the money supply. In order for these definitions to be meaningful, however, one must also have a precise definition of money.

What Is Money?

Money, as Frank Shostak succinctly explains, is «that for which all other goods and services are traded.» In practice, money is typically a homogenous and durable good that is universally recognized as something of value and which people are willing to accept in exchange for goods and services. It might be gold or pieces of paper physically exchanged in transactions, or it might be such items stored in institutions like banks and drawn upon by checks, debit cards, or other means.

Complications arise in applying this definition, however, due to practices such as fractional-reserve banking. When a depositor places a sum of money in a checking account at a fractional-reserve bank, the bank may loan out 90% of his deposit to another person with the assumption that the depositor will not withdraw all of his funds. When the bank extends such a loan, the depositor has effectively loaned his money to the borrower, but without his knowledge. In fact, both the depositor and the lender will have legal title to the same sum of money at the same time. Insofar as the depositor believes he can withdraw his money from the bank at any time, he perceives that he still possesses 100% of his deposit. As a result, the money supply has effectively become 190% of what it was originally. But this is just the first step. As the new money is deposited in turn, it generates yet more new money, which can also be deposited, on and on through the banking system until the money supply grows to as much as 1,000% of what it was originally.

While loans like the one above, which Ludwig von Mises referred to as «circulation credit,» have the effect of increasing the money supply, they lie in stark contrast to loans in which the lender temporarily gives up the right to his money, as happens when a depositor purchases a certificate of deposit from a bank. During the term of the CD, the depositor presumably understands that he cannot withdraw his money, and he adjusts his behavior and use of money based on that understanding.

To underscore the point, a loan that involves a temporary transfer of money from one party to another does not increase the money supply. A loan in which the lender somehow retains full title and use of the lent funds does increase the money supply.

Inflation or Deflation?

In order to determine whether inflation or deflation is occurring, it then becomes a simple matter of measuring the money supply. Conveniently, the Ludwig von Mises Institute recently began publishing True Money Supply (TMS) data. Unlike the various «M» monetary aggregates published by the Federal Reserve, the TMS properly includes those accounts that are money and excludes forms of credit that resemble money but are not (e.g., money market mutual funds). A graph of the TMS for the past five years is shown below:

While there are slight downward movements in the TMS from time to time, it has generally been increasing, and has continued to do so through its most recent measurement in April 2008. Accordingly, using my definition, we are experiencing inflation. While that much is perfectly clear, one must be careful not to draw certain conclusions based on that observation.

Bad Inflation, Not-Bad Inflation

One reason that Austrian economists place so much emphasis on the phenomenon of inflation is that it often causes boom-bust cycles. It is a specific type of inflation, however, that causes unsustainable booms, which I term «bad inflation.» This is the type of inflation that occurs in fractional-reserve banking, where money that is intended to be used for current consumption is loaned out to businesses, sending false signals about people’s preferences for current vs. future consumption, which makes it impossible for businesses to properly allocate resources. To the extent that market participants are not aware of the money creation or are not able to determine its rate or otherwise adjust for it, they will undertake business ventures and adopt consumption patterns that are unsustainable. In precisely the same way that Ponzi schemes can operate seemingly healthily for years or more before collapsing, the unsustainable booms caused by «bad inflation» might persist for a while, but will eventually go bust when reality surfaces, prices adjust, and previously profitable enterprises go out of business.

The other type of inflation that can occur I term «not-bad inflation.» This type of inflation does not lead to harmful booms and busts, but it’s not necessarily «good» in any sense either. Rather, it is a natural occurrence in a truly free market. An example of this type of inflation would be found in a society where gold is used as money. In such a society, it would be expected that some amount of gold would be mined from the earth and added to the money supply each year. As long as the rate of this dilutive increase in the money supply was acceptable to the populace (if it were not, a different commodity would be selected to function as money), entrepreneurs would adjust their calculations and business plans based on this dilution. If the growth in production of goods and services was faster than the growth in the money supply, the economy would experience gradually falling prices. Goods and services would go down in price vis-à-vis gold, and everyone would adjust his or her expectations to these falling prices and behave accordingly, exactly as people in modern society must adjust their behavior to rising prices.

To provide further illustration of why «bad inflation» leads to errors in decision making, consider the example of a valet parking service in an office building. Every morning when you arrive at work, you leave your car with the valet. In the evening, you retrieve your car and leave. Now assume that the valet has surreptitiously opened a side business where he loans your car to a taxi driver for a few hours during the day (much like a fractional-reserve bank). As long as you never leave during the day, no problems will occur. However, if you make the assumption that you can retrieve your car any time you want, and you attempt to do so one day based on that assumption, you will discover that your car is missing and you will not be able to honor the lunch commitment you made earlier in the day.[2]

Now consider the above scenario with one small change: the valet has disclosed his side business to you. Assuming that you consent to it (perhaps he reduces your parking fee), you will not assume that your car is available to you during the business day. You will therefore plan accordingly and avoid the errors that would be inevitable in the first scenario.

Unsustainable Booms

As noted above, the United States is undergoing inflation, and under the Federal Reserve System (FRS), inflation is primarily driven by the extension of circulation credit by private banks that are members of the FRS. As such, it is «bad inflation.» Those familiar with the Austrian theory of the business cycle might therefore hastily conclude that the United States will continue to experience an unsustainable boom and that prices of commodities will continue to rise, just as they have been for the past few months. However, drawing such a conclusion would be premature. Widespread business failures and cutbacks in consumption are threatening the solvency of the banks that are responsible for creating money. As these banks discontinue loans to capitalize their losses, the amount of money in circulation will tend to decrease. This pressure could eventually overwhelm whatever new money the FRS is creating elsewhere and lead to deflation.

Those who insist that Federal Reserve policymakers have the ability to simply print up as much money as they want are completely right in one sense, but they perhaps fail to realize that the bulk of the money supply is in the form of circulation credit, which banks, rather than the Fed, produce. The Fed directly controls only the monetary base, which is basically comprised of physical currency and bank reserves. When the Fed purchases securities through its open-market operations, the monetary base increases by a corresponding amount, but it is ultimately the banks and their customers who determine the amount of circulation credit built on top of the monetary base. This is where the idea of the Fed «pushing on a string» takes its meaning. The Fed can let out slack to the banks by buying securities from them to increase their reserves, but it cannot force them to take up that slack by loaning those reserves to businesses. To see the size of the monetary base relative to the overall money supply, consider the graph below:

As the graph shows, the monetary base is roughly $850 billion, compared to the TMS, which is about $5.4 trillion. The Fed therefore directly controls only about 15% of the money supply. It should be noted that despite many people’s claims that the Fed has been inflating tremendously in the last year, the monetary base remains relatively flat. Therefore, the Fed is not «printing,» but is instead relying on banks to expand the remainder of the money supply. And as long as they continue to experience losses (perhaps due to holdings of subprime securities or other impaired investments), their ability to extend new loans will be reduced, and there will be downward pressure on the money supply and potentially deflation.

The Fed’s Response

Most people are led to believe that deflation is a bad thing, but it is not. In fact, it is precisely what the economy requires to eliminate the malinvestment created by the Fed’s inflationary policies. Unfortunately, deflation tends to be politically unpalatable because it causes, among other things, a temporary increase in unemployment as capital resources are reallocated to more productive sectors. Accordingly, it can be expected that the Fed will do anything it can to avoid deflation, not to mention the fact that its chairman, Ben Bernanke, has gone on record discussing the importance of preventing «deflation» (he uses a definition of falling prices).

Given the goal of avoiding deflation (using my definition), the Fed can go one of two routes. It can «print» large amounts of money and inject it into the economy by various means, but this runs the risk of leading to hyperinflation[3] due to the «multiplier effect»: if reserve requirements for banks remain constant, any addition to the monetary base could result in an increase of up to 10 times that amount in the overall money supply. So if the Fed increases the monetary base too quickly, the very potential for further explosive growth in the money supply could lead to an utter loss of faith in the dollar and its abandonment by foreign central banks and other large holders of dollars. And for the government, to destroy a fiat currency system such as the dollar is to kill the goose that laid the golden egg. Despite any disagreements one may have with Ben Bernanke on economic theory, he is no fool. So far he has been supportive of mild forms of Keynesian deficit spending, but he has not yet resorted to printing. I find it doubtful that he will pursue any policy in earnest that he believes will cause hyperinflation.

Instead of printing, the Fed’s second option is to try somehow to convince banks to extend more loans, businesses to borrow and expand, and consumers to continue to consume. This is quite a challenge indeed, given the general negative sentiment in the business world. The housing bust has led to the laying off of many workers and the realization by homeowners that they aren’t as wealthy as they thought they were. Automakers and other retailers are struggling, and other problems continue to plague nearly all areas of the economy. The Fed’s challenge is compounded by the fact that its lowering of interest rates has led to the dollar’s weakening significantly against foreign currencies, which has had the effect of increasing the prices of imports, leading to further cutbacks in consumption and investment.

In order to combat the deflationary forces affecting banks, we see the Fed doing everything in its power short of printing money to prevent them from experiencing losses. This is why we have seen the Fed take actions that, as former Fed chairman Paul Volcker has said, «extend to the very edge of its lawful and implied powers.» When the Fed provided $30 billion in financing for J.P. Morgan to acquire Bear Stearns, it bailed out not Bear but Bear’s credit counterparties. If it had allowed Bear to go bankrupt, the banks that had loaned Bear money would have had to take losses, thereby reducing their reserves and their ability to extend credit elsewhere. It is even possible that Bear’s bankruptcy would have caused other large firms to become insolvent and declare bankruptcy as well.

In other attempts to encourage banks to create money, we have also seen the Fed create three new lending facilities (the TAF, the TSLF, and the PDCF) — in succession, in the hope that the additional liquidity they provide would induce banks to extend more credit. While each of them might have achieved limited success in doing so, there is no telling what other sorts of imaginative creations the Fed will reveal next if banks continue to experience losses and reduce the amount of circulation credit.

Conclusion

Ultimately, the debate over whether we are experiencing inflation or deflation is a simple one if it is only a matter of observing the change in the money supply. The debate becomes far more complex, however, if its purpose is to predict what will happen in the future. While measures of the money supply might provide some indication of where things are headed, one must also have a thorough understanding of the workings of the banking system and the role of businesses and consumers in the creation and destruction of money. The Fed has already taken several drastic actions in an attempt to prevent deflation, but it remains to be seen whether it is even possible for it to achieve such a goal without destroying the dollar and the entire financial system.

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Matthew Beller is a former employee of the Federal Reserve Board of Governors and the Securities and Exchange Commission. He currently works for a private investment firm in Los Angeles. Send him mail. Comment on the blog.

An audio version of this article, read by Ron Jennings, is available as a free MP3 download.

Notes

[1] Mises and Rothbard offer definitions similar to what I term «bad inflation» later in the article. Hazlitt offers the somewhat vague definition of an «increase in the supply of money and credit.»

[2] Such a scenario would also lead to economic miscalculations elsewhere. Although the «car supply» would appear to be two, there would in fact be only one car. This would send a faulty signal to the taxi driver about the number of cars truly available for his business to use. If the scenario were switched so that you retrieved your car before the taxi driver arrived to borrow it, he would experience a «credit crunch» and be left with no car to borrow. In a very basic sense, this is the same concept that underlies the Austrian theory of the business cycle — that when money enters the supply of loanable funds when it should not, it sends a faulty signal to producers about consumers’ preferences for current vs. future consumption.

[3] By hyperinflation, I mean a scenario where money loses its value so rapidly that consumers spend it as quickly as possible in order to avoid holding it.

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Wages, Unemployment, and Inflation

Daily Article by | Posted on 7/19/2008

  1. Wages Ultimately Paid By the Consumers
  2. What Makes Wages Rise
  3. What Causes Unemployment
  4. Credit Expansion No Substitute for Capital
  5. Inflation Cannot Go On Endlessly
  1. The Policy Of The Unions
  2. The Purchasing Power Argument
  3. Wage Raises As Such Not Inflationary
  4. The Dilemma of Present-Day Policies
  5. Insincerity In The Fight Against Inflation
  6. The Importance of Sound Monetary Policies

This essay originally appeared in Christian Economics, March 4, 1958. It was reprinted as chapter 10 of Planning for Freedom.

Our economic system — the market economy or capitalism — is a system of consumers’ supremacy. The customer is sovereign; he is, says a popular slogan, «always right.» Businessmen are under the necessity of turning out what the consumers ask for and they must sell their wares at prices which the consumers can afford and are prepared to pay. A business operation is a manifest failure if the proceeds from the sales do not reimburse the businessman for all he has expended in producing the article. Thus the consumers in buying at a definite price determine also the height of the wages that are paid to all those engaged in the industries.

1. Wages Ultimately Paid By the Consumers

It follows that an employer cannot pay more to an employee than the equivalent of the value the latter’s work, according to the judgment of the buying public, adds to the merchandise. (This is the reason why the movie star gets much more than the charwoman.) If he were to pay more, he would not recover his outlays from the purchasers, he would suffer losses and would finally go bankrupt. In paying wages, the employer acts as a mandatory of the consumers as it were. It is upon the consumers that the incidence of the wage payments falls. As the immense majority of the goods produced are bought and consumed by people who are themselves receiving wages and salaries, it is obvious that in spending their earnings the wage earners and employees themselves are foremost in determining the height of the compensation they and those like them will get.

2. What Makes Wages Rise

The buyers do not pay for the toil and trouble the worker took nor for the length of time he spent in working. They pay for the products. The better the tools are which the worker uses in his job, the more he can perform in an hour, the higher is, consequently, his remuneration. What makes wages rise and renders the material conditions of the wage earners more satisfactory is improvement in the technological equipment. American wages are higher than wages in other countries because the capital invested per head of the worker is greater and the plants are thereby in the position to use the most efficient tools and machines. What is called the American way of life is the result of the fact that the United States has put fewer obstacles in the way of saving and capital accumulation than other nations. The economic backwardness of such countries as India consists precisely in the fact that their policies hinder both the accumulation of domestic capital and the investment of foreign capital. As the capital required is lacking, the Indian enterprises are prevented from employing sufficient quantities of modern equipment, are therefore producing much less per man-hour and can only afford to pay wage rates which, compared with American wage rates, appear as shockingly low.

There is only one way that leads to an improvement of the standard of living for the wage-earning masses, viz., the increase in the amount of capital invested. All other methods, however popular they may be, are not only futile, but are actually detrimental to the well-being of those they allegedly want to benefit.

3. What Causes Unemployment

The fundamental question is: is it possible to raise wage rates for all those eager to find jobs above the height they would have attained on an unhampered labor market?

Public opinion believes that the improvement in the conditions of the wage earners is an achievement of the unions and of various legislative measures. It gives to unionism and to legislation credit for the rise in wage rates, the shortening of hours of work, the disappearance of child labor and many other changes. The prevalence of this belief made unionism popular and is responsible for the trend in labor legislation of the last two decades. As people think that they owe to unionism their high standard of living, they condone violence, coercion, and intimidation on the part of unionized labor and are indifferent to the curtailment of personal freedom inherent in the union-shop and closed-shop clauses. As long as these fallacies prevail upon the minds of the voters, it is vain to expect a resolute departure from the policies that are mistakenly called progressive.

Yet this popular doctrine misconstrues every aspect of economic reality. The height of wage rates at which all those eager to get jobs can be employed depends on the marginal productivity of labor. The more capital — other things being equal — is invested, the higher wages climb on the free labor market, i.e., on the labor market not manipulated by the government and the unions. At these market wage rates all those eager to employ workers can hire as many as they want. At these market wage rates all those who want to be employed can get a job. There prevails on a free labor market a tendency toward full employment. In fact, the policy of letting the free market determine the height of wage rates is the only reasonable and successful full-employment policy. If wage rates, either by union pressure and compulsion or by government decree, are raised above this height, lasting unemployment of a part of the potential labor force develops.

4. Credit Expansion No Substitute for Capital

These opinions are passionately rejected by the union bosses and their followers among politicians and the self-styled intellectuals. The panacea they recommend to fight unemployment is credit expansion and inflation, euphemistically called «an easy money policy.»

As has been pointed out above, an addition to the available stock of capital previously accumulated makes a further improvement of the industries’ technological equipment possible, thus raises the marginal productivity of labor and consequently also wage rates. But credit expansion, whether it is effected by issuing additional banknotes or by granting additional credits on bank accounts subject to check, does not add anything to the nation’s wealth of capital goods. It merely creates the illusion of an increase in the amount of funds available for an expansion of production. Because they can obtain cheaper credit, people erroneously believe that the country’s wealth has thereby been increased and that therefore certain projects that could not be executed before are now feasible. The inauguration of these projects enhances the demand for labor and for raw materials and makes wage rates and commodity prices rise. An artificial boom is kindled.

Under the conditions of this boom, nominal wage rates which before the credit expansion were too high for the state of the market and therefore created unemployment of a part of the potential labor force are no longer too high and the unemployed can get jobs again. However, this happens only because under the changed monetary and credit conditions prices are rising or, what is the same expressed in other words, the purchasing power of the monetary unit drops. Then the same amount of nominal wages, i.e., wage rates expressed in terms of money, means less in real wages, i.e., in terms of commodities that can be bought by the monetary unit. Inflation can cure unemployment only by curtailing the wage earner’s real wages. But then the unions ask for a new increase in wages in order to keep pace with the rising cost of living and we are back where we were before, i.e., in a situation in which large scale unemployment can only be prevented by a further expansion of credit.

This is what happened in this country as well as in many other countries in the last years. The unions, supported by the government, forced the enterprises to agree to wage rates that went beyond the potential market rates, i.e., the rates which the public was prepared to refund to the employers in purchasing their products. This would have inevitably resulted in rising unemployment figures. But the government policies tried to prevent the emergence of serious unemployment by credit expansion, i.e., inflation. The outcome was rising prices, renewed demands for higher wages and reiterated credit expansion, in short, protracted inflation.

5. Inflation Cannot Go On Endlessly

But finally the authorities become frightened. They know that inflation cannot go on endlessly. If one does not stop in time the pernicious policy of increasing the quantity of money and fiduciary media, the nation’s currency system collapses entirely. The monetary unit’s purchasing power sinks to a point which for all practical purposes is not better than zero. This happened again and again, in this country with the Continental Currency in 1781, in France in 1796, in Germany in 1923. It is never too early for a nation to realize that inflation cannot be considered as a way of life and that it is imperative to return to sound monetary policies. In recognition of these facts the administration and the Federal Reserve authorities some time ago discontinued the policy of progressive credit expansion.

It is not the task of this short article to deal with all the consequences which the termination of inflationary measures brings about. We have only to establish the fact that the return to monetary stability does not generate a crisis. It only brings to light the malinvestments and other mistakes that were made under the hallucination of the illusory prosperity created by the easy money. People become aware of the faults committed and, no longer blinded by the phantom of cheap credit, begin to readjust their activities to the real state of the supply of material factors of production. It is this — certainly painful, but unavoidable — adjustment that constitutes the depression.

6. The Policy Of The Unions

One of the unpleasant features of this process of discarding chimeras and returning to a sober estimate of reality concerns the height of wage rates. Under the impact of the progressive inflationary policy the union bureaucracy acquired the habit of asking at regular intervals for wage raises, and business, after some sham resistance, yielded. As a result these rates were at the moment too high for the state of the market and would have brought about a conspicuous amount of unemployment. But the ceaselessly progressive inflation very soon caught up with them. Then the unions asked again for new raises and so on.

7. The Purchasing Power Argument

It does not matter what kind of justification the unions and their henchmen advance in favor of their claims. The unavoidable effects of forcing the employers to remunerate work done at higher rates than those the consumers are willing to restore to them in buying the products are always the same: rising unemployment figures.

At the present juncture the unions try to take up the old, a-hundred-times-refuted purchasing-power fable. They declare that putting more money into the hands of the wage earners — by raising wage rates, by increasing the benefits to the unemployed and by embarking upon new public works — would enable the workers to spend more and thereby stimulate business and lead the economy out of the recession into prosperity. This is the spurious pro-inflation argument to make all people happy through printing paper bills. Of course, if the quantity of the circulating media is increased, those into whose pockets the new fictitious wealth comes — whether they are workers or farmers or any other kind of people — will increase their spending. But it is precisely this increase in spending that inevitably brings about a general tendency of all prices to rise or, what is the same expressed in a different way, a drop in the monetary unit’s purchasing power. Thus the help that an inflationary action could give to the wage earners is only of a short duration. To perpetuate it, one would have to resort again and again to new inflationary measures. It is clear that this leads to disaster.

8. Wage Raises As Such Not Inflationary

There is a lot of nonsense said about these things. Some people assert that wage raises are «inflationary.» But they are not in themselves inflationary. Nothing is inflationary except inflation, i.e., an increase in the quantity of money in circulation and credit subject to check (checkbook money). And under present conditions nobody but the government can bring an inflation into being. What the unions can generate by forcing the employers to accept wage rates higher than the potential market rates is not inflation and not higher commodity prices, but unemployment of a part of the people anxious to get a job. Inflation is a policy to which the government resorts in order to prevent the large-scale unemployment the unions’ wage raising would otherwise bring about.

9. The Dilemma of Present-Day Policies

The dilemma that this country — and no less many other countries — has to face is very serious. The extremely popular method of raising wage rates above the height the unhampered labor market would have established would produce catastrophic mass unemployment if inflationary credit expansion were not to rescue it. But inflation has not only very pernicious social effects. It cannot go on endlessly without resulting in the complete breakdown of the whole monetary system.

Public opinion, entirely under the sway of the fallacious labor-union doctrines, sympathizes more or less with the union bosses’ demand for a considerable rise in wage rates. As conditions are today, the unions have the power to make the employers submit to their dictates. They can call strikes and, without being restrained by the authorities, resort with impunity to violence against those willing to work. They are aware of the fact that the enhancement of wage rates will increase the number of jobless. The only remedy they suggest is more ample funds for unemployment compensation and a more ample supply of credit, i.e., inflation. The government, meekly yielding to a misguided public opinion and worried about the outcome of the impending election campaign, has unfortunately already begun to reverse its attempts to return to a sound monetary policy. Thus we are again committed to the pernicious methods of meddling with the supply of money. We are going on with the inflation that with accelerated speed makes the purchasing power of the dollar shrink. Where will it end? This is the question which Mr. Reuther and all the rest never ask.

Only stupendous ignorance can call the policies adopted by the self-styled progressives «pro-labor» policies. The wage earner like every other citizen is firmly interested in the preservation of the dollar’s purchasing power. If, thanks to his union, his weekly earnings are raised above the market rate, he must very soon discover that the upward movement in prices not only deprives him of the advantages he expected, but besides makes the value of his savings, of his insurance policy, and of his pension rights dwindle. And, still worse, he may lose his job and will not find another.

10. Insincerity In The Fight Against Inflation

All political parties and pressure groups protest that they are opposed to inflation. But what they really mean is that they do not like the unavoidable consequences of inflation, viz., the rise in living costs. Actually they favor all policies that necessarily bring about an increase in the quantity of the circulating media. They ask not only for an easy money policy to make the unions’ endless wage boosting possible but also for more government spending and — at the same time — for tax abatement through raising the exemptions.

Duped by the spurious Marxian concept of irreconcilable conflicts between the interests of the social classes, people assume that the interests of the propertied classes alone are opposed to the unions’ demand for higher wage rates. In fact, the wage earners are no less interested in a return to sound money than any other groups or classes. A lot has been said in the last months about the harm fraudulent officers have inflicted upon the union membership. But the havoc done to the workers by the unions’ excessive wage boosting is much more detrimental.

It would be an exaggeration to contend that the tactics of the unions are the sole threat to monetary stability and to a reasonable economic policy. Organized wage earners are not the only pressure group whose claims menace today the stability of our monetary system. But they are the most powerful and most influential of these groups and the primary responsibility rests with them.

11. The Importance of Sound Monetary Policies

Capitalism has improved the standard of living of the wage earners to an unprecedented extent. The average American family enjoys today amenities of which, only a hundred years ago, not even the richest nabobs dreamed. All this well-being is conditioned by the increase in savings and capital accumulated; without these funds that enable business to make practical use of scientific and technological progress the American worker would not produce more and better things per hour of work than the Asiatic coolies, would not earn more and would, like them, wretchedly live on the verge of starvation. All measures which — like our income and corporation tax system — aim at preventing further capital accumulation or even at capital decumulation are therefore virtually antilabor and antisocial.

One further observation must still be made about this matter of saving and capital formation. The improvement of well-being brought about by capitalism made it possible for the common man to save and thus to become in a modest way himself a capitalist. A considerable part of the capital working in American business is the counterpart of the savings of the masses. Millions of wage earners own saving deposits, bonds, and insurance policies. All these claims are payable in dollars and their worth depends on the soundness of the nation’s money. To preserve the dollar’s purchasing power is also from this point of view a vital interest of the masses. In order to attain this end, it is not enough to print upon the bank notes the noble maxim In God We Trust. One must adopt an appropriate policy.

[VIEW THIS ARTICLE ONLINE]

_______________________

Ludwig von Mises (1881–1973) was dean of the Austrian School. See his daily articles. Comment on the blog.

This essay originally appeared in Christian Economics, March 4, 1958. It was reprinted as chapter 10 of Planning for Freedom.

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Daily Article by | Posted on 7/1/2008

The latest data show that the yearly rate of growth of the US consumer price index (CPI) climbed to 4.1% in May from 3.9% in the month before. Most economists and Federal Reserve policy makers attribute this to sharp increases in commodity prices.

In his speech at the Federal Reserve Bank of Boston, Fed Chairman Bernanke said,

Inflation has remained high, largely reflecting sharp increases in the prices of globally traded commodities.[1]

There is almost complete unanimity among economists and various commentators that inflation consists in general increases in the prices of goods and services. From this it is established that anything that contributes to price increases sets inflation in motion. A decrease in unemployment or an increase in economic activity is seen as a potential inflationary trigger. Some other triggers, such as increases in commodity prices or workers wages, are also regarded as potential threats.

If inflation is just a general increase in prices, as popular thinking has it, then why is it regarded as bad news? What kind of damage does it do?

Mainstream economists maintain that inflation causes speculative buying, which generates waste. Inflation, it is maintained, also erodes the real incomes of pensioners and low-income earners and causes a misallocation of resources. Inflation, it is argued, also undermines real economic growth.

Why should a general increase in prices hurt some groups of people and not others? And how does inflation lead to the misallocation of resources? Why should a general increase in prices weaken real economic growth? If inflation is triggered by other factors, then surely it is just a symptom and can’t cause anything as such.

We know that a price of a good is the amount of money paid for the good. From this we can infer that for any given amount of goods, a general increase in prices can only take place in response to the increase or inflation of the money supply.

Most economists, when discussing the issue of general increases in prices, which they label inflation, never mention the word money. The reason for that is the lack of a good statistical correlation between changes in money and changes in various price indexes such as the CPI. Whether changes in money cause changes in prices cannot be established by means of statistical correlation. We suggest that a statistical correlation, or lack of it, between two variables shouldn’t be the determining factor in establishing causality. One must figure out by means of reasoning the structure of causality.

The Essence of Inflation

Historically, inflation originated when a king would force his citizens to give him all their gold coins under the pretext that a new gold coin was going to replace the old one. In the process the king would falsify the content of the gold coins by mixing it with some other metal and return to the citizens diluted gold coins. On this Rothbard wrote,

More characteristically, the mint melted and recoined all the coins of the realm, giving the subjects back the same number of «pounds» or «marks,» but of a lighter weight. The leftover ounces of gold or silver were pocketed by the King and used to pay his expenses.[2]

Because of the dilution of the gold coins, the ruler could now mint a greater number of coins for his own use. (He could now divert real resources to himself.) What was now passing as a pure gold coin was in fact a diluted gold coin.

The expansion in the diluted coins that masquerade as pure gold coins is what inflation is all about. As a result of the increase in the amount of coins, prices in terms of coins now go up (more coins are being exchanged for a given amount of goods). What we have here is inflation, i.e., an expansion of coins. As a result of inflation, the ruler can engage in an exchange of nothing for something. Also note that the increase in prices in terms of coins results from the coin inflation.

Under the gold standard, the technique of abusing the medium of exchange became much more advanced through the issuance of paper money unbacked by gold. Inflation therefore means here an increase in the amount of paper receipts resulting from the increase in receipts that are not backed by gold yet masquerade as the true representatives of money proper: gold.

The holder of unbacked receipts can now engage in an exchange of nothing for something. As a result of the increase in the number of receipts (inflation of receipts) we now also have a general increase in prices. Observe that the rise in prices develops here because of the increase in paper receipts that are not backed by gold. Also, what we have is a situation where the issuers of the unbacked paper receipts divert to themselves real goods without making any contribution to the production of goods.

In the modern world, money proper is no longer gold but rather paper money; hence inflation in this case is an increase in the stock of paper money. Please note we don’t say, as monetarists do, that the increase in the money supply causes inflation. What we are saying is that inflation is the increase in the money supply.

We have seen that increases in the money supply set in motion an exchange of nothing for something. They divert real funding away from wealth generators toward the holders of the newly created money. This is what sets in motion the misallocation of resources, not price increases as such.

Real incomes of wealth generators fall not because of a general rise in prices but because of increases in the money supply. When money is expanded — i.e., created out of «thin air» — the holders of the newly created money can divert to themselves goods without making any contribution to the production of goods. As a result, wealth generators who have contributed to the production of goods discover that the purchasing power of their money has fallen since there are now fewer goods left in the pool — they cannot fully exercise their claims over final goods since these goods are not there.

Once wealth generators have fewer real resources at their disposal, this will obviously hurt the formation of real wealth. As a result, real economic growth is going to come under pressure.

General increases in prices, which follow increases in money supply, only point to an erosion of real wealth. Price increases, however, didn’t cause this erosion.

Likewise, it is monetary inflation, and not increases in prices, that erodes the real incomes of pensioners and low-income earners. As a rule, they are the last receivers of money — often called the «fixed-income groups.»

According to Rothbard,

Particular sufferers will be those depending on fixed-money contracts — contracts made in the days before the inflationary rise in prices. Life insurance beneficiaries and annuitants, retired persons living off pensions, landlords with long-term leases, bondholders and other creditors, those holding cash, all will bear the brunt of the inflation. They will be the ones who are «taxed.»[3]

Can Increases in Commodity Prices Cause Inflation?

We have seen that, according to Bernanke and most economists, it is increases in commodity prices such as oil that are behind the recent strong increases in the prices of goods and services.

If the price of oil goes up, and if people continue to use the same amount of oil as before, people will be forced to allocate more money to oil. If people’s money stock remains unchanged, less money is available for other goods and services, all other things being equal. This of course implies that the average price of other goods and services must come down. Remember: a price is the sum of money paid for a unit of a good. (The term «average» is used here in conceptual form. We are well aware that such an average cannot be computed.)

Note that the overall money spent on goods doesn’t change; only the composition of spending has altered, with more on oil and less on other goods. Hence the average price of goods or money per unit of good remains unchanged.

Likewise, the rate of increase in the prices of goods and services in general is going to be constrained by the rate of growth of money supply, all other things being equal, and not by the rate of growth of the price of oil.

It is not possible for increases in the price of oil to set in motion a general increase in the prices of goods and services without corresponding support from the money supply.

Can Inflation Expectations Trigger a General Price Rise?

We have seen that as a rule a general increase in the prices of goods can emerge as a result of the increase in the amount of money paid for goods, all other things being equal. The key then for general increases in prices, which is labeled by popular thinking as inflation, is increases in the money supply, e.g., the supply of US dollars. But what about the situation when increases in commodity prices ignite inflation expectations, which in turn strengthens the rate of inflation? Surely then inflation expectations must be also an important driving factor of inflation? According to Bernanke inflation expectations are the key driving factor behind increases in general prices,

The latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations. The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation.[4]

Once people start to anticipate higher inflation in the future, they increase their demand for goods at present thus bidding the prices of goods higher. Also, according to popular thinking, workers expectations for higher inflation prompt them to demand higher wages. Increases in wages in turn lift the cost of producing goods and services and force businesses to pass these increases on to consumers by raising prices.

It is true that businesses set prices and it is also true that businessmen, while setting prices, take into account various costs of production. However, businesses are ultimately at the mercy of the consumer, who is the final arbiter.

The consumer determines whether the price set is «right,» so to speak. Now, if the money stock did not increase, then consumers won’t have more money to support the general increase in prices of goods and services.

Also, because of expectations for higher prices in the future, consumers will not be able to increase their demand for goods at present and bid the prices of goods higher without having more money. Consequently, the amount of money spent per unit of goods will stay unchanged.

So irrespective what people’s expectations are, if the money supply hasn’t increased, then people’s monetary expenditure on goods cannot increase either. This means that no general strengthening in price increases can take place without an increase in the pace of monetary pumping.

Imagine that somehow the Fed did manage to convince people that central bank policies are aimed at stopping inflation and maintaining price stability, yet at the same time the central bank also increased the rate of growth of money supply. Even if inflationary expectations were stable, that destructive process would be set in motion, regardless of these expectations, because of the increase in the rate of growth of money. People’s expectations and perceptions cannot offset this destructive process. It is not possible to alter the facts of reality by means of expectations. The damage that was done cannot be undone by means of expectations and perceptions.

Some economists, such as Milton Friedman, maintain that if inflation is «expected» by producers and consumers, then it produces very little damage.[5] The problem, according to Friedman, is with unexpected inflation, which causes a misallocation of resources and weakens the economy. According to Friedman, if a general increase in prices can be stabilized by means of a fixed rate of monetary injections, people will then adjust their conduct accordingly. Consequently, Friedman says, expected general price increases, which he calls expected inflation, will be harmless, with no real effect.

Observe that, for Friedman, bad side effects are not caused by increases in the money supply but by its outcome — increases in prices. Friedman regards money supply as a tool that can stabilize general increases in prices and thereby promote real economic growth. According to this way of thinking, all that is required is fixing the rate of money growth, and the rest will follow.

The fixing of the money supply’s rate of growth does not alter the fact that money supply continues to expand. This, in turn, means that it will lead to the diversion of resources from wealth producers to non–wealth producers. The policy of stabilizing prices will therefore generate more instability through the misallocation of resources.

Can Inflation Emerge While Prices Stay Unchanged?

Now, if for a given stock of goods an increase in the money supply occurs, this would mean that more money is going to be exchanged for a given stock of goods. Obviously then the purchasing power of money is going to fall, i.e., the prices of goods are going to increase (more money per unit of a good). In this case the general increase in prices is associated with inflation.

But now consider the following case: the rate of growth in money is in line with the rate of growth in goods. Consequently, the prices of goods on average don’t change. Do we have inflation here or don’t we? For most economists, if an increase in the money supply is exactly matched by the increase in the production of goods, then this is fine, since no increase in general prices has taken place and therefore no inflation has emerged. We suggest that this way of thinking is false since inflation has taken place, i.e., the money supply has increased. This increase cannot be undone by the corresponding increase in the production of goods and services.

For instance, once a king has created more diluted gold coins that masquerade as pure gold coins he is now able to exchange nothing for something irrespective of the rate of growth of the production of goods. Regardless of what the production of goods is doing, the king is now engaging in an exchange of nothing for something, i.e., diverting resources to himself by paying nothing in return. This diversion is possible because of the increase in the number of diluted coins, i.e., the inflation of coins.

The same logic can be applied to paper-money inflation. The exchange of nothing for something that the expansion of money sets in motion cannot be undone by an increase in the production of goods. The increase in money supply — i.e., the increase in inflation — is going to set in motion all the negative side effects that money printing does, including the menace of the boom-bust cycle, regardless of the increase in the production of goods.

According to Rothbard,

The fact that general prices were more or less stable during the 1920s told most economists that there was no inflationary threat, and therefore the events of the great depression caught them completely unaware.[6]

Conclusion

Contrary to the popular definition, inflation is not about a general rise in prices but about increases in money supply. The general increase in prices as a rule develops because of the increase in money. The harm that most people attribute to increasing prices is in fact due to increases in money supply. Policies that are aimed at fighting inflation without identifying what it is all about only make things much worse.

When inflation is seen as a general increase 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 as an inflation fighter. On this Mises wrote,

To avoid being blamed for the nefarious consequences of inflation, the government and its henchmen resort to a semantic trick. They try to change the meaning of the terms. They call «inflation» the inevitable consequence of inflation, namely, the rise in prices. They are anxious to relegate into oblivion the fact that this rise is produced by an increase in the amount of money and money substitutes. They never mention this increase. They put the responsibility for the rising cost of living on business. This is a classical case of the thief crying «catch the thief.» The government, which produced the inflation by multiplying the supply of money, incriminates the manufacturers and merchants and glories in the role of being a champion of low prices.[7]

[VIEW THIS ARTICLE ONLINE]

_____________________________

Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. He is chief economist of M.F. Global. Send him mail and see his outstanding Mises.org Daily Articles Archive. Comment on the blog.

Notes

[1] Ben S. Bernanke. «Outstanding Issues in the Analysis of Inflation.» Speech at the Federal Reserve Bank of Boston June 9, 2008.

[2] Murray N. Rothbard. What Has Government Done to Our Money?

[3] Murray N. Rothbard. What Has Government Done to Our Money?

[4] Ben S. Bernanke. «Outstanding Issues in the Analysis of Inflation.» Speech at the Federal Reserve Bank of Boston June 9, 2008.

[5] See Friedman’s Dollars and Deficits, Prentice Hall, 1968, pp.47–48.

[6] Murray N. Rothbard. America’s Great Depression. 153.

[7] Ludwig von Mises. Economic Freedom and Interventionism. 94.

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Estamos grandecitos

No queremos patoteros en el Gobierno
(Ya tuvimos demasiados)

 

Por amor a la democracia

RENUNCIA DE MORENO YA

 

Yo apoyo esta campaña
PIDO LA RENUNCIA DE MORENO YA

 FIRMA EL PETITORIO:

http://renunciademorenoya.wordpress.com/

Si tenés un blog o página y querés apoyar esta campaña, utilizá este código:

<a href=”http://renunciademorenoya.wordpress.com/2008/04/28/que-renuncie-moreno-ya/”><img src=”http://i303.photobucket.com/albums/nn127/renunciademorenoya/RENUNCIADEMORENOYA.jpg” /></a>

También podés apoyar esta campaña dejando tu manifestación como un comentario de esta entrada. Evitemos los insultos, no nos confundamos con ellos.

Visto en: No me Parece

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Are Recessions Deflationary?

 

Daily Article | Posted on 4/28/2008 by Robert P. Murphy

 

Over the past few months, I have become increasingly irritated with the confident press claim that recessions lead to lower rates of price inflation. For reasons that I myself do not understand, a recent Wall Street Journal piece pushed me over the edge, and the article you are now reading is the fruit of my frustration. By the end, I hope to convince you that both theory and history show that economic downturns lead to higher price inflation, other things equal.

 

The Offending Article

 

Before launching into my argument, let’s review the conventional wisdom that I wish to attack. The April 10 edition of the WSJ had the article, «Inflation, Spanning the Globe, Is Set to Reach Decade High.» On page A12 (carried over from the front page) we learn

 

In the U.S., Fed officials are concerned that food and energy prices have increased inflation even though the economy is sliding into recession. But they are generally confident that inflation will recede as rising unemployment prevents workers from winning wage increases.

 

So there’s the standard view in a nutshell: declining real output should ease price pressures, because, during economic slumps, workers can’t demand raises (and merchants can’t raise prices).

 

Now just in case some readers are as skeptical as I am, the Journal offered the following reassurance:

 

«Inflation almost always falls during economic downturns. The Fed has history on its side,» says Julian Jessop, an economist with Capital Economics in London. He expects inflation to be much lower globally a year from now, and the new IMF forecast does, too.

 

Well there you have it. The gurus at the Fed presumably have their macro models to show the connection between recessions and low prices, and Julian Jessop says history backs this up. Who could possibly doubt such a one-two punch?

 

Recession Leads to Higher Prices: The Theory

 

This part is very simple and will only seem mysterious because the conventional wisdom has such a strong foothold. Here’s my rule: Other things equal, lower real output will yield higher rates of price inflation.

 

Forget the complexities of money and go back to the basics. A smaller supply leads to an increase in prices. Very crudely speaking, the «average» price level (please forgive my use of such a non-Austrian concept) is related to the total amount of units produced versus the total units of money that trade against them. So if you have a certain price level, and then reduce the amount of goods by 5 percent, then other things equal you would expect prices to be 5 percent higher.

 

Again, this is so elementary that some readers may suspect trickery. Use a specific example. Suppose you are a hair braider and you lobby for a local ordinance that makes it illegal for 10 percent of your competitors to continue their business. The government adopts your hair-brained idea and now there are 10 percent fewer suppliers of hair braiding in your town. What happens to the prices you can charge? (Hint: they go up, which is why you lobbied for the restriction.)

 

Another example: OPEC decides to slash its output of oil. What happens to the price of a barrel?

 

Does everyone see the pattern? When an individual sector’s output declines, the unit price goes up. So what should we expect to happen during a recession, when output over most or all sectors goes down? Why, I think we’d expect prices in general to go up.

 

Now, as always, there is a danger here of being too mechanistic. Certain people become enthralled with monetarism (and the equation of exchange, namely MV = PQ) so that they forget about the importance of the subjective demand to hold money. This is a mistake. If real output (Q in the equation) drops in half, while the quantity of money stays the same, there is no law of economics that says prices have to double. Indeed, the equation itself doesn’t say that: the «velocity of circulation» could change to either amplify or offset the required change in P.

 

This possible fall in the turnover rate of money is what lies behind the conventional wisdom. People think, «Oh, in recessions consumers are afraid to spend their money. So they build up their savings, and merchants have to slash prices to move their products.»

 

Now it’s true that we would expect people to want to increase their real cash balances during a downturn, because of increased uncertainty. On the other hand, there are plenty of other competing forces. For example, if the hard times cause someone to rule out going to the movies and driving the SUV to work, he might tolerate a lower cash balance. Or, if someone is laid off, he might end up with much lower cash balances. Or, because the volume of goods produced has fallen, it might work out that a person has to devote more of his nominal income to his purchases than during normal times. This necessarily means that his real cash balances are lower.

 

Indeed, one of the purposes for accumulating large cash balances is to weather a recession. So clearly for these farsighted people, their demand to hold money drops during a recession. Think it through: If you have, say, six months’ of income in the bank, you start to draw on it when your manager scales back the number of weekly hours you work at the factory. It would be crazy to assume that you try to increase your (real) cash balances in this situation; you have built them up in good times so that you can draw them down during times like this. Yes, you will undoubtedly become stingier with your money as the bank balance dwindles, but the point is that you will tolerate a shrinking amount of total purchasing power over time, as the recession grinds on. If on average most people in the economy are doing this — and if the stock of money stays the same or (more likely) increases because of Fed stimulus — then clearly the «price» of money must fall, which is to say the dollar-prices of goods and services must rise.

 

Finally, whether you have been convinced by my description of the competing forces of money demand among domestic consumers, there is the unambiguous effect on international holders of the currency. Other things equal, surely there are fewer people clamoring to buy US dollars when the country is mired in a recession.

 

Thus it seems that whether we think in terms of flows or stocks, there are strong theoretical reasons for supposing that prices will tend to go up during an economic downturn.

 

Before leaving this section, let’s deal with a particularly silly argument about wages: As the WSJ story repeated, some people think that wage increases fuel inflation. The idea is that the workers extract an extra $1 million from the employer, and then they go spend that money, which causes merchants to raise their prices, and so on in a vicious cycle.

 

But now, because of the threat of layoffs, the workers quit griping and are glad just to have a job. So does that reduce spending in the economy? It’s hard to see how. Rather than giving that extra money to the workers, the employer now has it. So the shareholders can take their spouses out to a few more fancy dinners. If that $1 million is inflationary when the workers spend it, why not when the capitalist pigs spend it?

 

We see now that things get very murky when we start talking about the causes of price increases. The real danger is in flipping back and forth between a stock versus flow analysis — we need to pick one and stick with it. Yet as I’ve shown above, on either count my a priori hunch is that recessions should yield price hikes.

 

Recession Leads to Higher Prices: The History

 

Notwithstanding my logic above, the conventional wisdom is so certain in its pronouncements that I thought there must be something else going on. For example, if the Fed expands the money supply to stimulate the economy, and if the Fed hikes interest rates to curb inflation and in the process chokes off growth, then we might see high price inflation go hand-in-hand with boom periods, with lower inflation during downturns. So maybe this third variable — the growth in the money supply — was the foundation for the conventional wisdom, which the financial press mistakenly attributed to Keynesian demand-pull causes.

 

In order to see what I was up against, I consulted the St. Louis Fed’s website. Specifically, I plotted annual percentage increases in the Consumer Price Index, and looked to see how they behaved during recessions versus boom periods. I must say, the conventional wisdom doesn’t exactly jump out at me:

 

Conclusion

 

The worst downturn in US history (i.e., the Great Depression) was characterized by sharp deflation; there is no denying this fact. On the other hand, the glib explanations for this relationship are not self-evident upon closer scrutiny, and indeed one might expect prices to go up during recessions. Looking at the historical record, since 1955 this was quite obviously the case in at least 5 of the 8 recessions, and it was ambiguous in one of them. In other words, in only 2 of the 8 recessions since 1955 was there a pronounced deflationary (or rather disinflationary) trend.

 

In the present article I am not taking a stand on whether price inflation will be high or low in 2008. However I will say this: If you are revising your inflation forecasts downward because of your expectation of sluggish economic growth, you might want to rethink that logic.

_________________________

Robert Murphy is the author of The Politically Incorrect Guide to Capitalism.

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Reproduzco un artículo de La Nación donde se habla de una opinión del Washington Post acerca del cambio que se nos viene:

En el editorial de hoy

Duras críticas a Cristina Kirchner en el Washington Post

Asegura que «será una agradable sorpresa si evita una repetición de la historia»; quejas por el Indec y la falta de debate

 

Martes 30 de octubre de 2007 | 13:54

WASHINGTON (AP).- El diario The Washington Post lanzó duras críticas hacia la presidenta electa Cristina Fernández de Kirchner desde su editorial publicada hoy. Además señaló que la Argentina no parece haber aprendido de la historia y se pregunta si la futura mandataria será capaz de «evitar otra crisis económica».

«Será una agradable sorpresa si evita una repetición de la historia», sostiene en un comentario editorial.

El diario norteamericano afirma que los Kirchner «encararon la temporada electoral manipulando las cifras de la inflación y presionando a los supermercados a mantener los precios bajos».

Enseguida continúa: «Ahora, Fernández, quien realizó su campaña sin participar en un solo debate o siquiera una conferencia de prensa, debe tomar una decisión crucial».

El periódico dice que la primera dama o «puede usar su mandato para recetar la amarga medicina que la economía necesita –incluyendo aumentos en los precios de la energía y las tasas de interés, revaluación de la moneda y reconciliación con el Fondo Monetario Internacional, que tiene la llave para una renovada inversión extranjera– o puede seguir las políticas populistas de su marido hasta que se produzca otro ´crash´ económico».

«Argentina ha cambiado significativamente desde la última vez que una mujer se convirtió en presidente en sucesión de su esposo. Isabel Perón asumió el gobierno en 1974, presenció una catástrofe económica y una virtual guerra civil antes de ser depuesta en un golpe militar… Pero, Argentina -y el partido peronista de la señora Fernández de Kirchner- todavía no han aprendido las lecciones de la historia del país. Eso puede hacer los próximos años más turbulentos».

The Washington Post señala que el actual ciclo económico argentino, como en el pasado, se debe a los altos precios de la carne, trigo y soja del país, a la rigidez del presidente Kirchner frente a los acreedores internacionales, amplios gastos del Gobierno y controles de los precios de la energía y alimentos.

«El resultado predecible ha sido la falta de inversiones en el sector energético que ya ha causado carencias en el abastecimiento y una espiral inflacionaria que probablemente es el doble del estimado del 9%».

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Hoy el INDEK contó que a nivel Nacional la inflación fue de un magro 0.8%, que es 0.8% superior a la inexistente inflación promocionada por alguno de los Fernández. Lo que este organismo publicitario sí aclaró, fue que en San Luis la inflación fue de 3.3%, o sea, 5 veces más que en el resto del país.

¿No es hasta cómico que justo en la pProvincia del Alberto, el del comercial del partido de fútbol, el INDEK diga que hay inflación?; lo que sí es extraño, es que en Mendoza, la tierra del traidor Kobos, fue del 1.5%, duplicando la de la tierra de la Reina Cristina.

Lo más interesante es que en Córdoba, donde se llama a votar en contra del Kakalato, el índice fue del 1.0%, mientras que en Ciudad de Buenos Aires, y en Provincia de Buenos Aires, donde se gana la elección, el INDEK quiere convencernos de que el índice fue del 0.4% y 0.8%.

Básicamente lo que el informe quiere meternos en la cabeza es que donde se quiere a Néstor, la inflación baja; donde se vota contra Néstor, la inflación sube, sube, sube…

Para ver el Informe del INDEK: Índice.pdf

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Alberto Fernández nos despertó hoy lunes con una frase que ni siquiera mi prima de cinco años, que ve que le compran menos caramelos que antes, le cree; lo que el señor Jefe del Gabinete dijo fue…

 «En la Argentina no existe inflación»

Y como es propio de todo buen gobierno progre, pasó a descargarse contra los medios, ya que según uno de los tantos Fernandez que pululan en el gobierno, «Descubren que la papa sube y entonces todos hablan de la papa, pero que la papa sube no quiere decir que hay un aumento generalizado de precios», porque según el caballero, que la papa suba no significa que TODO lo demás suba, claro que al señor le encanta sazonar sus papas fritas con tapados y botas, que por empezar la primavera, están bajando de precio.

De paso, Fernández dijo que en «la Argentina no hay control de precios, sino que hay acuerdos de precios con grandes comercializadoras y fábricas». Pero no perdió el tiempo para aclarar que «en el tema inflacionario, uno debe estar atento».

Como si todo esto no fuera suficiente chiste como para arrancarle una sonrisa de lunes al gato Garfield, el personaje salió a defender los índices del INDEK para la Victoria, que no se los cree ni siquiera Moreno, que es el que los dibuja, y siguió pegándole a los medios.

Este es el Kambio que se Viene en Oktubre. Vote Kristina, para que también se lleven el kambio.

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