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Inflation is Inflation


Most people continue to believe that an increase in the general prices of goods is inflation. This resonates with them because for the average person, this is what matters: higher price of consumption. It is where it "hurts."

The Federal Reserve and an army of economists have done nothing to dispel this notion, and have done quite a lot to secure it, for much can be done to manipulate the indicators of general price levels, and thus assuage the consumer of any real problems (at least in the short run).

If consumers really knew the definition of inflation, they would begin to worry, and quite possibly cut back, in buying the "things" that are being inflated.

The definition of inflation as put out by "Man, Economy, and State" written by Murray Rothbard is, "the process of issuing money beyond any increase in the stock of specie (gold or silver or anything used as the standard or money proper)." This definition is not even explored in the book until page 990 in order to educate the reader on basic principles in order to understand the implications fully of that definition.

For the definition says nothing about prices. There is of course a very strong positive correlation between increasing prices and increasing the supply of currency/credit above the specie, and thus the confusion. One is the cause, one is the effect. This is a big difference and dangerous difference, for when one knows the cause, one can understand the ultimate implication: that the real problem is unchecked expansion of credit.

And increase the rate of issuing money the Federal Reserve has done... it has been its modus operandi since its inception in 1913. I, along with many others, have pointed out statistics that show the egregious amount of inflation that is really in the system. It is a difficult number to estimate because it is not just the supply of the money stock that needs to be measured; this must be measured within the context of the velocity of money.

One statistic that incorporates both is total credit: total credit in the U.S. is now around 310% of GDP. The highest level before that was 270% in 1933 as GDP dropped precipitously and the Federal Reserve kept monetary aggregates growing. These numbers were 155% in 1980, 175% in 1985, 225% in 1990, 240% in 1995, and 265% in 2000. Are we noticing something here?

So there is huge inflation by this definition. This inflation must go somewhere. The Fed, through hedonics and other measures, has been able to keep the "inflation statistics" under control. For example, housing prices are not included in these statistics, only average rent. Rent has not gone up because as home prices have increased substantially, mortgage service costs have not: monthly payments have been kept low through creative financing and negative real interest rates.

Because the non-financial economy has largely been unable to generate a long term utility (read: return) on the excess credit that the Fed has generated, those monies have not entered into the real economy: things like corporate capex spending and C&I (commercial and industrial) loans have lagged significantly in this "growth cycle" versus every single economic cycle since WWII.

So where has the money gone if corporate CEOs and CFOs haven't been able to put it to use?

The primary place 'inflation' has gone has been financial assets like stocks and bonds. And the thing that has kept this [particular flow] going is foreign acceptance (of our IOU's), for they seem to be even more clueless about (the Austrian definition of) inflation than the average American.

If the average person really thought this through they would see that financial assets bear the true marks of inflation. In this sense, higher stock prices are riskier than lower ones.
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