Even Slow Inflation Harms Us

Your thermometer says it’s 100 degrees outside yet there’s snow on the ground. A barbell has stamped on it “100 lbs” yet you can lift it with your little finger. A sprinter wins the 100 yard dash with a time of 0.5 seconds. How can any of this be? Simple. The units of measure don’t stay fixed. That’s what we do with price.

I grew up in a house that my folks bought for $30,000 and spent 30 years paying it off. When their survivors—us descendants—sold it, it fetched half a million dollars. Yet the house was old, worn out!

Living with inflation is a challenge. Employees try to negotiate higher salaries, shoppers scan junk mail for bargains, businesses change price tags on supermarket shelves, in catalogs, on gas station signs, etc. Restaurants reprint, too—“menu costs”, economists call them.

Rising Prices Mislead Us

We've grown used to inflation, but is it inherently dishonest? To constantly say an egg is worth more when it's not? Plus, there’s something worse: inflation makes people passive.

People think the economy is something like the weather, outside their control, where bad things happen. None of that is true. The economy is human-made. We can massage it with intelligent policy.

People think the economy is something like the weather, outside their control, where bad things happen. None of that is true. The economy is human-made. We can massage it with intelligent policy. And any bad things are minor but made barely bearable by our wrong-headed worldview.

Not everyone acts like a victim. Some people are active. They save less, buy fewer bonds, and invest less in stocks financing new machinery and factories. Instead, they hedge, holding real estate and gold. Yet those two expenditures do nothing for producers needing capital (eventually leading to recession).

A bane for some, a boon for others. Inflation lets a borrower repay in weaker dollars, thereby the lender loses purchasing power. Who’s the biggest debtor? Government.“Inflation is taxation without legislation,” stated Milton Friedman.

Federal Reserve governor Ben Bernanke noted inflation creates wiggle room so the Fed can lower its lending rates when Big Borrowers need a break.

Inflation Measurements Mislead Us

While financial powers want inflation, they do not want you to know how much it is. Over the past 30 years, the government has changed the way it calculates inflation more than 20 times. Officially, inflation is now close to zero. But using the official definition of 1990, it’s closer to 4% p.a. Using the official definition of 1980, it’s closer to 8%.

According to the Bureau of Labor Statistics (BLS), the average price of beef and veal increased 20% over the past five years. Yet according to the USDA, beef prices increased 26%. Which is it? They can’t both be right. The BLS refuses to reveal the data it uses. That makes an audit senseless.

Crucially, the Consumer Price Index (CPI) excludes home prices, yet houses have traditionally risen faster than the CPI inflation rate. According to the Census Bureau, the average price of a home rose between 1963 and 2010 from $19,300 to $272,900. Yet according to the government’s inflation calculator, that house should’ve risen to $137,531—half the actual price.

The Fed’s “Quantitative Easing” (even foreign corporations qualified) created $116 million per hour for all of 2013. While monetary inflation grew 4.9%, the BLS’s measurement of inflation was only 1.5% that year.

New Notes: Too Much of a Good Thing?

The sine qua non of inflation is more new money issued than more new goods and services produced. Then those who get the new money first bid up the prices of assets and products. Everyone else plays catch up.

In the US, only Congress has the Constitutional authority to expand the money supply. Yet Congress gave that power to the central bankers. Now new money is created “out of thin air” and issued when the Fed buys bonds of the central government, of member banks, and now of any entity in the too-big-to-fail club, putting them all into debt.

Should the central bankers have the legal power to control the money supply? Should there even be a monetary policy? Rising prices mask the good news: the economy keeps churning out more from less. So if input costs fall and the money supply stays the same, why go create and issue new money? Indeed.

What’s the right rate of inflation? Well, what’s the right temperature of a fever? Is even a low-grade fever good for you? Nope. So, what’s the cure? Less debt. Less deficit spending by politicians. Smaller mortgages by lenders. Both public and private debts flood the economy with excess cash.

What’s the right rate of inflation? Well, what’s the right temperature of a fever? Is even a low-grade fever good for you? Nope.

So, what’s the cure? Less debt. Less deficit spending by politicians. Smaller mortgages by lenders. Both public and private debts flood the economy with excess cash.

Deflating Inflation

Now, when a neighborhood spruces itself up, or workers earn more money, people pay more for a house-on-land. However, none of that higher land value belongs in a mortgage. The value of land is not created by the lender or landowner. Just like the land isn’t. That value is created by the presence of society.

Society could use a tax, fee, lease, dues, whatever, to recover that value of locations which it generates. When landowners pay society for land—they do in Hong Kong where all land is public and in Singapore where the land tax is high—they would not be paying lenders for land. Mortgages would be cut in half, taking inflation down a peg.

If society were to share its recovered land value among its members—pay residents a dividend (Aspen, CO, does something similar, albeit substituting affordable housing for a payout)—then residents would be much better off. People would not need so many governmental programs. Public debt could shrivel.

David Hackett Fischer in his The Great Wave: Price Revolutions and the Rhythm of History showed that every great world power collapsed after enervating itself via inflation. While ending empires would be a blessing for all, there are more economical ways to do it.

Inflation puts us on constant guard. It makes the world an exacting place. Conversely, as people find out that inflation is something they can defeat, they’d not feel so much like pawns. They’d be less susceptible to war propaganda, and vote for rational politicians (hopefully not an oxymoron). The military would shrink and public debt with it. Bye-bye inflation.

Life Sans Inflation

Given progress and cheaper inputs, where is any huge need for mountains of new money? If needed, could local currency clubs issue new notes? Especially if the US Bureau of Weights and Measures set the standard for a stable currency?

It’s time we let prices reflect only cost and demand, no longer privilege and sneaky dealing, also. Minus inflation, when you see a price, you’d see the true costs. Then the world becomes a far more relaxing place.

While financial powers want inflation, they do not want you to know how much it is. Over the past 30 years, the government has changed the way it calculates inflation more than 20 times.