November 2, 2022

Fault Lines

Inflation is our fault. 

For context, the Federal Reserve today will boost rates.

Illustration 6751294 © Artaniss8 | Dreamstime.com

The message will be clear: We consumers need to stop consuming, because we’re driving up prices.

We used to understand back when Milton Friedman was credible that inflation is “always and everywhere a monetary phenomenon.

Now we’re told by Federal Reserve officials and economic pundits opining on TV, in print, across social media, that the trouble is “demand must come down.”

In other words, it’s us.

We’re spending too much and if we’d just stop, prices would fall.

Hogwash.

That’s the people who created inflation shifting blame.

Inflation – stuff costing more – is caused by one thing: Money.  Give people money for nothing (like playing guitar on the MTV), and they’ll stop working.

Who wouldn’t? We trade time for money. If you can get money for nothing, the time remains yours.

Well, that happened.

With fewer people working for money, there aren’t enough people making products. And prices go up.

But the problem isn’t “excess demand” for stuff. It’s excess money.

You can do an experiment in your own living room to prove it.

Get some poker chips. Take $5 out of your pocket, and get three of your friends to also pony up $5 each.  Give yourself and your three friends five poker chips. Deal out some cards for Texas Hold’em, two face-down to each, and a card face-up on the table.

Now bet.

Now have your Aunt Helen come out of the kitchen and give two of you a bunch more chips.

Now bet again.

Did the people with free chips spend more money?

The problem isn’t the cards, or you. It’s Aunt Helen. Well, it’s the free money.

The party that gave everyone free money – Government, and by extension the Federal Reserve, so Uncle Sam rather than Aunt Helen – is now telling you to stop spending it because you’re creating inflation.

Demand is never the problem.

If people are getting jobs and spending money, businesses hire more people and invest to make more stuff. And other enterprising individuals observe it and get into the business of making and selling stuff too.

Competition.

And if the value of money is stable, the cost of goods and services comes down.

Yes, correct. Down, not up.

How? Better production and distribution fueling a growing market for goods and services.

I call it the Baker Rifle Rule.  In 1800, Ezekiel Baker sold cool new breech-loading guns to Napoleon for about $100 apiece.  Expensive, back then.  Good guns.

By 1860, you could buy Ben Henry’s lever-action repeater for about $40. More for less.  And by 1894, Sam Winchester’s marvelous gun could be had for around $25.

How could better technology cost less?  Stable currency coupled with improved distribution and production and growing demand.

Demand did not create inflation.

In fact, it’s the broad boulevard to wealth (we just visited the Biltmore in Asheville, largest private residence in the USA, which came from the Baker Rifle Rule – not the Fed, which did not exist then).

Not making more money. Not the way to wealth unless you make it faster than money shrivels (owning businesses, owning real estate).

No, the way to wealth is your money buys more. The few can and will always make more money. The many benefit from the enterprise of the few NOT by taxing and redistributing it, but if the money buys more, not less, over time.

The $100 spent in 1800 on a gun could by 1894 buy the gun, the ammo, and flour, and a keg of beer, and clothes and shoes, and maybe even a wagon and a horse to pull it.

Money went farther.

It’s still true in some economic areas. But much of the stuff we buy like gas and groceries keeps costing more because we can’t expand the market or the distribution or improve production enough to offset how our money doesn’t go as far as it used to.

Got a quarter in your pocket?  See those ridges on the edge? That’s “reeding.” It’s there so you know if it’s been shaved.  That’s how money used to be devalued.

Doesn’t much matter today because our coins aren’t made of gold or silver. But that’s inflation.  It shaves away the value of our money.

And it’s not our consuming doing it.

John Maynard Keynes, the British economist from last century who gave us government deficit-spending called “Keynesianism” said, “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

And it hits stocks too. They go up on “multiple expansion” and they devalue when they shouldn’t.

We shouldn’t lower interest rates to stimulate buying. We should keep them high to encourage savings and let spending take care of itself.

Now, over to you, Jay Powell.

Share this article:
Facebook
Twitter
LinkedIn

More posts

dreamstime m 206876446
February 14, 2024

I’ve got my Valentine, for which I’m grateful every day.  Whether the market finds love after yesterday’s blood remains to be seen. Back when the...

dreamstime m 212403964
February 7, 2024

On Nov 15, 2021, NVDA closed at $345.30 on a hundred million shares of volume. Without context, that information is interesting but unhelpful.  I’d note...

dreamstime l 24803177
January 31, 2024

Consumers are confident. I’m not sure they have all the data. It’s a lesson for public companies. In case you missed it, The Conference Board’s...

dreamstime l 56087804
January 24, 2024

If I said the name “Sherlock Holmes” to you, what’s your snap response? Probably, “Elementary, my dear Watson.” I have long favored a line by...

dreamstime l 50373701
January 17, 2024

What do bitcoin Exchange Traded Funds mean for public companies?   More competition for those dollars you chase with your story. A number of you...

dreamstime m 4397737
January 10, 2024

Total nonfarm payroll employment increased by 216,000 in December. So said the headline from the Bureau of Labor Statistics in its monthly report on jobs...