University Suckers

Tuesday, August 12, 2008

Inflation Is No Good

Inflation in the UK has risen to 4.4% in July. I find this coincidental, especially since I started reading Henry Hazlitt's What You Should Know About Inflation last night. As Hazlitt points out in his essay, which is still relevant almost 50 years later, is that the definition of inflation has 'dual' meanings - even though there is still only one true definition. Observe:
If you turn to the American College Dictionary, for example, you will find the first definition of inflation given as follows: "Undue expansion of increase of the currency of a country, esp. by the issuing of paper money not redeemable in specie."

The second definition being: "A substantial rise of prices caused by undue expansion in paper money or bank credit." However, as Hazlitt identifies, the second definition has of the American College Dictionary is completely different than the first:
Now obviously a rise of prices caused by an expansion of the money supply is not the same thing as the expansion of the money supply itself. A cause or condition is clearly not identical with one of its consequences. The use of the word "inflation" with these two quite different meanings leads to endless confusion.

Inflation is the increase of the supply of money and bank credit relative to the production of goods and services of a specific country. Knowing the correct definition of inflation, it is easy to identify when some people, whether they're in special interest groups or not, try to skew the definition by blaming inflation on something like the "shortage of goods". Indeed, prices climb by an increase in the money supply or because of a shortage of goods. Prices usually increase with a shortage specifically to goods that are experiencing the shortage. Inflation causes a general increase in the prices of all goods, regardless of the category. Seldom can we identify when the shortage of goods has produced a general level of price increase all across the board, even in war time. However, identifying inflation as a consequence of the shortage of goods does not fly. Hazlitt offers an example:
Yet so stubborn is the fallacy that inflation is caused by the "shortage of goods," that even in the Germany of 1923, after prices had soared hundreds of billions of times, high officials and millions of Germans were blaming the whole thing on a general "shortage of goods" - at the very moment when foreigners were coming in and buying German goods with gold or their own currencies at prices lower than those of equivalent goods at home.

Keeping in mind the example above, as well as the rest of my post, observe how the article below almost mirrors Hazlitt's example, and almost completely avoids identifying the true cause of inflation:
The statistics office said that the strongest upward pressure on prices came from nonalcoholic beverages and food, especially meat, bread, cereals and vegetables. Inflation was also pushed up by rising transport costs resulting from spiking fuel prices.

However, a major concern is that the rise could not be solely attributed to higher food and energy prices.

Core inflation, which excludes volatile items such as energy and food, jumped to 1.9 percent from 1.6 percent, indicating that higher energy and food prices are having second-round inflationary effects.

The prices were pushed up due to monetary injections made by the UK. The increase of prices is not from the shortage of goods, but from the government's expansion of money supply and credit relative to its production. If there is too much money chasing too few goods, prices must rise to ensure that shortages do not occur. However, it is different when prices increase from inflation than when they increase just from a shortage of goods.

In conclusion, inflation is brought on by governmental interference. By eliminating the gold standard, the government has illegalized the only method to objectively determine the proper money supply as well as calibrating proper interest rates. When governments take their country off of the gold standard and thus create inflation, several consequences unavoidably follow: The depreciation of the monetary unit, an increase in the cost of living (which in turn decreases the standard of living), the annihilation of past savings, the discouragment of future savings, the redistribution of wealth, and an overall undermining of confidence in the economy, which effects its future growth and value.