Price inflation and credit

[Faramir]

Just looking for some feedback on this train of thought. Money is easy and consumers, despite a coming recession don't care and are spending like crazy. When you have more money (not wealth, but money) chasing goods then we should see price increases, correct? With the onset of the american installment program by Singer sewing machines in the early 20th century you would have thought you would have seen them become more expensive. My guess is the other side of the ledger - the supply. Singer and competitors had capacity to produce more product to offset the increased demand caused by credit.

These days with product coming out of our ying yang (China, Taiwan, crap crap from everywhere) by rights we should be experiencing massive deflation if it were not for the consumer capacity to spend, is that not correct?

But then what explains the massive 40 year run up in housing prices in North America? My understanding was that the onset of the 25% down payment coupled with women in the workforce massively expanded the amount of credit. Housing prices did not increase as a function of the cost to build, but as a function of demand increasing because of credit. But would not have house building supply have kept up enough to keep prices flat, or at least in line with wage inflation?

[Hubert Mitchell]

If you believe there is no manipulation then it doesn't make sense. If you see the manipulation then it all makes sense. They are hiding the inflation by not including things like food, and highlighting things that are deflationary like PCs etc by including them in the stats. They want a bigger mess so they want a inflationary depression and not a deflationary one.

[Faramir]

If you believe there is no manipulation then it doesn't make sense. If you see the manipulation then it all makes sense. They are hiding the inflation by not including things like food, and highlighting things that are deflationary like PCs etc by including them in the stats. They want a bigger mess so they want a inflationary depression and not a deflationary one.

I completely agree. I assume you are familiar with shadow statistics that puts real US inflation at 8%. That all started wtih LBJ who wanted to make the GDP look better than it was by downplaying the inflation adjustment. I think Canada's stats are also suspect but perhaps due to innocent faulty equations borrowed from the US.

No doubt kings and governments love inflation. That is why Kings shaved around the edges of their gold coins. Inflation makes their debt easier to manage so in effect it is a sneaky downright dirty implicit taxation on the population.

[Gerry T. Neal]

What we call "inflation" is when the value of our money goes down relative to other commodities in the market. One of the most basic factors in determining the relative worth of two commodities is the amount available. If you have x amount of sugar and 10X amount of salt, salt will be worth less per unit than sugar.

The problem with money is that while its purchasing power is set by the market as if it were just another commodity, it is not just another commodity, it is the means of exchange which makes a complex market system work, the means of calculating wealth, and the means of saving and storing wealth. Each of these functions create a demand for the value of money to be stable. If the money supply is increased too much so that its value per unit goes down relative to other commodities - if it is "inflated" in other words - then the value of our savings goes down, and an incentive to spend now rather than save for later is created. That kind of spending, however, is irresponsible in any situation, and so there is a social demand for stable money which creates an incentive to save.

This creates a difficulty in that that demand is not easy to meet. You can tie the currency to something which has an enduring, intrinsic value, like gold. That remains my preference, but the gold standard, like many other good things, is difficult to retrieve when once lost, especially when you have a huge economy, which depends upon mass production, which requires a larger money supply than could be backed by gold in order to distribute the mass-produced goods through the market. This leaves government management of the money supply as the most obvious alternative.

Unfortunately, that alternative doesn't work. You run into the problem that Mises pointed out almost a century ago, that there is simply no mechanism available whereby an administering body can calculate in advance what economic activity and transactions would produce the outcome which is optimal for everybody. Since the value of money is determined by the same factors as the cost of other market commodities this rule applies to the money supply as well.

Sure enough, attempts to manage the money supply end up being attempts to mask inflation. We notice inflation - the decrease in value of our money due to an increase in the overall money supply - when it is reflected in rising prices. We notice it the most when we can see it in the price of commodities we are constantly buying and using up - food, milk, gasoline, etc. We notice it less when we can see it in the price of commodities we regularly but less frequently purchase - clothing for example. We notice it even less when it is seen in the price of things like vehicles and houses in which years and even decades pass between purchases. Therefore, there is much effort spent in trying to keep consumer good prices low, one result of which is that prices on other commodities, such as vehicles and houses, goes up.

This is exacerbated by the relationship between inflation and interest rates, which affect investment. Low interest rates and high levels of inflation tend to go together. One of the results is that people borrow more money to when interest rates are low. If the price of something has been steadily rising - as that of houses was due to the factors mentioned above - they are tempted to buy in the hopes of reselling and making a profit in the future. When more people are buying, the price rises even further.

This, however, produces an unsustainable bubble which ultimately pops. In the case of 2008 the bubble was made even worse by the American government bullying banks into extending credit to people with poor credit ratings in order that they might own their own houses.

[Faramir]

I largely agree with what you said. What we need is honest money, whether backed by gold or some means to limit government's ability to stealth tax us by inflation.