The real issue is that the vast majority of us don't understand what inflation really is. Now, we do understand what it means when the same trips to the gas pump in the car require more dollars to fund, or when the same amount of groceries require more dollars to carry out of the store, but these are merely symptoms of inflation.What Is Inflation?
Today we are in the midst of an episode of hysteria over the symptoms of inflation in two areas; food and gasoline. Some decry the lunacy of the Consumer Price Index, a government measure they say purposefully and willfully understates inflation. Some focus on inflation expectations, as if the mere expectation of continued inflationary symptoms was itself inflationary (this is akin to expecting hair growth to fuel hair growth).
What is inflation? It is actually very simple. It is an increase in the quantity of money and bank notes in circulation.
Where is the confusion? Ludwig Von Mises described it this way:
"[P]eople today use the term `inflation' to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation."
Inquiring minds will note that Ludwig Von Mises, Professor Depew, and I are all in the same camp along with countless other bright minds who believe in Austrian economics. My opinion can be found in Inflation: What the heck is it?
Unsurprisingly, primarily because I get tons of emails expressing the same sentiment, Professor Depew has received a mailbag of dissenting opinions.
"The Inflation Hysteria"
Please consider point 5 of Volcker, The Ghost of Crises Past, where Professor Depew addresses Minyan Mailbags on inflation. Professor Depew writes:
Money!Yesterday' Five Things, "The Inflation Hysteria," drew quite a few interesting responses on Minyanville's Exchange.
Balderdash!
Minyan William Geiger writes:
"What balderdash. If I hit you in the nose with my fist, is that an illusion or merely the symptom of my anger? What is the purpose of this article, to tell people that are hurting from rising gas and food prices that if they merely redefine a few terms their troubles will go away? If you are going to use your energy to fill up some written space and I am going to use my energy to read it, please say something MEANINGFUL."
I understand his frustration, but if inflation is to be stopped, the cause must be understood. When politicians and bureaucrats shift the language so that the symptoms of inflation (rising prices) can be referred to as the cause (increasing the money in circulation), it allows the real cause to continue unabated.That this seems like "balderdash" is typical of why it is allowed to continue and has actually been tacitly encouraged by the majority of citizens for so long. If doctors everywhere began referring to fevers as pneumonia, while ignoring what is causing the fever, deaths from pneumonia would skyrocket. That is what is happening right now. Inflation is the fever; unabated increases in the money supply is the pneumonia.
The symptoms of inflation are indeed serious, and I would say there are few in any form of media that have chronicled just how serious it is than Five Things has over the past few years. What is more serious than symptoms of inflation, however, will be the next step when these symptoms give way to a deflationary credit unwind.Wall Street: Making Cents of Your Dollars!
And Minyan James Shafland writes:
"I find your sense of the economy is clear and informative and you and Mish among other's are perceptive economics physicians. It is that stock market that I find so inconsistent. I keep trying to find a pattern but there is none."
Just to be clear, please don't think it is silly or foolish to try and find these links between the economy and stocks. Wall Street, and the media that serves it, have built a multi-billion dollar industry around trying to serve up economic data as meaningful to people who are not economists, all the while analyzing the stock market in terms of what it means to the economy and vice versa.
The question is, If this stuff in the context of stock price movement is mostly gibberish, then why does all of Wall Street talk about it so much and pretend it isn't? The answer is simple: money. There are billions of dollars to be made by disseminating it.
Picking up where professor Depew left off: There are billions of dollars to be made by disseminating misleading information about the state of the economy, housing, likelihood of defaults, interest rate expectations, and even about what inflation is.
Some do it on purpose, others because they are clueless followers. Regardless of which it is, those shorting interest rate futures or treasuries based on prices at the grocery store have had their heads handed to them on a platter.
They will continue to get their heads handed to them on a platter because inflation is not about prices. One can look at grocery prices and say "that's inflation" or one can look at prices and say that is a result of "past" monetary inflation.
The difference is night and day. One way of looking at things will have you shorting treasuries, the other way will have you long treasuries. That's not Balderdash, that's reality.
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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