Invest in inflation. It’s the only thing going up. – Will Rogers
World War II ration card |
Inflation represents economically a
rapid rise in prices caused by a range of factors. The rate of inflation is
calculated by averaging the percentage growth rate of the prices of a selected
sample of commodities, traditionally called a “basket of goods.”
There is not much good about inflation
but plenty of bad: financial costs and a social cost. Even Keynesian economists
recognize that inflation is damaging to the economy in general and to society.
Bondholders, for example, are exposed
to losses from inflation. If the overall price level rises, the purchasing
power of $1,000 for example, at bond maturity, diminishes, making bond
investment an uncertain proposition.
Rising inflation makes it risky to
enter any long-term contracts. Lending and borrowing money are also a big gamble
– neither lenders nor borrowers would be eager to enter such long-term
contracts. But investment becomes impossible without long-term loans. This
results in a stagnant economy. A stagnant economy with high inflation then experiences
stagflation.
Inflation causes consumers to change
their behavior and no longer shop where they used to, they look for bargains elsewhere.
Businesses engage in similar practices, they start shopping around for cheaper
suppliers; businesses experience rising costs as well, which then slows down
the efficiency of the economy.
Low inflation does not necessarily
lead to high inflation in theory. In practice, we have seen what happened with hyperinflation
in Zimbabwe, in Venezuela more recently, and in the Weimar Republic. There are
pictures from that period of a man pushing a wheelbarrow of currency (Deutsche
Marks) to buy a loaf of bread and of children building a pyramid of cash during
the hyperinflation of the 1920s because it was just as cheap as using sticks or
other materials.
In 1989 an article described how
Nicaraguans stopped using piggy banks to save coins because due to the 161%
inflation for a two-week period – a “penny saved is a penny spent.” Even
offering 70% interest rate per month for saving accounts at banks did not
persuade Nicaraguans to save money, they spent it as soon as they got it before
more inflation deteriorated its value. (New York Times, June 22, 1989, p. 2)
A wise sage, Yogi Berra, allegedly
said long ago, “A nickel ain’t worth a dime anymore.”
Indexing (adjusting monetary payments to the reported
inflation rate) “seeks to reduce the social costs of inflation” for two
reasons: 1) to reduce the capricious redistribution of income caused by inflation;
and 2) to reduce the blow caused by our tax system which levies taxes on
nominal interest (no adjustments are made for the decline in the purchasing
power of money) and nominal capital gains (the difference between what an investor
pays for an asset and what it sells it for, again, not taking into account the
loss of purchasing power of money).
Inflation strips the purchasing power
of wages. Seldom do wages rise faster than inflation but they do occasionally. Keynesian
economists believe that in the long run “wages tend to outstrip prices if new
capital equipment and innovation increase output per worker.” Democrats, however, have been telling us since
Obama that we must get used to “the new norm” of a lesser standard of living, a
low growth economy, and a diminished country.
Inflation has been measured with the
traditional basket of goods, food (at home, cereals, bakery products, meat,
poultry, fish and eggs, dairy products, fruits and vegetables, other foods,
away from home, alcoholic beverages), housing (shelter including rent, homeowner
costs, fuel, fuel oil, coal and bottled gas, piped gas, and electricity),
clothing (men’s women’s, boys’, girls’, footwear), transportation (private and
public), medical care (hospital stays), entertainment (ticket prices), other
goods and personal care services (shampoos, toothpaste, soap).
The Consumer Price Index (CPI) is used
to make cost of living adjustments to wages and pensions each year. However, seldom
do cost of living increases match the actual inflation rate.
The CPI market basket was altered in
1986 to reflect higher spending on housing and food eaten away from home. During
the Obama administration, the way inflation has been calculated, “core inflation,”
has omitted prices for groceries and gasoline, a move that makes
inflation rate appear lower than it is.
The excuse for this omission was that
food and gasoline prices are “sensitive to external shocks.” The price of
gasoline and food are often the result of fiscal and monetary policies (money
printing ad nauseam) by administrations in charge, both Republican and Democrat.
The escalating prices of food and the
disruption in the supply chain world-wide has been the result of the pandemic
created by globalists with a gain-of-function Corona virus which caused
unnecessary deaths from purposeful lack of proper medical treatment and
bankruptcies of millions of small, medium, and large businesses across the
globe. Americans were also paid by a Democrat regime to stay home, leaving
millions of jobs available and unfilled.
The fact that globalists are trying to
destroy the fossil fuel industry is no longer a conspiracy theory as President
Biden has closed the XL Keystone pipeline on the first day of his presidency, sending
oil prices into shock, doubling gasoline prices at the pump, and changing the
American status under President Trump from an oil exporting country to an oil
importing country again dependent on the OPEC cartel and its oil production
manipulation.
The calculation of CPI
understates inflation by “excluding housing prices” but not rent and “hiding
enormous increases in health care, schools, prescriptions, and higher education.”
… What
scaremongering about inflation gets wrong - The Washington Post
The Bureau of Labor Statistics uses the
Laspeyres formula on:
-
Selected shelter
services (housing at school, excluding board)
-
Selected
utilities and government fees (electricity, residential water and sewage
maintenance, utility (piped gas service, state motor vehicle registration and
license fees)
-
Selected medical
care services (prescription drugs, physicians’ services, hospital services,
dental services, services by other medical professionals, and nursing homes and
adult day care) Calculation
: Handbook of Methods: U.S. Bureau of Labor Statistics (bls.gov)
The CPI, if used correctly, is a prime
indicator of inflation and recession. It reflects economic trends but
influences them as well.
When inflation becomes galloping
inflation as it did at the turn of the twentieth century, one mark in 1918,
at the time of the Armistice, was worth 726 million marks in late 1923. Germans
burned their marks as it was cheaper than buying wood for their stoves.
Inflation is an ancient problem. When
Emperor Valerian was captured by barbarians in 259 A.D., Romans rushed to turn
their money into goods, thus creating a rate of inflation at 1,000 percent over
17 years (too much money chasing too few goods).
Emperor Diocletian tried to curb
inflation by passing an edict which fixed maximum prices (price fixing) on
1,000 goods, food, raw materials, textiles, wages, and transportation. It was
an utter failure even though the punishment for violating his edict was death.
This is nothing new as our Federal
Reserve System (the Fed), in control of our monetary policy (money stock and
interest rates) is printing too much money to help pay our Democrat government’s
bloated spending and debt to support their globalist mantra, Build Back Better.
It should be more aptly renamed, Build Back Broke.
The Biden regime claims that inflation is 7 percent - the highest it has been since 1982, but is it only 7 percent? How accurate is this CPI? Go to the grocery store and the gas station and you decide.
For it's clear and deja vue! Communist movement grew exponentially in America under Mau-Mau Hussein NObama's 8 year-long dictatorship. Now his Bidet puppet in Casa Blanca performs the orders given to him by the ex-POTUS, bringing down America, one day at the time, and one foot all the way toward the goal of"Equality for All," alias Marxism-Leninism. Hello Venezuela! Hello Cuba with the poorest intellectual class on Earth and hello Romania, Hungary, Bulgaria and the rest of Iron Curtain victims, still suffering from the catastrophic inflation and currency devaluation of 1948!!!! Socialism SUCKS in any form and shape!!!!
ReplyDeleteAurel, you are right.
ReplyDeleteIleana
Your article on inflation is smart and depressing because no prices ever go down, and now we're stuck juggling a strict budget to make ends meet.
ReplyDelete- Carmel in MS
Many thanks, Ileana. Having earned my MBA at the University of Chicago while Milton Friedman and George Stigler were icons there, I can totally agree with your article. My increase in Social Security for 2022 is about half of the true rise in living costs.
ReplyDeleteJim Casey