Inflation at New Ruskin College

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Lecture Notes: 08-17-05

What is the measure of inflation?

You might suppose that there is an objective standard. This is not true. A generally recognized measure of inflation is one that is generally recognized. This is why Economics is a tautology.

Inflation is not a natural force. It is what economists say it is. The “measures” of inflation are meaningful only if they are meaningful to you. There is no objective standard. As an alternative, consider: What would be a moral definition of inflation?

NEW YORK, Aug 17 (Reuters) - U.S. Treasury debt prices retreated on Wednesday after a report showing July producer prices grew at double the rate forecast, suggesting the Federal Reserve will keep raising interest rates. (See News Exhibit Hall at the Moynihan )

WASHINGTON, Aug 16 (Reuters) - Surging energy costs drove U.S. consumer prices up in July at the sharpest rate in three months . . .

The Consumer Price Index, . . . climbed 0.5 percent last . . . The monthly rise in consumer prices was the biggest since a matching 0.5 percent jump in April and topped Wall Street economists' forecasts . . .

Energy prices rose 3.8 percent in July, . . . Gasoline prices jumped 6.1 percent. . . . (See News Exhibit Hall at the Moynihan )

LONDON (Reuters) - Soaring petrol prices pushed inflation above its target in July to the highest level since comparable records began in 1997, dousing expectations of further interest rate cuts.

The Office for National Statistics said the consumer price index rose 0.1 percent on the month, taking the annual rate up to 2.3 percent . . . “July's UK consumer prices are significantly worse than expected and will no doubt dampen hopes of further near-term cuts in interest rates,” said Jonathan Loynes, chief UK economist at Capital Economics.(See News Exhibit Hall at the Moynihan )

In Secrets of the Temple, the Left author, William Greider claims that a little inflation is a good thing for the poor. Possibly on the theory that borrowers are advantaged by inflation many might agree. Yet this is mistaken.

It is true that the expansion of the money supply is a good sign, especially for the poor. But the expansion of the money supply is not the same thing as inflation.

If money expands at the same rate that the people mutually promise to engage in further economic activity there is not inflation. Inflation occurs when the money supply increases at a rate faster than do the mutual promises to engage in future economic activity.

These mutual promises are wealth. The money symbolizes, represents, these mutual promises. This is why the often heard complaint that the rich of the world are stealing the “wealth” of the people is mistaken, sense the wealth is the mutual promise.

Lots of cash is just lots and lots of promises to participate in future economic activity. These promises can not be stolen as they arise from our mutual interactions. The cash is merely a token of our promises, and everyone else’s promise to engage in further economic activity. For the poor the problem is to create an environment in which this future agreement or planning can take place; establishing trust in the future, and in the tokens of these promises.

Though the promises can not be “stolen” they can be watered down. That is what inflation is, a devaluing, a falsity. You say you are going to participate in future economic activity but not really. In the future you will only participate in 90% of the activity you promised, 10% inflation, or 80%, 20% inflation. This is our moral definition of inflation: it is a fraud. The token of our promise are not to be honored. It is a lie.

I suppose if you are not sure, how much to expand the money supply, it is better too error on the side of too many promises than too few, (i.e. more money than economic activity would justify), as the alternative, insufficient money, would prevent or starve economic activity. Perhaps this is what Greider was thinking. (But why error?) However, the important point is to see the distinction between money supply increasing and inflation increasing.

Money supply increases when you and I mutually promise to participate in future economic activity. We promise and thereby create money. Because we nationalized the banking system (Federal Reserve) we are mislead into thinking that the government increases the money supply. They do officially, but only in response to us, our activity.

If they get ahead of us: inflation. If Ludwig von Mises had his way we would be using Bank of America dollars, and/or American Express dollars, Citi Bank dollars etc. Contracts would specify the currency. These institutions would create money, responding to us, our promises, (as backed by, secured by, their loan portfolios), increasing the money supply as required by our mutual promises. In theory the nationalized bank can follow along, estimating our activity, approximating the traditional banking practice.

In theory. There is always the ownership problem. Is Dr. Greenspan as “efficient” as the bankers? After all he does not have an ownership interest. In other words what if Dr. Greenspan simply goes along with the oligarchy? If it were his own money he might have a different view, but since it is the government . . .

Of course this is just what was argued in favor of nationalization of the currency: That now the central banker will be inefficient! That is, disinterested.

And that is the problem. Without the historic, traditional, connection between the money supply and the economy, Ludwig von Mises argued, how will the central banker know what to do? What if Dr. Greenspan goes along with the rich? (And as we have seen so many times here at New Ruskin, isn’t this the tendency? To go along? Even if some one is killed?)

For the rich a little inflation, as Mr. Greider argued, is a good thing. Inflation might wipe out a small capitalist, like you or me, but for the rich better to keep things rolling, churning, deal after deal: ‘there will always be more economic activity tomorrow to bail us out!’ Or so they hope. Irrational exuberance.

Isn’t this why we nationalized the central bank in the first place? Because we feared that the rich would over supply themselves and us, the economy, with money, faster than the underlying economic activity, (the mutual promises)? Inflation?

The best way to get people to agree to some scheme is to wave a fist full of cash at them. Excess supply of money greases the wheels. A bird in the hand is worth two in the bush. A sober banker may look to future profits but it is much faster to book the profits today instead of waiting for the promise of tomorrow. Push, push, push for profit today and forget about tomorrow.

And so the bubble economy. (Bubble means unsustainable. Promises un-kept.)

So then too debt, and the deficits. Yes, $8 trillion national debt; but what about your personal debt? Saved for retirement have you? Medical care? Nursing homes are what, $4,000, $6,000 . . . a month? Got all that tucked away have you? And that is if everything goes right. What might go wrong?

Not even movie stars can afford medical care after the policy runs out, as Christopher Reeve discovered. Half of all bankruptcies are the result of medical problems and the bills and loss of income which follow.

66% of Social Security recipients would be in poverty without the income transfer from young workers to the retired. Insufficient money was saved to support them in retirement. What is this but a deficit? Call it: The middle class deficit. (Middle Class Inflation Index.)

“Just numbers on paper.” (Peter Peterson, Running on Empty, Foreign Affairs) That is what President Bush called the national debt.

But you will not even put a number on this deficit. Elizabeth Warren has put some numbers on it. (Two Income Trap) But for the most part you will not even admit the question let alone but a number on it.

William Bennett spends his time patting America on the back ignoring these problems. (This is not social policy discussion. To participate one must focus on what is wrong, how to fix it. Ignoring Elizabeth Warren is the social policy equivalent of ignoring the Schiavo CAT scan. Then too, Rush Limbaugh will not even admit that Social Security is a welfare program and O’Reilly will never accept “income transfer,” (hissed in a deep Long Island sneer), but apparently has yet to learn how Social Security gets the money to issue the checks.)

So this is the political environment in which Dr. Greenspan, the political banker must operate. $8 trillion national debt? Just numbers on paper. Collapsing private and eventually public pensions. Just numbers on paper? Two incomes to support the family, and falling, where thirty years ago one income supported the family? Just numbers on paper.

Zero savings rate?

Highest debt levels in history?

The bubble economy. The elite profits today from the housing bubble as it profited yesterday from the dot com bubble. Push, push, push. Plunder? Get what you can grab. Loot?

And all of this, what is it, but promises to engage in future economic activity, which will not be kept? The money supply has lost its value?

Social Security? These promises represent an increase in the Money Supply. (We will pay you . . . in the future.)

Pensions? National debt?

Debt of all kinds?

Promises, promises.

And if the promises can not be fulfilled? What if people entered into a mutual promise and then later, when “the future”, arrived, it turned out that the promise was only to be 80% kept, or 50% honored?

What if the money does not buy the medical care? Pay for the retirement? What if you end up in the 66% who would fall into poverty without the (hold your ears O’Reilly) income transfer?

Or what if you are in the bottom 84% of Californians who can not afford to buy the median priced home? (For example Economists do not include house price rises in “inflation” on the theory that the gains in “homeowner equity” balance out the ledger books for the increases. (Now that is a happy thought! (Academics live their whole lives in such misty thoughts.)) But what about the renters? Or the homeowners whose homes have not increased? What is their “rate of inflation?”

(For example, at one time the Red state homeowner or renter could move to California or Massachusetts and purchase a home. Now after several years of 20% increases in California and Massachusetts the homes have doubled or trebled. Someone has a balanced ledger but many, most, do not. There is here a loss of freedom, opportunity. At one time the Red staters could move to California, and now they can not. At one time their money was “backed” by the opportunity to buy a home, and now it is not, they can not buy a home. The value of their money has gone down in value by this measure. This loss of opportunity, what is it called?)

What if the promises are not kept?

This is what Economists call inflation. Not keeping promises is called inflation. It takes more and more money to buy the same things. Yesterday we promised to engage in future economic activity but today when you come to the market, Surprise!

For those of you who think money is like “gold” or some “thing” this is paradoxical. But the mistake was made in thinking of money as some fixed thing. It is a token of the promises you make. The market is not fixed, static, it is ever changing, and it includes everything, the totality of all the relationships. The value of money comes from this totality. You can use it for anything, to participate as you like.

The dollar represents not just gold, but houses, shoes, etc. Everything is in the market, this network of relationships, promises. Money is “backed” by the whole network, all of it. And as you fail to meet your promises, as your society declines, when the bubble collapses, we can see that there was inflation.

Dr. Greenspan can not control inflation by himself. His little national bank is only a tiny part of this vast economy. In any case he is part of this oligarchic elite. The ones who think that debt is :“Just numbers on paper.”

The ones who make policy for the day, or at most until the next election. They have manipulated the money supply, the promises that they made. That home you thought you could buy with your money, guess what, you have been “zoned out.” You thought you could afford the school to educate your children, “zoned out.” That pension, that health policy, they will not buy what you were told they would buy. They have failed to keep their promises. They have defrauded you.

But none of this is called “inflation.” It is not even measured by the Economists. They will not even admit what they are doing ---- those who profit from one bubble or another while letting the likes of you and me die?

I know. This wont happen to you. That is what I used to think.

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