Remember, children, not to confuse cause and effect. Otherwise you can let your house burn down as you try to blow away the smoke.
Rising prices, which most people think of as inflation, is just the effect, like the smoke. The fire is government expansion of the amount of money in existence. Government has made legal for itself that which sends counterfeiters to jail: printing up money out of thin air.
When they (government or counterfeiter) do this, they reduce the value of the money in your pocket by transferring part of your purchasing power to themselves. This is a sneakier and therefore safer form of theft than simply robbing you at gunpoint, which is why inflation has been so popular with governments throughout history.
Yesterday I bought for $1.49 a single-serving pie I used to enjoy in my childhood for 10 cents. The dollar is the new dime and well on it’s way to becoming the new penny.
It shouldn’t be necessary to explain this to people since it is not just Econ. 101, it’s Economics for Pre-Schoolers, but the fact that people aren’t taught it is part of how the government gets away with it.
@pschearer, under some circumstances, the government should inflate the money. And debt also inflates the money supply with or without government help. For instance, in the 1920s, highly leveraged private debt inflated the money supply and then collapsed. For the most part, this was no big deal - prices (and wages) fell.
However it was bad for those with fixed dollar amount loans - in particular farmers with mortgages. Farmers went bankrupt, and there was a food shortage and people were starving. The correct government action was to inflate the money supply again - preferably impartially by handing out money equally to all, but even giving it to cronys is better than nothing. Instead, both Hoover and FDR tried to raise just farm prices by destroying food - so even more people starved. Real smart.
Note that therapeutic inflation involves simply handing out money. If the government buys stuff instead, then that further reduces supply, and leads to “stagflation”. Tax cuts are a reasonable way to inflate by handing out money, especially when it includes credits for the poor (who don’t pay any taxes - “tax cuts for the rich” is a tautology in a progressive tax system).
All “stimulus” programs involving government buying take away goods and services from where they are needed and dump them into bureaucrat selected boondoggles. No matter how well meaning (and in general they aren’t), bureaucrats simply can’t have enough information to know what is truly needed - a lesson demonstrated repeatedly over thousands of years, but is always forgotten or ignored.
Stuart Gathman asserts that sometimes the government should inflate the money supply, but I equate this to sometimes the government should steal. I especially wonder how he justifies this in light of his final (true) comments against the bureaucracy.
The history of the Great Depression is complex and even historians (let alone economists with highly vested interests) are often contradictory. In my lifetime I’ve seen 1) the demise and resurrection of Keynesianism, 2) the general acceptance that the cause of the Depression was the cumulative effect of Fed. Reserve policy combined with the promise that a little inflation is a good thing, and 3) legitimate demands for basing money in gold as the only way to save the economy.
What to believe? My conclusion is that the government cannot be trusted with the decision of how much money there should be in the economy (just as the Soviets could not be trusted with the decision of how much sausage there should be in their stores). Further, the solution that history keeps coming back to is a gold standard in which arbitrary political decisions cannot influence how much the dollar (or pound or zloty or whatever) can buy. It should all be up to market forces guided by the totality of private decisions to buy, sell, invest, hoard, whatever.
The economics of a free market have been increasingly well-understood, starting with Adam Smith, then the Austrian school, and the laissez-faire economists that sprang forth from them. (But beware of “conservatives” who are actually apologists for the mixed-economy welfare state. I’m especially thinking of Milton Friedman, though there are many others.)
Bottom line: The purpose of government is to defend individual rights and nothing else, and definitely not to run the economy.
margueritem over 13 years ago
I like your style, Broomie!
Yukoner over 13 years ago
Another government bail-out??
GROG Premium Member over 13 years ago
I’m sure you’ll find the suckers who’ll buy into it, Broomie.
pschearer Premium Member over 13 years ago
Remember, children, not to confuse cause and effect. Otherwise you can let your house burn down as you try to blow away the smoke.
Rising prices, which most people think of as inflation, is just the effect, like the smoke. The fire is government expansion of the amount of money in existence. Government has made legal for itself that which sends counterfeiters to jail: printing up money out of thin air.
When they (government or counterfeiter) do this, they reduce the value of the money in your pocket by transferring part of your purchasing power to themselves. This is a sneakier and therefore safer form of theft than simply robbing you at gunpoint, which is why inflation has been so popular with governments throughout history.
Yesterday I bought for $1.49 a single-serving pie I used to enjoy in my childhood for 10 cents. The dollar is the new dime and well on it’s way to becoming the new penny.
It shouldn’t be necessary to explain this to people since it is not just Econ. 101, it’s Economics for Pre-Schoolers, but the fact that people aren’t taught it is part of how the government gets away with it.
stuart over 13 years ago
@pschearer, under some circumstances, the government should inflate the money. And debt also inflates the money supply with or without government help. For instance, in the 1920s, highly leveraged private debt inflated the money supply and then collapsed. For the most part, this was no big deal - prices (and wages) fell.
However it was bad for those with fixed dollar amount loans - in particular farmers with mortgages. Farmers went bankrupt, and there was a food shortage and people were starving. The correct government action was to inflate the money supply again - preferably impartially by handing out money equally to all, but even giving it to cronys is better than nothing. Instead, both Hoover and FDR tried to raise just farm prices by destroying food - so even more people starved. Real smart.
Note that therapeutic inflation involves simply handing out money. If the government buys stuff instead, then that further reduces supply, and leads to “stagflation”. Tax cuts are a reasonable way to inflate by handing out money, especially when it includes credits for the poor (who don’t pay any taxes - “tax cuts for the rich” is a tautology in a progressive tax system).
All “stimulus” programs involving government buying take away goods and services from where they are needed and dump them into bureaucrat selected boondoggles. No matter how well meaning (and in general they aren’t), bureaucrats simply can’t have enough information to know what is truly needed - a lesson demonstrated repeatedly over thousands of years, but is always forgotten or ignored.
Sherlock Watson over 13 years ago
Seems to me that Broomie would get a lot more money if she removed the word “the” from that sign. I know I’d want to contribute.
pschearer Premium Member over 13 years ago
Stuart Gathman asserts that sometimes the government should inflate the money supply, but I equate this to sometimes the government should steal. I especially wonder how he justifies this in light of his final (true) comments against the bureaucracy.
The history of the Great Depression is complex and even historians (let alone economists with highly vested interests) are often contradictory. In my lifetime I’ve seen 1) the demise and resurrection of Keynesianism, 2) the general acceptance that the cause of the Depression was the cumulative effect of Fed. Reserve policy combined with the promise that a little inflation is a good thing, and 3) legitimate demands for basing money in gold as the only way to save the economy.
What to believe? My conclusion is that the government cannot be trusted with the decision of how much money there should be in the economy (just as the Soviets could not be trusted with the decision of how much sausage there should be in their stores). Further, the solution that history keeps coming back to is a gold standard in which arbitrary political decisions cannot influence how much the dollar (or pound or zloty or whatever) can buy. It should all be up to market forces guided by the totality of private decisions to buy, sell, invest, hoard, whatever.
The economics of a free market have been increasingly well-understood, starting with Adam Smith, then the Austrian school, and the laissez-faire economists that sprang forth from them. (But beware of “conservatives” who are actually apologists for the mixed-economy welfare state. I’m especially thinking of Milton Friedman, though there are many others.)
Bottom line: The purpose of government is to defend individual rights and nothing else, and definitely not to run the economy.
lewisbower over 13 years ago
Pscheaer, Don’t tell that to a Democrat.
Phatts over 13 years ago
@SherlockWatson, what have you got against Rush?
http://www.rush.com/low/index.php
Sherlock Watson over 13 years ago
No, Phatts California, not the rock band; the guy on Faux News, who has rocks in his head.