An ignorant public is the inflationist’s best friend

This is definitely in the don’t try this at home category, but imagine you set up a printing press in your basement. You print up ones, fives, tens, twenties, fifties and hundreds. This can enhance your purchasing power and improve your standard of living. So why not do it?

For starters, it’s illegal. But why is it illegal? You’re not hurting anybody, right?

Oh, but you are. Aggregate purchasing power in an economy is not defined by units of money, but by the total body of goods and services available for purchase. So your increase in purchasing power must come at the expense of others. The increase in supply of currency units diminishes their value, so that you are helping yourself to the purchasing power of others with neither their knowledge nor consent. All they notice is rising prices. You’re taking something you haven’t produced or earned. You are practicing inflation.

In an example of how even some of the brightest people on Wall Street can be clueless when it comes to inflation, Bank of America’s Michael Hartnett poses the question:

Hartnett: “This Is The Existential Question: Is AI Inflationary Or Deflationary”

Economics classically defines inflation as an unbacked or unearned increase in the supply of money or credit, leading to the devaluation of units of money or credit, which then causes it to take more units of the same to buy things, which is just another way of saying prices rise.

Somewhere along the way, lots of economists have forgotten about everything but the last part. And worse yet, they confine their consideration of rising prices to just one subset of prices, those of domestic consumer goods and services. Oddly, other prices don’t seem to count.

Among other things, this leaves them blind to the possibility that some price changes may be real, having nothing to do with manipulations of money and credit. And then to the specious conclusion that policies relating to money and credit should attempt to manage all changes in domestic consumer goods and services prices regardless of whether they have anything to do with money or credit.

This might have been justified had there been some attempt to provide a basis for it. But if there has been any such argument, I have not seen it in over thirty years of economics study. It’s just been gradually assumed. This is inexcusable for any field with a pretense to science.

How did this happen? Decades ago, the US government began publishing a data series it called the Consumer Price Index. Or for short, the CPI. It did not, and still does not, purport it to be an index of “inflation”. Yet economists casually speak as if the “I” stands for Inflation.

A convenient accident, it appears, because Wall Street and Washington, which profit from inflation, don’t have to confront its true nature. It can raise the prices of Wall Street’s stocks and decrease the burden of Washington’s debt, shifting purchasing power from ordinary citizens to the financial and political elite, without calling attention to the man behind the curtain.

So we wind up with absurd questions like is artificial intelligence inflationary or deflationary?

The poser can then postulate an elaborate analysis and appear to provide insight while promoting obfuscation. The answer couldn’t be simpler. Does it arise from the artificial production of money or credit? If not, it has nothing to do with inflation.

Technology might lower consumer prices. But if it does, it’s because it’s reduced the real costs of production. If it doesn’t, it’s because the purveyors of inflation have used it as a cover for their monetary manipulations, appropriating for themselves the fruits of technological advance.

As Milton Friedman taught us, inflation is always and everywhere a monetary phenomenon. You can be sure everyone who’s anyone on Wall Street is educated enough to have heard of this, but not that they will ever offer a rebuttal or rationale for pretending otherwise. And financial media, surrogates for the kind of journalism that once sought out the truth, won’t question it.

Why aren’t the perpetrators and beneficiaries of inflation honest about it? Aside from the fact they’ve made what would be illegal for you legal for them, the same reason you’d hide your printing press in the basement.