Fire brigade or arsonist?
Federal Reserve official says inflation persistence led her to support interest rate hike
“Both spoke about inflation pressures arising from supply shocks, such as the war in Iran, as well as from solid business and consumer spending.”
The direction of cause and effect isn’t so simple. As it turns out, governments fund war with inflation. And commodity prices started to rise before the war started. We’ll get into the source of business and consumer spending next.
Fed’s Goolsbee: Strong demand may be adding to US inflation, ‘no ambiguity’ how Fed would react
“If demand overheats, there is no ambiguity about how the Fed needs to respond,”
You could look at it that way, and alas too many establishment economists do. But here’s another way:
Demand is infinite. There is no limit to human desires. But it can only drive up prices when that demand is backed up with cash. I can hold my breath until I turn blue “demand”ing stuff, but unless I open my wallet, it has no effect on prices.
This may seem trivial, but it makes a crucial point. Inflation comes from money. As Nobel Prize winning economist Milton Friedman once put it, “inflation is always and everywhere a monetary phenomenon”.
Supergiant corporations don’t just “demand” massive amounts of energy and materials to build data centers without having massive amounts of cash to do their demanding with. Governments don’t prosecute wars without having access to massive amounts of currency to demand weapons with. Neither of these can cause inflation … they are but way stations on the road from money production to final prices.
I categorically reject this imagery that inflation comes from anywhere other than the banking system, and that it’s central bank’s job to fight it.
Central banks aren’t the fire brigades, they’re the arsonists.
Inflation is not things going up due to excess demand, it’s money going down due to excess supply.
The Spartans of ancient Greece would agree. They famously didn’t mint gold and silver coinage to prevent demand for material and luxury goods.
Another example but in reverse, when the French colonised Madagascar they installed a tax that had to be paid in Francs. This forced the locals to abandon their subsistence lifestyle and work in French factories, farms etc. However, they were deliberately paid enough that they had enough left over for “small luxuries” such as lipstick, parasols, thus CREATING DEMAND for French products.
You would think if ancient Spartans and French colonials could understand it, PhD Fed economists could too!
“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”
– Upton Sinclair