When Low Inflation is Too High
Milton Friedman famously stated, “Inflation is always and everywhere a monetary phenomenon.” In other words, whenever you see persistent, high inflation, you know the cause was too much money. When too much money is chasing the same amount of goods, as they say, prices tend to rise; the faster the money supply is increased, the more pronounced the price inflation. Though Friedman had his doubters, this claim is one of the most basic applications of the well-known quantity theory of money, and not a real source of controversy amongst economists.
I think it would be pretty safe to extend Friedman’s dictum as follows: “Inflation is always and everywhere a government-caused monetary phenomenon.” After all, since the completion of the Progressive revolution in the 1930s, all national currencies have been monopolized by government central banks. Therefore, any cases of inflation are categorically instances of governments printing too much money.
“Ok, we knew that already. What’s your point?” you ask. Well, we’re on the cusp of a brand new cycle of high inflation. Even if inflation rates don’t reach the stifling levels of the 1970s (as I fear they will), they will go higher before they go lower. Many commentators, and even a few economists, are noticing it already, pointing to recent surges in food, energy, and commodities prices. If you take the quantity theory of money, and Friedman’s dictum, seriously, you ascribe causation to the government printing too much money—in our case, the Federal Reserve cranking up the virtual printing presses through measures like Quantitative Easing.
To quell the inflationary hysteria, the monetary authorities will defend themselves by saying, “inflation ain’t so bad.” The Fed, for instance, is trying to get us used to the “core inflation” measure, which ignores food and energy prices. Food and energy prices are volatile, don’t you know, and give a skewed picture of longer-term “inflation trends.” Along the same lines, we see Bernanke et al arguing that commodities inflation is just a temporary fad, with not much of a pass-through impact on the average person’s budget. And don’t forget the anti-inflation hawk trump card: we need to keep the inflation rate positive to avoid the perils of deflation. (Side note: in reality deflation ain’t so bad; in the late 1800s—an era when the gold standard effectively prevented countries from printing money ad libitum, deflation was a hallmark of a rapidly growing economy.)
Back to the justification for positive inflation rates: inflationists say it is needed to stimulate and manage the economy, to prevent recession, and so on. The mainstream economics/media establishment agrees; with an inflation rate of 2% or even higher, they remain convinced that the FED is doing its job as well as can be expected. So the rest of us are supposed to shut up and let the FED do its job, managing the economy for our own good.
But inflation is still inflation: a systematic reduction of the purchasing power of the currency. And inflation is still redistribution of wealth, because the early recipients of the fresh money get to spend it before it has its full effect on prices. They’re richer for the inflation. The last recipients see the prices go up first—they’re poorer. Therefore, this deliberate, monetary-policy type of inflation is best regarded as a tax—a tax on the value of the currency you choose to hold rather than spend; a tax on your income if you’re a late recipient of the new money. And considering the fiscal driving forces behind our current inflation, it becomes clear why the inflation tax is the preferred style of taxation these days—it allows the mirage of deficit spending to continue, seemingly indefinitely.
Imagine that—a government policy, which amounts to a subtle and sneaky form of taxation, advertised as “stimulus”! This is the real nature of inflation—an insidious, hidden kind of tax, but a tax nonetheless: inflation transfers control of resources and consumption from private citizens to the politicians, with their vast, incomprehensible array of vote-buying programs. Just because most people don’t notice or complain until the rate of inflation gets high—say 10%–doesn’t mean that it’s not troublesome at lower rates—say 1%. Imagine a criminal defendant pleading for leniency on the claim, “Only 1% of my wealth is stolen goods.” I, for one, am not going to accept it.
Perhaps we’d all have been better off if Friedman had simply said, “inflation is always and everywhere a bad, bad deal.”
Tyler Watts is an assistant professor of economics at Ball State University.
Image by jscreationzs / FreeDigitalPhotos.net.
