Your Right to Deflation
Llewellyn H Rockwell Jr
In
addition to big government, debt, and war, let us add one more item
to the list of wicked legacies that the Bush administration has
given to this country: inflation. The newest price data raise serious
concerns that we are being robbed (that is what inflation is) by
this government more than we know.
In
some ways, the return of constant upward price pressures on a level
exceeding economic growth is a telling act of destruction, and a
testament to the power of government to create messes where none
need exist.
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We
have been robbed of our right to deflation by a massive
countervailing force.
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We've
all been stunned at the price increases in tuition, medical care,
housing, and energy. And yet not all prices are rising and no prices
rise in tandem. In fact, we can all think of recent times when we've
experienced reverse sticker shock. "Only $35 for a CD player?" "This
huge jar of olives for only $4?" "This set of screwdrivers and sockets
for only $10?"
Those
of us with access to Wal-Mart, Sams, Big Lots, or any number of
other large discounters experience this sense every time we shop.
Low prices impart optimism about the future, and somehow provide
a glimmer of the prelapsarian might-have-been, with all goods and
services priced at zero: a world in which scarcity imposes no barriers
to all-round prosperity.
Hurrah!
Our intuition tells us that falling prices are great for our pocketbooks
because they leave more left over for savings or other forms of
consumption. It is just as good for society at large. Our money
becomes worth more and more, and hence our remunerative labors grow
in value too. If inflation works as a stealth tax, deflation works
as a tax refund. (For more on the issue of definition, see Mises
on inflation,
Salerno on deflation,
and the special
issue of the QJAE on these questions.)
Falling
prices are a gift that the free market grants to all people, provided
that the market's natural benevolence is not thwarted by central
bankers and government officials. The market does this through technological
innovations that make production more efficient, and a widening
division of labor due to the much-derided phenomenon of globalization.
We all benefit from computers and from trade with newly opened economies
in Europe and Asia.
Socialists
used to talk about working together as a community but global trade
shows that the best way to work together as a community is to work
separately and exchange to our mutual benefit. In this way, all
people of the world can unite in the effort to raise productivity,
increase efficiency, and – hugely important – drive down prices now
and forever.
Sadly,
in our times, we are being robbed of our right to deflation by a
massive countervailing force: the central bank. Thanks to the Federal
Reserve and its monetary spigot, the value of our money continues
to decline overall rather than increase as it should. We now face
the largest increase in consumer prices in 2.5 years. The Fed promptly
assured everyone that it would swing into action to prevent inflation
from getting out of control. But it said nothing that would indicate
that it might bear the responsibility for existing inflation. This
familiar posture has been compared to the driver who watches only
the rearview mirror but assures his passengers that all is well
up ahead.
In
the most recent inflation report, overall prices are climbing: 7.5
percent annualized for May and 5.5 percent in the last quarter.
Within the structure of the index itself, however, we find wide
variety, with many prices falling but enough rising to generate
a rapidly rising index (there is no such thing as an "inflation
rate" as a scientific measure).
The
big increases were in food and energy, particularly dairy and gasoline.
So getting from place to place costs 5 percent more now than it
did the same time last year (12.4 percent annualized from 3 months
ago!). Medical care is still outpacing everything but food and energy.
Housing too is rising.
Given
productivity increases, globalization, technological improvements,
and the world dollar standard that permits a seemingly limitless
export of paper, it is darn difficult these days to cause across-the-board
price increases. All pressures run the other way. These very pressures
have enabled the Fed to keep interest rates at rock bottom, pump
the money supply whenever they saw the need, and otherwise provide
backup for the massive amount of debt that is being created by the
federal government.
Food
and apparel are two sectors that have benefited enormously from
the impact of globalization, with constantly falling prices, despite
monetary pressures for higher prices. Housing can't benefit from
globalization, energy production is hugely shackled by state controls,
and everyone knows how viciously government intervenes in medical
markets.
The
point is not to say that regulations and market impositions cause
inflation, but rather that inflation will tend to hit sectors the
least where free markets are working to push prices down, as they
have in the apparel industry. The more the pressure for lower prices,
the less impact the Fed's relentless inflation will have on the
industry (at least in the short term).
In
the same way, there are additional factors contributing to the high
price of medical services and energy. Socialism has inflated the
demand for medical services and government restrictions have artificially
limited supply. The insane War on Iraq, coupled with sanctions before
that, has had a lot to do with restricting supply relative to demand
for oil – and this exists alongside environment regulations,
government land and water ownership, and taxes that limit profit
opportunities from production.
And
yet, despite all of this, the real culprit behind the price increases
that have stolen your right to deflation is the Federal Reserve.
The bout of money-supply increases began after September 2001 and
soared above trend line for the two years following. Finally, late
last year, the Fed pulled back a bit and the money supply even fell
for a time. But now we look again to find that this real deflation
was only temporary. The money supply is currently rising again.
Since 2001, the money supply has risen above its trend by more than
$400 billion.
Inflation
robs us of our savings, redistributes wealth from savers to debtors,
reshuffles property from consumers to those connected to the government,
makes conducting business more difficult, and subsidizes short-term
thinking at the expense of long-term planning. It drives people
into the workforce who would otherwise not be there of their own
choosing, and prevents the market economy from working its magic
of raising living standards every year.
So
how do we guard our future against future inflation? We could wish
for better central-bank managers and more responsible presidents,
but our founders hoped that we would not become a government of
men. Instead consider again the ideal method for securing the value
of money against the depredations of state power: the gold standard.
It takes away from the state the right to create money and forces
those who rule to live according to their means.
June
24, 2004
Llewellyn
H. Rockwell, Jr. [send him
mail] is president of the Ludwig
von Mises Institute in Auburn, Alabama, editor of LewRockwell.com
and author of Speaking
of Liberty. See
What has Government Done
to Our Money?, and the Austrian
Study Guide on Money and Banking.
Copyright
© 2004 LewRockwell.com
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