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June 8, 2021 | Consumer Inflation: Why Prices Rise

Is an American author of books and articles on economic and financial subjects. He is the founder and president of Agora Publishing, and author of the daily financial column, Diary of a Rogue Economist.

YOUGHAL, IRELAND – In matters of technology and material progress, we discover new things all the time.

But in love, central banking, and the rest of life… we discover the same things over and over.

And what Americans are likely to re-discover in the months ahead is the Quantity Theory of Money, or QTM.

Quantity Theory of Money

The idea was first proposed by Nicolaus Copernicus, the great Polish mathematician, in 1517.

Since then, it enjoyed a cicada’s celebrity… emerging from the deep earth of monetary theory only episodically… before disappearing again.

QTM describes – at least in rough relief – why prices rise. It tells us, again, grosso modo, that the more money there is in circulation, the higher prices will go.

Prices are rising now. Here’s the latest. Breitbart:

Inflation Nation: Labor Costs Soaring Twice as Fast as Previously Thought

Hourly compensation jumped 7.2 percent in the first quarter, according to the BLS’s [Bureau of Labor Statistics] revised estimate of labor costs and productivity. This had been reported as rising 5.1 percent in the first estimate.

Meanwhile, economist Roger Bootle, famous for noticing that inflation had gone underground in the late ’90s, now says it has surfaced again. Bloomberg:

The danger of deflation has passed, and the risks have definitely tilted in the other direction. How high inflation will go, and for how long, that’s debatable. But I’m not in much doubt myself that there’s been a sea change.

Phony Phenomenon

Inflation has been evident in the stock market for many years. But nobody worries about rising stock prices. Donald Trump even boasted about it, not realizing that it was a sign of failure not success.

High stock prices are only a good thing when they signal a real increase in earnings – that is, when companies are actually selling more products and pocketing more profits.

Price inflation – caused by fake money – is a completely different phenomenon.

As we explored last week, it causes investors to stop trying to discover the real value of companies and begin speculating on “meme” stocks like GameStop and AMC… cryptos… and the market itself.

Putting QTM to the Test

According to the textbooks, when central bankers see these signs of emerging inflation, they should begin to “taper off” their EZ-money policies, returning to more normal interest rates.

Instead, they are choosing to ignore it. MarketWatch:

New York Fed President John Williams said Thursday he doesn’t think it is time for the Fed to slow down asset purchases…

Unintentionally, the Federal Reserve is putting QTM to the test.

In the 12 months from March 2020 to March 2021, the Fed added to its balance sheet by 75%. Since then, it has slowed down, but it is still adding new money (measured by its balance sheet) at the rate of 17% annually.

Does that mean prices will increase at a 17% rate? No. QTM is not that simple.

Inflationary Disaster

The Fed’s balance sheet is usually described as the dollar’s “monetary foundation.” It provides the potential for inflation.

But the edifice built on top of it – and the price increases that result – depends on how much people want to borrow and spend.

And generally, it is the government itself that turns the Fed’s monetary inflation into an economy-wide inflationary disaster. It is the biggest borrower and spender in the world.

If the feds relied on either tax revenues or honest borrowing (taking real money from real savings), there would be no inflationary effect. The total supply of money would remain constant.

But the U.S. government is spending far more than it can raise from the citizens’ earnings or savings. That’s why the Fed is printing money – to add “liquidity” that the feds can spend.

This new money is fake – counterfeit, ersatz, phony-baloney… an imposter. But it is indistinguishable from the money already in circulation.

And it – like the old money – is a claim on real time and resources.

Government Bamboozle

It must seem like manna from heaven. No one ever had to earn the money, or save it. But nothing comes from nothing. And time and resources, unlike money, are limited.

So when the government gives some people fake money, it is permitting them to take real goods and services from other people.

That is, the whole government bamboozle consists of taking from some and giving to others. And when the Fed “prints” the money, it is just a means of disguising the larceny… as “inflation.”

The recipients rarely use the money to build new factories or provide new services. They do not add to the country’s wealth, in other words.

They subtract from it. They spend it. They consume it. And their spending bids up prices. QTM.

That is the discovery ahead of us… the same thing we discovered 50 years ago – the last time consumer price inflation rose over 10% (with mortgage rates of 15%!)

Back then, Paul Volcker (the Fed chair at the time), backed by Ronald Reagan, was able to contain it.

Who will this time?




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June 8th, 2021

Posted In: Bill Bonner's Diary

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