Wildstar,
In spite of all of the Austrian school's best efforts, most economists and other people refuse to believe in the reality of 'inflation' unless it shows up in the CPI or other similar indicators, no matter how much of an increase in the supply of money is admitted to.
The response of most people is to talk about 'asset inflation', which sounds unconvincing, even when true.
This causes two or more problems.
First, it allows the FED to claim that it has not been a reckless monetary inflator unless and until it shows up in the CPI. This is analogous to a reckless driver disclaiming responsibility for his driving by pointing to his rear bumper and noting its unmarked condition even though the front end of his car is a crumpled mess now two feet shorter than when it left the factory.
Secondly, it tends to seem to undermine the Austrian explanation of the 1920's boom/bust cycle since CPI measures did not reflect the monetary supply inflation that was present.
It seems to me that the conceptual problem is that no attempt is generally made to distinguish between different distinct possible monetary inflation supply mechanisms and their possible distinct effects when they initially dump supply on distinct individuals with tastes for different products with different distinguishable characteristics.
As an example, if the FED increased the money supply by passing out new $100 bills at the entrances of fast food restaurants, it wouldn't be hard to imagine that the products that showed the largest and earliest price inflation would be fast food itself, and then beef, for example.
Alternately, if the new $100 bills were distributed to Orthodox Jewish neighborhoods, it would likely be kosher products of all kinds that would show the earliest and largest price inflation.
In reality, the money supply is increased by creating new bank credit and loans, both for businesses and individuals. The impact of this form of increased monetary supply is far from uniform in its effects on products and the individuals that buy them. If you don't take out a new bank loan, you will not be an early participant in the bidding up of the products that YOU buy. Similarly, products that aren't bought mostly on credit will not tend to be among the earliest and most affected products.
But money supply is only part of the equation. For every product, its market price will depend on the following --
1. Specific product demand from its potential purchasers.
2. Specific product supply from its suppliers.
3. Money demand to hold from the potential purchasers of the product.
4. Money supply held by the potential purchasers of the product.
5. The competing demand for all other products from its potential purchasers.
6. The competing supply of all other goods and services from their suppliers.
The significance of all this is that products that may be similar in their relationship to an increased supply of bank credit may well respond differently in price due to other factors as above.
Some hopefully illustrative examples --
1. Housing and real estate -- This would be expected, under normal conditions, to be an area where prices respond relatively quickly and intensively to increased bank credit, the mechanism of increased money supply that is actually used. People who buy houses almost always do so through bank credit, and they will generally do so at times at which they are not demonstrating a demand for money to hold. They obviously have a demand for the house, and the supply of land and houses is often rather limited. All of these factors, money supply high, money demand to hold low, house supply low, house demand high, tend to drive the prices of houses up. In addition, houses and all other forms of goods that provide their services in an extended future, are valued higher in the present when the rate that discounts their future value back to the present is lower. This lower interest rate is exactly what results when the supply of loanable bank funds is increased.
It is clear that the prices of most houses and real estate have gone significantly higher in the recent past, largely, I am conjecturing, in response to increased bank credit, and the associated reduction in interest rates.
Cars and trucks --
As with houses, cars and trucks of all kinds are usually purchased with bank credit, although less intensely. Using the same reasoning, increased bank credit should be a factor that tends to increase prices. Also, cars and trucks see higher current values due to lower discount rates of their future service, as with any durable good. This also applies to equities and capital goods.
However, without even looking for data, I am confident that there has been little if any price increases in the recent past. The obvious explanation is a large supply of cars and trucks, both from domestic and foreign suppliers, that more than offsets the increase in bank credit.
Common consumer goods --
For example, a $25 table lamp sold in Walmart. This would not normally be purchased with new bank credit, especially if Walmart customers have maxed out their credit cards, to the extent that they have them. Nor would we expect them to have a large demand for money to hold, at least not a demand that they can satisfy. The consumer demand for this product would not be expected to be especially intense, and the supply of product from Walmart's Chinese suppliers would be as large as necessary. All of these factors tend to lead one to expect that Walmart table lamps, and many other common consumer products, should show little or no price increases in response to increased bank credit.
Every product has its own circumstances that will help determine the sensitivity and timing of its price to an increase in bank credit.
Summary,
To the extent that CPI-type measures of prices are weighted heavily to common consumer products, it is a near certainty that they will not adequately serve as a timely measure of the damage that monetary inflation through increased bank credit will cause.
Regards, Don |
