The Non-Stop Inflation
Steve Saville
21 March, 2006
The definition
The correct definition of inflation is an increase in the supply of money that CAUSES a decrease in the purchasing power of money, but we usually define it as simply an increase in the supply of money. This is done, in part, for the practical reason that it's impossible to measure changes in the purchasing power of money on an economy-wide basis.
It is not possible to measure changes in the overall purchasing power of money because it is not possible to come up with a meaningful number that represents the average price level within an economy. There are, of course, price indices such as the CPI that purportedly represent the average price level, but these indices are generally worse than useless because they are calculated in such a way that they are guaranteed to paint a misleading picture. And in any case, even an honest attempt to determine the average price level would fail. The reason is that even if it were somehow possible to determine a meaningful number that represented the average of things as different as eggs and new cars, a calculation that was valid today would, in a dynamic economy, be obsolete tomorrow.
To illustrate just one of the insurmountable challenges of coming up with a price index that accurately represents the EFFECTS of inflation let's consider the hypothetical example of the $2 widget made in the US. In our example we'll assume that monetary inflation within the US over many years pushes up manufacturing costs such that these widgets can no longer be made in the US and sold at a profit for anything less than $3; in other words, if nothing else changes then the inflation will cause the dollar's purchasing power to fall from 0.5 widgets (2 dollars = 1 widget) to 0.33 widgets (3 dollars = 1 widget). But something else does change. Instead of raising the selling price of the widget from $2 to $3 in response to the increase in costs, what actually happens is that our hypothetical widget manufacturer keeps the selling price the same and opens a factory in a part of the world where manufacturing costs are much lower. Therefore, in our example inflation causes the dollar's purchasing power to fall and this, in turn, leads to the closure of a factory in the US and an increase in the quantity of imported goods. Inflation has obviously had an important effect, but it's unlikely that any price index will capture this effect.
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321gold.com
I disagree about where we are headed for the simple reason he makes a mistake thinking that current conditions can go on forever, but he sure understands what inflation is and what it is not. He also understands the problems in measuring changes in price or purchasing power. Fancy that.
Mish |
