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Summary

  • What is the real definition of inflation?
  • What is the cause of inflation?
  • The recession is not over yet.

Today I read an article on Seeking Alpha by Michael Gayed, "A Surprise Recession" and was compelled to write this one because I disagree with much of what the author had to say. Having studied economics for over 25 years and basing my company on it, I feel the need to dispel some of the technical problems of his assumptions.

Inflation in General

First I would like to correct the general understanding of inflation. Inflation is not a rise of prices, but an increase in the quantity of money in the economy. Most economics courses teach that inflation is rising prices because that definition diverts the cause of inflation from the government, to sources other than the government. The author mentioned "cost-push" inflation which is a fallacy intended to blame unions and evil labor for the increase in prices. The word "inflation" means something growing in volume, a very astute observation conceived by the first great economists hundreds of years ago, Turgot and Cantillon. Adam Smith even realized this and wrote of it in his book, "The Wealth of Nations." Up until the 50's or 60's this was the only meaning of the word.

Prices rise for many reasons, not only because of inflation. Higher demand on certain sectors of the economy or lower supply will cause prices to rise in those sectors. Various situations cause higher demand, such as trends in society like new ideas, fashion, technology, or need. Prices decline for the same reasons. The rise of demand in some sectors of the economy is usually coincident to declining demand in other sectors because there are fewer resources with which to buy goods or services in those other sectors. The difference is that with inflation, there is still money in circulation with which to buy the goods and services in the other sectors along with those in the sector with higher demand. Prices act as signals or information to the public about the current status of the economy. Nobel Laureate Friedrich von Hayek wrote a whole book on this point in 1945.

Inflation has other effects besides causing prices to rise. Inflation causes a transfer of wealth from lender to borrower, from saver to debtor, and from citizen (or business) to government; the primary reason government does not want us to think that inflation is caused by government. For instance, suppose that because inflation causes prices to rise 10% (and values to decline 10%) and the profit of a corporation is 10% as well. The value of the company has not grown, but the government takes its tax bite out of the company's "profit," which is not its profit but capital. Stockholders also get the tax hit on the dividends or capital gains they may have realized.

Inflation causes interest rates to drop, punishing savers and those on fixed incomes. Lower interest rates cause higher order producer goods makers to expand production. Since wages rise in higher orders of production (mining, manufacturing, tools, etc.) and out of lower orders (sales, stores, transportation, etc.), labor moves toward the higher orders to seek higher wages. The reason for this is that the cost of production declines with the cost of capital. It is cheaper to produce longer term producer goods than shorter term consumer goods.

By properly defining inflation, these points become obvious. By not accurately defining the term, the cause is obscured, and the inflator can redirect the blame. It can claim that it is fighting inflation as hard as it can, when it is the cause of inflation. The government even makes people believe that we need inflation, which is a damnable lie.

The Current Recession

The second problem with the article is that the author reflects the general propaganda that we are not in a recession, a ridiculous idea. In my experience the only important aspect of a recession (which used to be called a depression, and before that a panic) is unemployment, not a negative GDP of two quarters. The GDP is more of an indicator of rising prices, not economic health, and is not comparable to older data because the government changed the way it is determined (I think to hide reality). For more accurate version of GDP and its comparison to the government's version, I recommend visiting economist John William's website, "Shadowstats.com", which I find very enlightening on several areas. Even if the data the government announced was accurate (which little of it is these days), it is still inadequate for determining the state of the economy. The fact that they announce a drop of 3% is a far greater problem than the actual drop.

At the moment, we are experiencing an unemployment rate of about 30%. There are few sources for this data, but it can be estimated by the workforce numbers. If there are 92 million people in the country without jobs and there are 315 million people living in the country, you do the math. The government numbers discount anyone not working in the last 90 days as "having given up looking for a job" and not counting them in the "U" numbers they announce. Do all these people stop looking for work just because they are unable to find it? I don't think so. They still have to eat. Who is paying for them? We are, so a large portion of our income (either through taxation and redistribution or rising prices) goes to that purpose so our leaders can buy votes.

I contend that we are now and have been in a recession for the last 6 years. Robert Blumen believes that the current recession has really began in 2000, so I think that I am conservative in this estimate. The market continues to climb because the government is printing money like there is no tomorrow. There is so much money in the system that the "rich" cannot find enough places to invest. They are buying real estate, stock, and collectibles as fast as possible while the rest are suffering. The bubbles in these areas are widely recognized. What is happening is that we are "eating our seed corn," or consuming our collective savings rather than producing more, making the pie larger. The pie is not growing at the present time but is shrinking. The economy is not expanding. To stop the bubble and the recession we must raise interest rates and correct the market. We must stop expanding the money supply. We should have been in the summer cyclical correction by now and the fact that we are not is evidence of the inflationary efforts of our leaders. As followers of the discredited "economist" Keynes, they think that this is what they must do to fix the problem. What it really does is to make the problem worse. Keynes knew this but felt it was the only thing that could be done.

Conclusion

What can we take from this information? Several things in my opinion. First, we can be aware that the announcements and data we get from the government are not necessarily to be taken as facts. We need to do some research of our own before we accept what they are trying to get us to believe. There are more sources from which data can be gotten than the media. The government is not evil in this, they are just pursuing their own goals. As always, they are trying to get re-elected, and postponing the crash for as long as possible is how it is done.

Secondly, since inflation is not rising prices but an increase in the money supply, we know who is to blame. The current situation is not the normal one. Prices in general are not rising as they normally would because the excess funds are going into the real estate and stock market bubbles. We must watch for cracks in these areas, knowing that when they do crack we must exit quickly or suffer loss. They will eventually pop because they must, and this is really the healthy thing for the economy. That's why they call it a 'correction'. When will it happen? No one can know, but stay alert.

Finally, the recession is not over yet, as can be attested by the high unemployment rate. People are not back to yet work and the drag on society by the unemployed and under employed is holding back economic expansion. Because of the market bubble, it is not a good indicator at the moment of the economy as it normally is. Don't be fooled into thinking that we are doing well just because the market is trending higher.

Source: Inflation And Recession