If Inflation is Good, Then America Should Be Poorest Nation on Earth
In my long running feud with pro-Federal Reserve and pro-Inflationist economic commentators on CAPS, I am always amazed at their ability to ignore economic history when making their arguments.
Inflation in American history, even considering the unprecendented actions of the Fed since 2008, pales in comparison to just about every country in the globe. In the 20th century, nearly every government in the world devalued their currency at a faster rate than America.
Before the Federal Reserve, under the gold standard, America suffered from deflation for most of its first 140 years (interrupted only when the government went off the gold standard to pay for wars.)
Considering this history, if inflation was a good thing, wouldn't America be economically backward, handicapped by its strict, unforgiving monetary policy in comparison to the rest of the world, which has been markedly pro-inflation over the last 230 years?
Well, shucks, I guess we just got lucky.
Obviously, inflation isn't the panacea for economic growth. In Milton Friedman and Anna Schwartz's book A Monetary History of the United States, they correctly point out that America's money supply shrunk consistently from 1870-1913, and yet, during this same period American industry was revolutionized, the standard of living for every American rose at a faster pace than any other time in world history, and real wages rose. They rose because labor became more productive. If your nominal wage falls 1% and prices fall 2%, guess what? You just became 1% richer. If your nominal wage rises while prices fall, that's even better.
JakilatheHun recently wisecracked that if I do indeed hold a job, would I really want to see my nominal wage fall? If prices fell further than my wage, why wouldn't I? And that's exactly what happened in America for its first 140 years or so of existence. Boy, those poor American workers must have been looking around their world in envy of those lucky ones living in inflationary regimes.
What about the scientific sounding term 'price stability?' Fed apologists on this site like to reference the Fed's goal of maintaining 'price stability,' whatever that is. Prices change because tastes change. They change because production costs change. Prices change every instant. Look up a stock price. Now look it up again. Well, whaddya know? Its price changed.
So what is 'price stability?' Is it a price control? We have 4,000 years of evidence that price controls do not work. Are we trying to maintain constant prices for an entire complex market economy now? To the Fed apologist, that is somehow a smarter idea.
Not to mention the Fed's idea of price stability has brought you $1100/oz. gold.
David in Qatar