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If Inflation is Good, Then America Should Be Poorest Nation on Earth

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55

April 19, 2010 – Comments (7)

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

7 Comments – Post Your Own

#1) On April 19, 2010 at 9:35 PM, angusthermopylae (39.58) wrote:

25 recs and no comments...you said it all, David.

(Whoops!  Make that "one comment!"  :-)

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#2) On April 19, 2010 at 10:17 PM, ChrisGraley (29.75) wrote:

I recced before, but didn't comment. I seem to do this to Dave's blogs a lot, because I feel like the comment diminishes the post.

I do the same with Cato's blogs as well and a few non-libertarian posters that seem to be gold and silver bugs or people that think for themselves.

I think that part of the reason is that when someone says something so well, you don't want to ruin it, and the other part is that when you have a correct, but minority opinion, it's hard enough to dodge the bullets aimed at you, but even harder when they are shooting at the guys next to you. I don't want Dave dodging my bullets. 

Dave said something in one of my blog posts that I'd like to carry forward though.

Dave, Cato, Sinch, Binve, Mrindependent, and about 50 other people. You are all welcome in my home and you have a steak and a beer waiting for you.

Dave invited me to his home, but that jar-head cheapskate didn't say anything about feeding me.

;) 

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#3) On April 19, 2010 at 10:54 PM, whereaminow (22.06) wrote:

Chris,

I almost p*ssed myself when I read that.  Absolutely classic.  

(Notice that I still haven't offered to buy you a beer. I'm just sayin... Maybe I have short pockets.)

David in Qatar

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#4) On April 20, 2010 at 12:00 AM, binve (< 20) wrote:

David,

I also recced but didn't comment. No need. Perfect post.

Chris,

Thanks man!! The feeling (and offer) is definitely mutual!!

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#5) On April 20, 2010 at 12:25 PM, imobillc (< 20) wrote:

Let's all chant loudly:

USA< USA< USA< USA.....

36 recs, barely any comments.... I don't get your point..

Maybe I am not smart enough?

Mars 

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#6) On April 21, 2010 at 12:46 AM, ChrisGraley (29.75) wrote:

It's about the opposite opinion imobillic.

It's a few rouge nobody's questioning if the emperor has any clothes on. 

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#7) On April 25, 2010 at 9:37 AM, TopAustrianFool (66.45) wrote:

"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."

Absolutely true. It's call "real wages".

"If your nominal wage falls 1% and prices fall 2%, guess what?  You just became 1% richer."

This means your real wages increased by 1%. Duh... You can buy more stuff. The problem with inflationists is that their theories are inconsistent. If spending is what drive the economy, and inflation helps spending then just make the minimum wage $100/hr and you'll erradicate poverty, right.

Everytime your theories or models are inconsistent you should re-evaluate them. They are probably wrong or just apply to a special case. Either way they are not the models you need to explain general phenomena. Inflationary policy is just wrong, it applies to no special cases.

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