Friday, August 3, 2012

How to Communicate the Ideas of Inflation to the Mainstream

We've probably all seen a free market economist on a mainstream financial news show at some point addressing the issue of inflation.  If you haven't, then you may wish to check out some videos of Peter Schiff or Ron Paul.  Many times it seems like arguments arise whenever inflation is mentioned.  The typical argument may run something like this:

Free Market Guy:  "There is massive inflation in the market thanks to the Central Bank."
Mainstreamer:  "There doesn't appear to be any inflation as the CPI has remained steady at 3%."

I propose that at this point the argument is really over definitions and semantics rather than anything of substance.  I'll go further to propose a clean and easy way to settle the dispute in a fruitful and educational manner which will allow the opportunity for the real ideas about inflation to be communicated clearly.

When somebody takes the argument that inflation doesn't exist, we should qualify the word.  So instead of saying there was massive inflation, we can say there was massive monetary inflation.  Monetary inflation inevitably leads to higher prices.  It should be easy to get agreement that when the Central Bank increases the money supply, it can be defined as monetary inflation.  We can go still further to explain that even if prices remain stable the effects of monetary inflation are detrimental.  In a market where prices would normally decline, if prices remain stable we lose the benefits of falling prices which help the poor and the economy.

The CPI is a narrowly defined set of prices which do not indicate the real effects of monetary inflation.  The numbers that comprise the CPI also change over time which makes its use as an indicator less effective.  Monetary inflation does in fact affect food prices.  Food prices are essential to many people.  A rise in food prices is a burden upon the most down trodden in society and especially those on a fixed income.

It is also important to note that the price inflation may be separated from monetary inflation by a factor of several months or several years.  This also causes a lot of confusion, because many people may look at prices directly following a monetary base increase and thus conclude, "Aha!  Monetary inflation doesn't cause prices to rise."  The housing bubble is a good example of the time difference.  It was the monetary inflation of the early 2000's that ultimately manifested as higher prices several years later.  We cannot predict the exact timing or the magnitude of the price increase, but there is no question as to effects which must be caused by monetary inflation.

I believe this definitional work is essential not only in explaining the idea to the newscaster, but also to the viewers who are often not versed in free market economics.  You can check out a brief video I made on the subject:    If you would like to become an expert in free market economics from your hom you can also check out Tom Wood's Liberty Classroom.

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