Hi, this is my first post here. It’s something I wrote today and already posted on my blog (romantivist.blogspot.com), I wanted to see what the community here thinks of it. It’s mostly inspired by mises.org dailies, especially one a few days ago about dropping bottles full of cash down mineshafts, a la Keynes and Krugman.
Here it is:
Imagine, for a moment, that tomorrow all the news networks are abuzz with the following announcement:
“President Barack Obama and Congress, in a super-secret economic stimulus program, have employed thousands of preprogrammed robots to bury almost five billion dollars in cash in bottles, deep underground in Maynard Park, Arizona. The entirety of the cash is buried on land owned by the government and not for sale. Anyone caught digging with anything more advanced than a shovel will be thrown off the land empty-handed. The money is there for the taking, and anyone who received a ticket can participate in what the administration is referring to as the Obamanomics Gold Rush! 50,000 tickets have been randomly mailed to US citizens. If you’ve been sent one it should arrive tomorrow or the next day.”
In the ensuing frenzy, 50,000 speculators rush to Maynard Park and begin digging. The money unearthed by the prospectors is spent, for the most part, in Maynard Park, which experiences a boom due to the sudden and massive influx of people and money. In only a few weeks the prices of nearly everything in Maynard Park will have skyrocketed. In a city where five billion dollars lay buried underground, prices simply cannot remain at pre-rush levels. The new population increases demand for housing, food, clothing and other necessities, and newfound wealth and the extravagant spending it fosters serve to bid up prices for everything the speculators want or need.
However, all prices don’t rise at the same rate, at the same time. To follow the rise in prices, let us follow a typical speculator as he spends the money that he has just dug from the ground. The speculator, flush with new cash, returns to Maynard Park and walks straight into the bar, where he buys the whole house a round. (This is a new tradition implemented by every speculator who makes a find.) He goes next to the local tailor and orders a brand new suit, and then to a restaurant to eat a filet and lobster. He rents a room for the night and deposits the rest of his funds in Maynard Park Bank.
Of course, all the speculators may not buy a new suit and lobster, but if we assume that they all go to the bar and buy that round for the house, as custom mandates, the price of alcohol will be the first to rise, and will be a good indicator of the extent of the finds made by the speculators thus far. Other prices will rise in time–the money will continue to proliferate until every price in Maynard Park has risen to a level commensurate with the amount of cash dug from the ground and spent in Maynard Park. But the price of alcohol will rise first and fastest.
So, it can be seen, a rise in the price level triggered by new and additional money in the money supply occurs in staggered steps. The first prices to rise are the prices of the goods purchased by the first spenders of the new currency. Eventually, though, all prices will rise.
Back in the real world, we have witnessed one of the biggest creations of additional currency in American history. The Federal Reserve has used newly created money in order to buy toxic assets from banks and ‘inject liquidity’ into the financial system. Information on how this process occurs is available in many other articles on www.mises.org and is not important to the purpose of this article. The important thing to know is that billions of dollars are sitting in reserve, waiting to be loaned when banks are confident that they will earn a good return. The money has been ‘buried in Maynard Park.’ If we can figure out what the ‘alcohol’ is, what the first receivers of these loans are likely to buy first, we can figure out which price will most quickly reflect the coming inflationary storm. We can use this price as a sort of Doppler radar, and perhaps even predict the magnitude of the coming inflation by examining it.
In my opinion, it is unimportant who the funds are loaned to or what they are spent on. The fact is that once these funds are loaned and spent, they will definitely affect the price of one good: oil.
Nearly every price in today’s market is affected by the price of oil, and nearly every price, therefore, has as a component the price of oil. This is why a rise in the price of oil can look so much like it is causing inflation, even though inflation is purely a monetary phenomenon. Once the billions of dollars of new money begin to be spent, the price of oil will be one of the first to rise in response. So the real-life ‘speculators’ who are currently betting on a rising price of oil are right. The price of oil is going to skyrocket in the coming months, just like the price of a round of drinks in the bar of Maynard Park. It will likely reach new highs, perhaps around the beginning of the summer driving season of 2010.
Of course, the skyrocketing price will have ‘little to do with supply and demand,’ as far as the media and government are concerned.
Soon after the price of oil rises, all other prices will begin to rise as well—no doubt economists in the media will call this ‘a classic case of cost-push inflation.’ They will be confusing the first indicator of inflation with the cause of inflation.
We may as well blame weathermen and radar for the destruction of a tornado. The media will report, with astonishment, that there seems to be no reduction in the supply of oil, no increase in the use of oil. They will blame rampant speculation and our government will likely crack down on the evil free-market capitalists who are fleecing us. But all of this will be unwarranted.
After all, who is to blame for the high price of a round in Maynard Park? Not the brewer and bartender, who post record profits. Not even the speculators willing and able to pay the high prices are at fault. Only the men who buried the cash in Maynard Park are responsible—any blame directed elsewhere is both misdirected and unwarranted.
Only our irresponsible federal government is to blame for the coming economic catastrophe–neither the speculators, nor the oil companies (who may well post record profits once again.) Any blame directed elsewhere is both misdirected and unwarranted.