I haver always been conservative, but have only really understood and embraced Libertarianism the last 4 years or so.
I have read many posts and articles here talking about the government printing money and expanding the money supply dramatically. My question is, ‘Where is the inflation?’. How is it that Greenspan and co. can so dramatically increase the money supply over a 20 year span, and not have out-of-control inflation? We all know there is statistical inflation, and the actual rate is probably higher than what the government posts… but why are we not in a runaway inflationary environment?
If someone could explain in a few basic points I would appreciate it.
The first is how the government has changed how it measures the CPI. I won’t get into it all, but basically since the 80s the government has been revising the way it calculates the CPI in such a way that lowers inflation. The BLS claims that this is because the old CPI overstated inflation. People such as John Williams of shadowstats.com believes the changes were made in order to understate inflation.
The second relates to the stock market. Stocks are essentially prices like anything else and I believe much of the new money created by the Fed has ultimately found it’s way into the stock market. In 1980, the market was a little under 1,000. 25 years later it was over 10 times that amount. Kel Kelley had a good Mises Daily about this: http://mises.org/daily/4654
The US is fortunate in that it can export a large part of the fresh dollars abroad, and enjoy smaller inflation at home… for a time.
Despite the massive pumping of money are the banks giving very few loans, which makes the money supply smaller than it would be, if the FRB was operating at ful speed.
It takes time to get to a runaway inflation, in a large, still somewhat functional economy.
An increase in overall GDP would also soak up some of the additional dollars. We have more dollars, but they are chasing more goods so it balances out a bit.
I like this thread because I count eight comparatively new forum members jumping into the discussion. Nice work!
Regarding the question:
Since the Volcker era, the U.S. became an exporter of dollars, rather than an exporter of goods. U.S. manufacturing was sent overseas during the '80’s, cheap goods could come in to the US. (I am not opposed to trade, don’t misunderstand, I am opposed to intervention in markets).
CPI inflation does not reflect reality. What does it really mean?
We should have enjoyed slowly falling prices due to productivity increases. Instead, we saw positive price inflation.
It is a complicated question, and my answers are not sufficient to answer it.
The central banks saw globalization as a means to delay / postpone the day of reckoning due to their interventions. The politicians therefore pursued this policy beginning in the late 70’s, early '80’s.
Sept. 2008 was the end of the Volcker era and the beginning of a new era. Volcker bought 28 years (Greenspan was a caretaker), but now they have to reinvent the system, which is what they are doing right now. Notice how active Volcker is as an advisor to Obama? He is right in the middle of this, again.
Along with the person who mentioned new money chasing up stock prices I also agree with the argument that inflation has been exported instead of goods. Another thing to think about are the rising prices in areas like health care and college tuitions. Some of the new money is probably being diverted by the government into these areas to drive these prices higher.
Base money has doubled or so, but extended money (after applying the fractional reserve multiplier, which is shrinking) has been decreasing. Hence, the ongoing deflation.
Inflation has been working its evil for quite some time. 1913 $1.00, 1971 24 cents, 2009 4.6 cents. We’ve lost 80% of purchasing power since 1971 (4.6 / 24). The same chart from 1792 to 1913
Purchasing Power of the US Dollar Since 1774 Notice the fluctuations in the 19th century, but the value held between 1800 and 1900. Imagine holding a dollar, then 100 years later it has almost the same purchasing power. Makes sense when the dollar was defined as a weight of silver or gold. A “dollar” was a mere unit of measure.
