Wednesday, February 18, 2015

The Death of Inflation? Hardly!

-Ron Paul, Facebook
Matt O’Brien recently wrote in the Washington Post, “R. I. P., Inflation. You had a good run, but it’s over now that prices are rising less than 1%.” O’Brien goes on to argue that since oil prices started falling, this caused inflation to fall as well. What he fails to realize is that inflation is the increase in supply of money and credit by the central bank, rather than evidence of falling prices of various items or the government rigged Consumer Price Index. Even though he dwells on the fact that the falling prices of certain commodities is proof positive that there is no inflation, his reasoning is pure Keynesianism.

Immediately after his assertion, he claims that the real problem is “credit bubbles.” I wonder where he thinks credit bubbles come from if not the inflation of the money supply by the Federal Reserve. He laments the fact that there are so many credit bubbles and claims, “just when the world gets over one, another bursts and drags everyone down again.”

He also points out that China is suffering from its own housing bubble and a bank-fueled debt explosion up to 75% of gross domestic product that looks unsustainable. He claims falling demand proves that there is no inflation, yet he entirely ignores the fact that the consequences of inflation -- the bubbles -- will inevitably be corrected by market forces. But instead of true deflation occurring, the central banks of the world, led by the Federal Reserve, become more determined than ever to INFLATE. He claims that inflation is only a concern for those who lived through the 1970s in the United States. However if he would choose to look at economic history he will find that inflation and its serious consequences associated with the destruction of currencies go all the way back to Roman times.

If O’Brien were more honest with himself he would recognize that though some prices are going down, other prices are skyrocketing: rents, bonds, equity markets, medical care costs, educational costs, and others. Just because our government can rig the CPI and convince Wall Street that the Fed will not raise interest rates because “inflation is dead,” that doesn’t mean that we will be able to put our heads in the sand and ignore the fact that inflating the money supply and eliminating the market rate of interest is a very destructive policy.

Failure to recognize that the inflation of the money supply, which is currently extreme, is causing the credit bubbles and preventing the corrections that the market demands, is a grave mistake. Though I believe inflation is alive and well and causing a great deal of harm to our economy and throughout the world, I plan to hold onto this headline as evidence of the flawed policies that brought on the coming economic debacle. Even for those who believe that because the CPI is not increasing more than at a 2% rate, there is no inflation, inflation will become obvious to everyone. And paraphrasing Mark Twain, then everyone will know the “reports of its death have been greatly exaggerated.”