One more time: Rising prices do not cause inflation

“Soaring energy and food push annual inflation up at fastest pace in 27 years,” The Associated Press reported on July 15.

I don’t suppose there’s any hope of getting The AP’s Washington correspondents to undertake a study of basic economics, but that statement is simply not true.

What has “pushed annual inflation up at the fastest pace in 27 years” is the fact that the Federal Reserve (and the obedient Bureau of Engraving and Printing, presumably) have been CREATING MORE FIAT DOLLARS at an annualized rate of 16 to 18 percent — and promptly handing these fast-degrading greenbacks to their friends at the otherwise insolvent investment banks, rather than allowing the upside-down-home-mortgage bubble to collapse, at which point wiser financial managers could acquire those banks’ remaining assets at a discount, completing the necessary correction and shakeout, and incidentally allow young couples saving to buy that first house to finally afford their dream home.

Is Congress partly at fault for pressuring these heavily regulated banks — they’re virtual government agencies now, just try to open a bank account without giving your Tax Slave Number — into making bad loans, through the Community Reinvestment Act of 1977, etc.? Of course. But while that may help EXPLAIN the Fed’s madness, which is destroying the value of all our savings via the legendary “hidden tax” of inflation, it doesn’t excuse inaccurate reporting.
 
Take this example: Three hungry kids sit around a table, bidding on an apple. The apple seller may wish he could get a buck for his apple, but the kids have 8 cents, 9 cents, and 10 cents, respectively. In an honest auction, that apple is going to go for a dime.

The losing kids complain they need more money. You up their allowances, handing them more money even though there’s been no real increase in their productivity. Now they all have 10 times more money, and they’re hungry again. Auction off another apple. One kid has 80 cents, another has 90 cents, the third kid has a dollar. The apple goes for a dollar.

Did the apple-seller get any “greedier”? No. Is the apple bigger and more nutritious? No. There were just more dollars out there bidding for the apple, which drove the price up, when measured in nominal “dollars.”
 
More dollars bid for limited goods, and the dollar price rises. You have to spend more dollars than you used to. If there are 20 times more so-called “dollars” floating around than there were in 1958, the dollar is going to buy what just about a nickel used to buy ... like, say, one little bottle of Coca-Cola (though not really — it used to contain cane sugar, now it’s “corn sweetener,” unless you find one from Mexico.)

That’s all fine if you get a 17 percent raise every year, like some government employees (add the “steps” to the “COLAS” to the “advancements in grade” to the new contract provisions for being paid extra when they cover for a sick co-worker, to the pay hikes they receive when they complete some night courses in how to file reports, etc. ad infinitum.) It’s not so good when the $100,000 you had in your savings account now has the buying power of about 5,000 of those 1958 dollars. 

A $20 gold piece now costs 1,000 of today’s so-called “dollars”. An old “silver dollar” now costs 20 new greenbacks. But gold and silver aren’t really any more rare or more valuable. What has happened is that the paper Monopoly money we now call “dollars” are too plentiful, so they’re worth less.

Rising food and energy prices REVEAL that rate of inflation — the rate of which was known to the hundredth of a percentage point by the Federal Reserve the minute they authorized the printing (or electronic creation) of all these new greenbacks six months ago. Higher commodity prices are CAUSED by that rate of currency inflation — albeit with a slight time lag.

Higher prices do not “push” inflation. How could higher prices force the Federal Reserve to print more greenbacks, thus “inflating” the currency supply? If the money supply were stable — as it was from 1789 to 1932, back when Congress set the value of the dollar the way they’re supposed to — the goods would just go begging, and suppliers would have to lower their prices to make a sale.