Before you start reading this, I advise you to look first at the Inflation segment on this website, so as to know what are the views that both the keynesians and the Austrians have on inflation. When someone thinks of inflation, prices rising in general cross his mind. This comes to no surprise since government agencies and both mainstream academia and media, the Triad, take this as the definition of inflation. Moreover, the Triad, because it's heavily influenced by Keynesianism, proclaims "inflation" - rising prices - to be a good thing and its realization ought to be pursued. It take this view for believing that: "deflation" - declining prices - delay consumption, so "inflation" keeps people consuming and the economy growing; and that prices are "sticky" - have difficulty in adjusting –, so when the economic collapse ensues and prices in general come down, government and/or central banks have to step in to bring prices to "equilibrium". To make long story short, keynesians want the crowd to believe "inflation" is desired because it's a sign the economy is booming. If an economy is growing, prices rise. Thus, if you force prices to rise, the economy will grow. There are two huge mistakes with this reasoning: 1. A booming economy doesn't necessarily lead to rising prices; 2. Even if that was the case, the economy doesn't function in the circular fashion the keynesians describe. Concerning the first mistake, there has been several periods when the economy was expanding and, at the same time, prices were dwindling. Perhaps the best example is the Gilded Age in the U.S. Between 1865 and 1898, the output of wheat increased by 256%, corn by 222%, coal by 800% and miles of railway track by 567%. From 1869 to 1879, the NNP (GDP minus capital depreciation) per capita was 4.5% annually. According to Milton Friedman, the 1880's were the highest growing decade of real output per capita, from 1805 to 1950, with an average annual rate of 3.8%. Still, at the end of the civil war in 1865 until 1900, prices went down 48%, as you can see below. In an expanding economy, the output builds up which means the supply of goods increase. Therefore, if the supply increases more than the demand, prices will decrease, just like it happened in the eighteen hundreds. In this century, the output swelled so fast because of gains in productivity. This not only means that one would produce more by working the same amount of time, but could also consume more, resulting in improving purchasing power. Hence, economic growth is synonymous with soaring living standards. Source: McCusker, John J. “How Much Is That in Real Money?: A Historical Price Index for Use as a Deflator of Money Values in the Economy of the United States.” Proceedings of the American Antiquarian Society, Volume 101, Part 2, October 1991, pp. 297-373. About the second mistake, the keynesians take the view that the economy operates as a closed circuit system, where there's a circular flow. Simply put, it doesn't matter if the flow gets started in the beggining, the middle or the end, the system will work the same way. Obviously, this is utter nonsense. The economy is extremely complex and dynamic, with prices and quantities changing all the time, and it's dependent on an infinite number of variables. Just imagine if someone from a medium-sized town wanted to bring such town to the level of a big city, like New York, and came up with this plan: "every major city in the world has a subway train system, thus if we build one in our town, it will become a major international centre." Of course, this isn't how you attract people and businesses to go to his hometown. "Doublethink means the power of holding two contradictory beliefs in ones mind simultaneously, and accepting both of them." - George Orwell Why do they want you to desire inflation?
In order to keep monetizing the debt to maintain the welfare and warfare programs, as well as to bail out the financial system and Big Business, the Triad has to manipulate the public into believing that rising prices is great. So now you know. Next time you go grocery shopping and your wallet comes a bit lighter than you were expecting, don't be sad about your living standards being deteriorating. Afterall, the economy is growing, therefore the standard of living must be swelling.
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AuthorDaniel Gomes Luís Archives
March 2024
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