Great Depression Online Archive Issue:

The Invaluable Trend of Rising Prices

Great Depression Online
Long Beach, CA
June 20, 2008

Inside This Issue You Will Discover…

*** A Negative Cocktail
*** Going Stag
*** The Invaluable Trend of Rising Prices
*** And More

A Negative Cocktail

We’ll start with the headlines.

“U.S. Economy: Housing, Prices Signal Some Stagflation”

Courtney Schlisserman and Shobhana Chandra, in a June 17th Bloomberg story, report…

“Builders broke ground on 975,000 homes at an annual pace in May, the least in 17 years, and construction permits fell, the Commerce Department reported in Washington.  Meanwhile, the Labor Department said producer prices jumped 1.4 percent, more than economists forecast.  A further report from the Federal Reserve showed industrial production unexpectedly dropped 0.2 percent.

“‘The latest round of commodity-price pressure is adding to both inflation and weak growth,’ said Ethan Harris, chief U.S. economist at Lehman Brothers Holdings Inc. in New York.  ‘It's a pretty negative cocktail for the economy and financial markets.’”

These three reports demonstrate the Federal Reserve’s impressive dilemma…how to control inflation and stimulate growth at the same time.  To control inflation they need to tighten the money supply…but to stimulate growth they need to keep the money flowing.  But they can’t do both.

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~~~~~~~~~~~~~~~~~~~~~~~~~

Going Stag

If you’re still unclear on what’s going on, Neal Soss, chief economist at Credit Suisse Holdings Inc. in New York, rather eloquently clarifies the situation…

“Industrial production is down, that’s the stag part, and prices are up, that's the inflation part.”

At the heart of the problem is the weak dollar…

“‘We’re in a recession and inflation is accelerating, so if you want to call that stagflation, then so be it,’ Steve Hanke, professor of applied economics at Johns Hopkins University in Baltimore, said in an interview with Bloomberg Television.  ‘This weak dollar is causing all kinds of problems with inflation.”’

And at the heart of the weak dollar is the Federal Reserve’s loose monetary policy.

“‘The dollar has lost 10 percent against the euro since the Fed started to lower rates from 5.25 percent in mid-September,’ says Stanley White and Kosuke Goto for Bloomberg.  ‘The weaker dollar has helped push commodities, such as oil and corn, to record highs, sparking inflation.’”

This last statement, while seemingly correct, is not entirely accurate.  We’ll take a moment here to pause, and consider just what inflation is.  To start we’ll quote Nobel Prize winning economist, Milton Freidman, who said, “Inflation is always and everywhere a monetary phenomenon.” 

In this statement, Freidman’s declaring that inflation is the rise in the supply of money relative to the supply and demand for the goods and services that money is traded for.  By inflating the supply of money, the currency is consequently debased; it effectively loses value or purchasing power.  

And it’s this loss of purchasing power that causes prices to go up, as it now takes more units of money – because of the loss of purchasing power – to buy the same amount of goods.  The rise in prices is the secondary expression of an inflating money supply; the weaker dollar is just an indication that the unit of measurement has been disfigured.

We don’t deny that oil and food prices are increasing because there’s greater global demand than supply.  Nor do we deny that speculators have a hand in the rapid price run-up.  But we’re also curious about where all the money’s coming from that’s pushing prices so high. 

And when we follow the money back – like a trail of bread crumbs – we find that its supply is increasing at an unprecedented rate.  In fact, the world’s two largest economies, the U.S. and China are increasing their respective money supplies at an annual rate of about 15% and 18%.  So what we discover at the end of the bread trail is big, fat, hideous, and grotesque monetary phenomenon.

The Invaluable Trend of Rising Prices

We always seek to identify the silver lining for you.  And with regard to rising food and gas prices, here it is.  When food costs more, people eat less.  When gas costs more, people drive less…and walk more.  So, as you can see, we are all part of a new trend…

As food and gas prices expand, waistlines contract.  The health and aesthetic benefits of this trend are invaluable. 

Sincerely,

M.N. Gordon
Great Depression Online

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