Inflation: Too much money chasing too few goods? – Hardly!

Robert Poteat

This article appeared in the American Monetary Institute’s ‘American Money Scene Bulletin #6 : Sept. 30/09’ –

That more money is available than goods is a nearly axiomatic definition of inflation in economic texts, media, and politics. But empirical data from direct observation indicates it is not true in the current economic environment.

One can find many retail businesses offering discounts, and failing businesses; while advertising is a multi-billion dollar enterprise. One can easily find retail stores full of merchandise for sale. This is direct evidence that there is not enough money to liquidate what is available for sale. Yet, prices keep going up. Therefore, it cannot be too much money for consumption causing price increases.

Consumer debt is about $2.5 trillions for consumer goods that have been “sold” but have not yet been paid for; and, still, retail stores are full of merchandise. Advertising of sales discounts is constant along with easy credit.

Inflation is often expressed as rising prices, but many things such as scarcity, seasons, fads, war, and weather affect prices along with the phenomenon of inflation.

Another way of expressing the inflationary effect on prices is to call it devaluation of money.

Debt is bank-issued credit used as money. Examination of the bank credit mechanism shows that when banks issue credit as loans, banks only create the principal of the loan and not the interest. If not all of the interest charges are spent directly back into circulation, then there is a shortfall. This creates a demand for more and more loans to keep up with interest payments. In practice, the system requires the constant growth of credit/debt used as money. It is inherently and unavoidably inflationary when expressed as quantity of credit/debt in circulation without respect to production and consumption.

The growth of debt is confirmed in statistics. Credit Market Debt, as published in The Statistical Abstract of the United States and Federal Reserve Bulletin, has grown from $5 trillion in 1981 to $52 trillion in the fourth quarter of 2008.

From the same sources above, the imputed total assets of the United States increased from $17 trillion in 1981 to $141 trillion in the fourth quarter of 2008. What accounts for such an increase can only be attributed to inflation as decreased value of money. There is no more land. Resources have been used so there is less to be priced. The environment has been polluted making some places unusable, consequently, worth less. Some increase in housing, commercial building, and infrastructure has happened but not enough to offset the losses. If total assets, including the additions directly above, were accounted in tangible measurements such as acres of land, barrels of oil, standing board feet of timber, remaining ores, condition of fisheries, depth of top soil, housing, commercial building, and infrastructure, it would be seen that assets are reduced. Only the prices of assets increased.

Price increases are related to the exponential growth of debt. The bank credit/debt money system is inherently and unavoidably inflationary. It is necessary to raise prices to recover the costs of exponentially accumulating debt. Asset price inflations allow banks to create more credit/debt money, which in turn fuels further asset price inflations. These activities continually increase the overall debt burden on society, ultimately increasing costs and prices, i.e. inflation.

As shown above, banks have issued enormous amounts of credit/debt. Where did it go? It went into war, extreme stratification that led to speculation and other non-consumption sinks, leaving insufficient credit/debt to liquidate consumption goods even after massive accumulations of credit/debt used as money.

For decades Federal Reserve officials have claimed they fight inflation by raising interest rates. Since our economy runs entirely on credit/debt, raising interest rates increases the cost of all business. In terms of price increases as a measure of inflation, raising interest rates would be expected to increase inflation. If prices come down it is because of a squeeze on businesses and labor causing shutdown of production and increase in unemployment. It is anti-social not to mention classical double-think.

The time has come for monetary reform!

Robert Poteat