Saturday, June 13, 2009

INFLATION

I take it back. I take it all back. I was wrong.

If something isn't done, and done soon, there's gonna be one wicked inflation. It's already trying to break out. A bag of Milky Way bars was 99 cents last week. This week it's $2.50. That's jaw-dropping wrong.

It's not just candy bars. It's several items already. One in the McMaster book. One at the hardware store. One at the lunch counter. And more: I don't remember them all. It is spotty, an item here and there. But this is how it starts. By the time it's two items at the lunch counter, we've got rampant inflation.

This is how it stops:

  • Stop short. Don't buy it. Boycott unreasonable prices. Save your money.
  • Call for wage-and-price controls for a limited, 30-month period.

I don't like wage and price controls. I think they don't work. But we need 'em, and we need 'em now. We need wage-and-price controls to get us through a transition phase, because of special circumstances in our economy: severe recession plus credit crisis in a time of horrific debt, and the Fed's response to it all.

We need 'em because boycotting unreasonable prices is not enough. That's what we do. It is our instinctive reaction. We could organize and vocalize and sympathize and that might help make boycotting a little more effective. But if you need your Milky Way bars, you need 'em.

I want President Obama to call for a program explicitly modeled on President Nixon's wage-and-price controls. If nothing else, the bureaucracy of it all will slow down the process of getting higher prices to market. It will slow the inflation. It will help. But it has to be done now.

* * * * *


Yeah, I know: Printing money causes inflation. And they're printing money like it's going out of style. So people expect inflation. But there are two forces at work here: Printing money leads to an increase in spending, an increase in demand. This works on the principle of "supply and demand" to pull prices up. One of the forces at work is demand.

The other is expectation. Supply-side expectation. Every supplier wants to be the first to get in on the inflation. So they jack up a price and test it out: Does Art still buy his candy bars?

I'm not sayin' there's no reason for it. I'm one of the few who say profits are too low and must go up. But given that businesses have good reason to push prices up, it doesn't follow that they have to be outrageous about it.

Prices have been going up for years. It's not much in the news, but prices are not stable. Still, the increases have been generally mild. (Not counting oil prices after Katrina and again now.) Inflation is unacceptable. But mild inflation is better than rampant inflation. If suppliers would stick to a mild inflation, we wouldn't need wage-and-price controls. But that's not gonna happen.

* * * * *


Two forces at work: demand, and expectations. It's expectations that are pushing prices up in these bizarre, sporadic, excessively big jumps. I wanna say these expectations are perfectly aligned with the sporadic and excessively big increases in the quantity of money and the bizarre behavior at the Federal Reserve.

Expectations can be trimmed back by wage and price controls. Demand cannot. When demand is pulling prices up, price controls only muddy the waters. Economic forces cannot be long restrained. Fortunately, demand is not pulling prices up. Demand is not the present cause of inflation. Demand, by definition, is not excessive at times of recession. Demand at such times is insufficient. Demand is not the cause of this inflation.

Later, when we are coming out of the recession and people are ready to spend, all this new money will be there to cause a terrible, demand-driven inflation. But demand-driven inflation will come later. Not now.

The presently blossoming inflation is driven by expectations. The expectations are driven by the Fed, which has been printing money like mad. They call it quantitative easing but everybody knows what it is.

Everybody knows the Fed is printing money. And everybody knows that printing money causes inflation. That is the source of the inflationary expectations. That, and the opportunity people see to make a buck by being first to raise prices.

But it is never printing money that causes inflation. Spending it is the cause. Spending is an indicator of demand. Printing is not. Printing money, as practiced by the Fed today, is a policy that's driven by the wish for a large and growing demand.

You don't get inflation from wishes. Not from wishes for increased demand. Not even from wishes that people will still buy what you're sellin' after you jack prices up unconscionably. You only get it if they actually do buy at the new, unconscionable prices. But it disrupts markets and nobody likes it.

Wish-based inflation can be held in check with temporary price controls. But this plan will work best if the controls are in place before inflation is rampant.

3 comments:

The Arthurian said...

My buddy's car insurance payment just jumped from $250 a month to $350 -- a 40% increase!

The Arthurian said...

Two, maybe three weeks ago now the wife came home with Mars bars again, instead of the lower-priced substitute she was getting. How come?

The price went up on the cheaper substitute. Almost as expensive as the Mars bars. So why not, she said.

By the time it's two items in the candy bowl, we've got rampant inflation. So. But for the record, the Stimulus Watch gadget this morning reports 176 days since passage, 9.3% allocated. That's allocated, remember, not spent.

So what's the cause of this rampant inflation? Not the stimulus. Maybe the "cash for clunkers" rebate and the $8000 housing kickback? I personally know people taking advantage of these plans... However automobile prices and housing prices are still GOING DOWN. No inflation there.

What's causing the inflation? Everybody EXPECTS it. Expectations are causing inflation. Not the printing of money. The consciousness of inflation, the fear of inflation, is doing it. "We have nothing to fear but fear itself."

Price controls could have stopped expectations-based inflation. But it's too late for that now, I fear.

The Arthurian said...

Mars bars: price drop from $2.50 the pack back down to $1. I'm piggin out again.

At work, however, candy bars in the machine went up from 75 cents to $1 about two weeks back.