Tim Carney writes that a consequence of inflation is that it encourages people to invest their money, rather than store it in mats or cash in bank accounts.The nut of his argument is this
One consequence of inflation is that you need to work harder to preserve the wealth that you earn but aren’t spending. This drives profits for financial companies, discourages saving (thus encouraging overconsumption), and generally punishes people who have more demanding jobs and who are less savvy. In other words, inflation exacerbates inequality.
And inflation is not a force of nature. There are unpredictable market factors that drive inflation, but the value of the dollar is largely determined by the supply of dollars, and the supply of dollars is mostly determined by the Federal Reserve.
Such a short couple of paragraphs, but so much to debunk!
Let’s start with the line: “Inflation is not a force of nature.”
Well, actually, it’s just the opposite. We see inflation everywhere we look.
- It used to be that it was difficult to get an “A” in a class, but now they’re given out to everyone.
- It used to be that getting a standing ovation was a rare phenomenon after a performance, but now every performance gets one unless it’s really horrible.
- It used to be that on twitter, when someone agreed with someone, they’d append “+1” to the tweet, but now they append “+1000” a clear sign that the number one has lost its value as digit to signify agreement.
- The crappiest countries are still rated, like AA+
- Normal eggs at the super-market are labelled “Grade A Fancy”
And so on, and so on. Humans inflate everywhere they can, so the idea that it’s not a force of natural is obviously hogwash.
But then in his last sentence, Carney does a double trick. First he equates “inflation” with “the value of the dollar” as if they were the same thing, which they’re not.
Here’s a look at the value of the dollar (red line) vs. the annual change of the CPI (blue line). Not only has the falling dollar not lead to accelerating prices, the annual change in prices has shrunk, as well.
OK, so right off the bat, equating inflation with the strength of the dollar is improper.
Then he says that the value of the dollar is determined by the Federal Reserve.
It’s possible that at the margins the Fed influences the value of the dollar, but for more than a decade the dollar has basically performed exactly the opposite of the S&P 500, which makes sense. When growth prospects are good, people don’t want to horde cash. When times are bad, people do strive for cash.
More directly to Tim Carney’s point, Hale Stewart posted this chart, comparing the CPI (red line) vs. the annual change in the money stock, going back to 1975.
If you can find a relationship, you’ve got better eyes than we do.
So basically nothing described up top holds. CPI clearly isn’t the same thing as the dollar, and it clearly isn’t associated with money supply. Basically nothing about that relationship holds.
If you’re looking for something the government does that might influence the dollar, look at deficits. This chart shows the relationship of federal receipts to federal expenditures (red line) vs. the dollar (blue line). At least for the past several years, the lower the red line, the weaker the dollar.
Still, the point holds: Dollar devaluation is a natural phenomenon that comes from humans being humans, but it’s not the same thing inflation and the Fed is not the primary driver of either.
More generally, there’s just something weird about bemoaning the difficulty of storing your wealth.
As every libertarian/free-marketer knows, wealth is what happens when people coordinate to create things. That’s basic Austrian stuff. The idea that you can then just store that “wealth” in a box, or in a mattress, or with a pile of cash, or in a vault is absurd.