Wednesday, February 16, 2011

Charles Hugh Smith Is On a Roll!

CHS says "You Want Inflation?  Here's How to Get It."

In the very first line, he gets it:

Rising prices driven by speculation is not the same as organic inflation, and diverting national income to the banks will not create organic inflation.
He goes slightly off-course when he accepts the Federal Reserve's stated goal of creating "modest inflation" as its actual goal (which I think is to induce a political crisis in the U.S. in response to the 1970s-style stagflation that the Fed is purposefully fostering), but I can forgive him for that.  Skipping to the end:

The Fed's policies cannot create organic inflation, because all the Fed is doing is transferring wealth to the nation's Elites. Their spending on luxuries and fine dining are not broadbased enough to generate organic inflation in the entire economy.

Borrowing money does not drive organic inflation: higher incomes and free cash drive organic inflation. If you want inflation, then you have to increase the incomes and assets of 60% of the households, not just the top sliver who own most of the financial assets.
Unlike most other Austrian-inspired people, Smith is taking care to use the term "inflation" as it is actually defined by the Austrian school, which is in terms of the quantity theory of money, which conveniently lays the blame for inflation at the feet of labor for demanding and getting higher wages.  "Silly wage slave, if you demand higher wages, I'll just have to raise the prices you pay for stuff."

One thing that Smith has done that I think works well is to embrace the misuse of the term inflation and relable it as "speculative inflation" so it can be compared and contrasted to correct usage of the term in economics according to the quantity theory of money, now relabeled "organic inflation."  As much as I demand and appreciate this kind of rigorous thinking, I do so in part because it calls the quantity theory of money into question.

Remember that Chicago neoliberals blamed rising labor wages for the stagflation of the 1970s.  If what we have today is the same as the stagflation of the 1970s (I think it is), and what we have is being caused by financial speculators, shouldn't we revisit the 1970s and reassess what caused the stagflation in the 1970s?  When you do, you'll see that financial speculation caused that, too, and when you dig a little deeper, you'll see that the quantity theory of money entirely fails to explain inflation.  Inflation is, always and everywhere, caused by financial speculators.