In the wake of the federal government’s $2 trillion fiscal monstrosity and the Federal Reserve’s even more monstrous promise to create new money and credit with no limit whatsoever, it is a good time to reiterate a point I’ve made before: the claim that “inflation” has been low over the past ten years is a scam.
No, I’m not talking about the real definition of “inflation” being the creation of new money and credit, rather than the resulting rise in prices. Nor am I merely claiming the inflation rate is underreported due to all the tricks played with the numbers (hedonic adjustments, substitution, etc.).
I’m saying the claim that prices are not higher because of all the previous quantitative easing is a bald-faced lie. It represents perhaps the biggest gaslighting of an entire population in human history. And because it’s been so successful, the Fed is about to do it again.
The Fed reports the consumer price inflation rate over the past ten years as ranging from about 1.5% to 2.4%, not counting a few outlying years. The average from 2010 – 2019 was 1.77%. The Fed then tells us that low number proves its massive inflation of the currency during the last decade “hasn’t resulted in inflation,” by which they mean a rise in the price of consumer goods. But it has.
The key to this deception is its false premise: that one should compare the prices of goods and services this year to what they were last year. That’s the wrong comparison.
The correct comparison would be between what prices are today vs. what they would be without quantitative easing. Perhaps they wouldn’t be higher at all. Perhaps they would be lower.
Perhaps they should be lower.
Obviously, we don’t get to do a controlled experiment where we relive the past ten years with the Fed’s printing press shut down. But we can look at other factors influencing prices and draw some reasonable conclusions.
First, 2010 just happened to be the year baby boomers started retiring en masse. They have been doing so at a rate averaging 280,000 per month over the past ten years and will continue to do so for another ten.
Why is that important? Because it is well-established that retirees spend a lot less money, about 1/3 less, than they did while they were working. That’s a huge drop in demand that puts deflationary pressure on consumer prices.
It’s true that retirees are producing much less, or nothing at all in some cases, but that lost production is more than made up by the second price deflationary trend.
That, of course, is automation. Donald Trump got elected largely based on his claim that unfair trade deals have destroyed American manufacturing, sending manufacturing jobs overseas. This may play well with unemployed Rust Belters, but there is one problem: American manufacturing hit its all time high in 2007, long after NAFTA and long before Trump got into politics.
It wasn’t trade deals that took away the jobs; it was automation. That means the American economy is producing far more manufactured goods with far fewer people. And this trend isn’t limited to the manufacturing sector. It is ubiquitous across the economy, from robots in warehouses to automated kiosk ordering in fast food restaurants.
So dramatic has been this trend that another presidential candidate, Andrew Yang, campaigned on the idea that we need a “universal basic income” because of all the jobs being eliminated.
Yang’s argument rests upon an old fallacy, but one thing is certain: Automation represents yet another huge deflationary force on consumer goods prices, as does a host of other trends like ever more powerful computing capabilities, web retail replacing brick and mortar stores, etc.
For these reasons and others, GDP has continued to rise, albeit modestly, during the mass retirements of the baby boomers. So, the increase in total goods produced combined with the decreased demand represented by retiring baby boomers should result in falling consumer prices.
Instead, the Fed’s QE and other monetary inflation interventions – injecting massive amounts of new dollars into the economy – have overcome massive price deflationary forces to make consumer prices rise modestly when they should have been falling.
Falling prices raise real wages, even when nominal wages don’t rise. To put it in topical terms, if the price of toilet paper falls from $2 per roll to $1 dollar per roll, you can buy twice as much toilet paper without getting a raise. Ditto consumer goods in general.
The Fed has a whole story about why falling prices would be catastrophic. But falling prices are what naturally happens as society produces more per capita.
Don’t believe me? Take another look at the Fed’s inflation table, this time from 1800 – 1899, most of which time the U.S. was on a gold standard.
If you make a spreadsheet multiplying a basket of goods costing $100 in 1800 by the inflation rate each year, you’ll see something quite startling.
Nevermind, I did it for you.
That’s right. Prices fell dramatically over the course of the 19th century. A basket of goods that cost $100 in 1800 cost only $48.94 in 1899. That means one could buy twice as much with the same wages in 1899 as one could in 1800.
Falling prices are the natural result of a more productive economy. But as the Fed’s inflation table also shows, it has always overcome this natural tendency and made prices rise (the Fed was created in 1913). That same basket of goods that fell from $100 in 1800 to $48.94 in 1899 cost $1,498.45 in 2019. It should have cost something like $24.00, or even less considering accelerating innovation.
Yes, monetary inflation eventually raises wages, too, but always more slowly than it raises consumer goods, making wage earners poorer while the beneficiaries of inflation – mostly in the financial sector – get richer.
Get it yet? You’re being ripped off on a massive scale. You’ve been ripped off by the monetary system your whole life, but especially in the past ten years when decreased demand from baby boomer retirements combined with automation and other innovations allowing society as a whole to produce more goods and services should have made prices fall even faster than usual.
You’ve been had. And now the Fed is going to use its disinformation about consumer prices to take you again.
Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? Part One and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.