By Alasdair Macleod
* * *
* *
"I can prove anything by statistics except the truth" – George Canning
Canning's aphorism is as valid today as when he was
Britain's Prime Minister in 1817. Unfortunately, his wisdom is ignored
completely by mainstream economists. Nowhere is this error more important than
in defining economic activity, where the abuse of statistics is taken to levels
that would have even surprised Canning.
Today we describe the economy as being in one of two
states, growth or recession. We arrive at a judgment of its condition by taking
the sum total of the transactions selected by statisticians and then deflating
this total by a rate of inflation devised by them under direct or indirect
political direction. Nominal gross domestic product is created and thereby
adjusted and termed real GDP.
The errors in the method encourage a bias towards a
general increase in the GDP trend by under-recording the rate of price
inflation.
* BINGO...!!!
From here it is a short step to associate rising prices
only with an increase in economic activity.
* PREACH, BROTHER, PREACH!
(*WINK*)
It also follows, based on these assumptions, that falling
prices are to be avoided at all costs.
* IN THE INSANE VIEW OF INSANE ECONOMISTS...
(*SIGH*)
* YEP...
(*JUST SHAKING MY HEAD*)
Assumptions, assumptions, all are assumptions. They lead
to a ridiculous conclusion, that falling prices are evidence of falling demand,
recession or even depression.
* EXACTLY! ABSOLUTELY RIDICULOUS!
(*VIGOROUSLY NODDING*)
Another of Canning's aphorisms was that there is nothing
so sublime as the truth. There's no sublimity here. If there was, the
improvement in everyone's standard of living through falling prices for
communications, access to data, and the technology in our homes and everyday
life could not possibly have happened.
* DUH!
Well, they have happened, and the falling prices of the
products of the greatest private sector corporations on earth are proof that
they are both popular and good for business.
* YES...!!!
Furthermore, the either/or condition of
inflation/deflation firmly believed by macroeconomists would logically rule out
the impoverishment of people in hyperinflations. If rising prices are good for
the economy, how come everyone was so unhappy in Germany's Weimar Republic in
1923, or in Zimbabwe fifteen years ago? Surely, as inflation accelerates the
happiness level should rise...
* I... FRIGGIN'... LOVE... THIS... GUY!
(*THUNDEROUS APPLAUSE*)
No sublimity here, either.
(*NOD*)
Error compounds upon error.
* INDUBITABLY!
So what is economic growth? It is not what the name
suggests, it is merely an increase in the total monetary value of statistically
eligible transactions. There is no qualitative judgment in this: governments
can and usually do goose the GDP number with needless bureaucracy and projects
few consumers would be prepared to pay for with their own money.
* AIN'T THAT THE FRIGGIN' TRUTH?!
Furthermore, an increase in GDP only occurs if the
quantity of money and bank credit has been increased, and then applied to the
part of the economy explicitly covered by the statisticians' statistics.
* YEP...
(*SIGH*)
The following is what happens when new money or bank credit
enters the economy. The banks create money out of thin air and lend it to a
favored customer. The customer spends it before prices adjust, reaping the full
benefit of prices that do not take the creation of the new money into account.
Only then will the prices of goods bought with this new money reflect the extra
demand that has materialized seemingly out of thin air, and this price effect
subsequently spreads, always one step behind the new money being spent. The
large majority of consumers will find prices have already risen against them,
without any compensation in their income, or if they are retired, the value of
their pensions and savings. So the end result is wealth has been transferred
from the weakest in society up the line incrementally to the first receivers of
the new money.
* ABSOFRIGGIN'LUTELY!
* AND BEYOND THAT WE HAVE THE REALITY THAT EVEN WHEN THE
WEALTHY ARE HIT BY INFLATION... THEY CAN HANDLE THE HURT FAR BETTER THAN CAN
THE NON-WEALTHY!
As the new money gradually spreads through a community,
prices will tend to rise. If one could record the effect, it would be found
that in real terms the extra economic activity from currency debasement is
gradually dissipated into higher prices. It is a short-term increase in demand
that is then reversed. In a perfect statistical world, real GDP would
faithfully track the effect. Unfortunately, we have the vested interests of
statisticians and their paymasters to contend with, and also the
inappropriateness of the application of statistical method, more suited to
measurement in natural sciences such as physics than to an imprecise social
science akin to psychology.
Instead of taking into account these temporal effects of
monetary inflation on prices, it is just assumed that an increase in the
quantity of money and credit leads to straightforward price increases. All else
being equal, it eventually does, but all else is never equal. Of far greater
importance is the public's relative preference between money and goods. Money
retains its role as money only because people accept it as such. Fiat
currencies, which have no value for any other purpose, are at continual risk of
becoming valueless. The condition required for a fiat currency to retain any
value is that demand for it has to be maintained, so that it is always scarce.
Assuming that condition applies, the most important
determinant of the level of money's purchasing power is the marginal balance of
peoples' preferences for it relative to goods. In practice, and because
government ensures a monopoly exists for its fiat currency, this is usually
stable, tolerating large changes of the amount of money and credit in circulation
without altering radically.
If this marginal preference changes from consumption
goods towards money, prices of goods will tend to fall. This was dramatically
illustrated during the financial crisis in 2008/09.
* YEP! ABSOLUTELY! THAT'S HOW I GOT MY BELOVED RED CHARGER!
CASH PLUS STELLAR CREDIT EQUALED... ACCESS TO BARGAINS!
The opposite is also true, when the marginal preference
swings away from money towards goods. It is this condition which leads to
hyperinflations, not the rapid expansion of the quantity of money as commonly
supposed, though monetary expansion is usually part and parcel of the
condition.
* YEP...
No comments:
Post a Comment