The Inflation Lie: The Silent Robbery of Americans
Deflation is a dirty word in America. With a recession that continues to intensify, the media and government continue to stress how devastating a deflationary environment could be to the American economy. The idea of deflation being harmful is largely derived from the Keynesian school of economics where the growth of an economy is based on a controlled amount of inflation.*
So with a deepening recession, is the average citizen benefiting from the deliberately inflationary policies of the Federal Reserve and the Treasury? I believe common sense once again rules in this situation. Deflation means that the price of goods is going down. When people are losing their jobs on a daily basis, working hours are being cut and salaries are being reduced, would a healthy free-market economy have rising prices or falling prices? A simple analysis of the supply-demand chart tells us that as demand decreases for many superfluous items as wages decrease, the price of goods should also decrease.
If prices do not fall to meet falling demand, then the balance of the marketplace will be lost, leading to a loss in profit for companies while at the same time people can not afford the goods they want. Clearly, both sides of the market, the producer and consumer, are at a disadvantage. A report today from Bloomberg.com only helps to support this analysis:
Today’s report showed inflation accelerated. The price gauge tied to spending patterns rose 1 percent from February 2008, up from a 0.8 percent 12-month gain in January. The Fed’s preferred gauge of prices, which excludes food and fuel, climbed 1.8 percent, more than forecast.
Adjusted for inflation, spending dropped 0.2 percent, following a 0.7 percent gain the prior month.
If the current increase in prices coupled with decreasing wages is harmful to almost everyone, why is it even happening? Well, to get the answer to this question, we must ask how inflation is controlled. In a free-market economy, inflation is controlled by rising interest rates. Why are interest rates not rising now? The simple answer is that the Federal Reserve has enormous control over fixing interest rates through target rates and now even the ability to purchase Treasuries.
So next time you walk into your local supermarket and you can not afford to purchase the milk anymore, please remember where to address your angry emails and phone calls. The manager of the store needs to make money to eat just like you do so if he has to continue to pay more to stock his store with milk, then the only option for him is to pass that cost on to you or lose his business. The Federal Reserve is not helping anyone when they control interest rates to unrealistic levels, so let Ben Bernanke know how you feel.
To support Ron Paul’s initiative to bring transparency to the Federal Reserve, contact your congressmen and ask them to co-sponsor bill H.R. 1207. Help bring an open market to America so that you and your children can still afford food next year.
*(Although many libertarians believe that inflation means an increase in the supply of money, for now we will assume that inflation is the rise in the cost of goods because this is the most widespread meaning of the word today.)