High Inflation Did Show Up: Here’s Where

Posted: Apr 02, 2018 12:07 PM
High Inflation Did Show Up: Here’s Where

Paul Krugman, a once-respected economist turned progressive-liberal mouthpiece, had a column on January 23 in the New York Times, entitled “The Durability of Inflation Derp,” a mockery of anyone who predicted high inflation from the monetary expansion, quantitative easing, and fiscal stimulus actions after the onset of the Great Recession in 2008. He does have a valid point that those who were predicting high inflation of consumer prices in the near future were wildly wrong. What they were wrong about, however, was not that there would be large inflationary pressure, but rather that they could only look at consumer prices.

In the American economy, dollars, the only legal tender, are used to buy nearly everything outside of barter. That means that items from automobiles and apples to zippers and zucchinis, along with every other consumer good and service, use dollars for sales and purchases. Krugman was correct that those prices have only had a relatively mild price inflation, and those he mocked were incorrect. Dollars, however, also buy everything else in the economy not included in that consumer goods category. Factories and casinos are built using dollars. Machines are purchased using dollars, as are farm tractors and radio towers. More to the point, however, stocks, bonds, and every other type of financial asset are purchased and sold for dollars. In order to honestly say that there was no significant price inflation over the last ten years, you would have to take all prices of every type of good and service into account.

We again have a problem using large aggregates for measuring reality, as the aggregates don’t reflect the reality of any portion of it. In this case, prices of everything purchased with dollars do not rise evenly. Price inflation of the items in consumer goods, individually and in aggregate, is very different from the price inflation in both the aggregate and the individual items in non-consumer goods, including and especially financial assets.

While the official measure of consumer price inflation shows that the average prices of groceries and iphones increased a total of about 15% since 2008, the Russell 3000 index, which includes 98% of the capitalization of American stocks, increased 295%. To put that into perspective, the total gross domestic product of the United States stands just shy of twenty trillion dollars while the total capitalization of stocks is approximately thirty trillion dollars, and has grown by nearly seven trillion dollars in the last year. During the period in question, the stock market has grown by twenty two trillion dollars, more than the current total GDP. That doesn’t include any other type of financial asset. That is a big deal. No, Dr. Krugman, the inflated money supply is not going into consumer goods. It is, rather, going into stocks, bonds, and other investments. Yes, Dr. Krugman, there has been massive monetary inflation, as some of the people you mock have predicted (though not necessarily in the right area of the economy), and in spite of your statements to the contrary.

When you consider that the top 10% of households own 80% of the stocks and other financial assets, it becomes more clear why apparent income inequality is increasing. The Federal Reserve Bank is debasing the value of the dollar, increasing the cost of living for the rest of the country, while concentrating the benefit of the increased money supply with the wealthy, those who own the financial assets.

If people are going to complain about income inequality, they should start placing the blame where it belongs and start applying pressure for some change to the monetary control system that is decimating the purchasing power of the dollar, unfairly rewarding investments in financial assets, and causing economic instability to boot.