Sunday, January 20, 2013

Where Is the Inflation?

Below is an important column by Mark Thornton. It is a must read. However, two points I would like to make relative to the column. The first is Thornton's assertion that oil prices rise during the boom period. This is generally true.  However, if during a boom period significant new quantities of oil are produced, we may not see the price increase that would occur under steady oil supplies. At present, new oil is being produced at accelerated rates because of fracking and technologically advanced oil production from oil shale. It is unclear at this point how much oil may be produced by these methods, but it is possible it may result in a stable or declining oil prices, despite accelerated  money printing. Of course, if enough new money is printed, it will push oil prices higher even with accelerated supply.

On a second point, I am glad to see Thornton point out that the price of gold generally declines during the down leg of the business cycle. Few understand this, but gold is generally not a good investment during the down phase of the business cycle.-RW  

by Mark Thornton

Critics of the Austrian School of economics have been throwing barbs at Austrians like Robert Murphy because there is very little inflation in the economy. Of course, these critics are speaking about the mainstream concept of the price level as measured by the Consumer Price Index (i.e., CPI).

Let us ignore the problems with the concept of the price level and all the technical problems with CPI. Let us further ignore the fact that this has little to do with the Austrian business cycle theory (ABCT), as the critics would like to suggest. The basic notion that more money, i.e., inflation, causes higher prices, i.e., price inflation, is not a uniquely Austrian view. It is a very old and commonly held view by professional economists and is presented in nearly every textbook that I have examined.

This common view is often labeled the quantity theory of money. Only economists with a Mercantilist or Keynesian ideology even challenge this view. However, only Austrians can explain the current dilemma: why hasn’t the massive money printing by the central banks of the world resulted in higher prices.

Austrian economists like Ludwig von Mises, Benjamin Anderson, and F.A. Hayek saw that commodity prices were stable in the 1920s, but that other prices in the structure of production indicated problems related to the monetary policy of the Federal Reserve. Mises, in particular, warned that Fisher’s “stable dollar” policy, employed at the Fed, was going to result in severe ramifications. Absent the Fed’s easy money policies of the Roaring Twenties, prices would have fallen throughout that decade.
So let’s look at the prices that most economists ignore and see what we find. There are some obvious prices to look at like oil. Mainstream economists really do not like looking at oil prices, they want them taken out of CPI along with food prices, Ben Bernanke says that oil prices have nothing to do with monetary policy and that oil prices are governed by other factors.
As an Austrian economist, I would speculate that in a free market economy, with no central bank, that the price of oil would be stable. I would further speculate, that in the actual economy with a central bank, that the price of oil would be unstable, and that oil prices would reflect monetary policy in a manner informed by ABCT.


  1. That's very interesting but my Falcons lost and my favorite guy dropped off the first page of the leader board. But, maybe worst of all , I'm out of corn chips..... hey is that why my corn chips are $5.00 a bag? What next,$10.00 for a six pack of beer. I'm starting to really get pissed now!:)

  2. Coincidentally, the Thornton piece answers the outrageous and false allegations of the dishonest and dimwitted MMTer Mike Norman in this video from Saturday. The video would be funny if it weren’t so tragic. The video is only 6 minutes long.

    The debate is over. We’ve won.

  3. Few understand this, but gold is generally not a good investment during the down phase of the business cycle.

    I pray this lasts a bit longer so I can accumulate more while I have the chance. (Go shorts, go! lol) I'm sure China and a few others are thinking the same :)

  4. Don't bet much on lower oil prices lasting very long:
    US daily crude production is 5.7 million barrels.
    US daily crude consumption is 18.8 million barrels.

  5. I'm thinking the lows in Gold are yet to come. The talking heads I read say we have another down leg in the current secular bear market that started in 2000/2001. They recommend holding cash for now and waiting to back up the truck near the next bottom.

    Are they correct? I don't know but it could happen.

    1. Perhaps instead of backing up the truck all at once, you could just buy a few ounces at a time and rebalance as it becomes necessary. I'd recommend Harry Browne's writings and Money Talk radio show: Browne studied Mises and ABCT thoroughly, and developed his investment theories on lessons learned in Human Action. Not only was he the Libertarian candidate for President, but his deceptively simple permanent portfolio strategy has outperformed Warren Buffet for at least the last 3 years. - RJD

  6. The author states: "However, only Austrians can explain the current dilemma: why hasn’t the massive money printing by the central banks of the world resulted in higher prices."

    That's flat out not true. The Federal Reserve has spent the last years outlining the logic for exactly this point in numerous speeches and articles. Ben Bernanke is adamant that current Federal Reserve policy will not lead to "price inflation" in excess of 2% per year, the target. Austrians have been doing EXACTLY the opposite, warning of hyper[price]inflation over these years. Look at the Mises Institute for example, there are scores of links since 2009 warning of hyper[price]inflation to come; warning of the current situation in the like of Weimar Germany in 1923 and so and so on. To now turn around and claim that these same people have done the opposite speaks to an amazing amount of intellectual dishonesty.

    Finally, it is also telling that the author speaks of a "dilemma". It is a dilemma only for Austrian economists who have had egg on their face for decades warning of hyper[price]inflation which has not materialized. It is not a dilemma for the Federal Reserve nor the American public. The Federal Reserve has been impeccable of maintaining "price inflation" close to the target of 2% per year. Impeccable.

    1. It is true that hyperinflation has not materialized YET. BUT I think the Austrians argue that it WILL materialize. I suspect they are correct, but I think another economic down leg similar to 2008, possibly 10x worse, may occur before the hyperinflation kicks in.

    2. We've had plenty of CPI inflation that past few years using the 1980 method as Peter Schiff explained and all in the face of collapsing real estate prices and banks not lending.

      Further, as Prof. Thornton explained for the 787th time, Austrian theory is not primarily concerned with predicting CPI inflation but is concerned primarily with explaining how funny money dilution distorts relative prices and economic calculation especially in longer term and more complex investments. I never cease to be amazed how Keynesian inflationists refuse (or are unable) to wrap their tiny brains around basic Austrian concepts. Again, Rothbard's theory of the Great Depression was that the price distortions which led to the collapse were not apparent from the CPI. He explained that in 1963. You've now had 50 years to learn that relatively simple explanation. What's your problem?

      2% annual price inflation (a geometric increase on top of all prior geometrical increases in the price level) employing dishonest methodology? What do you want, a cookie? Whatever the CPI, there is no purpose for funny money dilution other than to steal purchasing power and/or to create an artificial boom that will invariably end in disaster. ONLY THE AUSTRIANS EXPLAIN THAT.

    3. Bob Roddis:
      Leaving aside your gratuitous snide comments and ad hominem attacks ("tiny brains"), the OVERWHELMING conclusion of research on the Great Depression points to its main cause as the fixation on maintaining the Gold Standard by policymakers. Rothbard is flat out wrong on this. But your insults seem to suggest a certain level of defensiveness on your part anyways.

      Are you seriously claiming that the CPI would be a better index of consumer prices if there are absolutely no goods and services in it which have been introduced since 1980? That's ridiculous. You couldn't, for one, participate in the discussion on this blog using that metric. Substitution of goods and quality adjustments are important to give an accurate picture of "price inflation". Also what about the Billion-Price index from MIT showing similar rates of "price inflation" as the official CPI? Peter Schiff wants to sell gold and his "research" to gullible readers and listeners, those are his business interests. He has to distract from his failed claims of "hyperinflation around the corner" which he made like a broken record over the last years if not decades. Nothing wrong with that in a free marketplace of ideas, but not something to be taken seriously.

      The 2% target is shouted from the rooftop by the Federal Reserve. If you think that makes holding cash unattractive to you, don't. Go to your broker and set up a gold (or whatever other commodity you think best) ETF and put all your assets in it. Only transfer a small amount into a checking account for transactions purposes. There is your own private gold standard. All businesses will tell you that they prefer a stable and predictable rate of "price inflation" to the much much greater variety of general price movements under a gold standard. If businesses don't know if prices next year will fall by 10% or rise by 5%, good luck maintaining investment.

    4. "All businesses will tell you that they prefer a stable and predictable rate of "price inflation" to the much much greater variety of general price movements under a gold standard."

      I would greatly appreciate evidence supporting this claim of unanimous preference for "predictable" price inflation over the "Gold Standard." And to which "Gold Standard" are you referring? The gold-exchange, warehouse receipt, physical coin, bimetallic, Bretton-Woods, 2-tier, or what?

      As far as predictability and stability of inflation, it must be noted that a predictable and stable rate of inflation was enjoyed in ZImbabwe: a stable and predictable 98.0% percent inflation with a predictable and stable halving of purchasing power every 24.7 hours. I can't imagine that this is preferable to any business owner other than the print shop owner who produces the paper notes. Although I don't sell gold for a living, I am a business owner, and would greatly prefer stable and predictable price deflation occurring due to increased productivity- it is a greater quality of life at decreased real price levels that is the end goal, is it not? As far as real prices rising 5% after decreasing 10%, this is clearly not a preferable market for either a gold adherent or a monetarist. An arbitrageur, perhaps, but not any person who desires to maintain their current purchasing power. Perhaps there is some other possible scenario- the nominal price levels are not the issue, after all. - RJD