Wednesday, November 13, 2013

Where's The Inflation? Dr. Mark Thornton Will Tell You

By, Chris Rossini

Yesterday, I quoted Murray Rothbard on the how economists in the 1920's (outside of the Austrian School, of course) were caught by surprise by the Great Depression:

Here's the Rothbard quote again:
“The fact that general prices were more or less stable during the 1920’s told most economists that there was no inflationary threat, and therefore the events of the great depression caught them completely unaware.”
EPJ regular reader Bob Roddis wrote in the comments:
"Rothbard showed that the 'inflation' went into areas other than the CPI prior to 1929 and that's exactly what has happened here since 2009 as I and others thought it would."
Roddis is correct, and just to embellish more on this very topic, here is Dr. Mark Thornton on a recent episode of The Tom Woods Show:
The government measures inflation with a Consumer Price Index, the normal consumption goods that everybody buys on a weekly basis...If we look around at the broader economy we see tremendously high prices. We see record highs in the stock market and stock prices...We see all-time prices in the bond markets, whether it's government bonds at all-time highs, or even junk bonds...And so the bond market is in a bubble as well and prices are very very high.

If you look at the real estate market, prices are up across the country. All-time record prices in Manhattan. Up over 25% in Florida, Arizona, California, and Nevada...Agricultural land in the Midwest is at all-time highs. The auction market for contemporary art in Manhattan - all-time record highs. All of the auctions are setting new records, despite the increases in supply...

Apartments in Manhattan, in some of the better neighborhoods, are selling now for close to $100 million each. And that's just for the normal condominiums, not for the specialized condominiums by designers...

The government measure, that CPI index, is being held down by the fact that the American public is not doing well at all. They're not getting this free money from The Federal Reserve. They're not getting near zero interest rates. They're not getting loans at all. All that money's going to hedge funds. It's buying up government bonds and things like that.

So it makes perfect sense from an Austrian point of view.
Mises called this process: “the acme of the short-run principle.” The first receivers of the Fed's digits get to live it up in "the short run". This is, of course, done at the expense of everyone else. Our loss of purchasing power is their gain.

However, the dying Keynesian idea has not, and will not, change the economics of the big picture.

We started with Rothbard, now let's end with him:
“What makes us rich is an abundance of goods, and what limits that abundance is a scarcity of resources: namely land, labor, and capital. Multiplying coin will not whisk these resources into being. We may feel rich for the moment, but clearly all we are doing is diluting the money supply.”

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  1. Chris, I commend you for this magnificient post. It is well written and it explains clearly that contrary to the naysayers and keynesian/monetarist money pumping advocates, there is a high degree level of inflation in asset markets, such as real estate, equities, farm land and bonds. It really amazes me that mainstream economists immediately point out at the CPI and say there is no inflation.... just because the overall picture of consumer prices has not increased greatly does not mean inflation is not alive, as it is. What these mainstream economist forget is that if the money pumped is not frontrunned by hedge funds in wall street, is then kept in the banks vaults as "excess reserves", which is the real reason why the CPI has remained stable. It is also our duty as Austrians to stop focusing so much on the CPI, we (me included) make the mistake of thinking that the CPI is lying because it is low and stable, no the CPI is not lying, it is simply that the inflation created by the Fed is showing in asset markets or is stuck in excess reserves. That's something we ought to make clear every single damn time when we address the issue of inflation.

  2. Anonymous,

    Great points.


    Something just dawned upon me. The Krugmans of the world are constantly pointing to the stable CPI that the Austrian predictions of increasing prices due to Fed inflation are false. At the same time they are also horrified by the widening income gap statistics. They fail to realize the hidden irony (I admit I did myself until recently).

    As Thornton and others have pointed out, the new money/credit goes to a select group of individuals first. I think it is highly unlikely that these people will suddenly go out and buy more things measured by CPI. I doubt they are going to spend this new money on groceries. It much more reasonable to assume that they will go and buy assets such as stocks, bonds and real estate.

    In summary, the stable CPI that Keynesians champion is due to the widening income statistics they berate which is a direct result of their idiotic policies.

  3. My notes in my Hazlitt paperback 1974:

    "In" people w/ govt get it 1st. Spend it at base rate. Call it 100. As it filters through....

    This is not brain surgery. It's not even 1/10 as complicated as photosynthesis.

  4. What happened to JW? Would have expected him to have something to say here. Did he get a new assignment?

  5. Don't forget that the government has changed the way it calculates CPI. See for more details.