Inflation vs. Scarcity, Two Different Things.
I've been noticing that the headlines lately have been talking a lot about "inflation" and how it's threatening the global economy. And then the writer uses the price of wheat to illustrate that, gee, the price is really shooting up there because of the droughts in China and Brazil and Russia, etc. so with the price of food shooting up like that, it means that we have inflation.
But inflation and price increases due to scarcity are two different things, caused by two different phenomena.
Inflation is strictly a monetary phenomenon. You get inflation when the people who print up the money decide that they need more money than they have, and instead of producing something of value and selling it, they simply print up more money. So if you have a value level of 100, and a money level of 100 - things are good.
If the value level stays at 100, and the money level drops to say 90, then you have deflation - which is to say that the money increases in value. (It's a bit hard to follow - but if you think about it, you'll see that when it comes to money in an economy, less is more, and more is less.)
So if you have a value level of 100, and the money-printers print up another 100 for a money level of 200, then you have inflation - which is to say that the value of the money has dropped 50% and the money is only worth half what it was before.
Now - NOTE that the amount of value in the economy has NOT changed. There is as much stuff of the same quality and quantity as there was before - but now the price of that stuff has changed due EXCLUSIVELY to the amount of money in the economy to pay for it. Prices driven by inflation and deflation are NOT self-regulating. They are dependent on manipulation of the markets by the authority that prints the money.
Price increases due to scarcity are due to the lack of a specific product or type of products available for sale in the face of high demand. In a scarcity situation, you have the same amount of money around, but less of the desired product. In such a situation one of two things will happen as the price of the good goes up due to scarcity. Potential buyers will look at the good, and at the new higher price and then they will make a decision. Can they do without that good, or not? If they can do without it, then they will stop buying it and demand will adjust downward, bringing the price back down where it was. OR they will find a substitute for that good, fulfilling their need, without buying the specific scarce good - and again, the demand adjusts downward and the price follows.
Or they will decide that they do not need that good at all, and will stop buying it unless the price goes down. Prices driven by scarcity are self-regulating.
So if the price of wheat is rising because of drought - that's not inflation. Scarcity driven price increases are generally limited to one good, or to one class of goods. If only the price of food goes up, while all other prices stay at their former levels - you're looking at scarcity. If ALL goods and prices go up, you're looking at inflation.
Okay - so where are we now? We've had inflation - more properly STAGflation - for nearly three years now. But there have been plenty of food and other goods available for purchase. The price of the food has been going up at around 20% a year due entirely to inflation. Plenty food + price goes up = inflation. WHO causes inflation? In the USA it's the FED and the US Treasury. So you can blame the government for the high food prices, increasing fuel prices, etc of the last two years.
Price of specific foods go up, such as wheat when wheat is in short supply? Scarcity + price goes up = scarcity driven increases.
Got it?
Above I used the word "stagflation" - stagflation is when you have a stagnant economy, high inflation, and high unemployment - like we do now. Stagflation is different than pure inflation and deflation. Stagflation is caused by combining a stagnant economy which yields high unemployment, then topping it off with a Keynesian Idiot in charge of printing money who thinks you can spend your way out of debt, and so they borrow crap loads of money and the government SPENDs on stupid stuff, causing hyper-inflation. And since the Keynesian is too stupid to realize that they got us into the mess in the first place, they have NO clue as to what they've done, or how to fix it. So periods of stagflation just kinda drag on and on and on. Japan has been enjoying stagflation for what… 15 ? 20 years?
The US had stagflation that was caused by Nixon, made worse under Ford, and really accelerated by Jimminy Carter, the second worse president in history. That bout of stagflation was ended by Chicago School Monetarist Paul Volcker who figured out what stagflation was and how to fix it. So now Mr Obama and his closet of Keynesian Fools have followed the Bush Keynesian Fools in getting the stagflation going… and I do not expect an exit soon, because as they said when they took office, "We are all Keynesians here.".
Don't know about you, but I've adjusted my economic expectations to the present state of affairs, and am taking the long view. The short view is flat and uninteresting unless you have the money to play the carry trades - but that's another tale…
But inflation and price increases due to scarcity are two different things, caused by two different phenomena.
Inflation is strictly a monetary phenomenon. You get inflation when the people who print up the money decide that they need more money than they have, and instead of producing something of value and selling it, they simply print up more money. So if you have a value level of 100, and a money level of 100 - things are good.
If the value level stays at 100, and the money level drops to say 90, then you have deflation - which is to say that the money increases in value. (It's a bit hard to follow - but if you think about it, you'll see that when it comes to money in an economy, less is more, and more is less.)
So if you have a value level of 100, and the money-printers print up another 100 for a money level of 200, then you have inflation - which is to say that the value of the money has dropped 50% and the money is only worth half what it was before.
Now - NOTE that the amount of value in the economy has NOT changed. There is as much stuff of the same quality and quantity as there was before - but now the price of that stuff has changed due EXCLUSIVELY to the amount of money in the economy to pay for it. Prices driven by inflation and deflation are NOT self-regulating. They are dependent on manipulation of the markets by the authority that prints the money.
Price increases due to scarcity are due to the lack of a specific product or type of products available for sale in the face of high demand. In a scarcity situation, you have the same amount of money around, but less of the desired product. In such a situation one of two things will happen as the price of the good goes up due to scarcity. Potential buyers will look at the good, and at the new higher price and then they will make a decision. Can they do without that good, or not? If they can do without it, then they will stop buying it and demand will adjust downward, bringing the price back down where it was. OR they will find a substitute for that good, fulfilling their need, without buying the specific scarce good - and again, the demand adjusts downward and the price follows.
Or they will decide that they do not need that good at all, and will stop buying it unless the price goes down. Prices driven by scarcity are self-regulating.
So if the price of wheat is rising because of drought - that's not inflation. Scarcity driven price increases are generally limited to one good, or to one class of goods. If only the price of food goes up, while all other prices stay at their former levels - you're looking at scarcity. If ALL goods and prices go up, you're looking at inflation.
Okay - so where are we now? We've had inflation - more properly STAGflation - for nearly three years now. But there have been plenty of food and other goods available for purchase. The price of the food has been going up at around 20% a year due entirely to inflation. Plenty food + price goes up = inflation. WHO causes inflation? In the USA it's the FED and the US Treasury. So you can blame the government for the high food prices, increasing fuel prices, etc of the last two years.
Price of specific foods go up, such as wheat when wheat is in short supply? Scarcity + price goes up = scarcity driven increases.
Got it?
Above I used the word "stagflation" - stagflation is when you have a stagnant economy, high inflation, and high unemployment - like we do now. Stagflation is different than pure inflation and deflation. Stagflation is caused by combining a stagnant economy which yields high unemployment, then topping it off with a Keynesian Idiot in charge of printing money who thinks you can spend your way out of debt, and so they borrow crap loads of money and the government SPENDs on stupid stuff, causing hyper-inflation. And since the Keynesian is too stupid to realize that they got us into the mess in the first place, they have NO clue as to what they've done, or how to fix it. So periods of stagflation just kinda drag on and on and on. Japan has been enjoying stagflation for what… 15 ? 20 years?
The US had stagflation that was caused by Nixon, made worse under Ford, and really accelerated by Jimminy Carter, the second worse president in history. That bout of stagflation was ended by Chicago School Monetarist Paul Volcker who figured out what stagflation was and how to fix it. So now Mr Obama and his closet of Keynesian Fools have followed the Bush Keynesian Fools in getting the stagflation going… and I do not expect an exit soon, because as they said when they took office, "We are all Keynesians here.".
Don't know about you, but I've adjusted my economic expectations to the present state of affairs, and am taking the long view. The short view is flat and uninteresting unless you have the money to play the carry trades - but that's another tale…