Tuesday, January 8, 2013

Wheres the Hyper Inflation

I saw this as an interesting post on dailypaul.com and thought it warranted a thorough look. 


Questions for the Austrians:
Why hasn't hyper-inflation hit yet? We are well into QE-infinity now and although food prices have gone up, we are yet to see Weimar-type paper burning on the streets. What gives? What manipulations are going on to prevent such exponential inflation?
Thanks all.

This is an excellent question for those of us free market folks to answer. If all our doomsaying is to be believed we should be experiencing hyperinflation so where is it all going?
Well for starters its reasonably safe to say that we are in fact suffering from hyper inflation. We are seeing a drop in wages, high unemployment, and poor economic growth. Yet even under these conditions we are seeing prices increase. If your doing the same job you were 5 years ago and your able to buy less with your paycheck thats arguably inflation.
I have heard the consumer price index tagged in for these debates. For those who dont know the Consumer Price Index is the estimated price of goods for a particular year tagged to the price of those same set of goods in previous years.  Its a relatively effective means of tracking inflation except it ignores subsidies, incentives, spending habits and production efficiency all of which are part of the cost. If we look at gas, retail pricing on most goods, or even sandwiches at subway we can see tons of inflation. 
Subway is a perfect example of where the CPI breaks down I actually worked at a subway almost 4 years ago. The 5$ footlong marketing campaign hadnt quite started and most of their subs except for the cheesesteak, Pastrami, Turkey Ham and some others were 5$ or less. Not only was a Tuna 5$ or less but you got four scoops per six inch as opposed to the current three and three tomatoes as opposed to the current two. Assuming the tuna is the most costly item in the sub and a current price point of about 6.40$ per foot long its safe to say prices have inflated a bit more than the CPI would let on. Another excellent example of monetary inflation is the price of precious metals. old and silver prices have skyrocketed, considering there have been no major supply disruptions its pretty easy to say the dollar has fallen dramatically in value compared to these commodities. 
But even with this inflation were still not looking at insane levels of monetary devaluation. So to truly answer this question we need to look deeper at the why. There are a few key reasons the first is globalization.  Much of the created notes have been shipped overseas to pay for goods and services from those countries as such the economic inflation that should be felt among a group of a little over 350 million individuals is spread through almost 9 billion. As long as our dollar is whats tied to the oil market we can expect our dollars to continue to be traded among foreign nations. 

A second factor affecting the monetary supply is what is being created through its expansion. Created dollars are used to fuel government spending and government spending is used to fund projects that no sane individual would pay for with their own money. As several studies have found government spending does not lead to an economic multiplier every dollar spent generates less than a dollar in economic output. while there is debate as to what this factor is in the end it is always less than a dollar producing a dollar. In short as government finances poorly performing technologies it destroys dollars worth of economic value.  

Now several people have shown that there is no drastic inflation of the number of physical dollars in circulation. This is not so true for digital currency which has shown a massive jump since 2008. As such there is no visual surplus of physical dollars and thus no drastic inflation that is tied to a physical dollar. What this demonstrates is th most important factor in economic numbers is how much we believe in it. If everyone thought there was too much money then the inflation of the dollar would be incredibly rapid, but as long as someone is buying US debt and someone doesn't care about the fed irresponsible fiscal policy can be continued. 

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