Interest About Inflation Seems to be Creeping Back

As usual, Paul Krugman has been going on about how we need more inflation. There is no surprise there, as this has always been his position (though one has to wonder how he feels about the woes of Argentina and Venezuela). Christina Romer has always come forward recently to discuss the need to further inflate the currency. Meanwhile, those of us separated from the Ivory Towers are left to deal with the real effects of currency inflation.

Barley. Think about how helpful lower food prices would have been with incomes crashing and people losing jobs. No, rising food prices are exactly what the farm lobby wanted.

Beef. These prices never fell. Looks like we're losing a lot of nutrition, and this is a population that is already starved for quality food.

Iron. Construction was hit particularly hard by the depression, due to malinvestment accumulating in higher goods industries. Think about what wonders lower prices of raw materials would have done to the failing industry.

Meanwhile, inflation rates in Argentina and Venezuela are near 25%. Is your income doubling every 2.8 years to keep up with that kind of inflation, not to mention your investments? Good luck with that.

What is Causing the High Gas Prices

Reading around the mises.org blog, I was looking for posts about oil markets. Specifically, I was looking for posts that tried to answer the contention that speculators are responsible for higher gas prices. The claim is often made that rising gas prices are due to speculators keeping the price of oil high in order to make money. Well, I found some answers to the contention, and I thought that I would post them here.

The first and easiest answer to find is that most of the rise in the price of oil is due to the Federal Reserve. Of course, blaming monetary inflation is not an uncommon phenomenon among Austrians, but it makes sense. Oil is traded in dollars, so when the supply of dollars goes up or is expected to go up, the price of oil goes up. This would be a direct result of inflation. With more bills and the same scarcity, the end result is a higher price.

What I found more interesting, though, was the indirect result of this inflation. Because of the inflationary policies of the Federal Reserve, nominal prices will tend to rise and the average real value of a bill decreases. This means that when you invest a fixed amount at the current time and expect payment in the future, you will get less in real terms than you expect because of inflation. This drives investment in commodities markets because their value will rise in nominal terms when the supply of bills increases. This kind of commodity speculation is not useful, but how can you blame investors for wanting a hedge against inflation? They are just trying to protect themselves. Commodity investment is supposed to be about predicting demand rises and supply shortfalls so that we can conserve those scarce resources better. When investment is driven by a fear of inflation, what is the purpose to the average consumer? But again, blame the government policies for that, not the speculators who are merely trying to protect themselves.

And probably my favorite explanation of all is the short and sweet one provided by someone called the Anti-Gnostic.

–Trillions in new dollars seeping out of reserves?
–Record levels of deficit spending?
–Supply chain disruption/uncertainty?
–Environmental restrictions?
–Competing consumption by government military operations?

–or–

–Speculators?

Must be the speculators.