As Inflation Continues to Lose Its Sole Meaning, Liberty Is Lost

History books will exonerate Joe Biden for so-called “Bidenflation.” And that’s not a defense of Biden. Instead, it’s a defense of the meaning of inflation.

For background, we turn to the Cato Institute’s Ryan Bourne. In a review of Isabella Weber’s Anti-Fascist Economics, Bourne rightly critiques Weber’s assertion that producers, responding to higher prices born of the coronavirus lockdowns (among other things), gave businesses “the ‘perfect opportunity’ to raise prices beyond their now-higher cost.”

Bourne wisely asks, “If firms could profitably raise prices at will, why await a cost shock?” His question is the correct one, though he might have added that investors reward the low-cost seller the most as the valuations of Amazon, Costco, and Walmart routinely remind us.

Bourne then adds what has largely been missing from the “Bidenflation” discussion: a rising price naturally signals a falling price elsewhere. Economics is about tradeoffs. In Bourne’s words, “One price – gas - rises, but it is offset by demand and price pressure falling elsewhere.” Yes, precisely. Disappointingly, Bourne didn't stop there in his piece for the Washington Post.

Instead, he pivoted to his own inflation theories. He writes that “Washington ran budget deficits” that increased what he describes as “aggregate spending.” Except that it’s accepted (and true) wisdom inside Cato that governments produce nothing, at which point they can hardly increase demand. Production precedes all demand, which means government-funded consumption only occurs insofar as there’s commensurately less consumption by the productive.

Bourne then adds that “Between February 2020 and March 2022, the money supply grew by $6.2 trillion.” See above. If governments can’t increase demand, then it’s pure folly to presume that central banks created by governments can do what governments decidedly cannot. Money in circulation is production determined. It’s abundant where production is, and scarce where it isn’t as a reflection of the basic truth that products always and everywhere buy products.

About increases in so-called “money supply” care of the Fed, some will surely persist that the central bank “prints.” Except that it doesn’t. If it did, the dollar wouldn’t circulate.

All that, plus it’s useful to point out that during the time when Bourne claims the Fed was inflating through increases in so-called “money supply,” the dollar substantially outperformed foreign currencies on the WSJ Dollar Index. As for gold in dollars, a dollar purchased 1,676 th of a gold ounce in February of 2020 versus 1,900 th of an ounce in March of 2022. Said another way, the inflation described by both Weber and Bourne would have been the first since Pericles in which the currency in question didn’t decline much, if at all.

So, while Weber’s portrayal of inflation reads poorly per Bourne, Bourne’s disappoints too. He ultimately makes a case that “excess demand” care of the federal government brought on higher prices, but governments have no demand.

In defense of Weber and Bourne, prices during the Biden years and beyond certainly rose, but the spikes were all about Adam Smith, not corporations, central banks, or high-spending governments. As Smith vivified so brilliantly with the pin factory visited, the more hands and machines participating in production, the lower the prices as production soars. Only for the lockdowns to eviscerate to varying degrees productive cooperation built up over many decades around the world. It’s hard to rebuild these supply chains. They’re still being rebuilt.

Confucious once said, "When words lose their meaning, people will lose their liberty" Weber and Bourne both fear authoritarianism born of inflation. Your author agrees. Which is why it’s so important that inflation (a shrinkage of the unit of measure) be properly defined by economists.

Originally published on Real Clear Markets.