The False Definition of Inflation
By
Monty Pelerin, posted December 4th, 2009 http://www.economicnoise.com/2009/12/04/the-false-definition-of-inflation/
W. C. Fields
“How is the human race going to survive now that the cost of living has gone up two dollars a quart?“ W. C. Fields
“Inflation is when you pay fifteen dollars for the ten-dollar haircut you used to get for five dollars when you had hair.“ Sam Ewing
Despite
the humorous quotes, inflation is a very serious matter, but one not
well understood. Confusion regarding the definitions of inflation and
deflation are widespread. The correct definition of inflation is, and
always has been, an increase in the money supply. Deflation is a
decrease in the money supply. (Economists, however, differ as to what
is meant by the money supply.) Changes in the money supply eventually
reflect in prices. As Walter Wriston observed: “Rising prices or wages
do not cause inflation; they only report it. They represent an
essential form of economic speech, since money is just another form of
information.”
Today, most people think the definition of inflation is rising
prices. Defining inflation as rising prices is akin to defining cancer
as a high temperature. Treating the high temperature does not cure the
patient, just as “treating” rising prices or wages does not cure the
economy. The usual political treatment, wage and price controls, is
actually worse than the disease itself.
The false definition of inflation is not accidental. By Orwellian
diversion, politicians crafted this definition. For their purposes,
redefinition was essential. Defining the disease in terms of its
symptoms, enabled blame to be put on “greedy” business, labor and
consumers. It absolved the real culprits, the politicians themselves,
and the revisionist definition had secondary benefits. It created both
an “enemy” and a “crisis,” a winning “twofer” for politicians. It
created the perfect political situation.
In 1966, Jesse Unruh declared: “Money is the mother’s milk of
politics.” Today, “inflation” is the mother’s milk. Politicians are
addicted to inflation. It is their modus operandi, their
source of power and their route to re-election. Inflation enables
“Government as Santa Claus.” It allows vote-buying via “free” programs,
not paid for by increased taxation. Inflation enables the myth that
Government has money and resources. That myth was sadly on display
recently in Detroit where a citizen, when asked where handout money
came from, answered: “Obama’s stash.”