How Inflation Picks Your Pocket

Ludwig Von Mises Institute ^ | May 15, 2014 | Dan Sanchez

[Diana in Wisconsin]

In the denouement of the film There Will Be Blood, the antihero Daniel Planview dramatically reveals to his nemesis that he has secretly siphoned away all of the latter's underground oil.

"Drainage!" he bellows, as only Daniel Day-Lewis can, "Drained dry. I'm so sorry. Here, if you have a milkshake, and I have a milkshake, and I have a straw. There it is, that's a straw, you see? You watching? And my straw reaches across the room, and starts to drink your milkshake. I... drink... your... milkshake! [sucking sound]"

Through inflation (expanding the money supply), as I will show, the state and its cronies "drink our milkshake" every day. Only, it does so surreptitiously, with nary a sucking sound to be heard.

[Diana in Wisconsin]

Understandably, everyone would like to see his own personal money supply increase. That would obviously make the individual better off. But does it make sense to conclude from that, that if a whole society’s money supply increased, that the society would be better off?

To use a favorite example of economist Murray Rothbard’s, say an “Angel Gabriel” magically multiplied everyone’s money supply tenfold overnight. Would all of society wake up richer? If so, then that’s great news, because our “angels” in the government have a similar power. Under fiat money, the quantity of money is whatever the government says it is. So if “more money” makes the whole society wealthier, the government can enrich everybody with a simple government declaration.

Say the government increases the money supply by just having people add zeroes to their bills. Isn’t it regrettable, after all, that not everyone can afford a new computer? Some people only have a dollar to their name. To alleviate this situation, the government could just have everyone add three zeroes to their bills. Now everyone has at least $1,000, and can afford a new computer!

But why stop there? Not everyone can afford a private jet. So why not keep adding zeroes until everyone can? Voilà, our society will then be so rich, that we’ll all be zooming across the country every weekend.

Obviously something is wrong with this line of reasoning. When speaking to student groups, to show them what the problem is, I walk them through the following thought experiment...

[Pontiac]

Great article

Thanks for posting.

[Diana in Wisconsin]

:) I thoroughly enjoyed it.

[Deagle]

Maybe you mean that the inflation value decided by the Feds is erroneous and should actually be measured by the real value of money spent by individuals. Not going to happen with this administration - that would be bad for the economy.

Inflation is a value decided by the government, not by actual prices and such. They have decided to remove the cost of food, gas, energy, and other high cost items so that they can say that inflation is really low...(might be a problem with just this administration but doubt it) ha.

[Mr. K]

Why are we hearing NO INFLATION REPORTS???

I know when Odorkwad took office my average grocery bill was $150

Now, with the same general purchasing patterns, I am lucky to get out of the store without topping $350 - 400 and last month for the first time ever I spend over $500 at the grocery store. Granted that was a big day where I stocked up on a lot of meats and stuff but HALF OF A THOUSAND??? And it was less than one full grocery cart.

[TBP]

Of course it does, and many people don’t really notice. That’s why government loves it.

Abolish the Fed.

[DannyTN]

The problems of inflation are real. However, they are relatively small.

The problems of deflation are worse. Deflation causes deflationary depressions.

Losing 2 to 3% of the purchasing power of the cash you are holding is a small problem compared to seeing your dollars increase in purchasing power, but your job and income evaporate. You get a little more with those dollars but then you are quickly broke.

[DannyTN]

By the way, there’s nothing to prevent you from buying assets such as gold, precious metals, real estate etc, that are immune to the inflation in the dollar. These assets may experience inflation or deflation of their own, but it’s not like the Federal Reserve is printing more of them.

Of course those assets aren’t convenient and are often illiquid. The dealer spread on gold will probably cost you significantly more than inflation if you try to cash out within a year.

[Secret Agent Man]

anything meat related has gone up a lot. some items have gone up significantly, and many have both shrunk in weight and gone up in price.

[Diana in Wisconsin]

If you read the other financial threads, I’m a total Gold & Silver Bug. Been in Commodities since I was a teen - back when you had to use a newspaper, a stubby pencil and a wall-mounted telephone to do your trades, LOL!

My allowance? Buy fashion magazines and mascara? HA! It was Coffee and Cocoa Futures for THIS girl. :)

[Diana in Wisconsin]

We raised our own steer last season and shared in 2 hogs with a cousin. We’re doing the same this season. Meat prices are INSANE right now.

Have you priced bacon, recently? I know lard-butt Moochelle doesn’t want us eating that stuff, but just to spite her, I do buy it when on sale. *SMIRK*