Inflation for Snots 1

by Richard Morris

"Did you see that the rock rap massive metal band Snot Heat Ice Tooth is going to Reykjavik, Iceland, and the price of the tickets are so high that it caused a 10% inflation in the country?"

While the names have been changed to protect the guilty, that is the essence of a question put to me when recently dining at a friend's home. "No," I responded, "and the price of the tickets deals with supply and demand. Ticket prices will not cause inflation. Inflation comes from printing money."

When others at the table did not grasp these two elementary economic concepts, it was time for an explanation in simple, non-economist, everyday language without all the nuances often inserted into a technical answer.

The Study of Scarcity

Let's start with a classical definition: Economics is the study of the use of limited resources that have alternative uses.

In a society, how do we allocate our labor, our money, the show tickets, or anything else? People always want more than the actual resources available. More people want to go see Snot Heat than there are seats. And virtually any resource can be put to many alternative uses. For example, an almost limitless number of products can be produced from petroleum.

The fundamental question is simple: What system should we use to allocate resources? The basic choices are either orders from the government, or, the free market. There is no other choice-even though some would like to pretend there is by applying price or government controls.

Either the government says who gets tickets to Snot Heat. This is the Aristocracy of Pull (whomever you know or can corrupt to get a ticket for you). Or, the people who want to attend bid for the tickets, and the highest bidders get the tickets. This is supply (the limited resource being the number of tickets available) and demand (the number of snotties who want to attend). Either system leaves a whole bunch of little snots without tickets.

Now let's pause and look at inflation. Inflation is typically defined as a general increase in the prices of goods and services. Like the tide coming in and lifting all boats, inflation causes the prices of everything to go up.

In days of old, a couple thousand or so years ago, money was coins, and gold became the standard metal.

To illustrate: Let's assume society has 1,000 gold coins of one ounce each, a total of 1,000 ounces. But some clever bad guy named Dirty Duke figured out he could drill into the rim of each coin and remove 20% of the gold, then smooth over the edge so nobody could tell he did it. People would think there were only 1,000 ounces in circulation, but Duke added the 20% (200 ounces) he drilled out, so the money in circulation is equivalent to having 1,200 coins in circulation.

Did Dirty Duke create any new resources? No. He created no new wealth.

Besides, wealth is not money. Wealth is what is produced and consumed. As Elon Musk put it, wealth is "stuff."

Duke did not make any new stuff. But, his action meant there was now more money to buy the existing stuff (limited resources). At any moment in time, the amount of stuff is fixed. You can make more stuff later, but the supply is fixed at any particular instant.

Just as the high bidders get the Snots tickets, Duke can use the additional  money to outbid others for the stuff he wants. Those who cannot bid as much as the high bidders, like the Snotties who did not get tickets, go without stuff.

Those who sold stuff to Duke now have more money, and they can go buy stuff they want, and the higher prices filter their way down the chain. That is how we get a general increase in the prices of goods and services. That is called inflation.

Unlike the tide that lifts all boats simultaneously in the harbor, inflation is more like a distant estuary and it takes time to fill. Likewise, inflation spreads in a ripple effect. Early receivers of the new money (friends of the government) spend more and bid up prices. The later receivers face rising prices, but their incomes either remain unchanged or they increase but at a slower rate. People at the low end of the income scale suffer the most.

Then the government learned the coin trick and began to make coins of lesser weight, but with the same value imprinted on them. And, to discourage any competition in pilfering or counterfeiting by the likes of Dirty Duke, the governments put knurling on the edges to make the drilling obvious. To this day, governments do that and claim the integrity of their coins-even though modern coins have no intrinsic value like gold does. Just another con added to the list of government cons. After all, who will drill into a coin to extract worthless metal?

Then came a bonanza for kings, emperors, sakes, sheiks, and presidents: the printing press. The Dirty Dukes printed money, too, but they could not declare it to be "legal tender." Legal tender is a form of money that the government dictates is satisfactory payment for any monetary debt. But it has no intrinsic or fixed value and is not backed by any tangible asset, such as gold or silver. It is called fiat money.

The founders of the U.S. were aware of the fraudulent practice of fiat money, and to prevent it from happening in the new country, the Constitution provided that only gold and silver shall be money. That was an error. They should have picked one and said something to the effect that one grain of gold is worth one dollar. (There are 480 grains to a Troy ounce.)

If they had done that, or if the United States government had not violated the Constitution and printed fiat currency, there would never be inflation. Period. It is truly that simple. It has nothing to do with tickets to the Snot Heat Ice Tooth concert.

How do we measure inflation? Here's a shocker, it's not the Consumer Price Index. That's a sham. We can calculate the ocean's tide because it does not involve anything other than the height of the water. But not so with inflation.

Economist Murray Rothbard said it best: "Any concept of average price level involves adding or multiplying quantities of completely different units of goods, such as butter, hats, sugar, etc., and is therefore meaningless and illegitimate. Even pounds of sugar and pounds of butter cannot be added together, because they are two different goods and their valuation is completely different."

Trying to measure inflation by adding up product prices is not accurate. To make matters worse, in compiling the Consumer Price Index, the government arbitrarily decides what goods and the weight given to each. But, alas, it is our only tool, and it gives people a clue.

So, following the teachings of Niccolo Machiavelli, that politics have no relation to morals, all governments now print fiat money.

Anyone over the age of forty can easily remember that the price of everything in terms of fiat money is higher today than it was twenty years ago. The rising fiat money tide is not a natural phenomenon. It is solely created and controlled by the government printing the money. That is why inflation varies among fiat money-issuing countries.

Not only could inflation not occur in the free market, the value of money would increase for reasons beyond the scope of this article. The money you put in the bank or under your mattress for your old age would be worth more later than it is now. Let that sink in.

Because most people genuinely don't know it, the fact needs emphasis: The government, through the Federal Reserve, is the only reason inflation exists. Our money is under the Fed's complete control, and fiat money inflation always occurs when government entities want to buy votes and approval.