This post is in response to an interesting blog entry from a friend of mine. His words are in bold font.
This post is for all the Austrian, gold hugging, inflation fearing bears who have no idea how or why capitalism continues to increase our standard of living.
Have you got any Austrian economists in mind here? I’ve read a lot of Austrian economists who fear and decry monetary and price inflation (e.g., Peter Schiff, Ron Paul, Tom Woods, Robert Murphy) while retaining a solid understanding of how capitalism drives prosperity.
[Quoting Prof. Mark Perry] Bottom Line: For a consumer or household spending $750 in 1964, all they would have been able to afford was a console color TV from the Sears Christmas catalog. A consumer or household spending that same amount of inflation-adjusted dollars today (about $5,500) would be able to furnish their entire kitchen with 8 brand-new appliances (refrigerator, freezer, dishwasher, range, washer, dryer, microwave and blender) and buy 9 state-of-the-art electronic items (laptop, GPS, camera, home theater, plasma HDTV, iPod Touch, Blu-ray player, 300-CD changer and a Tivo recorder). And of course, even a billionaire in 1964 wouldn’t have been able to purchase many of the items that even a teenager can afford today, e.g. laptop, GPS, digital camera.
Here’s the real bottom line: a person holding $750 in fiat currency in 1964 would not have $5,500 in today’s dollars since, in the real world, fiat money is not indexed to inflation. In the real world, a person holding $750 in 1964 would still have $750 in today’s dollars and would not be able to furnish their entire kitchen with 8 brand-new appliances nor be able to buy 9 state-of-the-art electronic items. In fact, a person holding $750 today would have insufficient purchasing power for a top-of-the-line color TV .
The reality is, a person holding $750 in 1964 in fiat currency has lost 86% of the purchasing power of their money between then and now. That’s the bottom line. Or is an 86% drop in purchasing power inconsequential to one’s standard of living?
Now I’m not saying we couldn’t be doing even better with lower inflation but seriously, we live better today than ever before. At the end of the day does it matter if we only pay income taxes or a combination of income taxes and inflation?
Let’s wait until the next statement to answer the question posed here.
For those unaware, inflation is simply a reduction in the purchasing power of a dollar via theft by the government. The cost of goods and services rise because the value of our money decreases. Think of it this way, if the government deposited one million dollars into every persons bank account overnight would we be any richer? Perhaps the first guy to the store would benefit but that would be about it. Because we haven’t increased our physical production of goods and services the prices would rise to reach a new equilibrium. These higher prices are what we call inflation. The government does this every year a little at a time because they own a printing press and dilute the purchasing power of your money every year.
To be accurate, there are two types of inflation. Monetary and price inflation. The former is a major contributor to the latter and involves an increase in the money supply.
But, more importantly, my friend admits here that price inflation is the outcome of theft. (Obviously, other factors may contribute to price inflation, not least supply and demand forces.)
So going back to his question from a moment ago, he’s essentially asking the following:
At the end of the day does it matter if we only pay income taxes or a combination of income taxes and [theft]?
In a moral universe where theft is wrong and restitution is required when theft occurs, yes, inflation matters. Or are we to simply ignore moral categories because inflation-adjusted scenarios – which do not reflect the real world where one’s money is not indexed to inflation – show that a person can buy more stuff today than in 1964? I hope the answer is self-evident.
