By Ronald-Peter Stoferle, Incrementum AG Lichtenstein

Here’s The Truth Governments Don’t Want The Public To See

November 26 (King World News) 

The Austrian School of Economics has provided investors with a new angle for analyzing asset and commodity prices.  In contrast to other economists, “Austrians” do not regard the rising demand for gold, oil, and other assets as the decisive factor behind rising prices.  Rather, we consider the ongoing expansion of the money supply, which in our fractionally reserved banking system triggers an expansion of credit, the main factor of the price increase....

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From a semantic point of view, it is very important to distinguish between inflation and rising prices Inflation describes the expansion of the uncovered money supply, whereas rising prices denote the increase in the general price level.  In general linguistic usage the latter tends to get reduced to the segment of consumer prices.  Inflation is the root cause of the devaluation of money, whereas price increases are just the result of inflation.

Nowadays these two terms are used interchangeably.  This blurred terminology comes with grave consequences.  The linguistic desensitization prevents us from recognizing the cause-effect relationship and as a result keeps us from solving the problem.  Instead, unsuitable measures such as price regulations and nationalization have been demanded in order to fight the wave of rising prices, while in the background inflation continues to be fueled.

Why should money not follow the laws of supply and demand?  Rising supply at stable or falling demand has to lead to falling purchasing power by default.  One thing is clear to “Austrians”: the more monetary units are in circulation, the lower the perception of their quality.  Numerous studies support the notion that there is often a clearly positive correlation between growth in money supply (i.e. inflation as defined by the Austrians) and the subsequent rise in prices.  The following chart shows the relationship between the growth of the M2 money supply (horizontal scale) and rising prices in % (vertical scale) in 103 different countries over a period of ten years.  Clearly, the correlation is high and positive.  According to the graph, an increase in M2 of 40% causes the rate of inflation to rise by 15%.

The following table of the Federal Reserve Minneapolis also highlights this extremely strong relationship.  It shows the correlation coefficient of money supply growth (M0, M1, and M2) and inflation in various regions.

Also, the definition of inflation as rising price levels is problematic merely from a measuring point of view, given that baskets of goods cannot depict all the price movements in an economy.  And lastly, the most disparate goods and services are aggregated under this concept. 1 haircut, 1⁄2 cinema ticket, one 40,000th of a car, 3 bags of potatoes etc.  Adding up this very mixed collection of goods makes little sense.  Besides, quality parameters (1 bag of potatoes does not come with one single price, but with numerous ones, depending on location, quality, kind etc) are not taken into account.  This is why Ludwig von Mises once said that any housewife knew substantially more about purchasing power of money than official statistics could ever convey.

We have criticized the official inflation rates many a time. Since 2003, many European countries have applied the hedonic calculation method.  Let me give you small example what that means: in the case of books, the number of pages, the kind of cover, and the size of the book all enter the calculation as criteria.  In the “pre-hedonic” methodology the prices of books would have increased by 5.5%.  But from the hedonistic point of view, the prices fell by 3%.  On top of that, the price increases of wedding rings enter the model at the same magnitude as those of sausage or cheese.  This may be good news for bigamists, but John Doe will probably consume sausage and cheese more often.

In the US, since the beginning of the 1980s the Bureau of Labor Statistics has “adjusted” the methodology of its inflation model 24 times.  Along with the hedonic approach, the geometric weighting, and the adjustment for intervention, the surrogate approach is dubious as well. For example, if steak becomes more expensive, statisticians assume that instead people will eat hamburgers.  The following chart shows the divergence of the new, official rate of inflation and the former method that was still in use in the 1980s.  This also explains why the real income of the households has been stagnating for years.

“When the government causes the money to deteriorate in order to cheat all creditors, this procedure is politely called inflation.” George Bernard Shaw

But why are inflation numbers manipulated?  The reason for showing lower inflation is elementary.  Numerous expenditures hinging on national insurance, government transfers, the salaries of civil servants, food stamps etc. depend on valorization.  This way, real GDP growth is also revised up, since nominal economic growth is divided by the price index.  Even if we are generally told that “an inflation rate of 2% is healthy”, this still translates into a loss in purchase power of 50% within 35 years.

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