Inflation of prices, deflation of policies

octobre 10, 2019 0 Par Michel Santi

So you think you understand inflation? Allow me to correct you because it is in no way the result of an unreasonable expansion of the money supply that translates into a rise in prices. This clichéd term of “inflation”, used unscrupulously by the detractors of central banks, by the prophets of misfortune whose commercial stock comes by announcing day in day out, in articles and interviews, the hyperinflation that will inevitably be brought about by the current level of interest rates: this term is in reality void of all meaning precisely because every school of thought slaps a label on it.

This is how we, with indifference, conveniently place in the same easy category – as if to scare us and maintain this paranoia – everything that is likely to see an increase in prices, for want of being able to define the boundaries of what inflation is. Milton Friedman is closely linked to it, he who – thanks to his famous line “inflation is always and everywhere a monetary phenomenon” – actively contributed to locking us into a restrictive and biased interpretation of inflation. For those who went through the very high inflation of the 1970s, inflation is always and everywhere brought about by the upward spiral of prices and wages. But the Germans, and more generally the Austrian School, thought inflation is always and everywhere the result of central banks borrowing too much money. And the sirens of rolling back state powers, the neoliberals, for their part reckon that inflation is always and everywhere the punishment inflicted by the economy and by the markets on governments that borrow and spend too much. And the fanatics for gold and the detractors of free currency fluctuation attribute inflation always and everywhere to devaluations. And those versed in Modern Monetary Theory maintain that inflation is always and everywhere the result of poorly allocated resources and labour.


It’s not just the measuring of inflation that’s problematic because, besides the numerous indexes that measure the various and diverse components of it, the volatile price scales of certain goods and products impart on inflation an appearance of instability that contributes to fomenting anxieties. It goes without saying though that our consumer habits change a lot, technological progress contributes to price slumps, and other products occasionally get more expensive because of cosmetic improvements… As for these official inflation indexes, they don’t even take into account stock market booms, while the central banks were castigated for the outbreak of the subprime crisis…

We therefore don’t really understand inflation: the interpretations of it diverge and we also don’t have reliable measurements to show us its development, without any ambiguity and political manipulation, even if we expect our central banks to cultivate an infallible mastery of it so as not to endanger our savings. In fact, this demand implies at least intuitive recognition that inflation is a phenomenon that can be handled, managed, by our governments and economic leaders: a perception that is not far from reality since hyperinflation is a disaster that comes about when the populace loses confidence in a currency and refuses to carry on using it as a means of exchange.

Hyperinflation is thus not the systematic and natural consequence of an increase in the money supply, because it manifests itself as soon as the citizen-consumers no longer believe in their governments’ abilities to maintain their purchasing power. Hyperinflation is therefore an erosion – a destruction, even – of the value and confidence granted to our banknotes due to the incompetence – even corruption in certain cases – of our leaders. It is, in other words, the errors and failures of the powers-that-be that are dragging us towards social disorder and economic chaos, and that undeniably cause inflation, rather than such and such other measures taken by a central bank.

Inflation is, in summary, closely correlated to the credibility of our governments and not – as the deficit-fetishizers neverendingly repeat – proportionate to public debt. This is why, having a terrible track record of economic irresponsibility, Venezuela,will much more easily be subject to hyperinflation that the US that has always honoured itsduties…Inflation is therefore always and everywhere a question of confidence.