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The Berenstain Bears is a collection of “First Time Books” with a devoted following among young kids, along with parents who used to be young, and who used to be devoted readers of the series. The books seemingly cover everything, including the Tooth Fairy aspect of losing a tooth.
When Sister Bear feels her first tooth loosening, she begins to contemplate with excitement the dollar she expects the Fairy to place under her pillow. From there, she imagines the various toys and sweets that she’ll be able to purchase with her dollar.
Without a hint of hyperbole, Sister Bear’s thoughts about a dollar and what it might command in the marketplace provide more insight into money than readers will find in just about every economics opinion piece, report, and book on earth. Money isn’t on its own wealth as much as it’s an agreement about value among producers that facilitates the exchange of goods and services. Broadly accepted “money” means that the vintner can purchase bread from the baker even though the baker only desires the butcher’s meat.
Applied to Sister Bear, she desires a dollar precisely because the latter can be exchanged for real goods and services. Looked at through the eyes of Sister Bear’s parents, along with parents the world over, they don’t earn dollars, pounds, yen, yuan, euros, francs, and all manner of other currencies as much as they earn what those monetary units can be exchanged for.
The challenge nowadays is that without exaggeration, an overwhelming majority of PhD economists believe that devaluation of these monetary units is the path to country prosperity, and politicians aren’t too far behind them when it comes to a belief that is tragically obtuse. Even though the people are the economy, and the people earn money with Sister Bear-like visions of what they can exchange money earned for, economists and politicians have this fancifully cruel belief that the economy is improved when money is losing value. Which is why you’d be better off reading the lead up to Sister Bear losing her first tooth as a path to learning about money over the endless self-serious books on economics that give life to idiotic.
Thankfully Steve Forbes, Nathan Lewis and Elizabeth Ames are nothing like the PhDs who hide behind charts, formulas and other non sequiturs to obscure their non-knowledge of money. Women dress for women, stalked-by-fallacy economists write for fellow economists similarly stalked by fallacy, while Forbes, Lewis and Ames write to enhance understanding. And while there’s some disagreement with the authors about the causes of inflation, with their new book Inflation: What It Is, Why It’s Bad, and How to Fix It, they provide readers with a highly useful resource when it comes to comprehending inflation that is always and everywhere economically harmful. Better yet, they do so in a way that won’t have readers scratching their heads.
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The authors, like your reviewer, believe deeply that when it comes to inflation, “confusion reigns,” and worse the “misunderstanding of money” that is a major driver of utter confusion about inflation “has led to countless disasters that have disordered lives and societies.” Which is the why behind their book. Doctors of economics have so perverted inflation’s meaning that they’ve actually rendered it meaningless, or at the very least they’ve made it invisible when it’s evident, and highly visible when it’s not. If you doubt this, stop and listen to the commentary of just about any economist the next time it’s reported that economic growth is robust. They’ll almost to a man and woman conclude inflation is on the way. You can’t make this up!
Inflation is an antidote to all the foolishness. In the words of the authors, their book is “a plainspoken discussion of why inflation happens, and why, contrary to the insistence of so many in Washington, DC, almost any level of inflation is ‘bad’ for both the economy and for society.” Amen. Implicit in the view of economists at the Federal Reserve (the largest employer of economists on earth….) that 2% inflation is a necessary ingredient to economic growth is that a gradual shrinking of the dollars earned by the individuals who comprise the economy actually boosts the economy. Again, you can’t make this up.
That you can’t speaks loudly to the difficult job the authors have. They’re certainly correct that true inflation and its horrors can be explained in “plainspoken” fashion, but oh my do they have a lot of misinformation to overcome care of the doctors of the alleged science that is economics. To become acquainted with the confusion of the credentialed in economics is to never visit a medical doctor in the same way again. It’s hard not ask if the doctor examining you is duped by fallacy as much as the doctors of human action are, and who don’t understand that it’s human action they’re supposed to be shining a bright light on. You see, human action can’t be understood via formulas and charts. Economists will stick to the latter. They’ve got fellow PhDs to impress.
Meanwhile, Forbes, Lewis and Ames write to help you the reader. They crucially take the reader back to first principles. Money, “first and foremost, is a measure of worth. To fulfill this role, and for markets to function, its value must be stable.” There you have it. More useful information in those 22 words in quotes than you’ll find in voluminous reports from the U.S. Treasury, Federal Reserve, and any faculty lounge the world over.
Money is just a measure. That’s it. But it’s a crucial it. What’s so basic is broadly misunderstood, and has been broadly misunderstood for centuries on the way to the aforementioned “countless disasters that have disordered lives and societies.” Readers can hopefully connect the dots, even by now. We once again earn money for what it can be exchanged for. If there’s ever a question about this truth, just think of Sister Bear and what she imagines getting for her dollar. While money’s definition is simple as a measure of worth, governments have been altering the measure of worth for millennia; most often by shrinking it. Is it any wonder, by extension, that devaluation has “disordered lives and societies”? When government tinkers with the measure, or viciously shrinks it as is so often the case, the people who comprise the economy see the value of their work taken from them. In other words, the theft that is inflation has a tendency to thoroughly anger its victims. Get it?
All of which brings us to an essential truth about inflation. It’s not necessarily “rising prices.” Goodness, a near-term supply/demand mismatch for a certain good can cause a price to spike, so can a change in consumer preference, not to mention that the imposition of command-and-control (think the tragic lockdowns in response to the coronavirus) can vitiate longstanding commercial cooperation of the global kind on the way to slower, more expensive production processes. What’s important is that none of the previously mentioned price events are inflation. Are you listening, neo-inflation hawks who “coincidentally” saw no inflation when the dollar sharply fell against commodities and currencies in the first decade of the 21st century? In the words of the authors, “non-monetary inflation” is “not what we’re writing about” in their book, and that’s good because “non-monetary inflation” isn’t inflation. We all intuitively know this truth from our own shopping: if your spending power is limited to $50 at the shopping mall, you can’t buy anything at the Gap if you purchased a doll at American Girl for $50. In any economy, consumption is about tradeoffs. If the price of a doll is soaring, by definition we have fewer dollars for other goods and services. Long story short: a rising price for one good signals a falling price for another, less desired good.
Basically there’s an ocean of difference between rising prices and inflation. Prices rise and fall all the time in a market economy. To quote Lewis from an earlier book of his, prices are how a market economy organizes itself. Looked at through the prism of the present, economists, pundits and politicians who haven’t a faint clue about inflation tie the latter to rising prices. No, this is a mistake. As the authors properly put it, “higher prices are the effect of inflation, not the cause.” Yes! Inflation is a shrinking of the measure; in our case the dollar. With true inflation, money prices rise for reasons unrelated to supply/demand, consumer preference, command-and-control, and anything else readers can imagine. Just as most of us would suddenly stand above 11 feet tall if the foot were cut in half (without growing an inch), so do prices have a tendency to broadly rise when the measure of worth that is money is shrunken.
The challenge yet again is that the truth about inflation has been separated from the parallel universe in which so many economists, policymakers, and pundits reside. And it’s long been as evidenced by always and everywhere avoidable currency disasters that are as old as money is. The main thing is that the economy is always the loser in these scenarios because the people are once again the economy.
As the authors put it, when “money is no longer a reliable unit of value,” society is frayed. Money is what ties producers together the world over. Instability of the unit tears away at the ties, and as the investors who create all jobs seek monetary returns in return for their intrepid commitment of capital to ideas, they too have reason to pull back when confusion about inflation’s truth brings on inflation. To shrink measures of worth like the dollar is to tax the very investment that drives productivity and progress. Yes, inflation is a tax on growth. No wonder economists encourage it.
Worse, inflation is more than the cruel shrinkage of the exchangeable value of the money we earn. Arguably inflation’s cruelest, but least “sung” demerit is that it’s a tariff on the very trade that facilitates our individual specialization. When we can work for dollars exchangeable for the goods and services we desire, it enables us to relentlessly focus on work most commensurate with our unique skills and intelligence. Money doesn’t stimulate as much as when it’s stable as a measure of value, it sets us up to import as much as possible so that we can produce in uniquely specialized fashion as much as possible. But not if the money we earn isn’t trusted. If it’s not, as in if it’s routinely being devalued, we’re logically not able to import as much simply because fewer producers will provide goods and services for dollars that might not command equal value in the marketplace. In short, when we’re “importing” less we’re specializing less, which means we’re less productive. Inflation is a tax on our production. And a cruel one at that.
So what causes inflation? This is where some disagreement arises. About the disagreement, it should be made clear that particularly within the crowd favoring stable money, what the authors contend is wholeheartedly agreed with. In other words, if readers are looking for the “fringe” character in this analysis, it’s your reviewer. Rarely do I agree with the consensus, and the consensus within the stable money crowd about the causes of inflation falls short in my mind. Readers can decide.
While there’s total agreement that inflation is the devaluation of money, Forbes, Lewis and Ames write that money “loses value when there’s too much of it.” And on the following page they write that the “value of a currency” is “ultimately determined by the ratio between supply and demand.” The view here is that per the inflationary episodes they describe in their book, “too much” money is the logical corollary of the actual inflation. There’s only “too much” money after the inflation, as opposed to the latter existing as the cause. Think about it.
Money is devalued when it’s “clipped” as it were. As the authors put it, the “very first coins” reached the market in Turkey in 7th century BC, only for those coins to lose value when it became apparent that they “did not contain the gold and silver indicated by their face value.” Considering the Roman Empire’s “money,” the authors write of its silver coins that eventually “contained only 4 percent silver,” while they report that in 16th century England, the country’s “once-reliable silver pennies were depleted of about two-thirds of their silver content,” thus sending prices skyward. In each instance the devaluation takes place first only for money that’s worth much less to suddenly become excess in supply. Which is what we should expect. Inflation, then excess supply.
Precisely because producers use money to move goods and services back and forth, they’re at their core engaging in barter. Which explains why heavily circulated money is money that best holds its value over time. With perfect money barter is just that, while bad, untrustworthy money soon enough ceases circulating simply because producers lose trust in it. Good money can never be oversupplied.
The authors routinely and surprisingly mention so-called “money supply,” but as their arguments at times indicate, “money supply” is of no consequence if the money is trusted. Switzerland is among the excellent examples used by them. “With a population of just less than nine million,” Switzerland has “eight times more base money per capita than Canada, whose population is nearly four-times the size at thirty-eight million.” What’s the difference? Switzerland’s monetary authorities have long protected the franc. That’s been policy. Somewhat similarly, the authors note that “the base money supply of the United States increased by an estimated 163 times” between 1775 and 1900.” Too much money? No. The policy was a dollar defined in gold, and since (per the authors) gold’s “intrinsic worth throughout history has remained largely unchanged,” so-called “money supply” was immaterial to the dollar’s fixed price in terms of the world’s most stable commodity.
Thinking more expansively about the dollar’s gold definition, the notion that money loses value “when there’s too much of it” implies that right up until 1971, U.S. monetary authorities actively (and expertly) fiddled with “money supply” to maintain the dollar’s price. But they didn’t. There was no need. The dollar was defined as 1/35th of a gold ounce. That’s it. Then the definition was severed. Is it any surprise that delinking the dollar from gold resulted in a relative oversupply of dollars? Obviously not. The dollar was less perfect post-Bretton Woods as evidenced by the rise of gold as measured in dollars from 1970-74. The authors note that the increase was from $35 to $175. That there were subsequently too many dollars is and was a statement of the obvious. Of course there were. Dollar policy had changed such that dollar-price stability was no longer the currency’s defining quality.
Crucial about the above disagreement is that it’s rooted in the information conveyed by the authors. Along similar lines, the authors write halfway through Inflation that the latter occurs when “central banks devalue money,” but as their history of inflation (from Turkey to Rome to England, etc.) makes abundantly clear, currency devaluation is as old as money is. In the words of the authors, “Currency debasement has been called the world’s second-oldest profession because it has been around since the invention of money.” In other words, central banks were extraordinarily late to the inflation story, and as such, arguably don’t rate near the attention the authors give them, if any. Central banks are just outsourced arms of government as is, which means yet again that government devalues money. Always. This also calls into question the authors’ assertion that the Federal Reserve funds Congress’s spending. An arm of Congress couldn’t fund Congress, but the U.S. taxpayers whose income Congress owns a piece of, could.
The main thing is that when the Fed came into the existence, the U.S. dollar was linked to gold. The Fed’s creation didn’t alter this truth. Subsequent changes in policy under Presidents Roosevelt and Nixon brought on dollar devaluations, but those policy changes engendered passionate disagreement from Fed Chairmen Meyer and Burns. Their disagreement was of no consequence. Roosevelt and Nixon changed dollar policy, and the dollar declined. Currency policy is the story on the matter of money, not central banks that are once again very new to the historical monetary discussion; one that’s once again been defined by devaluation from the earliest of days.
The bigger, long-term problem with a focus on central banks is that it detracts from the policy that the authors plainly want: they desire a dollar that is very stable, and their view is that such a dollar can be had by tying the greenback to the commodity (gold) whose “intrinsic worth throughout history has remained largely unchanged.” On that, agreement is total, at which point the argument that you can arrest inflation by “shrinking the monetary base” loses any kind of luster. Policy changes in the direction of floating money logically lead to “too much of it,” which means the only answer to “too much” money is better policy. As the authors would surely agree, their vision for a gold-defined dollar would result in a surge of dollars in global circulation, and it would because the dollar would be a much better “measure of worth.”
Lastly, on the matter of inflation, an economist by the name of Mark Skousen is cited by the authors on the way to the suggestion that ‘”big banks, commercial interests, stock market investors, Wall Street” profit from inflation. This didn’t sound like the authors. Certainly not Forbes. With it agreed that inflation is currency devaluation, the dollar fell substantially beginning in 2001. By 2008 many of the most prominent banks and investment banks were fighting for their lives, while the stock market was well down. No one gains from inflation. Not even homeowners, even though housing tends to do “best” when money is losing value. It’s true. It does. But per the authors, the gain is illusory as the devaluation of the currency would attest.
Back to the many areas of agreement, the authors helpfully remind readers that “loss of faith in a currency” isn’t an obvious consequence of “budget deficits.” In particular, the dollar experienced a gruesome fall in the 1970s despite federal debt and deficits that “were minuscule by today’s standards.” As always, inflation is a monetary policy choice.
On the matter of wages, they ridicule the mindless notion bruited by a nameless economics professor that a “lack of inflation can create problems for consumers, because when prices fall, wages are likely to fall as well, since firms are earning less for what they sell.” Books. Could. Be. Written. But with brevity in mind, a lack of real inflation is a lack of devaluation, which means there’s little taxation of the very investment that powers productivity growth. Put another way, a lack of inflation is the best way to boost worker compensation simply because a stable dollar reduces a barrier to the very investment necessary for workers to enjoy increased compensation.
Instead of joining the unhinged “Drill Baby, Drill” cheering section that believes oil extraction costless, the authors are clear throughout that the historical oil “spikes” were really nothing of the sort. More realistically, periods of expensive oil have correlated with a falling dollar. In their words, “In the 1960s, oil cost $3 a barrel and oil companies were profitable,” but by “mid-2021, oil cost $75 a barrel, and oil companies could barely get by.” Translated, even if President Biden were President Hannity, the cost of extraction stateside would be too great for an admittedly innovative form of energy exploration (fracking) that is reliant on very high oil prices (meaning, a debased dollar) to make any kind of economic sense.
On the matter of cryptocurrencies, rather than lots of excitement about “sticking it to the elites” and other nonsense, they observe that while “Cryptos may have been invented as an alternative to government ‘fiat’ currency,” and the resulting instability of money devoid of a policy, they soberly note that the crypto forms of money at the moment are “even more turbulent” than the government money forms they’re billed to replace. Even the crypto crowd doesn’t understand money, which is why your reviewer speculates that Bitcoin et al are the Netscapes of the modern currency discussion, and that their instability is a loud signal that we’re very far from the private money frontier.
Which brings us back to the first principles of money about which there’s so much agreement. Money is about trust in the measure of worth. As the authors put it, “When money is no longer a trustworthy measure of value,” promises aren’t kept. Amen. Money flows signal flows of real things, except for when money’s value becomes uncertain. Then people feel ripped off. The authors would like to make money money again, which is why Inflation is such an important read.
Source: Forbes
