Once it has finished its initial acceleration, and has reached its steady speed of about 30ft/sec, you can juggle in a descending elevator just like you would standing on the floor waiting for the elevator. Seen from outside, your upward toss of maybe 15ft/sec would be revealed as not an upward toss, but a reduction in how fast the ball is descending, but from inside the elevator, it still looks like an upward toss. Looking at inflation only from the perspective of consumer prices can lead us to a similar deception. Government economists speak of the dangers of deflation and assure us that inflation is well under control, but is that true?
A currency is stable when the money supply keeps pace with the growth in goods and services produced within the country. But with millions out of work and businesses cutting back across the country, can we logically agree that our real output of goods and services is keeping pace with the real money supply? (M2 graph from Wikipedia) Of course not. Our output of goods and services has declined since 2007, while money supply, through loose credit and Federal Reserve actions has grown at record levels. Monetarily, we are in the midst of an inflation not seen since the Carter administration.
So, why don’t we see the wage and price escalation we associate with inflation?Because we aren’t looking outside the elevator.
Prices are set by supply and demand, and demand is so low, due to high unemployment and low consumer confidence, that prices cannot rise. Businesses can’t raise prices, so they just don’t grow or produce at capacity. They can’t, because outside the elevator, the costs of production are visible to them. Prices for gold, industrial metals, oil, and other nation’s currencies,which allow us to see outside the elevator, are rapidly rising.So, the monetary inflation which is taking place is, for now, expressed in high unemployment and low growth instead of rising prices, because US businesses cannot sell their wares at prices which make it worth producing them.
As soon as we get any measurable real recovery in our economy, the trillions of dollars of capital business is sitting on, out on the sidelines, will come out and that hidden inflation will be expressed in more traditional measurements such as prices and wages. But by then it will be too late to properly manage that inflation, as it will have already occurred.
So, how did we get into this mess? John Maynard Keynes advocated leveling out the highs and lows of the business cycle with government spending to stimulate aggregate demand in the lows to encourage full employment, but he also advocated generally frugal government and paying off government debt in good times. The Pseudo-Keynesians who have been the darlings of both major parties for the last 30 years have instead engaged in constant stimulation of the economy, in good times and bad, with only the means of stimulus changing with the change in majority status.
These policies of eternal stimulus, primarily through the actions of the Federal Reserve, have left us with a money supply which bears no relationship to the country’s true wealth or production.
But like juggling in that elevator, sooner or later, the car stops and you return to the real world.