The Times of India today carries a leader article on inflation by Bhaskar Dutta, professor of economics at Warwick University.
After reading the article I have decided never to send my son to this university; that is, of course, if he ever decides to go to university, since I have always advised him against formal education – especially in Economics.
Dutta must be a teacher of that fiction called “macroeconomics” – or has suffered being a student of it, thereby destroying his ability to see that inflation is a purely monetary phenomenon, caused by the abundance of fiat money, and the fractional reserve banking system, which creates credit out of thin air. The cause of inflation is excess money – not fewer goods.
Dutta thinks otherwise. Take these lines from the piece:
“Very simply put, the world economy is just not producing enough to satisfy rising world demands. Some time ago, President George Bush earned instant notoriety because he quite naively (but why expect anything else from him?) blamed China and India for the rise in food prices. However, there is a grain of truth in his statement.”
Actually, if inflation today is a “global phenomenon” the cause must be global money – especially US dollars.
Yet, from the USA there is an observant and intellectually incisive article by a well-taught schoolboy on how the copper in the US penny is worth two pennies – and the implications thereof.
And here is another on how these pennies are now going to be coined in steel.
We already have steel coins in India – for quite some time now.
Dutta favours more direct subsidies on food.
I favour “sound money”.
To me, “macroeconomics” is nonsense upon stilts.
Read my “Funny Money” – also from The Times of India, a year ago.
Monday, June 23, 2008
Inflation: Two Views
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A fall in supply can never be a cause of the general rise in prices we have now.Whatever be the popular perception,in reality,the tendency has been that the supply increases each and every year.If so,the real effect has to be that the prices should fall every year.In fact, the impact of rising supply has been so overwhelming that in United States,prices have fallen every year from the mid half of the eighteenth century to 1940,with the sole exception of Napoleonic wars ,Civil war and World War I.It was only during the wars when Governments ran the printing press at full blast that the prices had to rise.There was of course,paper money in those days,but the exceeding supply offset those increases in paper money.
ReplyDeleteEven in cases when supply has come down,as in Chile in 1970’s and Uruguay in 1960’s the role of falling supply has been minor in the price rise.The supply had only fallen to a certain extent,but the prices rose thousands of times.Moreover,if we take falling supply as a cause for general price rise,it would imply that the supply has been falling through out every year,as prices have been rising at an amazing pace.That would imply the general disappearance of human civilization,which obviously isn’t happening.Such an analysis would make it obvious that the falling supply is not the reason and something else is wrong.
It should also be taken in to account that supply would fall if there is an extreme rise in aggregate demand.It means that supply would fall with an increase in paper money,which obviously is one of the causes for a fall in supply in many of the cases.Every time an inflation occurs,people scream that there is a fall in supply going on.It is so ridiculous and it would be worth pointing out that in Germany of 1923,after priced had soared hundreds of billions of times,high officials and even the people were blaming it on the shortage of goods and at the same time foreigners were buying German products at a price lower than what would they have had paid in their home country with their own currency or gold.Even in conditions of war,we do not see a general rise in prices due to a decrease in supply.
Some Indian Economists with inadequate knowledge of the subject,like Swaminathan Anklesaria Aiyar were pointing out that inflation is not always a monetary phenomenon and in India,inflation has always occurred after major droughts.But,it is well known that the prices have been rising continuously in India for the past several decades.His argument would imply that there were droughts continuously and material civilization is slowly disappearing,which,obviously isn’t true.It should be apparent now that it is utterly illogical to blame inflation on droughts and famines.It should also be kept in mind that famines are created by Governments.
A fall in supply also can’t explain the debtor/creditor effects of an inflation.During an inflation,the debtors gain at the expense of creditors.A fall in supply of goods can’t explain this.Only an exorbitant rise in the amount of paper money can be an adequate explanation for this.Moreover,the argument that a fall in supply is the cause of inflation would imply that a rise in supply would lead to deflation and depression.It is obvious that a rise in supply would lead only to prosperity and this alone would be enough for us to reject a fall in supply as the cause of inflation.