Montek... And The "Magic Bullet"

Montek, Sonia’s chhota ustad at the Planning Commission, has opined that “there is no magic bullet to cure inflation.”

Since inflation and monetary policy are now “poll issues” (see earlier post) this statement from a former IMF man must be scrutinized using sound theory.

What is inflation?

How is it caused?

What are its effects?

We will briefly deal with each of these important questions.

First, inflation is a disease of the currency. A steady rise in ALL prices should correctly be seen as a steady fall in the value of the currency.

The cause of inflation is government monopoly paper money enforced in all market exchanges by “legal tender” laws.

The “magic bullet” to get rid of the curse of inflation is “currency competition”. In such a scenario, gold and silver coins would be privately coined and circulated, and notes redeemable in these coins would spontaneously emerge. Irredeemable paper money would be hounded out of the market.

The biggest gainers under such a regime of “sound money” would be the poor. Let us see how:

The effects of inflationism must be understood over a stretch of Time. There is no direct, proportional mathematical relationship between the quantity of money and the “price level”; indeed, there is no “price level” at all. The “rate of inflation” is statistical nonsense.

To “understand” inflation, we must see who first get to spend “new money” and who get to spend it last – after a long period of Time has passed.

The money is first spent by the government, their contractors, and those who get big loans from the cartelized banking industry. This is what happens in the first period of Time, when prices are relatively unchanged. This “new money” enables these privileged few to purchase real goods and services at “old prices”.

Now, prices start rising slowly, first of those goods that the new money is spent on, and then gradually the value of money falls – what is a “general” rise in all prices. This is what happens over the second period of Time.

The third period of Time opens with the daily wage earner getting some of this new money to spend (via the National Rural Employment Guarantee Act!). But, while his wages have not increased, the buying power of his wage has fallen. He thus purchases fewer goods from the market than he otherwise would have, if the value of the money had not fallen.

There is thus a “redistribution of real wealth” that accompanies inflation: real goods get transferred from the poor to the government and its hangers-on and from savers to borrowers. The government often claims to “encourage saving”, but when it inflates it actually encourages borrowing, thereby destroying the character of the business community – who should be the biggest savers.

The key point to note is this: When the government increases the total paper “claims to property” (which is legal tender paper money) without increasing the properties themselves, all that can result is a redistribution of those properties.

No “economic stimulation” occurs.

Rather, this is how the poor and those who save lose heavily.

This is how and why the poor get poorer.

So there, Montek!

We have the “magic bullet” and are now looking for the “magic gun” to shoot it from.

Currency competition will finish off the curse of inflation - which is caused by central banking based on Keynesian poppycock.