This much I do know.  Using the bls.gov inflation calcuator $100 in 1972 (since Nixon removed us from the last vestiges of gold Aug, 15, 1971, the first full year free from the “barbarous relic” would be 1972.  That would give us a better idea the perils of fiat money.) has the same buying power as $516 today.  That’s hyper inflation by any sensible standards.

Let’s not forget this graph for a moment:


For money to lose more than FIVE TIMES its value during the course of my lifetime is hyperinflation and wealth destruction of an order of magnitude unseen in the country’s history.  However, I wanted to investigate somethings further.

Now, what piqued my interest was that the 80’s and 90’s were rather unique in the technological changes that occurred.  (Of course, that did all come crashing down with the massive bubble in the 2000’s and the terrible malinvestment.  And we wonder why growth has stagnated!!)  Technology increases productivity and lowers costs of production.  We hadn’t seen anything like that type of real economic growth since the 20’s (which was also destroyed by a fed induced malinvestment bubble.  Gee, who said history repeats itself???).

So, I wanted to cut down some time frames and look a little deeper into the inflation.

The first thing I looked for was productivity.

productivityUnfortunately, the data only goes back to 1986.  But you can see why I will choose 1992 as the delineating year on inflation.  From the mid 80’s until 1992, productivity was basically flat.  So, that should give us a fairly decent picture (and remember, I am not a university professor with years to dedicate to research.  Would be nice though!!) although much more in depth and detailed measurement would surely help.  However, I do believe that the overarching picture would only be augmented by such further inquiries.

Now, $100 in 1972 has the same purchasing power as $335 in 1992.  That is unbelievable.  Well, actually it’s not at all when one realizes what happened to our money.  Anyways..

Two decades later and money was worth 30% of its original value.  Granted, the inflation fighting ways of Paul Volcker went far to keeping it from being much, much worse.  Of course that’s like having 100 people swinging sledgehammers and knocking down a wall to only having 40.  Better, but the wall is still being destroyed.

Without the further data to confirm, I would take, for argument sake, the productivity for the entire term in question (’72-’92) to be flat.  Yes, there were oil shocks and such, and it’s probably closer to reality that productivity increased somewhat between 1972 and 1992, but that only serves to illustrate the point further.  Productivity increases dampen inflation, so it would have been far, far more pronounced.

Now that takes us to 1992 to the present.  $100 in 1992 has the same purchasing power as $153 today.  That’s a remarkable turn of events, or so it seems.  That was where I had some serious doubts as to the true nature of real inflation.

Side note: I am referring to inflation as by its general usage, that being a rise in the general price level.  But, Austrian theory is clear on this major issue.  Rising prices are the result of inflation, inflation being the increase in the money supply.

So, I found this rather odd.  In spite of a a huge increase in productivity, we still had significant increases in prices.  Of course this did not apply to every area of the economy.  This certainly was not the case for instance with personal computers.  A decade ago, a decent laptop was priced at $2000, while today one can be purchased for one third that price.  Or less.

Now, that would imply that a decent laptop a decade ago is similar to a decent laptop today.  What has happened in reality with laptop (and all) computing is that a decade ago we purchased a Sopwith Camel for $2000 while today we are purchasing an F16 for a third the price.

So, with an economy more heavily dependent on technology, communication, information, and the productivity gains that this new computing power wields, how is it possible that we’ve still had such increase in prices?  Logic would dictate that we’d see something comparable in almost every sector of the economy.  I’d well expect the petty deflationistas to get ruffled and proclaim that falling prices across the board are a serious problem.  But if our tech companies are not suffering, how then would all companies suffer?  And they’ve prospered in spite of falling prices in their sector coupled with rising prices most other sectors.

Imagine if prices fell across ALL sectors.  Imagine how much wealthier and prosperous we’d be today.

Thus, our productivity gains must have had a tremendous dampening effect of price increases.  In fact, I doubt only but the staunchest of labor theorists would dispute this point.  So, let’s take a moment to speculate on where we’d otherwise the massive improvements in technological and productivity gains.

First, let’s examine (yes that graph again) what has happened to the money since the mid 1990’s.

fed_our_moneyFocusing just on M2 we discover there was a significant increase in money from 1995 onwards.  Had the Fed just kept on the current trajectory, there well may have been “deflation”, but our good Keyesnian overlords wouldn’t allow for that.  So, given the highly inflationary policies of the Fed (which of course DID lead to massive inflation and bubbles in housing and stocks, and thus the terrible bursting) one ought to be shocked that prices only increased as little as they did.

Assuming the relatively flat productivity growth extended out into the 90’s and beyond, what might our inflation looked like then?  That is anyone’s guess, however, if we consider that in just two decades prices tripled, is it unrealistic to argue that sans the productivity, we’d be looking at a CPI over 900?

That doesn’t factor into account the massive increase in money either (more than doubling of the money supply from 1995 to 2008).  Perhaps 900 is a lowball estimate.

All this must be considered in light of more recent trends and proposed legislation.  One, US productivity has not kept up its rapid pace, in large part to pernicious acts like Sarbanes/Oxley.  Secondly, the massive housing bubble diverted untold resources from productive to non-productive ventures for many years.

res_v_nonresFor clarification, that is the graph which shows relative percentages of non-residential (productive) investment to residential (non-productive) investment.  Productivity gains correspond to increases in non-residential, and the housing bubble is clearly evident as well in the huge “bubble” of increased residential investment.  As all those houses and accompanying strip malls sit idle, don’t expect much new productive investment to happen in the near, or distant, future.

Here’s something to ponder:

net-nonresAgain, the data was taken from the bea.gov website, and corresponds to the graph 5.2.6 of the NIPA tables.

So, not only did the housing bubble correspond to a massive drop in productive investemnt, but it also corresponded to a massive decline in NET productive investment.  Net non-residential investment means capital depreciation and replenishment is subtracted out, thus giving us the clearer picture of how much NEW capacity is being created.

Although it is surely increasing as of the past few years, we are still a long ways off from long term trends of real growth.  And here’s where a simple percentage graph doesn’t truly demonstrate the carnage.

investemnt_latestPrivate investment is in freefall.So, any increases in net non residential investment are not only as a percentage, still low, in real dollar terms, they are horrific.

So, we are already starting from a diminished standpoint.  Next, we have to contend with the readjustment and misallocation of resources, the unproductive and unused stock that has to clear.  All this is going to take some time.

Add in to that the massive tax increases that are coming to deal with the debt, as well as crowding out the markets for loanable funds, the nationalization of industry, the cartelization of the financial sector, the major health care overhaul that is surely to drive up the cost of production, and the looming cap and trade environmental burdens on the horizon.  Then factor in things like Employee “Free Choice” and greater union thuggery (unless the O’s giving Chrysler to the unions was a one shot payoff!!  Nope, the UPS deal is coming.)  with all the coming regulations and oversight and bureaucratic nightmares businesses will face.

Out of that scenario it is absolutely impossible to see any type of productivity gains coming, even a fraction of the kind that prevailed in the 90’s.

Then, when you see hat has happened to the money the last year:

moneybaseHyperinflation will be an understatement.

But the good news is that “yes, we can” spend out way to prosperity.


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