South Africas 3 to 6 percent wealth destruction target

Lot’s of talk about inflation targeting policies these days but not much thinking about inflation targeting policies.  This mainly stems from not a lot of thinking about inflation period. 

Inflation is exactly what it says, something inflating.  Prices do not inflate.  A price is an abstract entity, a non-physical quality, a subjective relative value.  A price is not a physical thing.  It cannot inflate.  Balloons inflate, infected areas of the body inflate, tires inflate, and lungs inflate (ok, sometimes egos inflate), but prices do not inflate.  

Rising prices is not inflation.

Let me quickly explain. 

Cars don’t drive.  Humans drive cars.  Petrol fuels cars.  Engines power cars. 

Cars get driven, get fuelled, get powered, not the other way around.  Doesn’t it sound silly when someone says, “I saw hundreds of cars driving around today”?  You would generally expect to hear that statement from a little child or from an adult using lazy English or with limited understanding.  When we see cars on the road being propelled forward and backwards we know that this wonderful spectacle does not happen in isolation, but happens because of, in a phrase, human action, and specifically the human application of the laws of physics and combustion energy to material objects.

I’m not trying to patronise you.  This elementary common sense lesson is actually important.  You see, rising prices, like moving cars, are driven by something.  Rising prices are not themselves inflation but are driven by inflation.

So, what is it exactly that “inflates”? 

Money supply.

Money supply is inflated, expanded, added to, enlarged, swelled, or any other name you wish to use.  Considering that the name inflation was first correctly applied to the money supply and not to rising prices, it is strange how it has now been adopted incorrectly to increases in the CPI.  After all, wouldn’t it sound strange, or just plain wrong, to call rising prices “expansion” or “addition” or “enlargement” or “swelling”?

Of course it’s wrong.  It’s a fallacy and a myth.  Inflation is not rising prices.  Inflation is a growing quantity of physical money.  After all, goods and services prices are measured in money, so money is the sole determinant of the price level.

Where am I going with this, is this not just petty semantics?

I wish it were.  This subtle but lethal fallacy is at the heart of one of the most destructive and immoral forces in economics today.  Governments and their central banks are the sole creators of money in our current global economic system.  Governments generate inflation, not ordinary citizens, not businessmen, not labour unions, not speculators, not higher oil prices, not higher electricity prices, not greedy stone-hearted capitalists, not “supply-side shocks”, not demand and supply, not any of that stuff.  Governments and their central banks generate inflation when they create at their discretion new, crisp, cold, hard, money.

Of course, when government makes worthless paper out of thin air, the only way that new paper can acquire any real value is to steal little bits of value from every other piece of paper money in circulation. 

Ladies and gentlemen, discretionary money printing is theft. 

If it takes you and me hard work every month to earn our money, but government can roll fresh notes off the printing press with some ink, paper and the flick of a switch, what does it say about the real value of the money we’re working so hard for?

Picture this: Say I earn R10,000 for doing some really hard work that adds value.  That money sits in my bank or under my mattress and is a monetary representation and store of the real economic value I created.  When government prints up new money, it is however even more destructive than stealing purchasing power value from my notes with its new printed notes.  The act of printing and introducing more notes into the economy actually erodes the real economic value and labour time that the money represents. 

That work I did is in the past, I cannot get that time back. If I were to hold on to my money long enough, eventually government’s printing would steal just about all the value I created and time I spent, and I can never get that value or time back.  It is destroyed.

Therefore, the printing of money out of thin air is a hidden and insidious tax on real wealth creators.  By actually destroying real wealth and stealing away your time, it can only lead to less, not more prosperity.

So when general prices rise across the economy, it is DEFINITELY NOT a healthy sign as most mainstream economists would have us believe, but instead is irrefutable proof that a) government is creating money out of thin air (inflation), and b) government is destroying real wealth.  Wow, are we being conned or what?

TAKE NOTE: An increase in the money supply always and in every case leads to a higher general price level than would have prevailed had there been no increase in the money supply.  There is simply no exception to this rule.  It is an axiom.

When the representative basket of prices of goods and services rises (aka CPI), the origin of that general price level increase is inflation or a higher money supply.

Central Banker Mumbo-Jumbo

Armed with this information our world becomes far clearer and more certain to operate in.  Even more to the point of this article, monetary policy choices become much easier than the pretzeled, convoluted, dithering, contradictory, and dishonest words of the world’s central bankers would have you believe.

Let’s take an example: As recently as October 2009 South African Reserve Bank (SARB) governor Tito Mboweni in his Monetary Committee Policy (MPC) statement said that he was worried about the adverse effect of Eskom’s electricity tariff hike on inflation. 

Now, armed with the information presented above, we can safely say that Mr. Mboweni is either a) ignorant of what real inflation is (unlikely), b) thinks that Eskom controls the money supply (impossible), c) is using Eskom as a scapegoat to print more money out of thin air (possible), d) is trying to mislead the public (also possible) or e) some strange combination of a), c), and d).

Let’s break this down a bit further:  Suppose the quantity/supply of money in the SA economy remains stable (or roughly stable) in 2010.  In other words, the government does not print any new money next year.  Now, let’s suppose that Eskom raises its tariffs across the board by 45%.  Let’s assume that because electricity is such a necessary good, demand for electricity by households and companies only falls a little bit, and also that because Eskom is the sole supplier of coal-powered energy, there is no option to go to a cheaper supplier.

Let’s say this causes households to spend $20 billion more on electricity in 2010.  Let’s also assume that companies spend $50 billion more on electricity in 2010, and the particularly energy intensive producers want to pass these extra costs on to their customers.  Without an increase in the money supply, how will households keep paying for other goods and services with all these cost increases?  Once they’ve diverted income to their own electricity usage, and then diverted more income to those products that have now become more expensive, how much income will they have to spend on everything else?  Not much.  On those non-electricity intensive goods, prices will most likely fall and inefficient producers will be forced to liquidate until the market clearing price is reached.  

The general price level on balance will be unchanged.

Folks, Eskom tariff hikes are not inflationary, they simply divert more resources to electricity, which if used inefficiently makes the entire economic system worse off, but if used most efficiently makes the system better off.

Stop babbling Freeman, get to the point…

Thanks for your patience in getting this far, I’m nearly there. 

So, to cut a long story short, when the SARB says it is adjusting the repo rate to target a 3-6% rate of inflation, it is doing nothing of the sort.  If that were the case we would not have seen money supply growth in excess of 25% in recent years under the “inflation targeting” regime. 

It would be more accurate to say the SARB is targeting a 3-6% annual decrease in the value of money relative to goods and services, or perhaps even better a 3-6% rate of theft and real wealth destruction. The government confiscates wealth.

A 3-6% target rate of theft and wealth destruction?  No wonder we’ve been above the target band for so long.  

Now there’s a policy goal any government can get behind.

UPDATE: See this quote from John Maynard Keynes, one of the most influential economists of the 20th century who’s theories left us with these inflationary policies.

“By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose.”