Massive Inflation, Right under Our Noses

It is helpful to remember that there are two sides to every transaction. If the price of an ounce of gold goes up $100, you can say that the price of gold has gone up in terms of dollars — or you can say with equal accuracy that the price of dollars has gone down in terms of gold. A trivial and not exactly blazingly original insight, but one to keep in mind.

Food prices are hitting record highs. Sugar, meat, oils — boom, boom, boom. Food-related products, like fertilizers, are on a pretty steep upward trajectory. (Even the reliably pessimistic cotton farmers are celebrating.) Inflation is nipping at the Chinese economy and threatens to exacerbate social unrest in the world’s largest for-profit police state.

Meanwhile, oil prices are zooming, and the boom in gold and other precious metals has been too amply remarked upon to bear further commentary here.

So, what’s happening? Has the entire planet suddenly got a serious case of the munchies? Sure, there are specific factors contributing to all of this — population growth, higher demand in Asia, non-economic events such as crop failures and droughts, etc. — but we ought to consider another interpretation: The price of food and petroleum isn’t so much rising as the price of dollars, euros, yen, and renminbi is dropping. The financial crisis, the continuing fiscal incontinence of the U.S. and European governments, and the global attempt to stimulate our way out of our recent economic troubles has undermined confidence in government finances, and with it confidence in government-issued currencies, which have no inherent value. (No, I am not setting up an argument for gold-buggery.)

Yesterday, I put up a picture yesterday of a guy sporting my new favorite tattoo: one of the old supply-and-demand graph familiar from your Econ 101 textbook over the motto: “These Laws Cannot Be Broken.” (I want every joker elected to federal office to get that tattoo on his voting hand.) What is underappreciated is that the laws of supply and demand apply to currencies, too: You create new money (and, boy howdy, have we been creating money!), you increase the supply, demand does not change, and the price goes down. Usually, this is reflected in currency exchange rates: Uncle Sam creates lots of dollars, and the greenback falls against the euro and the yen. But when all of the major currencies are being pumped up at the same time, the exchange rates won’t move in the same way, since they’re all being devalued at the same time.

Another underappreciated aspect of our current currency situation: One of the biggest stimulators out there — and one of the biggest money-supply inflators — has been China. China’s money supply, by some estimates, increased by 50 percent during its stimulus campaign. Part of that is the familiar ChiCom program for keeping its currency artificially cheap and its people artificially poor to keep the exports sector booming, but part of it is Beijing doing exactly what they’ve been doing in Washington and London and Tokyo: flooding the economy with free money in the hopes of stimulating economic activity — i.e., the crystal-meth approach to economics.

It seems to me entirely plausible that what we are seeing is a giant, global vote of no confidence  in the economic policies of the world’s major economies: Europe and the United States, sure, but China, too. I used to say that you could judge how seriously a man took his beliefs about the future by how much of his own money he was willing to bet on a given proposition. But there are things that people take even more seriously than money: things with real value, like food and fuel. Inflation happens when the money supply is increased, regardless of whether it shows up in the Consumer Price Index. CPI jumps are not inflation, they are a reaction to inflation. But don’t tell me that at a time when the market is putting high or record prices on everything of inherent value that everything is hunky-dory on the inflation front. When one country devalues its currency in a last-ditch effort to stave off crisis, it’s a banana republic. When the United States, Europe, Japan, and China do it in a coordinated fashion, we’re all part of the Banana Federation of Greater Bananastan.

Supply and Demand: These Laws Cannot Be Broken.

– Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism, now available at Amazon.com. You can buy an autographed copy through National Review Online here.


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