The deflation "ogre" is about to devour the economies of the eurozone and the United States, according to some senior officials. The solution is hyperinflation that wipes money and all debt. Amazing mountains of money being printed out of thin-air in the US and eurozone, near-zero interest rates; credit expanding at two-digit rates; stocks prices setting record highs; housing prices rising at 14%; food becoming unaffordable to increasing numbers of people and putting over 50 million Americans on food stamps - describing these conditions as "deflation" is simply insanity and falsehood.
Based on this wicked vision of deflation, we may state that Germany was battling the "deflation" ogre in 1922-23. The Reichsbank had to print money to keep prices upward and insure
that the price of a loaf of bread increases from 6 trillion marks to 10 trillion marks. If prices had to fall, Germany would have been consumed by the deflation "ogre". In fact, German prices kept rising at ultra-sonic speed until German marks became useful only in fireplaces. By fighting the deflation "ogre", Germany was devoured by the inflation "ogre".
Demagogues never learn any lesson. Ben Bernanke kept fighting deflation since 2002; in doing so, he kept endlessly inflicting devastation on the US economy. The top officials who now curse deflation are perfectly immune from inflation.
They live in heavens, fly first class, are served champagne and liquor, stay at first class hotels, enjoy opulent banquets, are driven in luxurious limousines, and live in comfortable mansions; all is paid by the taxpayer. In contrast, the wage earner is being ruthlessly robbed by inflation. Every day, he puts much less food on the table for his children. Inflation demagogues made millions of workers jobless.
In no time and in no country have workers ever protested against deflation; they only protest against inflation. They never gone on strike because of deflation; they have often gone on strike against inflation. Inflation, when too much money chases fewer goods, is called public enemy number one. The world witnessed widespread food riots in 2007-2008. For workers, there has never been a deflation "ogre"; instead, there has been an inflation "ogre" that ate up their livelihood.
How do demagogues define inflation?
For demagogues, inflation is measured by "core products" price inflation; "non-core products" such as bread, butter, oil, meat, and energy are excluded. Stock prices and housing prices are excluded. Demagogues believe that the dollar buys only core products; it does not buy assets and non-core products such as meat, milk, and vegetables. When core product prices, such as toys, plastic shoes, or DVDs, rise by 2% a year, this low inflation is dangerous; core inflation has to exceed by far the observed low rates. Otherwise, the world faces the deflation "ogre".
Even when food prices trigger riots, demagogues still dismiss inflation. They could not care less if millions of people suffer famine and malnutrition. Professor Charles Kindleberger deplored the fact the central bank was totally oblivious about speculation and asset price inflation and never tried to prevent the consequent economic and financial collapse such as the Great Depression.
Why do demagogues want to force more inflation? Inflation reduces tremendously a country's real debt burden. It is a powerful confiscation mean. The government can wipe out literally all debt through inflation; the higher inflation is, the more that debt is reduced. A German farmer bought a farm of 1,000 hectares on mortgage in 1912. He paid it off in December 1923 by selling four eggs. The same scenario applies in any hyperinflation. If one buys a house at US$1 million now, and if its price goes up to $10 billion, one may be as fortunate as the German farmer - he sells four or even two eggs and pays off the whole mortgage.
In 2014, asset prices became too over-valued and too expensive; as in the case of Reichsbank, the US Federal Reserve and the European Central Bank have to keep pushing prices upward and divert more real wealth to speculators and asset holders. Without powerful inflation, asset prices will crash.
The inflationist demagogues equate deflation with evil. They do their utmost to re-inflate bubbles and prevent deflation. Unequivocally, inflation is a sign of grandiose theft. Deflation may be a sign of immense prosperity and technical advancement. Often, competition within the economy and from abroad lowers prices. For instance, Apple has to constantly innovate and reduce cost by locating plants in China instead of the US, to maintain its pricing and keep market share. Likewise, Mercedes Benz is grabbing a larger share of the vehicle markets; its competitors have to innovate, reduce prices, to regain sales.
Historically, the US enjoyed fantastic growth during 1873-1893, which led to great technical progress, advanced machinery, new products, and mass production. Prices went down sharply during this period and wages rose, leading to an immense gain for workers.
Inflationists would sabotage any economic progress, competition, and deny labor any economic gain. Assume wheat is $10 a bushel and a worker is paid $10 a day. Assume that with technical progress, fertilizers, and machinery, wheat production is multiplied by five and wheat prices drop to $2 a bushel. Obviously, a worker has now a real wage of five bushels of wheat instead of one bushel. Inflationists confiscate by expanding money supply as far as is required to maintain wheat prices at $10 a bushel.
Often, technical progress is overwhelming and downward price pressure is too strong. In these conditions, inflationists use government force to cut acreage. Likewise, inflationists use government force to erect tariff walls and create monopolies to prevent both foreign and domestic competition.
Inflationists undermined the economic prosperity of the 1873-1893 and threw the economy into desolation and the Great Depression. Similarly, the US economy was enjoying high prosperity until it was turned by inflationist Ben Bernanke, the outgoing Federal Reserve chairman, into stagnation and poverty. US workers have lost too much in real terms; wealth has become too concentrated via inflationism; debtors and speculators have been the gainers from this process.
Inflationists are by definition anti-market; they can operate only through the government, which has fixed by force near-zero interest rates, pushed banks into reckless lending to subprime markets and speculators, and promised unlimited bailouts, as plainly shown by US and European money policies. Inflationists have to use the power of government to inflate the economy.
Only corrupt governments practice inflationism, as this policy involves injustice and grandiose theft. Inflationism amounts to a redistribution of wealth in favor of speculators, debtors, and beneficiaries of government handouts. It never creates any new wealth.
Government can inflate only via inconvertible paper money, which it can print without bound, or in case of metallic money by debasing the coin. It can never bail out banks with gold money.
Inflationism raged in the colonies and during the US independence war. Hence, the framers of the US Constitution had a perfect intimate knowledge of inflationism and its unjust redistribution and impoverishment.
To prevent inflationism, the US Constitution reads as follows:
Art. I. Section 8. The Congress shall have power: (i) to borrow money on the credit of the United States; (ii) to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures; and (iii) to provide for the punishment of counterfeiting the securities and current coin of the United States. Art. I. Section 10. No state shall coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts.
Inflationists have been able to disable the money laws of the US Constitution and to counterfeit as much as they wish without punishment. US money laws are now purely arbitrary. There is no money standard; the money laws depend on the US president and the whims of inflationists such as Bernanke, his successor Janet Yellen, and their supporters. Irrespective of the chaos, injustice, and impoverishment caused by inflationism, the latter remain politically very powerful. Even among academics and media, inflationism has strong supporters.
Their credo is that inflationism is a stimulus, leads to prosperity, and achieves full-employment of labor; any form of deflation has to be combated, be it from technical progress or competition. Competition among labor that undercuts wages is unlawful.
Top inflationist officials are still not satisfied with stock prices rising at 30% a year. They say the inflation "genie" is still safely locked in the bottle. They are scared by the deflation "ogre". They want more inflation. Their miserable track record since 2002 never dissuades them from their destructive policies.
More inflation is tantamount to more robbery, deliberately denying workers the fruit of their work as urged by the Keynesians, and more confiscation of wealth. Regardless of whether inflationism achieves prosperity or no, as a policy mean it is unjust and totalitarian. Where inflation is high, society suffers.
Noureddine Krichene is an economist with a PhD from UCLA.