240 years ago Adam Smith wrote “The Wealth of Nations.” Largely, he described what he observed in the Economy, and provided a reasonable explanation. For example, Pigs.
He observed that the production of pigs fluctuated, as did the price of pork. His explanation – the Pig Cycle – was that, if the production was low, the relative shortage caused prices to rise, which encouraged greater production. The higher production eventually might cause prices to fall, which led to reduced production.
All this unfolded irregularly over a 3-5 year period, and repeated. Prices for any individual product (or service) do not remain the same over time – they fluctuate.
But there are other forces which affect prices. A pig farmer may develop better methods or adopt some new technology. All else being equal, he will produce more over time, meaning that pig prices will tend to decline over time – even though those prices will continue to fluctuate according to the Pig Cycle.
The farmer may choose to work longer hours (or shorter hours) causing increased (or decreased) production, and the changed supply will lower (raise) prices. Of course, this is self-limiting as the farmer has to sleep sometime.
The demand for pigs may go up (or down) as population and food preferences change. Demand also may appear to go up if more new money is printed. If the money supply change is a one shot deal, then any change to demand and prices is akin to the farmer working longer hours – but of course the result is opposite.
The greater demand will cause prices to rise, stimulating greater production. As the money supply increase works its way through the Economy, pushing prices for each and every product and service up somewhat, then the higher general Cost of Living will equalize the apparent demand, although at a higher nominal level. “Adjusted for Inflation,” the Pig Cycle will be back where it started before the money printing.
In today’s world, money printing certainly is NOT a one shot deal. The FED and other world Central Banks (and other banks through the fractional reserve banking system) continue printing indefinitely. Eventually, the expectation of future price increases due to the money printing will nullify the effects of the monetary inflation, and production will settle back in where it would have been without the money printing.
All the while, the FED et al benefit from getting the new money out of thin air, while everyone else is penalized from the increase in the general price level. As Keynes said, “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”
Many times, the deliberate debasement of the country’s money leads to general price rises so high that the public demands that inflation be controlled. In response, the money supply increases are slowed (or even stopped!).
But the reduced apparent demand within the Economy then causes prices to fall, leading to a reduction in production – a Recession or a Depression. Yes there are natural price and production fluctuations within any Economy, and better methods and technology will lower prices continuously – but this money supply normalization is another animal altogether.
The Recession or Depression caused by a halt to money supply increases is totally artificial – totally outside the normal fluctuations of any dynamic Economy. The bad times are caused directly by the previous theft of purchasing power through money printing. Central banks benefit when they print, but when they stop printing, the rest of us suffer – sometimes mightily.
Another factor affecting our Economy wide Pig Cycle is taxes. There is an old saw which says, “If you want more of something subsidize it, and if you want less of it then tax it.”
Taxes take some of the price that the producer receives. His apparent lower price leads to lower production. The lower production leads to higher prices which restore the production level. Producer taxes – regardless of whether they are sales taxes, income taxes, or whatever, wind up being passed partly onto consumers. And with less revenue available, the employees also receive a smaller share of what’s generated by the private, productive sector of the Economy.
The price level reaches a new equilibrium, where profits, wages, and consumer prices all reflect what’s left after taxes. It makes no difference what the tax money goes to buy. That tax money is used to buy something other than what each one of us would have bought if we had been able to keep our money. The Economy is reduced by taxation.
The natural fluctuations of the Pig Cycle can’t be undone. They are… natural. They are part of Capitalism. The natural reductions to prices over time, through innovation and invention, also are part of Capitalism. All of us benefit by the efforts of others.
Money Supply manipulation and Taxation are not natural – they are man-made. They are part of Socialism, and they hurt everyone in the Economy except the favored few. You may want some of what Socialism offers, but still you should recognize that it is Socialism, and your benefit comes at someone else’s greater loss.