The Fed Redefines Inflation Again

The Fed Redefines Inflation Again Author: Tom Luongo for Gold, Goats and Guns

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The original definition of inflation was an expansion of the supply of money. If you create more money while keeping everything the same, ceteris paribus, then prices should rise accordingly.

This is a simplistic understanding of the role of the money supply as it leaves out the manner in which the new money makes its way into the economy.

If we digitally airdrop 10% more money into everyone’s accounts, as the latest proposals from economists attached to the Federal Reserve suggest, then the general price level will, in fact, rise 10% if that money is spent on necessities.

This is the scenario we are in now, as I talked about in a recent article.

In an environment where most people’s time preference is short because they are literally fighting for their economic lives, this new stimulus money will go right into the things people needs right now — food, clothing, shelter.

Things are so bad for so many Americans now that they saved their first stimulus checks and only spent them on the bare necessities, forgoing any thought of paying down debt.

They used what’s left of their credit rating to feed themselves now on someone else’s dime and let the bank choke on their mortgage when the credit card is maxed.

This next round of stimulus money will circulate. The Fed will finally do what Bernanke tried desperately to avoid, print helicopter money.

This showed up in consumer spending numbers outpacing expectations while debt delinquencies rise.

That definition of inflation, while simplistic, is still instructive under certain market conditions. It ignores the Cantillion effect of who gets the new money and how it travels. That was the old monetary policy mechanism, through credit expansion via the banks.

Jay Powell’s speech yesterday all but told us that that mechanism is broken and that we’ll be embarking on a new monetary experiment into the future.

That said, at a minimum, the simplistic view of inflation defines for us that moment when all the other considerations about the value of the money have been stripped away — the debt issued in that currency, the confidence in it, etc. — and just focuses on what happens when you pump money in.

Bids for goods rise. Not all goods, equally, but goods.

All About Prices…

To obfuscate this underlying truth, inflation was later redefined to reflect the change in the general price level, since this was one of the pillars of the Keynsian economic worldview which elevated concepts such as aggregate supply and demandto having near religious significance.

These concepts, steeped in the religion of social engineering and technocracy, form the basis for all central banking and monetary policy.

… and all of their basic, methodological errors.

It had to be done in order to support the Phillips Curve, the thoroughly-debunked relationship between unemployment and inflation, which has shaped monetary policy for two generations, to everyone’s detriment.

With this definition of inflation it allowed for the unmoored-from-gold financial system to engage in experiments based on flawed theories, like the Quantity Theory of Money (QTM), to justify monetary policy.And every time the Fed (and every other central bank) was wrong in their forecasts, they redefined both inflation and unemployment to keep satisfying the Phillips Curve as the basis for their commnications.

But never for a second believe that the central banks didn’t know exactly what they were doing with this stuff. That was all for the big show — to project institutional confidence in their ability to manage the economy through monetary policy.

From that confidence flowed our faith in government’s ability to tinker with human nature, alter our incentives and prep humanity for their latest project, The Great Reset, as advocated by the World Economic Forum.

The Davos Crowd.

The operation was simple. Keep things anchored in arcane, economic guildspeak to bamboozle the muppets. Ultimately, it allowed them to print money for domestic political advantage during down periods of the economic cycle and pull back on the money supply to gain international political advantage during the ends of boom periods.

Buy votes at home and bankrupt/colonize people abroad. Lather. Rinse. Repeat.

All the while keep redefining unemployment, inflation and the money supply itself to constantly shape the narrative of their competence.

The Austrian Call

Austrian economists, as gadflies, sharpened their pens, pointed out these failings, advocated for gold and told everyone there is a limit to how far the expansion of credit over the base economy could go in propping up asset prices.

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