An alternative to popular faith

Ask a debt hawk why he hates federal deficits and he will give you four main reasons:

1. Federal debt must be paid back by taxpayers. (But, because the federal government has the unlimited power to create the money to pay its bills, taxpayers do not fund federal spending.)

2. Federal debt adds to the government’s interest-paying burden. (Again, interest is no burden to a entity having the unlimited ability to create money.)

3. Federal debt uses up lending funds that otherwise would go to private needs. (But, federal spending adds money to the economy, making more, not less, funds available for private lending.)

4. By increasing the money supply, federal deficits reduce the value of money, thereby causing inflation. Readers of this blog have seen the graph (below) which shows no relationship between federal deficits — even large federal deficits — and inflation.

Note how the peaks and valleys of deficit growth do not match the peaks and valleys of inflation growth:

If deficits don’t cause inflation, what does? In a previous post “Is inflation too much money chasing too few goods”, we answered that question (“No.”), and we presented a graph indicating the real cause of inflation may be energy prices, more specifically, oil prices. See below:

The extreme movements of energy prices corresponding with the more modest movement of overall inflation, seem to indicate that energy costs “pull” inflation in either direction.

We can see this parallelism better by magnifing the CPI movement with a different vertical axis:

Now here is another graph that may substantiate the hypothesis that energy prices pull CPI:

It compares inflation movements (red line) with the movement of energy prices less the movement of inflation (blue line). Notice how closely the two lines correspond.

Compare that graph with the graph below. This graph is the same as the one above, except rather than comparing energy price changes with inflation, it compares food price changes. See how there is much less correlation.

Food price changes do not seem to be the key inflation-causing factor. In fact, energy price changes seem to cause food price changes:

Inflations are not caused by too much money. Inflations are caused by shortages.

Energy, and more specifically oil is, aside from food and water, the one universal need. It is the only commodity, the shortage of which, affects the prices of all other goods and services.

Rodger Malcolm Mitchell
http://www.rodgermitchell.com

No nation can tax itself into prosperity. Those who say the stimulus “didn’t work” remind me of the guy whose house is on fire. A neighbor runs with a garden hose and starts spraying, but the fire continues. The neighbor wants to call the fire department, which would bring the big hoses, but the guy says, “Don’t call. As you can see, water doesn’t put out fires.”