Everyday High and Higher Prices

That's the government's promise to you...

“Too many factors must be known, and no one can know them.”

~ Henry Hazlitt

Joel Bowman with today’s Note From the End of the World: Buenos Aires, Argentina...

Everyday low and lower prices. That’s the free market’s promise to you. And if the free market were allowed to operate properly, that is to say, if it were allowed to function as the name suggests, freely, lower prices are precisely what you would expect to see.

Lower prices at the grocery store... at retail outlets and restaurants... at the gas pump and online.

And yet, as inquiring minds fairly recognize, that’s simply not the case. Rather than enjoying a cornucopia of hyper-abundance, brought about by the turbo-charged purchasing power of the dollar, the average working stiff has witnessed his greenbacks plummet in value during his lifetime.

In real terms - that is, adjusted for inflation - household net income has gone virtually nowhere in the U.S. over the past half a century. This despite the fact that most households now send two warm bodies off to the daily production line. The same is true in most of the developed world.

How could this be?

Free Market Dividends

With all that extra input... with a growing population... mechanized machinery... Moore’s Law... the ubiquitous wonders of the digital age... cryptos... EVs... NFTs... ChatGPTs... and all the rest... shouldn’t we expect the price of production and, therefore, the cost of associated goods and services, to fall... or, dare we utter the word... “deflate”?

Price deflation is progress, after all. Lower prices - ceterus paribus - are a surefire sign we’re getting better at “making stuff.” It means we’re becoming more efficient. This happy outcome is the result of increased competition and scale in the marketplace. It’s the glowing, cherub-cheeked lovechild of Schumpeter’s “creative destruction” and the compounding effect of “learned processes.” Standing on the shoulders of giants, and all that...

In this way, lower prices ought to serve as a “kind of dividend for the working man,” as Jim Grant, editor of the venerable Grant’s Interest Rate Observer, once (ahem) observed.

“Not so fast!” cry the know-it-all federales.

Coming off the back of multi-decade high inflation during The Covid, American consumers have understandably grown weary of watching the price of their favorite goods ticking up every time they visit the store. Cumulative inflation in the US since the beginning of 2020 runs somewhere between 25-30%. And that’s just the official numbers, likely well shy of the real world.

Bumbling from one crisis to the next, as late stage empires tend to do, the current energy debacle is likewise exacerbating an already precarious situation. From NPR:

Inflation jumps to its highest level since 2023

The U.S. war with Iran has pushed inflation to its highest level in almost three years.

Consumer prices in April were up 3.8% from a year ago, according to a report Tuesday from the Labor Department. That was the biggest annual increase since May 2023.

Whether or not the US and Iran reach a deal today... or tomorrow... or next month... (The Donald is in the Situation Room as we type)... the lingering effects of critical supply chain disruptions are unlikely to abate anytime soon.

Daylight Robbery

And yet, conventional wisdom (such as it is), tells us that a little inflation here and there is actually a “good thing.” Indeed, the Fed claims 2% as its “optimum” rate of inflation. That is, it aims to steal exactly 2% of the purchasing power of your savings each and every year, give or take. They don’t always get it right, of course. Sometimes it’s more.

But what’s so deadly about discounts anyway? Do producers really suffer under a deflationary episode, as we’re constantly assured they do? After all, aren’t producers also consumers? Do they not, therefore, also stand to benefit from lower input costs?

In a now classic interview with Steve Forbes, Jim Grant provided an illuminating walk down memory lane...

“We’ve seen this before,” Grant told Mr. Forbes, “in many different ages of American economic history. The late 19th century was a time of persistently dwindling prices. Some people resented it, of course, and there was a progressive movement - so called - that mobilized itself in opposition. But, on the whole, Americans rather enjoyed a great generation of progress. In the 1920s, prices were stable or dwindled. In the early 1960s, the same.

“As recently as 1954,” continued Grant, “there were 12 consecutive months of falling prices, as registered by the CPI. If you go back and look at the newspapers, you will search in vain for expressions of hysterical concern about that as we certainly see today.”

What, if anything, has changed during this past half century or so? When did “high and higher prices everyday” become part of the Fed’s stated agenda?

“I think what has changed is not so much the behavior of prices,” concluded Grant, “but rather the attitude of our central bankers towards prices. They feel they must control them and they must raise them up. The Fed has moved to substitute price administration for price discovery.”

Fiat Fetish

And just how does the Fed achieve this dubious end, you may be wondering? Henry Hazlitt explained the process back in 1946 in his artfully titled column, “The Fetish of Low Interest Rates.”

When interest rates are kept arbitrarily low by government policy, the effect must be inflationary...The natural rate of interest is the rate that would be established if the supply and demand for real capital were in equilibrium. The actual money interest rate can only be kept below the natural rate by pumping new money and new credit into the economic system. This new money and new credit add to the apparent supply of new capital, just as the judicious addition of water may increase the apparent supply of real milk.

Through “watering down the milk,” to borrow Hazlitt’s metaphor, the Fed claims to spare us the immeasurable inconvenience of low and lower everyday prices. In other words, the Fed is diluting the value of the currency in which our favorite knickknacks and gizmos are denominated, thus offsetting the gains made through productive efficiency and the market’s natural downward pressure on prices.

Hazlitt’s musings might well have been written this morning. And yet, more than half a century later, his words have still not touched a central banker’s ear. Until they do, it’s high and higher prices, as far as the eye can see.

Stay tuned for more Notes From the End of the World...

Cheers,

Joel Bowman

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