The Big D-Word

Deflationville at the End of the World...

(Something for the working man to look forward to…)

“Too many factors must be known, and no one can know them.”
~ Henry Hazlitt, from Economics in One Lesson (1946)

Joel Bowman with today’s Note From the End of the World: Vau, Portugal...

Look out below, dear reader... prices are actually falling at the other End of the World.

A friend sends a message from our adopted home in Buenos Aires, Argentina. It shows a sign out front of a popular cafe-restaurant in Palermo:

“Bajamos los precios un 11% para estar más cerca tuyo.” (“We lowered prices by 11% to be closer to you.”)

Commented another friend, also a long-time Argentine resident:

“Competition, baby!”

The price war comes as Javier Milei’s administration continues to tame inflation at what might be called the “printing press level,” with producer (wholesale) prices actually falling for the first time in years. From local paper, La Derecha Diario:

In a historic event for the Argentine economy, the Wholesale Domestic Price Index (IPIM) recorded a 0.3% monthly decrease in May, marking the first wholesale deflation in almost two decades.

The data was confirmed this Tuesday by INDEC and was quickly celebrated by the Minister of Economy, Luis “Toto” Caputo, as a new milestone in the process of economic stabilization.

The decline was mainly driven by a 4.1% monthly reduction in the prices of imported products, while the prices of domestic products remained stable. On an annual basis, the IPIM rose by 22.4%, the lowest increase since December 2017, consolidating the downward trend of wholesale inflation.

Phony Fiat

Naturally, egghead establishment economists (EEEs), who lay their uncluttered craniums to sleep each night, visions of everyday high and higher prices dancing in their heads, are baffled. They fear the Big D-Word like a politician fears a lie detector.

They cannot comprehend the free market’s promise to you: everyday low and lower prices. And if the free market were allowed to operate properly, that is to say, were it left 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 same or fewer dollars chasing ever more stuff, the average working stiff has witnessed his state plundered fiat plummet in value.

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 modern families now send two (or more) warm bodies off to the daily production line...

How could this be?

Road to Nowhere

With all that extra input... with a growing population... mechanized machinery... Moore's Law... the ubiquitous wonders of the digital age... with 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 dreaded D-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 quipped.

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

After years of grinding, multi-decade high inflation, much of it the direct result of post-pandemic spending hysteria across the so-called developed world, consumers are once again being assured by their slimy monetary overlords that inflation is cooling and that prices are coming down.

Ah, but going up “less quickly” is not the same as coming down.

Consider annual price inflation in the US going back over just the past decade when overlaid with the cumulative price increase over the same period.

(Data sourced from The Federal Reserve Bank of St. Louis reports and U.S. Inflation Calculator's compiled tables. Graph made with ChatGPT)

Drowning Less Quickly

The blue line (left axis) makes it look as though prices are decreasing when, really, they are only going up less fast. What you ought to see is each incremental increase stacked one on top of the other in order to get a picture of the total increase.

Here, the green line (right axis) shows a clearer picture. An item that cost you $100 a decade ago now costs $135.

That’s a 35% increase in the cost of goods ($35 / $100) * 100% = 35%... or a 26% decrease in purchasing power (100/135 = 0.74 or 74%)... meaning you can now buy 74% of what you could before; a 26% decrease.

Said another way, your money lost over a quarter of its value in a single decade.

Add to that the wild price swings themselves, due in no small part to the scourge that was Bidenomics and the resulting 40-year high in inflation during his term, upon which we are only building higher now. Whatever happened to “price stability,” one half of the Fed’s own so-called “dual mandate.” (The other half being “maximum employment,” a subject for another Note...)

And yet, it’s not like the Fed is being duplicitous in its modus operandi. They rob and steal at will, under cover of the population’s widespread innumeracy and basic economic illiteracy.

The Price of Money

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. Right now, the inflation rate in the US is 2.4%, up slightly from 2.3% the previous print.

But even 2%, compounded annually for a decade, adds up. Or rather, it waters down.

For instance, at the stated “target” rate, $100 dilutes to being worth just $82.03 under ten years under the Fed’s reliable abuse and mistreatment. After twenty years, that $100 whittles to $67.29. And during the course of a working man’s life, let’s call it 40 years, that first $100 he put in his sock drawer becomes worth less than half ($45.29) of its original value.

With that kind of math, one begins to wonder... could the alternative really be so bad? After all, we hear constantly – from the long-disgraced expert class – dire warnings of dastardly deflation lurking around every corner.

But what's so deadly about discounts? Do producers really suffer during 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 their respective businesses?

The Price of Administration

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 some years ago, “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.”

Hmm... what, if anything, has changed during this past half century or so? When did “high and higher prices everyday” become so en vogue?

“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.”

And just how does the Fed achieve this dubious end, you may be wondering? Henry Hazlitt explained the process in his artfully-titled column, penned back in 1946, “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.

~Henry Hazlitt, The Fetish of Low Interest Rates (1946)

Through “watering down the milk,” to borrow Hazlitt's metaphor, the Fed has successfully spared us the immeasurable inconvenience of lower 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 yesterday. And yet, until President Milei dared question the “statist quo,” they seem barely to have touched a central banker’s ear.

Here’s to low and lower prices, dividends for the working man, and a return to the free markets that deliver them.

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

Cheers,

Joel Bowman

P.S. “But, but, but… without the government, who would…?”

We would, dear reader. Free people. The freed market. Those who express real world demand for whatever it is people fret over the government not doing. Education. Healthcare. Roads. Not putting razorblades in candy apples. (Turns out, it’s bad for repeat customers.)

Whatever the government does poorly, the market can do better, cheaper and (perhaps most important of all) with the consent of voluntary individuals.

This in mind, we’d like to extend a special thanks to all our Notes Members, whose generous support keeps the lights on and our laptop charged. It’s thanks to you we’re able to share the message of free markets, free minds and free people… now in all 50 US States and across 140 countries, from one End of the World to the other.

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