Infaltion

I bet you thought I made a spelling error in the title above (Got ya!) I am a terrible typist. I often type too fast and hit the keys out of sequence, and have often attempted to type the word "inflation" and instead type "infaltion". The other day I did it, and it hit me that this misspelled word perhaps could be interpreted as a compound word meaning "false inflation" or a new word that represents the concept that the entire monetarist or quantity theory concept of inflation is FALSE.

Well that might be a good new word to add to the lexicon of truth, because the monetarist concept of so-called "inflation" is false under a state currency system that is free floating and non-convertable. There is NO SUCH THING as "inflation" any more; at least as it is defined in the monetarist's view.

For a start, let's look at the video below where several of the 1st generation MMT thought leaders discuss the concept of "inflation" under a FFNC state currency system; fast forward to the 13:00 minute mark.

At the end of the segment that answers the audience member's question about inflation, Warren Mosler and Bill Mitchell discuss how under a FFNC state currency, it is always the government, what Warren often calls the "currency monopolist", that ratifies higher prices in the economy. Here's an excerpt from the transcript:

Warren Mosler: I guess I’ll go to Bill’s point first, that you don’t get inflation until you’ve used up the resources. And the other thing is, there’s a whole question of what is actually inflation and what are just price increases, and in this country we look at CPI. [01:03:47]

What happened in the 70s was we had an external monopolist in OPEC that was raising prices of oil, and it went from $2 to $40 dollars, and those costs were passed through, had nothing to do with monetary or fiscal policy. And in fact, the inflation broke after the cartel broke, which was largely based on, I think, the deregulation of natural gas in 1978. Where it had been capped at below market levels and so no one was producing any natural gas. We lifted the cap, the price went up to two-fifty or -sixty or something, and suddenly natural gas was everywhere, the electric utilities converted, and OPEC tried to sustain prices. They cut production by, I think, over 15 million barrels a day in the early 80s. Finally they couldn’t handle it, the price collapsed, and the inflation went away. I don’t attribute any of the success in the war against inflation, whatever, to monetary policy at the time, I see it as an underlying thing. [01:04:47]

The other kind of inflation, the kind of inflation that you can get from the monetary system is the demand pull, rather than the cost push, and that, I’ve frankly never seen that in my 40 years. I’m sure it’s possible, and you see it in some countries, occasionally, but you have to get to full employment, run out of resources, and then the government has to continue to be pushing it past that point, and you use the price signals. Right now, we have an enormous output gap by any measures, some might say it’s smaller than others, but it’s certainly large enough where that’s clearly not the problem. I’ll let somebody else continue, just to fill in. [01:05:24]

Bill Mitchell: The question about the OPEC is very interesting, because I think Australian experience was similar to elsewhere, but with slight nuance. You’ve got to understand what inflation is, first of all. A continuous price… a price bubble within a specific asset class, which is… that’s not inflation. That’s an issue, so a real estate bubble is an issue, but it’s not inflation, and the public debate tends to conflate housing booms with inflation. It’s a wrong conflation. [01:06:05]

And you’ve also got to differentiate, as Warren did, the “cost push from the demand pull” type inflation. In the mid 70s, all of our oil-dependent economies had very major cost shocks to the system. The question then was, if you think about what that means, what that means is that there’s a real income loss to the domestic economy. That real income loss has to be shared in some way, and then the cost shock just dissipates very quickly. What governments did at that time was to, for political reasons, was to delay the dissipation of that cost shock. And that’s where you do, you can get demand-side factors interacting with the supply-side factors.

Warren Mosler: Through indexation. [01:07:00]

Bill Mitchell: Yeah, because you don’t want to take the crunch, you don’t have a distributional consensus in your country, whereby the workers will take a bit of the real wage cut, the bosses will take a bit of the margin cut, and it’ll go out of the system fairly quickly.

Warren Mosler: Your decline in the real terms of trade. [01:07:27]

Bill Mitchell: That’s what I’m saying. So you can get an inflation then feeding on itself if the workers and the bosses have a slug-out fest in a distributional struggle where each of them has price-setting power and they can defend their own margin, the real wage and the profit margin, and the government ratifies that through indexation.

Here's my interpretation: In the US for instance, if the oil cartel gets control of the price of petroleum for a time (such as now) then the higher energy prices work their way into the general price of products in the economy and the government does Cost of Living Adjustments (COLAs) in the transfer programs (Social Security, Medicare, Nutrition Assistance, etc..) and also, they pay the new prices to provision the government, for instance the US military is the largest purchaser of petroleum products in the world. This act by the government of paying the new higher prices is the ratification of the new price.

So with the government as the monopoly issuer of the state currency, they are the natural price setter for everything in the economy. They set prices when they spend to provision the government and make transfer payments. Prices have generally gone up over time solely due to the fact that the government agrees to pay more for things over time.

So it is not as if the general trend of rising prices over time is a function of “how much money is out there” or "money supply" or reserve balances in the banking system or any of that; it is that the currency monopolist agrees to pay the new higher prices that occur due to supply/demand shocks that can happen periodically. So it not correct to look at “money supply” in a FFNC currency system to predict price movements at all. This dogma should have been completely discarded in at least 1972 (if not even before this; this requires more thought).

Under a FFNC state currency system, the long term price trend just depends on the price level that the government sector willingly agrees to pay. Looking forward, if we ever experience inflation again in the US, it will be because the government has agreed to pay ever increasing prices.