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The yearly rate of growth of personal consumer outlays jumped from 2.5
percent in August last year to 3.8 percent this January.
The growth momentum of personal income has been pushing ahead strongly
since May last year.
Year-on-year, the rate of growth shot up from 1.8 percent in May to 4.6
percent in January.
 
Most economists and various commentators, while expressing satisfaction
that the US economy is starting to display signs of improvement, are also
raising concerns that a further strengthening in the economy could trigger a
higher rate of inflation. Indeed the growth momentum of both the
consumer-price index and the consumer-price index less food and energy
displays a visible strengthening. The yearly rate of growth of the CPI stood
at 1.6 percent in January versus 1.1 percent in June last year. Meanwhile,
the rate of growth of the CPI less food and energy stood at 1 percent in
January against 0.6 percent in October.
Most experts are of the view that as the economy gains strength the Fed
will have to step in at some stage and tighten its stance in order to keep
the rate of inflation from getting out of control. Experts, however, caution
that we are still not at this stage. The key reason is that the yearly rate of
growth of the core consumer-price index, i.e., the CPI less food and energy,
is well below the 2 percent target. According to experts, as long as this is
the case the Fed should still be concerned with deflation rather than
inflation. Hence, for the time being, experts assign a very low likelihood of
the Fed tightening its stance soon. But why should economic growth be
positively associated with a general increase in prices of goods and
services?
Let us examine how prices in general could go up. The price of a good is
the amount of dollars paid per unit of this good. So with all things being
equal, an increase in the amount of dollars in the economy must lead to a
general increase in prices of goods and services. Now, when we talk about
economic growth, we mean an increase in the production of goods and services,
i.e., an expansion in real wealth. Obviously then, for a given amount of
money an increase in economic growth means a greater amount of goods and
services, which must lead to a decline and not an increase in the prices of
goods and services in general. (We now have more goods for the same amount of
dollars.)
This simple analysis illustrates that an expansion of wealth, which
promotes individuals' well being, cannot at the same time generate bad things
such as a general increase in prices, which undermines people's living
standards.
So, if what we are saying is correct, why are we currently observing a
strengthening in the growth momentum of prices at the same time as a
strengthening in economic growth? We suggest that from a strictly empirical
perspective the yearly rate of growth of the CPI less food and energy is
actually closely following the yearly rate of growth of industrial production
lagged by 19 months. So from this relationship we can suggest that the growth
momentum of the core CPI is likely to strengthen sharply in the months ahead.
But does the good correlation between the growth momentum of the core CPI
and the lagged growth momentum of industrial production make sense? Again,
why should more wealth, which raises people's living standards, also generate
bad things such as a higher rate of inflation?
We suggest that the positive association between economic activity and
price inflation is not on account of an expansion in real wealth but on
account of an expansion of the money supply. The so-called total real
economic growth cannot be quantified as such — it is not possible to
add potatoes to tomatoes to obtain the meaningful total that would be
required to calculate real economic growth. So-called economic growth is
calculated from monetary turnover, which is deflated by a dubious price
deflator. This means that what is labeled as economic growth is nothing more
than the rate of growth of distorted monetary-turnover data.
"What is
labeled as economic growth is nothing more than the rate of growth of
distorted monetary-turnover data."
According to mainstream thinking, the stronger the monetary pumping is,
the stronger the pace of spending — and consequently the stronger the
monetary income and the so-called real economy is going to be. In short, in
this framework more money means more spending and this leads to stronger economic
growth.
Contrary to this way of thinking, more money only undermines the process
of real-wealth generation. This means that more money is bad news for the
production of real wealth.
Consequently, with more money and less wealth, this means more money per
unit of goods, i.e., a general increase in prices. Observe that what we have
here is an increase in monetary turnover on account of monetary pumping,
which is presented as a strengthening in real economic growth, and an
increase in general prices on account of the monetary pumping. Hence, it is
not surprising that we observe a positive association between the so-called
strong economic activity and price inflation. Note again that the so-called
strengthening in economic activity reflects the strengthening in monetary
pumping. In fact what we have here is a situation wherein
monetary pumping is positively associated with the strengthening of price
inflation.
From here we can deduce that it is erroneous to suggest that stronger
economic growth must lead to higher price inflation. As we have seen, on the
contrary, stronger economic growth for a given money supply must lead to a
fall in prices. Observe that the fall in prices here is the manifestation of
real-wealth expansion. It means that a every holder
of dollars can now have access to more real wealth, i.e., goods. Contrary to
conventional thinking then, a fall in prices whilst real wealth is rising is
great news.
A fall in prices whilst the economy is declining should also be regarded
as good news because it reflects the liquidation of various bubble activities
that undermine the process of real-wealth generation. (These bubble
activities that have emerged on the back of previous loose monetary policy
come under pressure as a result of a fall in the growth momentum of money.)
We can thus conclude that the so-called empirical positive association
between economic growth and price inflation, which is labeled as the Phillips curve, and is
regarded by almost all economists as natural law on par with the law of
gravity, is a misleading concept. All that it describes is the fact that the
variation in the rate of growth of the money supply must result in a
variation in prices of goods and services over time. Now, as long as the
machinery of wealth generation is still functioning, Fed policy makers can
get away with the illusion that they can steer the economy by monitoring the
Phillips curve.
However, once the wealth-generation machinery is severely damaged on
account of the Fed's relentless tampering (its "counter-cyclical
policies"), the illusion that the Fed can help the economy is shattered,
and the economy sinks deeply into a black hole. Any attempt by the Fed to
revive the economy by means of massive pumping only makes things much worse.
Also, we find it extraordinary that Fed officials continue to push money on a
massive scale at the same time as they try to assure the public that they are
fighting inflation.
Conclusion
Most economists, while expressing satisfaction that the US economy may
have entered a self-sustaining economic-expansion phase, are also concerned
that a further strengthening in the economy could trigger a higher rate of
inflation. Most experts are of the view that as the economy gains strength
the Fed will have to step in at some stage and introduce a tighter stance in
order to counter inflation. We suggest that it is questionable that genuine
economic growth can lead to general price inflation.
Also, we maintain that the positive association between economic activity
and price inflation is not on account of an expansion in real wealth but
comes in response to the expansion in money supply. We maintain that,
contrary to popular thinking, the recent strengthening in some key US
economic data such as employment doesn't reflect economic strengthening but
is simply a response to the strengthening of bubble activities that are
setting in motion another economic bust.
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