Kyle Johnson
Absent both an intellectual and a political revolution, inflation will persist.
Here’s why.
As with any intellectual debate, it’s important to begin with definitions.
During a speech in 1951, the preeminent Austrian economist Ludwig von Mises best explained the true definition of inflation and the wordplay used by economists to obfuscate the matter:
“There is nowadays a very reprehensible, even dangerous, semantic confusion that makes it extremely difficult for the non-expert to grasp the true state of affairs. Inflation, as this term was always used everywhere and especially in this country [the United States], means increasing the quantity of money and banknotes in circulation and the quantity of bank deposits subject to check. But people today use the term “inflation” to refer to the phenomenon that is an inevitable consequence of inflation—that is, the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify that has been, up to now, called inflation. It follows that nobody cares about inflation in the traditional sense of the term. As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil.”
Admittedly, Mises’ claims are subject to debate. His critics often cite Jean Baptiste Say, who wrote in 1821, “The experience of English commerce has, however, proved that a casual inflation of the price of domestic, and depression of that of external products, may be the basis of permanent commerce.”
But if inflation was then defined as rising prices, Say’s comment is redundant. It’s also a curious choice to use “depression” rather than “deflation.”
In his book Money, Sound and Unsound, PhD economist Joe Salerno calls Francis A. Walker America’s leading monetary theorist in the last quarter of the nineteenth century. In 1888, Walker wrote, “A permanent excess of the circulating money of a country, over that country’s distributive share of the money of the commercial world is called inflation.”
But things change.
Writing for Georgetown University’s Institute for the Study of Markets and Ethics, PhD historian Michael Douma notes that in 1925 economist Fred Garlock wrote about the lack of unanimity on inflation’s definition and also on whether inflation was a “monetary or price phenomena.” This confusion led economist Andrew Gourvitch to write in 1936 that he intended to avoid using the term because he wasn’t sure he knew what it meant. Douma claims that rising prices did not become the dominant definition until the 1960s.
And here we are today—nearly every use of the word refers to rising consumer prices (not assets like equities or real estate).
This definitional change is likely the greatest historic victory for “modern” schools of economic thought. Only the exceedingly rare advocates of hard-money and/or private-sector money dare say otherwise.
In his magnum opus Human Action, Mises explained the necessary conditions for prices to serve as a meaningful measuring stick: “Only if people were to value the same things always in the same way, could we consider price changes as expressive of changes in the power of money to buy things.”
But modern economists “measure” inflation with an ever-changing basket of goods. They intentionally introduce subjectivity into inflation data through hedonic adjustments, substitutions, surveys, and the like.
This is suboptimal for truth but ideal for subversive and deceitful economic engineering.
It’s tempting to meticulously dissect each of the subjective inflation measurements. I could sift through mountains of academic papers and textbooks to analyze the nuances mainstream economics claims to offer.
But this would cede too much ground.
Mainstream economists have taken to heart the words of American comedian W.C. Fields, “if you can’t dazzle them with brilliance, baffle them with bullshit.” Economists love hiding behind jargon, formulas, and datasets.
Consequently, debating them on their own terms is a fool’s errand—an unwinnable game of intellectual Whac-A-Mole.
If mainstream economists can’t explain the basics of their ideas in plain English, then they don’t deserve to be taken seriously.
But for the sake of argument, I’ve gathered some key points from influential mainstream economists for us to consider.
Most inflation debates start with the assumption that inflation is both necessary and good.
But is this true?
Explaining the dangers of setting a zero percent inflation target, Ben Bernanke once warned, “We would be spending maybe half of our time, or a significant amount of time, in a deflationary zone. And we’ve seen in many instances that deflation can be bad for economic performance and bad for employment.”
But consider your own behavior regarding price deflation (not actual monetary deflation).
Everybody knows that electronics, like televisions, computers, and cell phones, have gotten better—and less expensive—over time. Yet we all buy them despite the radical price deflation.
Not long ago, computers occupied hundreds of cubic feet and cost millions of dollars. Today, laptops costing a few hundred bucks are better and more powerful in every regard. The boom we’ve seen in technology has caused massive price deflation—and is anyone complaining?
Why should we believe that wildly profitable industries can thrive despite lower prices, but widespread deflation would wreak havoc on the economy writ large?
If we take them at their word, deflation-phobes ignore or misunderstand basic human nature and time preference—people prefer goods and services today compared to having them tomorrow.
Mainstream economists love to exclude things like food and energy from their inflation analyses, saying they’re too volatile. But why is their convenience relevant to getting things right?
More important: how would your behavior regarding such expenditures be any different in a deflationary environment?
How many days in a row would you go without food, knowing your meals will cost a fraction of a penny less in the near future? How many days would you forego life’s pleasures, like a hot cup of coffee or a cold beer, because of falling prices? Would you live on the streets today because housing will cost slightly less next month and even less next year?
The fear of deflation is both illogical and ahistorical.
Salerno notes that from 1880 to 1896, prices in the US fell by 30% (1.75% per year). And at the same time, real GDP grew by 85% (5% per year)—the highest decadal rate of growth in US history.
From 1870 to 1898, wholesale prices dropped 34% (1.7% annually) and consumer prices fell 47% (2.5% annually). Simultaneously, real gross national product grew 4.5% annually. Consumption per capita increased 2.3% annually.
Salerno further notes that between 1998 and 2001, the Chinese economy grew 7.6% per year while retail prices fell between 0.8% and 3% per year.
In 2004, the American Economic Review published a paper by economists Andrew Atkeson and Patrick Kehoe that analyzed data from 17 countries spanning more than 100 years. The economists concluded that there is virtually no empirical evidence of a link between deflation and depression.
At best, mainstream economists ignore inconvenient truths. But I suspect they’re afraid to acknowledge a more damning truth—it’s impossible to meaningfully taper a fiat money, debt-based financial system without upheaving the established power structure.
Qui bono?
According to the Powers That Shouldn’t Be, yes, absolutely… as long as it’s moderate and constant.
Speaking at an economic conference, former San Francisco Fed President John Williams was asked how inflation benefits the average American. He reasoned:
“We know from economic theory and we also know from economic practice and experience that if you have on average 2% inflation, wages will grow faster than 2%. Salaries and wages will grow faster than 2%. So typically over history, incomes will grow about 3.5% dollar growth if you have 2% inflation because real wages, which are adjusted for inflation, are actually rising over time.”
Citing rising wages, Williams summarily rejected any suggestion that inflation steals purchasing power from the average person or household.
Titles and credentials be damned. Does Williams deserve to speak with such surety? Has he mastered the subject?
In September 2019, CNBC quoted Williams as saying, “low inflation is indeed the problem of this era.” CPI began the year at 1.6% and was 1.7% that month.
I won’t fault him for not predicting COVID-19. But it’s important to understand his mindset prior to the pandemic and subsequent government reactions.
Fast forward to March 2022… while speaking at a digital event hosted by the Council for Economic Education, Williams asserted:
“Clearly, the punchline is that inflation is high, much higher than we expected. And I expect inflation to come down this year but will still be well above our 2% goal. So really, that reassessment is telling me that inflation is going to be higher for longer than we thought. We’re absolutely committed to bringing inflation back to 2% and taking the actions necessary to do that.”
CPI was 8.5% as he spoke. It peaked at 9.1% that June, finishing the year at 6.5%.
Is this the best the Federal Reserve can muster?
CPI has been at or below 3% since June 2024. Here’s a smattering of recent headlines:
If we’re to believe Williams, 1.7% inflation is disastrously low and 2% inflation is unequivocally good.
But if 2% inflation is good for the average Joe, wouldn’t 2–3% be even better? Why do people continue to suffer with inflation at or below 3%?
I stand to be corrected, but I seriously doubt a million such headlines would do anything to convince Williams and company to seriously reexamine their priors. They’d double down on their rose-tinted calculations.
Well, free-market economists can also crunch numbers.
Last year, PhD economists EJ Antoni and Peter St. Onge calculated that US inflation since 2019 has been understated by nearly half.
Antoni and St. Onge reached this conclusion by focusing on biases in the official statistics:
The skewed official statistics resulted in economic growth being overstated by approximately 15%. For perspective, they note that the peak-to-trough drop in real GDP during the 2008 crisis was just 4%. By their calculations, America entered a recession Q1 22 and remained in contraction through Q2 24.
During the March 2022 event, Williams claimed that the US economy was “really strong” and there was “definitely not a stagflation issue.”
Oops.
A recession and falling real wages go a long way towards explaining the headlines above. Getting more technical, we could also consider the Cantillon and Inverse Cantillon Effects.
When push comes to shove, mainstream economists will always defend inflation. Ultimately, they must insist on the superiority of their own numbers and claim that millions of people misunderstand their own expenses and lived experiences.
Pathetic.
By changing the definition of inflation, mainstream economists get to play the blame game.
Inflation can be blamed on seemingly any superficially plausible reason:
My favorite explanation comes from Jerome Powell who eloquently blamed inflation’s victims when speaking before the Senate Banking Committee in 2023. Powell was asked how a 2% inflation target helps the average family. Rather than knocking this softball out of the park, he pivoted to blaming inflation on the average Joe:
“2% inflation, to have people believe that inflation is going to go back to 2% really anchors inflation there because … you know, the evidence is, and the modern belief is, that people’s expectations actually have a real effect on inflation. If you expect inflation to go up 5%, then it will. If everyone kind of expects that because that’s what businesses and households will be expecting and it will kind of happen because they expect it.”
You and your feelings are to blame!
Mainstream economists will blame seemingly anything except their conjuring of trillions from thin air.
“Everyone else is doing it!”
Children learn at a young age the unpersuasive nature of this attempted justification. Yet this is literally how the Fed officials choose to defend their 2% inflation target.
Returning to Powell speaking before the Senate Banking Committee in 2023, he attempted to justify the Fed’s 2% inflation target by explaining, “[2%] has become the globally agreed… essentially all major central banks target 2% inflation in one form or another.”
The Fed formally adopted the 2% inflation target in 2012. You might expect this figure to be backed by a mountain of data and precise calculations. But no, quite the opposite; the origin of the 2% inflation target is rather squishy.
After earning a PhD in economics from the London School of Economics in 1987, Arthur Grimes joined the Royal Bank of New Zealand (the country’s central bank).
As Grimes retells the story in a CNBC documentary from 2023, he relied heavily on his education when influencing New Zealand’s central bank act:
“If we have independence, what should we target? Interest rates or money supply? One day I just said, well actually, what are we trying to achieve? We’re trying to achieve price stability. Why don’t we just have an inflation target? It was like… cut through the middle man.”
Contrary to today’s nomenclature, Grimes did not set a strict 2% target: “We really wanted to embed our credibility by achieving a target that no one believed we would achieve. We made the target pretty tight… 1%, plus or minus 1%.”
New Zealand’s CPI had been bouncing between 10–15% since the early 1970s. Eventually, Grimes & Co. did get it down to 1%. “It took a few years before unemployment came back down to normal levels and inflation stayed low,” he recalls.
But even he admits that things didn’t end happily-ever-after: “I actually left the reserve bank in 1993 thinking that ‘OK now we’ve solved all the problems of monetary policy.’” With a chuckle, Grimes confessed, “Clearly, I’ve turned out to be a little too optimistic on that front in recent years.”
Reflecting on the issue more broadly, Grimes criticized Milton Friedman’s idea of 2–3% yearly deflation as being “too severe.” Interestingly, he called a yearly 1% deflation rate “not problematic” as it would simply reflect the reality that “a lot of prices are falling.”
It’s wholly unsurprising that today’s central bankers regularly violate Grimes’ upper bound and totally ignore his take on deflation.
It may be that 2% inflation is simply the maximum rate before voters get upset. If so, that just makes it a pain threshold, not a good idea.
Predictably, some influential economists advocate for an inflation target well above the norm.
Olivier Blanchard, former Chief Economist of the International Monetary Fund (IMF), has advocated for a 4% inflation target. So too has economist Laurence Ball, professor at Johns Hopkins University and visiting scholar at multiple central banks.
How do they explain the polls and headlines above?
Perhaps positioning himself as the inflation-Goldilocks, Paul Krugman advocates for a 3% inflation target.
Is he aware of how recent inflation has impacted the typical American?
I doubt it.
There’s reason to believe he hasn’t even attempted to understand.
In December 2021, Krugman posted, “Is there any good reason to believe that inflation hits low-income households especially hard?”
In a follow-up post, Krugman explained, “inflation redistributes from creditors to debtors—not exactly a burden on the bottom half of the income distribution.”
He ultimately concluded, “‘Inflation especially hurts the poor’ has truthiness—it sounds like it should be true. But I don’t see either evidence or a mechanism.”
In October 2023, Krugman declared victory over inflation, proclaiming “The war on inflation is over. We won, at very little cost.”
His proof?
A chart of six-month CPI change, annualized, excluding food, energy, shelter, and used cars.
Willfully blind.
I don’t know what Krugman genuinely believes. Perhaps he’d eventually confess that inflation disproportionately hurts the poor if he were dragged out of his ivory tower and forced to live near the poverty line.
Now is a good time to reassert that mainstream economists are cowards until proven otherwise.
In 2010, Ben Bernanke sat down for an interview with 60 Minutes to discuss the Fed’s decision to buy $600 billion in US Treasuries.
His explanation?
“It has to do with two aspects. The first is unemployment. The other concern I should mention is that inflation is very, very low… which you’d think is a good thing, and normally is a good thing. But we’re getting awfully close to the range where prices would actually start falling.”
The interviewer responded, “Falling prices lead to falling wages. It lets the steam out of the economy.”
Bernanke: “Exactly.”
Interviewer: “… and you start spiraling downward.”
Bernanke: “Exactly.”
Bernanke addressed his critics’ fear of inflation by claiming, “Well, this fear of inflation is way overstated. We’ve looked at it very, very carefully. We’ve analyzed it every which way.”
Interviewer: “Is keeping the inflation in check less of a priority for the Federal Reserve?”
Bernanke: “No, absolutely not. What we’re trying to do is achieve a balance. We’ve been very, very clear that we will not allow inflation to rise above 2% or less.”
Interviewer: “Can you act quickly enough to prevent inflation from getting out of control?”
Bernanke: “We could raise interest rates in 15 minutes, if we have to. So there really is no problem with raising rates, tightening monetary policy, slowing the economy, reducing inflation at the appropriate time.”
Interviewer: “You have what degree of confidence in your ability to control this?”
Bernanke: “100%.”
Did Powell and everyone else at the Fed not think to ask Bernanke for help? If Bernanke is correct, inflation would have actually been transitory (as was promised).
How is the inflation of the last few years not a major scandal?
Rather than entire schools of thought being put on trial, the issue is scarcely acknowledged. Speaking at a European Central Bank forum, Powell sheepishly confessed, “I think we now understand better how little we understand about inflation.”
Feel better?
It sure seems like mainstream economists and central bankers are not only winging it but also feel no fear of consequences from being wrong.
On the bright side, Powell can follow in Bernanke’s footsteps and win a Nobel Prize by authoring a jargon-filled autopsy on the matter while denying any and all responsibility.
It’s not difficult these days to find incendiary economic forecasts on social media.
We tend to steer clear of making predictions here at IndependentSpeculator.com. But I’m going to break the rules and make the least controversial “prediction” ever: officially recognized or not, inflation will persist.
War-time deficits are now the norm. And as Lyn Alden says, “nothing stops this train.”
The Fed lowered interest rates in September despite inflation being well above the 2% target. Powell’s plan for stagflation was to “not have it.” We’re now finding out that he has no Plan B.
The money helicopters aren’t coming back—they never left our skies.
Bernanke and company portend to have 100% confidence in the Fed’s ability to control inflation. Their abject failure says that buying the dips in Pet Rocks—if you haven’t already—is a good way to protect yourself from immortal inflation.
KJ
P.S. Gold bullion is for savings. Gold miners are for speculation. The price assumption used by most miners is $1,500+ below gold’s current spot price. See how Lobo is playing gold, silver, and other metals by subscribing to our free, no-hype, no-spam newsletter: The Digest.
