Episode 15: Inflation’s Inconvenient Complexities, Part 1

There’s been a lot of talk of inflation lately, with predictions in the media running from one extreme to the other.

Most folks define inflation simply as “rising prices.” But as John Flaherty and CEO Keith Weiner discuss in this week’s episode, it’s not that simple. There are a number of intricacies to be aware of if you want to understand what’s really going on.

In this episode:

• • Why there’s more to the story than simple rising prices
  • The appropriate standard when measuring economic goods & values
  • What holds up the value of the dollar & hides monetary dishonesty
  • How monetary manipulation hides efficiency gains in production

Additional Resources

• Chart discussed – Hidden Monetary Debasement

Episode Transcript

John Flaherty: Hello again and welcome to the Gold Exchange podcast. I’m John Flaherty and I’m here with Keith Weiner, founder and CEO of Monetary Metals. Today, we’re going to start a two-part series on inflation. A lot can be said on the subject because it touches our lives so directly.

In fact, just yesterday I was listening to a sports talk radio show and they were discussing the salaries of professional quarterbacks and how those big contracts keep getting bigger. In this first episode we’ll seek to define inflation and how it’s measured.  And then in the next episode, we’ll explore more of its effects.

So, first to definitions. Keith, a couple of the mainstream ones that come to mind is simply rising prices. That’s kind of what I reference the professional quarterback discussion, and that kind of ties directly to that. Another, more sophisticated definition would be that it’s just simply an increase in currency supply, relative to a fixed amount of goods, which then leads to rising prices. And so I’ve seen examples of kind of a sponge where you have this pool of currency and this fixed amount of goods has to sort of swell in response to a bigger pool of currency. And that’s the effects that we see.

And then, of course, there’s the famous Milton Friedman who said that inflation is everywhere and always a monetary phenomenon. So, Keith, I’d love for you to comment on these definitions. What might be the the shortcomings, and then how you would define inflation?

Keith Weiner: So first of all, one of the shortcomings of Milton Friedman’s definition, assuming that the rising salaries of quarterbacks is taken to be a sign of inflation, it could very well be. I’m not somebody who follows the professional sports industry closely. It could very well be that as the market for professional football grows there’s simply more viewers and more dollars in that market, and the value of the quarterback is actually higher. So in other words, sometimes prices change in response to actual changes in value.

If something happens to destroy 10 percent of the wheat crop, some wheat rust, or drought, or something like that, then wheat actually become scarcer and the price of wheat should actually rise. And that is not a monetary phenomenon. Although Friedman would quibble and say, “Well, I meant a general rise in prices, not one specific to one product.”

But of course, if the price of wheat rises enough that people turn to the substitutes such as corn and potatoes, and if there’s enough of a wheat shortage or a scarcity, then the prices of those other commodities could be bid up as well. And then one could say that food is getting more expensive because the marginal use of corn could be to feed pigs, and if now more corn is being demanded to feed people, then the price of pig feed goes up, and therefore the price of pork goes up and so on.

But getting back to inflation…there’s something I observe with a little bit of irony, and that is, that of course, very few people would agree to measure the dollar in terms of gold. So what do they want to measure the dollar in terms of? They want to measure the dollar, in terms of consumer prices, which are of course, measured in dollars. So it becomes a bit circular.

Prices are measured in dollars, the dollar is measured in terms of prices. And people say, well, if prices are going up, then that’s inflation, that the dollar is worth less. The problem with that is there are lots of things that can damage or undermine the dollar without necessarily causing prices to rise. And conversely, if price is rising, it could be due to non-monetary phenomenon, one of which I’ve written a lot about, and that is the rise or the increase of what I call useless ingredients.

So the quintessential useless ingredient is when the government forces gas stations to put either ethanol or a chemical called MBTE into the gasoline. It doesn’t add any power. It doesn’t add any value to the gasoline. In fact, it decreases your gas mileage. And it may increase the damage to your motor, but it adds a lot of cost. And that’s a perfect example of something that is a useless ingredient. And useless ingredients are being mandated in every industry. And so there’s a general upward pressure on prices due to the adverse effects of the ever-rising onslaught of regulations.

So getting out of that, the other thing that monetarists such as Friedman tend to look at is the quantity of dollars which they mis-call money. The dollar is a credit, it’s not an extinguisher of credit. We talked about that, I believe, in the previous episode. But a rising quantity of dollars, and they try to compare the quantity of dollars which they call money supply to the quantity of goods which they call goods supply. But the two are not comparable because the goods that are produced are to be consumed.

And money, whether it’s dollars or gold, is something that endures. So if I buy wheat from you in a transaction, the money that I give you, you can use it for the next transaction and the recipient of that same money can use it for the next transaction and so forth. But I buy the wheat in order to, let’s say, bake it into bread and then sell it to consumers to be consumed. So we’re comparing something that is constantly being produced and constantly being consumed or destroyed, and we’re comparing that to something that is not a flows, but a stocks.

And so the idea of comparing the two is tempting. It’s convenient because it would make economics so simple. If you could say, well, if you double the money supply, you double the general price level. And therefore, conversely, you can measure the debasement of the dollar in terms of consumer prices. Very tempting, very convenient. But it doesn’t really work that way.

John: So, again, there’s more to the story than simple rising prices. And I think that’s the point you’re trying to make. And you alluded to a few of these metrics. The most common one you see, is the CPI, which we all know stands for Central Planning Index. No, no, no consumer price index. I’ve heard it called the CP-lie. Is that a good measure of inflation?

Keith: Well, people who call it CP-lie are stuck on the idea that if you double the quantity of dollars, you double price level. So, of course, the “official” government statistic of the price level hasn’t doubled and this troubles certain folks, so then they say, “Well, the whole thing’s a lie. Really, prices have been skyrocketing as much as the quantity of dollars.” But it’s not true. It just isn’t. If you go to the grocery store, it’s not true that prices are skyrocketing in the way that their theory predicts. So instead of questioning the theory, they’re questioning the data that non-confirms their theory.

John: So what about the M numbers, M1, M2, M3, that are produced by the Fed and used in all sorts of sophisticated models to inform the central planners’ decisions? Are these reliable? Or meaningless numbers, ultimately?

Keith: So, one interesting observation is that there’s endless debate as to what the proper measure of the money supply is. Right?

So, conventional monetarists look at M0 and M1, M2, M3, and then the Austrians look at Austrian money supply, true money supply, MZM. There’s all these different definitions. Without getting into the technicalities of it. What’s interesting to me is that what’s happened is, since 1971, they’ve removed money –  gold – from the monetary system. Everything else is credit. The difference between a dollar of Federal Reserve liability and a 30 year Treasury liability, 30 year bond, is duration and interest rate. They’re both credit instruments.

So the reason why there’s so much debate about where to draw the line, is they’re trying to draw the line on the assumption that they’re trying to separate two different kinds of things. They’re trying to draw a dividing line between kind A and kind B, but in fact, they’re all the same kind of thing, which is credit. And they’re trying to draw the line there for deciding by a matter of degree which things go on the left side of the line, which things go on the right side of the line.

And so ultimately, it’s an exercise that doesn’t produce a lot of meaningful value.

John: So, Keith, what about velocity? I know we’ve touched on this in a prior episode, but I think it’s important, in light of this discussion, how does velocity impact inflation?

Keith: Well, as I think I said in that episode, it’s like you’re in organic chemistry lab and you’re trying to synthesize aspirin and you’re supposed to get a certain amount and you don’t. And so you invoke the fudge factor. The equations for Quantity Theory of Money say if you double the money supply, you’re supposed to get a doubling. You don’t. And so then you have to plug in a velocity and say, well, velocity was halved. That’s why prices didn’t change, you see.

But I don’t think velocity is really a real notion. I think it’s fabricated because it fits the purpose. It makes something that isn’t working appear to work. And so you have an equation and it becomes a tautology. And I think it’s an attempt to shore up or bolster a failed theory, which is the Quantity Theory of Money.

John: Gotcha. You have a chart that you often flash in your lectures…we’ll definitely link to that in the show notes. But could you walk us through the details of that chart and why it’s relevant to this discussion?

Keith: Every industry is constantly working to improve its efficiency. So, for example, I wrote an article for Forbes on how much wages have really been falling over the decades. And I got some great data from the Wisconsin Dairy Association on dairy production and the real factors of dairy production. That is like how many cows you got per acre, or how much land per cow, I guess, how much labor per cow, how much milk per cow you got and so forth. The actual real resources that went into producing a gallon of milk fell by something like 90 percent between 1965 and 2012. And so if you had a money that held its value, if you had objective money, you should see a 90 percent decrease in the price of milk.

Now, if somehow, the monetary magicians were to debase the dollar at a corresponding rate…so, over that same time period they debase the dollar by 90 percent…which is impossible. And even if they did, it wouldn’t affect the price of milk that way. But leaving aside those two glaring errors, they managed to debase the dollar at a matching rate such that the price of milk actually held steady. Most people would be tempted to say, well, there’s no inflation or there’s disinflation. But actually, the price of milk should have fallen 90 percent, approximately, and it didn’t. Because of monetary manipulation.

And so that’s what that chart is showing. There’s a huge drop in the real cost and then people only get all excited about the two percent increase in the nominal price, missing the fact that production of milk, along with the production of everything else, is orders of magnitude more efficient and therefore lower cost today versus in 1965.

John: Yeah, I think it highlights in one picture what you’re trying to communicate, and that is there’s A LOT going on under the surface. And to try to simplify inflation down to just Quantity Theory of Money is missing a lot. Let’s conclude by talking about gold.

Is the dollar price of gold a reliable measure of inflation?

Keith: If you mean in terms of, the dollar should lose value as they debase and debauch it? Not necessarily. And the thing that holds up the value of the dollar is the struggles of the debtors. Every producer is in debt up to their eyeballs. They have to work harder and harder and harder. They’re on a treadmill that’s cranking faster, to produce more and more stuff to dump on the bid price in the market in order to frantically raise enough dollars to service their debt.

And so you don’t necessarily see the monetary dishonesty. And so I don’t see it as a quantity problem. I see it as an ethical or moral problem. You don’t see the dishonesty. You don’t see the corruption necessarily in dropping price of the dollar, which I think should be measured in gold. So just just for reference, in August of 2020, the dollar had made a new low of around 15 milligrams of gold. So I think the dollar should be priced not in consumer goods, but in gold.

It made a new low of 15 milligrams. And today, as of Friday, February 26, or recording this just slightly after that, the dollar is about 18 milligrams of gold. So it’s risen from 15 to 18 milligrams, which is a rise of about twenty percent. So the dollar has some real volatility in it. And I suggest that gold should be used as the closest thing to an immovable object. It’s like measuring altitude. If you climb a thousand meters, you say, well, I got ten thousand meters higher.

And so I’m going to criticize that. And I could say, well, you do realize the Earth is going around the sun at this velocity and the sun is going around the center of the Milky Way galaxy, at this velocity, the Milky Way galaxy is careening towards another galaxy, that two galaxies are going to collide in another few billion years. And so, therefore, the motion of climbing up the mountain is nonobjective or something like that. To which I would say, if you’re on Earth, the appropriate standard for altitude is sea level.

And that’s the reference point. And if you’re measuring economic goods or economics values, the appropriate standard is gold. And I think the dollar, along with everything else, should be measured in gold.

John: All right, well, that’s all the time we have today. Next episode, we’ll continue our discussion on inflation. Here in Arizona, as with other places, real estate is just going bananas. And we’re seeing gas prices on the rise. So we’ll continue to talk about actual inflation, its effects, how the Fed is involved, inflation targets, etc. Thank you for joining us on The Gold Exchange.