And then I got a new job with a small steel warehouse. The counter man -- Wesley, his name was -- once said something I never forgot. He said, "We have to raise our prices, because our costs are going up."
This wasn't Milton Friedman's explanation. It was something else. As I look back now, it is clear to me that "always and everywhere" is not the same as "only." Friedman said prices go up when the quantity of money goes up, always and everywhere. He didn't say that was the only reason prices go up.
When you raise your prices because your customers have "too much money," your good profit gets better. When you raise your prices because you have to, it's because your profit is being squeezed. These two worlds are totally unlike one another.
Milton Friedman explained demand-pull inflation. Wesley introduced me to cost-push. Everybody today is familiar with Wesley's problem. Our costs are going up. Health care costs. Gasoline and heating oil. Candy bars and coffee. Costs are going up and it's tough to make ends meet. We have met the enemy and it is cost-push inflation.
We've been fighting cost-push inflation since the 1960s with Friedman's method. But Friedman's method is for demand-pull inflation. We've been fighting the wrong war. This is why we have been unsuccessful, why inflation continues.
There is more: We have restricted the quantity of money so very much that it hinders growth. So Congress pulls rabbits out of hats to boost growth. Mostly, they do things that make it easier to use credit.
Take a dollar out of your pocket and look at it. Is it a dollar? Or is it a dollar of credit-in-use? You think you know the answer. Here's my answer: Do you have any debt? Do you owe any money? If you do, then you could use that dollar to reduce your debt. So then your dollar isn't a dollar. It's a dollar of credit-in-use, which quits being "in use" when you pay off some debt with it.
They all look alike. And money is fungible. Interchangeable. One dollar is as good as another. Five of 'em are as good as a fiver. Interchangeable. Except for one thing: Credit-in-use bears a cost that the dollar doesn't. The cost of interest.
Oh, by the way: the cost of interest? That's the cost that's pushing prices up. Not oil. Not health-care. Not candy-bars. Those are the consequences.
3 comments:
Ah, but doesn't a shift in the relative price of steel perforce lower the price of other goods. If I spend more on steel, I have less to spend on other goods.
I think, as you have intimated, that there is a fundamental difference between inflation and relative price moves. I don't think Friedman would have called the increase in steel prices inflaton. He would have called it a price change.
Of course, in practice, how can we measure such differences. If the prices of inputs are rising because of a depreciation of the dollar, do we attribute the change to money are real relative prices? I don't know.
Idunno, SE. To my mind, when I look at too much money chasing goods, I see the providers of goods grabbing a little extra of that money. I see profit improving. Wesley had a different problem.
No. You know what? The Secret Economist says: "Ah, but doesn't a shift in the relative price of steel perforce lower the price of other goods. If I spend more on steel, I have less to spend on other goods."
No. I don't necessarily "have less to spend on other goods," because I can use tomorrow's money today. I can use credit. And when I run out of tomorrow's money I use the next day's money, and the next... For which I'll gladly pay you on Tuesday.
Excessive reliance on credit changes the game, and things we know to be true become false. If I spend more on steel, I do not necessarily have less to spend on other things. Not 'til the future gets here.
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