Sunday, July 13, 2008

Prices aren't rising

Prices aren't rising, folks, despite what you see at the pump and the grocery store. Prices are in whatever your local currency is, dollars or pounds or shekels or whatever, and the value of your currency is dropping as your duly elected representatives, and the banking system over which they notionally preside, shamelessly inflate said currency by (a) not having it backed by anything real and (b) increasing the supply of your currency faster than your economy is growing.

This act of debasing one's currency actually feels good for a while, perhaps like the warm rush one feels when one wets the bed. Inevitably, however, that warm rush is replaced by cold and smelly sensations. So it is today across our economy.

Forty years ago I worked as a grocery clerk at the local supermarket. Kraft Dinner would go on sale at 6 for $1. Now I would be lucky to find it at $1 per box. Bread was 15 to 23 cents per loaf depending on the brand and (seemingly) how brown it was. The price of Kraft Dinner and the price of bread were pretty good reflections of the cost of their production and handling in the currency of the time; neither could be considered luxury items where pricing included a big premium for their fancy image.

When you complain about the cost of gasoline, or electricity, or bread or Kraft Dinner or beer, pause for a moment and think about how markets work and how prices are set. Producers will seek to cover their costs of production, make a profit to cover their risks and the financing of their new product development, and build their brand image in the minds and hearts of consumers. Governments will want their cut of taxes, both for general revenues and for social engineering purposes, such as to discourage people from driving or drinking too much beer. Retailers need to pay rent and taxes, and retain capable staff. The hidden assumption in examining the pricing of all of this is that the currency underlying these transactions is stable in its value. Manifestly, it is not stable, and has not been since the world began its drift from the gold standard a hundred years ago.

What bothers me most during this inflationary trend is that politicians, with increasing frequency, will climb onto a soapbox and promise price controls or competition reviews to address increasing prices, which are mainly the symptom of the inflation problem which they themselves have allowed to happen. Back our currency with something that has enduring value (gold or silver come to mind) and hold the growth in money supply to the rate at which our economy grows. We will return to price stability and our currency would become the envy of the world.

Ain't gonna happen. We are too busy trying to get warm by wetting the bed.

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