On the Matter of Inflation, We Have a Problem of Definitions

With inflation we seem to have a problem of definitions. More specifically, everyone seems to want to give inflation a definition as opposed to accepting the definition. It’s the word equivalent of various writers deciding that “excellent” isn’t simply “great,” and that going forward what signifies great will now have varying meanings including bad, average, and corpulent. No, excellent means one thing.

Historically inflation had a singular meaning. It was a devaluation of the currency. Inflation was Germany in the early 1920s as the mark fell to less than a four billionth of a dollar. In Argentina, a peso billionaire as of the 1950s was worth pennies several decades later thanks to the peso’s devaluation. Before Zimbabwe dollarized (making official what markets had long before made official), the country’s “dollar” went into stupendous decline such that there are countless ZWD billionaires around the world, including yours truly.

This is useful to bring up in consideration of a co-authored opinion piece by Dartmouth professor Andrew Levin and Rosenberg Capital Markets senior economist Mickey Levy. They wrote that the Labor Department recently “confirmed something you already know: Inflation is far too high.” Not asked is why the Labor Department’s opinion would be germane to something related to the dollar. The simple truth is that the rate of unemployment doesn’t have anything to do with inflation. Think about it.

Was Germany’s hyperinflation born of too many German’s working and prospering? Did the same transpire in Argentina and Zimbabwe? These questions are rhetorical.

From there, Levin and Levy note that readers “may be wondering what the Federal Reserve’s plan” is to bring down inflation. They ask the question to make a bigger point that on the matter of a specific plan to arrest inflation, “The Fed doesn’t seem to know either.” And it shouldn’t know. Really, why would the Fed have a plan to fight inflation? The question isn’t as flippant as it may appear. While this has been forgotten in modern times, dollar policy is not part of the Fed’s portfolio. Translated, the Fed’s role has nothing to do with maintaining a stable, non-inflationary dollar. History is clear here.

When FDR decided to devalue the dollar from 1/20^th of a gold ounce to 1/35^th in 1933, he did so in the face of major protest from Fed Chairman Eugene Meyer. So incensed was Meyer that he resigned over a policy choice that he was powerless to stop. And while Arthur Burns didn’t resign over President Nixon’s decision to sever the dollar’s link to gold, he protested it passionately without success. The dollar collapsed in the 1970s. The collapse was inflation and there was nothing the Fed could do about it. The Fed yet again doesn’t do dollar policy. It never has.

Which is why the question is asked about the Fed having a plan for what is a currency phenomenon. Of course it doesn’t.

All of which leads to a question about the dollar under Joe Biden. Since this is accepted as “Biden’s inflation,” the dollar must have collapsed? Actually, it’s risen against every major foreign currency since January of 2021, and similarly has risen a fair amount against gold. Translated, this would be the first inflation in the history of mankind in which the currency rose.

It’s useful to bring up in light of Levin and Levy’s assertion that “The economy now faces a serious risk of persistent high inflation.” Not explained is why. Germany’s hyperinflation was ended in a week. Its inflation after WWII similarly ended quickly with the introduction of the deutschemark. In the U.S. we plainly don’t have hyperinflation, but the dollar is certainly weak in a 21^st century sense. Most notably the dollar fell a large amount during the presidencies of George W. Bush and Barack Obama. If Biden wanted, he could stage a press conference with Janet Yellen at which the two could state a preference for a stronger, more stable dollar. Inflation fixed.

Indeed, in focusing on prices as evidence of inflation, Levin and Levy are at best focusing on symptoms. To blame inflation on rising prices is like blaming rain on wet sidewalks. Causation is reversed. Looked at in terms of today, we allegedly have inflation at a time of a rising dollar against currencies and gold. To paraphrase my friend David Bahnsen, wouldn’t the latter at least cause inflation hawks to question their conclusions?

Figure that prices can rise for all manner of reasons that have nothing to do with currency devaluation. Conversely, one of the biggest drivers of falling prices is work divided. Is the division of labor deflationary? Certainly not, and it’s not because it’s not a currency phenomenon as much as work divided enables enormous specialization on the way to falling prices. In that sense, high prices today are kind of a statement of the obvious: global lockdowns eviscerated or compromised trillions of global commercial relationships. Naturally prices are higher today, but that’s not inflation. See the dollar again.

Which has this reader wondering if Levin and Levy are looking in the wrong places. They worry the Fed could be ignoring the possibility that “inflation could turn out to be much higher,” and as such they bring up the possibility that the Fed isn’t hiking enough. But what does boosting an artificial rate have to do with the dollar’s value? Furthermore, if there is true inflation of the debauched currency kind, isn’t the Fed a bit superfluous? Really, what private lender wouldn’t raise borrowing rates amid a falling dollar?

Levin and Levy also write about “unprecedented fiscal stimulus” as a source of higher prices, but governments can only give out what they’ve taken. Government can’t create demand, and it certainly can’t beat inflation by putting people out of work. Puzzlingly, that’s where Levin and Levy leave it; they revert to Paul Volcker hagiography and the falsehood that inflation’s cure was economic desperation. More realistically, Ronald Reagan ran on reversing President Nixon’s dollar devaluation.

Presidents yet again get the dollar they want. Assuming there’s inflation, the fix is simple. The challenge seems to be definitions.