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Inflation Does Not Produce Economic Growth

Tyler Durden's picture




 

Submitted by Frank Shostak via the Ludwig von Mises Institute,

After settling at 3.9 percent in July 2011 the yearly rate of growth of the consumer price index (CPI) fell to 1.6 percent by January this year. Also, the yearly rate of growth of the consumer price index less food and energy displays a visible downtrend falling from 2.3 percent in April 2012 to 1.6 percent in January.

On account of a visible decline in the growth momentum of the consumer price index (CPI) many economists have concluded that this provides scope for the US central bank to maintain its aggressive monetary stance.

Some other economists, such as the president of the Chicago Federal Reserve Bank’s Charles Evans are even arguing that the declining trend in the growth momentum of the CPI makes it possible for the Fed to further strengthen monetary pumping. This, Evans holds, will reverse the declining trend in price inflation and will bring the economy onto a path of healthy economic growth. Evans also asserts that the Fed should be willing to let inflation temporarily run above its target level of 2 percent. He also said that an unemployment rate of about 5.5 percent and an inflation rate of about 2 percent are indicative of a healthy economy.

But how is it possible that higher price inflation will make the economy stronger? If price inflation slightly above 2 percent is good for the economy, why not aim at a much higher rate of inflation, which will make the economy much healthier?

Contrary to Evans a strengthening in monetary pumping to lift the rate of price inflation will only deepen economic impoverishment by allowing the emergence of new bubble activities and by the strengthening of existing bubble activities.

It will increase the pace of the wealth diversion from wealth generators to various non-productive activities, thereby weakening the process of wealth generation.

Evans and other economists are of the view that a strengthening in monetary pumping will strengthen the flow of monetary spending, which in turn will keep the economy stronger.

In this way of thinking, an increase in the monetary spending of one individual lifts the income of another individual whose increase in spending boosts the incomes of more individuals, which in turn boosts their spending and lifts the incomes of more individuals, etc.

If, for whatever reasons, people curtail their spending this disrupts the monetary flow and undermines the economy. To revive the monetary flow it is recommended that the central bank should lift monetary pumping. Once the monetary flow is re-established this sets in motion self-sustaining economic growth. So it is held.

Again we suggest that monetary pumping cannot set in motion self-sustaining economic growth. It can only set in motion an exchange of something for nothing (i.e., economic impoverishment).

As long as the pool of real wealth is still growing, monetary pumping can create the illusion that it can grow the economy. Once however, the pool is declining the illusion that the Fed’s loose policies can set in motion economic growth is shattered.

If, on account of the deterioration of the infrastructure, a baker’s production of bread per unit of time is now 8 loaves instead of 10 loaves, and the shoemaker’s production per unit of time is now 4 pairs of shoes instead of 8 pairs of shoes, then no amount of money printing can lift the production of real wealth per unit of time (i.e., of bread and shoes). Monetary pumping cannot replace non-existent tools and machinery.

On the contrary, the holders of newly-printed money who don’t produce any real wealth will weaken the ability of wealth generators to produce wealth by diverting to themselves bread and shoes, thereby leaving less real wealth to fund the maintenance and the expansion of the infrastructure.

Now, Fed officials give the impression that once they put the economy onto the so-called self-sustained growth path the removal of the monetary stimulus will not generate major side effects. But in reality a loose monetary policy sets in motion bubble activities. The existence of these activities is supported by monetary pumping, which diverts to bubble activities real wealth from wealth generating activities.

Once monetary pumping is aborted, bubble activities are forced to go under since they cannot fund themselves without the support of loose monetary policy. An economic bust ensues. The illusion that the Fed can bring the economy onto a self-sustaining growth path is shattered.

 

Conclusion

On account of a visible decline in the growth momentum of the US price index, many economists have concluded that this provides scope for the Fed to maintain its aggressive monetary stance. Some economists such as the president of the Chicago Federal Reserve Bank, Charles Evans, even argue that the declining trend in the growth momentum of the CPI makes it possible for the Fed to further strengthen monetary pumping. This, it is held, will reverse the declining trend in price inflation and will bring the US economy onto a path of healthy economic growth. We suggest that contrary to Evans, a strengthening in monetary pumping will only deepen economic impoverishment by allowing the emergence of new bubble activities and by the strengthening of existing bubble activities.

 

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Tue, 03/18/2014 - 17:34 | 4565220 maskone909
maskone909's picture

Growth is irrelevant when you cant get a return on your money.

Tue, 03/18/2014 - 17:46 | 4565251 maskone909
maskone909's picture

Ot

Local news station shows penis during live helicopter crash report

Project mayhem

Edit here is uncensored

http://deadspin.com/denver-news-station-accidentally-puts-a-big-ol-dick-...

Tue, 03/18/2014 - 18:01 | 4565312 Overfed
Overfed's picture

LOL!!!

Tue, 03/18/2014 - 18:55 | 4565518 Stoploss
Stoploss's picture

What percentage of inflation was it?  Looked like just a little more than 2%.

 

Didn't take the girls long to notice that did it.  LOL!!!

Tue, 03/18/2014 - 19:06 | 4565559 Overfed
Overfed's picture

Yeah. They were like "scroll back, scroll back!"

Tue, 03/18/2014 - 17:37 | 4565227 Cattender
Cattender's picture

Inflation is Awesome!!!!! it's just that we are NOT Seeing Nearly Enough of it yet! PRINT JANET PRINT!!!!!!  (you crazy bitch!)

Tue, 03/18/2014 - 17:54 | 4565292 aVileRat
aVileRat's picture

Inflation caused by demand, true demand for human capital or CapEx is a signal of a good economy which is building shit. Like your body sweating as it is working out.

Inflation caused for the sake of inflation is just stupid as shit. I guess the medical analogy would be to heat up the body to burn out the disease. Only in bioscience, heating up the body only increases the rate of infection aid the rot spreads. .....So I guess, just like science says so, heating up a sick body is a stupid as shit idea.

Good thing the dismal science learns from other silos of academia.

 

Tue, 03/18/2014 - 18:57 | 4565526 khakuda
khakuda's picture

I'm waiting for the current Fed guys and gals to pull a Greenspan and come out and say, "Well, our models were wrong.  We can't believe it, but new research says it is so."

Maybe they are reading the economic texts from back to front.

Tue, 03/18/2014 - 19:01 | 4565537 Mudduckk
Mudduckk's picture

Not heat up the body...but put a flame under thermometer in a cold room and then report to the occupants, "be happy now that the room has achieved a comfortable temperature."

Tue, 03/18/2014 - 20:38 | 4565878 X_mloclaM
X_mloclaM's picture

Not optimal body temperature, but with free production of money, inflation (defined as +money supply) in absolute terms, could grow with the market's growth in demand for money. But to say it is a 'sign' of economic health, no. Market health persisted through the post civil war silver deflation (and price deflation); Sawant Wants You!.

Tue, 03/18/2014 - 17:40 | 4565234 Smegley Wanxalot
Smegley Wanxalot's picture

Inflation does so produce economic growth. 

The Fed said so!

Wed, 03/19/2014 - 12:41 | 4568133 XitSam
XitSam's picture

It does. But only temporarily, benefits those that get the first couple rounds of it, leads to malinvestment and the inevitable crash after.  So it is only false growth and to be avoided.

Tue, 03/18/2014 - 17:40 | 4565235 mayhem_korner
mayhem_korner's picture

many economists have concluded that this provides scope for the US central bank to maintain its aggressive monetary stance

 

LOL.  There is one and only one result when the currency supply expands faster than production.  The recent phenomenon of (understated) "low" inflation is a function of liquidity hoarding by the banks.  The inflation kraken will be released in time.

In the meantime, "many economists" wax on about maintaining an "aggressive monetary stance" because postponing the carnage is the only viable path.

I grow tired of asking, so this will be the last time.  When does this comedy show end?  - channelingTarkin, Star Wars

Tue, 03/18/2014 - 17:40 | 4565237 Schmuck Raker
Schmuck Raker's picture

"Assume the second chart to be different."

Tue, 03/18/2014 - 17:41 | 4565238 i_call_you_my_base
i_call_you_my_base's picture

It never was or is about growth. It's about distributing the cost of debt.

Tue, 03/18/2014 - 17:42 | 4565241 newsguy68
newsguy68's picture

 What Do You Think Of This?

 

20 Passengers From Missing Malaysia Flight Were DOD Employees Involved In Electronic Warfare & Weapons That Can “Cloak” Or Make Planes Invisible 

 

http://govtslaves.info/20-passengers-missing-malaysia-flight-dod-employe...

Tue, 03/18/2014 - 17:45 | 4565254 Cattender
Cattender's picture

NOTHING in this World matters MORE than the missing plane!!!! OMFG!!!!

Tue, 03/18/2014 - 17:48 | 4565269 mayhem_korner
mayhem_korner's picture

20 Passengers From Missing Malaysia Flight Were DOD Employees Involved In Electronic Warfare & Weapons That Can “Cloak” Or Make Planes Invisible

 

Wake me up when they also have the Elder Wand and the Resurrection Stone.

Tue, 03/18/2014 - 17:45 | 4565256 EndOfDayExit
EndOfDayExit's picture

Inflation per se does not cause growth. If it were, then all they had to do was to send out $50K checks to every household, and the problem would have been solved. Organic growth from the other hand does cause some inflation. It is this inflation-as-a-result of growth, which Fed is so desperate to see, yet there is none. As Hussman put it concisely, money printing does not create new business opportunities. 

Tue, 03/18/2014 - 17:49 | 4565273 NOTaREALmerican
NOTaREALmerican's picture

Inflation DOES produce economic growth in direct proportion to the amount of devil-may-care risk you are willing to accept.

Inflation BENEFITS the top 10%, that's WHY we have inflation.   

God,  these Libertarians are as bad as the socialists and communists.  It's like they aren't human.

How do these semi-austist Libertarians even survive long enough to reproduce?

Tue, 03/18/2014 - 17:58 | 4565307 Bioscale
Bioscale's picture

You are trying to be smart, but you look stupid. Go and read

What Has Government Done to Our Money?

https://mises.org/money.asp

Tue, 03/18/2014 - 19:15 | 4565589 NOTaREALmerican
NOTaREALmerican's picture

Re:  Go and read

Looks like somebody is confusing what "our money" means?

The government is owned and operated for the top 10%.    The top 10% is doing quite well with "our" money, because it's actually THEIR money.  

Why don't these semi-austistic Libertarian economists ever write a book titled:

Assholes, why they win  (colon)   How the smart-n-savvy extroverted assholes create bullshit for the clueless dumbasses about how the world is supposed to work while the smart-n-savvy extroverted assholes don't follow the rules and actually get all the best looking females. 

Tue, 03/18/2014 - 20:55 | 4565939 FredFlintstone
FredFlintstone's picture

This is a man who knows how the world works. I on the other hand am one of those semi-autistic types who is finally figuring out this stuff.

Tue, 03/18/2014 - 20:47 | 4565904 X_mloclaM
X_mloclaM's picture

Inflation DOES produce "economic growth".

Yeah, as defined as GDP, a numerical addition of transformed inflation...  Retard says y = y

U sound like Keynes, conflating a causal function with an identity.

Inflation BENEFITS the top 10%, that's WHY we have inflation.  

yep

Tue, 03/18/2014 - 17:51 | 4565281 q99x2
q99x2's picture

Yellen needs to print. Now there's a novel idea.

Tue, 03/18/2014 - 17:54 | 4565289 smacker
smacker's picture

"Inflation Does Not Produce Economic Growth"

This is true.

But it sure provides the criminal elites to juggle numbers, tell lies and fool electorates into thinking that there is.

That's all that matters to them.

Tue, 03/18/2014 - 17:57 | 4565302 Johnny Cocknballs
Johnny Cocknballs's picture

fucking idiot fucks.

it would be cute if these fuckers weren't given such vast power to test their theories out on the world.

inflation produces theft.

 

And that is all it does.

Tue, 03/18/2014 - 18:12 | 4565347 actionjacksonbrownie
actionjacksonbrownie's picture

It does one more thing - it keeps the Fed ponzi scheme alive. It is absolutely necessary, as there is more debt+interest, than there is money - hence the need for money supply inflation.

Tue, 03/18/2014 - 18:59 | 4565535 negative rates
negative rates's picture

And don't forget the reverse inflated pothole, expensive buggers they are.

Tue, 03/18/2014 - 18:16 | 4565367 nakki
nakki's picture

How can inflation be good unless you have wages going higher. Evans is just another clown who could give a crap about 85% of the population. Does the jerkoff want rates to rise? How about housing prices going higher so everyone can use their primary residence as an ATM again. Economists are perhaps some of the dumbest fucks walking the planet. Maybe with inflation, oil could hit $150 a barrel that should get things moving. If the FED really wanted inflation they'd send every family in the US a check for your $25,000. 

Tue, 03/18/2014 - 18:27 | 4565408 A Lunatic
A Lunatic's picture
Inflation Does Not Produce Economic Growth

Of course not. Printing money does......

Tue, 03/18/2014 - 18:30 | 4565421 Freewheelin Franklin
Freewheelin Franklin's picture

2 + 2 = 4

 

I had 4 semesters of Calculus in college and no matter how complex the problems, this was always true. 

 

Economics has a similar "law". It's called "Say's Law". 

 

“it is production which opens a demand for products. . . . Thus the mere circumstance of the creation of one product immediately opens a vent for other products.” Put another way, Say was making the claim that production is the source of demand. One’s ability to demand goods and services from others derives from the income produced by one’s own acts of production. Wealth is created by production not by consumption. My ability to demand food, clothing, and shelter derives from the productivity of my labor or my nonlabor assets. The higher (lower) that productivity, the higher (lower) is my power to demand."

Tue, 03/18/2014 - 18:38 | 4565458 NOTaREALmerican
NOTaREALmerican's picture

Re;  Economics has a similar "law". It's called "Say's Law". 

Unfortunately,  most Economic laws were written by semi-austistic males trying desparately to "explain" how the non-semi-austistic people around them were screwing each other.

Here's an actual human law:  bullshit adds value to (almost) anything.

Government + bullshit = politics.
stuff + bullshit = bling
morals + bullshit = religion.
craft + bullshit = splatter art.

X + bullshit = $ ** bullshit (money to the power of bullshit).

When dealing with humans, if you don't account for the bullshit you haven't accounted for reality.

Tue, 03/18/2014 - 20:49 | 4565912 X_mloclaM
X_mloclaM's picture

aaaand that's why it's called Human Action...

Tue, 03/18/2014 - 22:45 | 4566307 Freewheelin Franklin
Freewheelin Franklin's picture

Well, what do you expect when all value is subjective?

Tue, 03/18/2014 - 18:51 | 4565504 Spungo
Spungo's picture

Raising the cost of energy and food leaves less money in my pocket for consumer spending, therefore the economy will grow. Duh. It's so simple you guys.

Tue, 03/18/2014 - 18:54 | 4565512 khakuda
khakuda's picture

Why couldn't Charlie Evans be on that Malaysian flight?

Tue, 03/18/2014 - 19:13 | 4565555 Wait What
Wait What's picture

is it me, or does it feel like this article could have been written w/ 10th grade knowledge of Econ and English? while i commend the author for conciseness and strict adherence to standard literary structure, it tells me nothing about the mechanisms by which inflation does or does not produce growth at the macro level.

it does illustrate one thing: capitalism that isn't constantly expanding will eat itself when push comes to shove, which obviously explains why its in America's best interest to push democracy (and corresponding institutions, i.e. opening of markets) wherever it doesn't exist.

never cared much for Marx's political economy, but his view of the history and evolution of capitalism does seem spot on. Karl Marx, Capital, Vol.1, Ch.XXV "The general law of capitalist accumulation."

strikes me that, w/ as much education in communism and its history as both Russia and China have in their ranks, wouldn't it be an out-of-nowhere Knight takes Queen move if the whole time they've been playing at capitalism they've really been subversively nurturing its demise?

Tue, 03/18/2014 - 19:50 | 4565665 slightlyskeptical
slightlyskeptical's picture

I would say you are probably right, but you can't ignore the level of domestic subversiveness that exists either.

Holy moly, I turned off animations and now iIcan type normally! Tylers..do you realize what these multiple animations do to peoples computers? Due to animations only 1 in every 3 or 4 letters made it in the original post. If anyone else is having isssues I reccomend you do the same.

 

Tue, 03/18/2014 - 19:30 | 4565639 JailBanksters
JailBanksters's picture

I think the Club Fed does all their Financial Planning using Sim-City 1.0, either that or a Magic 8 Ball. And at times, I'm sure their using the 8 Ball and there lies the Magic of Banking.

 

Tue, 03/18/2014 - 19:39 | 4565660 AdvancingTime
AdvancingTime's picture

We should understand that demand drives investment, confidence is not the real driver. Lack of real growth is about lack of real demand. Much of the demand we see today is driven by artificially low interest rates and a mirage in the markets they distort. By this I mean that the distortion and illusion that the economy is healthy tends to cause people to make poor economic choices. The article below looks into how this creates the wrong kind of growth.

http://brucewilds.blogspot.com/2014/01/false-demand-fuels-wrong-kind-of-...

Tue, 03/18/2014 - 20:32 | 4565845 The Most Intere...
The Most Interesting Frog in the World's picture

If I read the word "bubble" one more time I'm gonna blow huge chunks...  fucking pop already...

Tue, 03/18/2014 - 20:33 | 4565852 The Most Intere...
The Most Interesting Frog in the World's picture

Just noticed this...

Copyright ©2009-2014 ZeroHedge.com/ABC Media, LTD

LOL does ABC own ZH???

Tue, 03/18/2014 - 21:04 | 4565963 Drifter
Drifter's picture

Yawn.

What is this, the 2,365th article on this subject since '08?

Tue, 03/18/2014 - 21:17 | 4565982 Jack4952
Jack4952's picture

Should the government's CPI and other data be considered accurate?

According to John Williams at ShadowStats.com, the current real CPI is about 5% (government says around 1.6%); and the current real unemployment rate is around 23% (government says around 6.9%).

We know as fact that the government stats EXCLUDE food and energy - which are the most basic needs of people. Further, the increase in prices for many products are "adjusted" downwards based on supposed "efficiencies" introduced into those products. Excuse me, but when the price for the SAME make and model refrigerator increases, to ME that is a REAL price increase - even if the extra 0.001 inch of insulation offers some increase in "efficiency". Hell, I could have turned up the refrigerator's thermostat 2 degrees and saved a lot more electricity!!!

 

The fact (Surprise!)is that the government's statistics can NOT be presumed to be accurate.

If simply dumping more money (paper or digital) into the system created real wealth, why was Weimar Germany not SUPER WEALTHY? Indeed, why not load up fleets of military cargo planes and drop $100 bills all over the U.S.? If Mr. Evans at the FED is correct, should that not make us all wealthy?

(Just send ONE cargo plane to my house. OK, Ms. Yellen?)

 

Wed, 03/19/2014 - 00:14 | 4566495 starman
starman's picture

Jack its Mr Yellen not MS!

Tue, 03/18/2014 - 21:26 | 4566048 Jack4952
Jack4952's picture

I forgot to ask:

I read somewhere in the last few days that people in the U.S. are quickly using up their SAVINGS, especially money that had been saved or invested for their future retirement. The author then asserted that for many folks, this source of money was about to run dry - forcing people to drastically cut back on all except the most essential purchases. He concluded that as spending decreases over time and eventually this money runs dry, the retail sector will suffer a CRASH like it has never seen before. (I searched around for the article, but cannot locate it.)

Has anyone read any similar articles? Is this guys full of BS?

Thanks.

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