December 30, 2003

Inflation: The Grand Illusion

Sean Corrigan on the consequences of inflation:

Aside from that particular inefficacy of the inflationary cure, we also have to contend with the other difficulties to which inflation gives rise - among them the invalidation of already faulty entrepreneurial calculation, the disruption of many entrained production processes, and the implicit frustration of contracts between lenders and borrowers, and savers and investors.

Of even more immediate concern is this: While we know a new inflation will build its usual distortions under the veneer of a temporary prosperity (mostly localized among those favored to receive the first use of the new means of payment), we remember also Hayek's point that those dependent on the artificial stimulus of inflation for their continuance will become so addicted to it that they will sicken and die if that inflation slows or is redirected.

To date in this so-called "jobless recovery," US-driven inflation has, in fact, succeeded in leading to more labor being hired. However, to the collectivists' dismay, the new labor is largely in China, where the labor distribution is better adapted to US spenders' needs and where total relative labor costs are substantially lower than they are in the US.

In this, US consumers - sustaining their lifestyles not from sufficient production of exchange value, but by using borrowed money they have not earned - have been exhausting the fruits of others' labor via the consumption of present capital and the alienation of future income. Neither of these trends can be maintained indefinitely in real terms, though they can be monetarily disguised for long enough that the damage can become severe before it is fully recognized.