How inflation works 2

Some notions of inflation, money and finance… (2/3)

Read part 1

Keywords: money, cost, Friedman, Keynes, chicago boys, monetary, Central Bank, ECB interest rates

1st point: Fight against inflation? Yes but which one?

Have you ever been interested in knowing how the Central Bank or our governments interpret “inflation” and measure it?

While inflation is normally defined as a lasting rise in the general level of all prices (i.e. the prices of everything traded - bought and sold - in an economy), In fact, the inflation numbers circulated over and over again in the media actually correspond to “rising consumer prices”. This is how all the prices of all the traded products are not taken into account. The prices of what is aptly called "the investment" are thus carefully excluded from the calculations.

Think about it carefully: a consumer good, by definition, loses its value over time (you will undoubtedly sell it for less in a year than when it was purchased), whereas an investment is by definition (or by definition). convention?) supposed to correspond to the reverse. But why is that? I will answer with a joke: because for some to be rich, it is essential that others be less rich, or even poorer (remember: by definition, wealth is relative).

Those who will invest will be (in a system that no longer euthanizes the pensioners) richer than those who only consume! This was to be demonstrated.

You don't understand why real estate prices are soaring and official inflation does not exceed the famous 2%? Look no further: the purchase price of housing (new or old) is not taken into account in inflation! Normal, answer the economists, we consider that it is an investment! However, 55% of French people “own” their home (in fact, often tenants from their banker who lent them the money!). Suddenly, and quietly, the part "Housing, water, gas, electricity" is reduced to the minimum portion in the calculation of this pseudo inflation.

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Do you want to know how high it is taken into account? The answer is on the INSEE website, click here

Yep, if you happen to be spending on housing, water, gas and electricity, all together, more than 13,4% of your total spending, then ... you should start listening critically the inflation figures given to the 20 pm newscast. And above all, do not draw too definitive conclusions about the size of your last increase!

In July 2879 issue 2005 of the very serious Economic Problems journal, an article originally published in The Economist was soberly titled "Measuring Inflation Remains Controversial." Controversial is a weak word! We learned that a study had been carried out in the United States by an economist from the HSBC bank, by assigning to real estate a weighting of 30% of the global index of consumer prices (to compare with our meager 13,4 , 5,5%). As a result, inflation jumped to over XNUMX% per year, more than… twice the official level of inflation intended for crowds. Either a very slight difference! Of course, I let imagine what the figure for inflation would be if we also included the price of all financial assets, in particular that of shares and products from the financial sphere ...

Because this restrictive interpretation of Inflation (with a capital I), which excludes all that is investments (or supposedly such), is not without consequences. Excluding real estate prices, but also all the prices of financial assets (stocks, various investments, financial products, etc.) in a period when the financial sphere has become dominant is not a straw: it is a beam ! And obviously a supporting beam of current financial capitalism ... In other words: it's (almost) anything!

This is also recalled in the article in Economic Problems cited above:

“The idea that central banks should follow the evolution of asset prices is not new. In a book titled "The Purchasing Power of Money," American economist Irving Fischer argued in ... 1911 that monetary policy makers should adopt a price index based on a broad basket of goods and services that would include also financial stocks and real estate ”.

Thus, 95 years after 1911, the question is raised timidly so as not to tackle it, above all, because of such a supposition, modern capitalism still does not want it, any more than there is almost a century. The so-called fight against inflation skewed by the current (deliberate) measure is a veritable scam that dares not speak its name.

As the article then specifies, the idea of ​​establishing such a price index would implicitly assume on the part of a Central Bank (truly independent, including financial markets and "investor" circles) that the rise in prices of these assets, by creating inflation, could be "detrimental". However, this inflation does not seem to bother some people too much, even those who claim to be independent of the financial markets. But are they really, culturally and personally? The supposed independence of financial audit firms, such as Arthur Andersen, did not long resist cronyism and cross-interests, among others in the ENRON affair ...

Yes, but no… Because there is inflation and inflation, my dear sir. Whether real estate is climbing to the sky or whether Jean-Pierre Gaillard is strangled with joy because the CAC 40 climbed 25% in 2005, this is not inflation! Well, not bad, no this one, it's good, my good sir. The one that does not euthanize annuitants what, and for good reason: this one creates income!

The bad news is what the lower people see, which makes them growl and demand wage increases to maintain their purchasing power. This one is bad, we tell you. Do not insist, it is so, and it is understandable finally ...

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2nd point: control of the money supply: do not put too much money in the economy, because at all times and in all places, inflation is of monetary origin.

There are definitely some very strange things in fields as rigorous and supposedly as scientific as economic and monetary policies. Take the example of the ECB. Officially launched in 1998, it set itself the objective (in addition to controlling inflation below 2%, under the measurement conditions that we know) a programmed and fixed evolution of the money supply, that is to say - say about the quantity of money in circulation in the euro zone, in accordance with the precepts of Milton Friedman: to increase the money supply by a constant and predictable value, equal to the targeted inflation added to the targeted growth. Thus was defined the objective of growing this money supply (called M3) by around 4,5% per year (2% inflation + 2% growth + 0,5% corrective term).

In 2005, I took a look (of course, you have to want it, because all this is neither very publicized nor very understandable at first glance, it is true) on the data in the matter. And guess what we discover: in 2005, money supply has grown in Europe by almost 8%.

Isolated case will you tell me? Nay. Because since its launch, never a year, I mean never a year, the ECB has kept its target of 4,5%! Always on top, and not just a little.

Result: compared to the theoretical progression targeted in 1998, around 20% of "excess" euros were created and put into circulation, i.e. nearly 1000 billion euros out of a total money supply of about 6000 billion.

Read part 3

Learn more

- Author's website
- What is the consumer price index?
- The European Central Bank website

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