BEWARE THE ENEMY IS "I"

http://www.mises.org/story/1947


What is wrong with the popular definition of inflation?

According to Mises,
Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation' to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation.

By responding to the symptoms of inflation that the Fed has itself created the US central bank gives the impression that it fights inflation. Once it is realized that inflation is increases in the money supply, it becomes obvious that the source of inflation is the Fed and fractional reserve banking. It also becomes obvious that rather than fighting inflation, it is the Fed itself that generates the inflationary process.

Conclusions

For the past several weeks, Fed officials have warned the public about the growing inflation threat. Officials blame the growing risk of inflation on the rising price of gasoline as a result of the rise in crude oil prices and hurricane Katrina. Despite all this Fed officials are resolute that it is their duty to protect the US economy from the inflation menace.

According to officials, what is needed to counter the looming inflation threat is to prevent an acceleration in inflationary expectations. This, it is held, can be achieved by pursuing a transparent and credible policy to counter inflation. It is overlooked by most experts that the source of inflation has nothing to do with the high price of oil and high gasoline prices.

The main source of inflation is the Fed itself. Various measures that Fed officials are promising to employ in the fight against inflation rather than fixing the problem will make things much worse. These policies only generate a further misallocation of resources, which in turn undermines the process of wealth generation.