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It’s All How You Look at It

January 6, 2011

We talked before the holidays about food prices going up, and I’m pretty sure everyone is noticing the rise in gas prices.  Kevin Williamson looks at it a different way.

It is helpful to remember that there are two sides to every transaction. If the price of an ounce of gold goes up $100, you can say that the price of gold has gone up in terms of dollars — or you can say with equal accuracy that the price of dollars has gone down in terms of gold. A trivial and not exactly blazingly original insight, but one to keep in mind.

He goes on to make a fair claim that the lack of consumer confidence in the policies of world governments is devaluing money in comparison to real goods.  I think his final conclusion sums it nicely:

It seems to me entirely plausible that what we are seeing is a giant, global vote of no confidence  in the economic policies of the world’s major economies: Europe and the United States, sure, but China, too. I used to say that you could judge how seriously a man took his beliefs about the future by how much of his own money he was willing to bet on a given proposition. But there are things that people take even more seriously than money: things with real value, like food and fuel. Inflation happens when the money supply is increased, regardless of whether it shows up in the Consumer Price Index. CPI jumps are not inflation, they are a reaction to inflation. But don’t tell me that at a time when the market is putting high or record prices on everything of inherent value that everything is hunky-dory on the inflation front. When one country devalues its currency in a last-ditch effort to stave off crisis, it’s a banana republic. When the United States, Europe, Japan, and China do it in a coordinated fashion, we’re all part of the Banana Federation of Greater Bananastan.

Often in my job I tell people I help that they need to look at things from outside the normal box before they make a decision on how to act.  And this is a good example of that.  If you look at it the normal way, then you think that the solution to rising food, gas, and other prices is to proactively manage the money system to bring the value of the items back to a norm.  Sure, you can give everyone a 10% raise, but that just likely means that everying will go up 10%…

By looking at things the other way, a differnt solution potentially comes to light… Perhaps by increasing the confidence of the consumers in the overall monetary policies — by, you know, having policies that MAKE SENSE — then maybe that will bring things back to the norm faster.  After a couple years of bad policy and inane ideas, let’s try something new.  I’m all for it.

3 Comments leave one →
  1. January 6, 2011 4:03 pm

    There will always be a counter-intuitive aspect to good monetary and economic policy, and I don’t pretend to understand it well enough to prescribe specifics. However, people understand that some things that don’t look right on the surface work anyway. When they feel they’re being sold a bill of goods and the money’s flying out of their pockets, well, THEN they lose confidence.

  2. January 6, 2011 3:28 pm

    I absolutely and completely agree with you that confidence is key to growth. Some level of ‘certainty’ inspires confidence. Certainty is one aspect of the attraction of command economies. The other side of the coin is self-determination inspires confidence — freedom to do what you want. Self-determination is an aspect of capitalism.

  3. January 6, 2011 3:07 pm

    I quibble with your ‘common sense’ policy approach. Some things are counter-intuitive so ‘common sense’ by some people’s standards doesn’t always lead to effective policies.

    “Common sense” might lead many to disbelieve the reproduced results under Reagan and Clinton (and several examples in Europe too) that cutting taxes expands economic growth which brings in MORE tax revenues. Raising taxes inhibits economic growth which lowers taxable wealth which leads to less good and services, especially for the lower strata of the economy.

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