Inflation does not create itself
The theory of spontaneous generation, that living beings spring spontaneously from inanimate matter, died out in biology by the mid-1800s. It apparently remains alive and well in journalism. Just look at media stories about the economic tragedy in Zimbabwe. That nation recently announced that August’s price levels were 6,593 percent above year-earlier figures, a drop from July’s increase of 7,635 percent. One recent U.S. TV news story noted this showed “some success in the Mugabe government’s fight against inflation.” A wire service story said the “battle against inflation remains a challenge for Zimbabwe’s government.”
These assertions are silly. The government of Robert Mugabe is not fighting inflation. It is the direct cause of inflation. To say that this tyrant is fighting inflation is like saying that the Cali drug cartel is fighting cocaine use.
That anyone writes such claptrap testifies to continuing misunderstanding of what causes inflation.
Louis Pasteur ended the spontaneous generation debate for biology in the 1850s. Milton Friedman ended any debate about the causes of inflation in the 1950s. Too-rapid growth of the money supply causes inflation. That news apparently has not reached everyone.
Why does it matter? Media and public misunderstanding of why inflation occurs abets demagogues like Mugabe, Nestor Kirchner and Hugo Chavez in duping their countrymen. The resulting policies foment poverty and privation.
The average Argentine is rich compared to citizens of Zimbabwe. The tragedy of Argentina is not extreme poverty, but that its citizens remain much poorer than those of Australia or Canada, two other nations with immense natural resources relative to their population.
Kirchner’s wife, Christina, is the Peronist party’s candidate in presidential elections to be held Oct. 28. At his behest, the Argentine central bank is pumping up the money supply to goose the economy. And every day he lambastes farmers, banks, grocers and other retailers for raising prices.
Many economists think inflation is about 15 percent, but since Argentina has sold bonds with interest rates tied to its own inflation, Kirchner intervened in the government statistical office, forcing it to cook the books and announce an official rate of under 10 percent. Superficially, Argentina’s economy is doing well because world prices for its agricultural exports are high. But once again, short-run economic gimmickry is dooming the country’s long-term growth.
Central banks cause inflation. Period. If a country experiences inflation and its central bank is subject to political control, the blame lies squarely on the person or party in power.
© 2007 Edward Lotterman
Chanarambie Consulting, Inc.