Henry Hazlitt on the troubles of even a mild inflation
Via the WSJ:
Even a relatively mild inflation distorts the structure of production. It leads to the over-expansion of some industries at the expense of others. This involves a misapplication and waste of capital. When the inflation collapses, or is brought to a halt, the misdirected capital investment—whether in the form of machines, factories or office buildings—cannot yield an adequate return and loses the greater part of its value.
Nor is it possible to bring inflation to a smooth and gentle stop, and so avert a subsequent depression. It is not even possible to halt an inflation, once embarked upon, at some preconceived point, or when prices have achieved a previously-agreed-upon level; for both political and economic forces, will have got out of hand. . . .
For . . . the causation is never a merely mechanical one. You cannot, for example, say in advance that a 100 per cent increase in the quantity of money will mean a 50 per cent fall in the value of the monetary unit. The value of money, as we have seen, depends upon the subjective valuations of the people who hold it. And those valuations do not depend solely on the quantity of it that each person holds. They depend also on the quality of the money. In wartime the value of a nation's monetary unit, not on the gold standard, will rise on the foreign exchanges with victory and fall with defeat, regardless of changes in its quantity. The present valuation will often depend upon what people expect the future quantity of money to be. And, as with commodities on the speculative exchanges, each person's valuation of money is affected not only by what he thinks its value is but by what he thinks is going to be everybody else's valuation of money.
All this explains why, when super-inflation has once set in, the value of the monetary unit drops at a far faster rate than the quantity of money either is or can be increased.
.....................
Related books:
Economics in One Lesson
What You Should Know About Inflation
- Richard Duncan Quotes
“There is one other aspect of the quantity theory of money that is important to understand. This theory is concerned with the impact that a change in the quantity of money (M) has on the price level (P ). It does not preclude the possibility, however,...
- Wsj: Albert Edwards Has Another Reason You Should Worry About Profits
Last week the BLS revised the unit labor cost rise in Q2 up from 2.2% to 3.3% quarter over quarter. US non-farm business unit labour costs are now rising by 2% year over year. That is very bad news for profits. Bad news for equities. And because the pace...
- Changes In The Inflation Rate Matter As Much To Investors As The Level - By Bill Hester
The topic of inflation tends to be a tool used by both sides of the debate about stock market performance. It's argued that because corporations can pass on rising prices of raw goods to consumers, earnings will keep pace with inflation, so equities...
- Hussman Weekly Market Comment: Anatomy Of A Bubble
Presently, the Shiller P/E stands at 24. Be careful how you interpret the data in the table for Shiller P/E's above 24, since these levels were almost never observed in data prior to the late-1990's market bubble. You can see the odd effect of...
- Hussman Weekly Market Comment: Cash And Credit - Implications For The Financial Markets
So what is the effect of creating an extra $600 billion dollars of monetary base by having the Fed purchase $600 billion dollars of Treasury debt? The same thing that happens anytime any security is issued. Somebody has to hold it, and the returns on...