Thu, 26 Apr 2007

Is Robert Samuelson an economist?

Boy, after reading Samuelson's April 30 Newsweek column, I have to question his right to the name "economist". First, he pursues the common wisdom that inflation is caused by higher prices. It isn't. Inflation is everywhere and always caused by an increase in the supply of money. Money is just a thing that people are always willing to trade for because people are always willing to accept it. There's a supply and demand for money, and, yes, a price of money.

But here's the thing you need to remember: the only reason there is sustained inflation is because the government is always creating more money. It does so because it gets to spend the money first. It's a tax that nobody notices, if they even understand it. So Samuelson's discussion of oil prices, food prices, and core CPI is pretty much a waste of time, space, and print.

Second, he talks about recession. It's clear to any real economist that the Fed causes these recessions through its manipulation of the supply of money. When it inflates the money more than people expect, they think they have more cash, so they go spending. Business owners see a higher supply of money, and they think that they should invest. Unfortunately, both of them are wrong, and they need to adjust their spending downwards when the Fed reduces the rate of inflation.

I'm talking about the rate of inflation, because people get used to a certain rate of inflation. If you want to get the higher employment effects of inflation, you need to continue to raise the rate of inflation. Not just inflate, but inflate more and more. That's what von Mises called the crack-up boom". Eventuall the transaction cost due to the rate of increase exceeds the value of most transactions, so the economy stops in its tracks and falls over, dead.

Third, he worries about the U.S. trade deficit. "Trade deficit" is a misnomer (and although he's talking about terminology problems in this article, he doesn't catch this one.) There is no such thing as a trade deficit. All free trade is balanced; deficit is not possible. The term "trade deficit" really means that we're selling people things inside the US more than we're selling things to be delivered to people. As such, it's not much cause for worry.

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