ECONOMIC MYTHS #1 – RISING PRICES = ECONOMIC RECOVERY

Author’s Note: This is in the first in a series of short posts which will seek to rebut popular, but wrong, economic beliefs.

One of the positive indicators of our so-called economic recovery bandied about not only in the media but also by our monetary lords and masters at the head of central banks is the idea that rising prices are a sign of economic recovery. This mistaken belief is part of a wider myth that views the economy as little more than a giant number – a number which, if going up, means things are good and getting better, and if going down means the situation is bad and getting worse.

Theoretically the market price for any good is never “good” or “bad”; it is simply a function of the supply and demand for that good. The only way in which we can say that the market price is “good” is that both parties to a transaction are satisfied with that price and, thus, both have received an increase in welfare as a result.

That aside, however, surely economic progress is marked by an increasing abundance of goods and services – that more and more stuff is being produced for each hour of work? Therefore, if goods and services are increasing in supply then shouldn’t this lead to decreasing prices rather than increasing prices? If so, then increasing prices must indicate the opposite – a decreasing supply of goods relative to the money used to buy them and, consequently, greater impoverishment.

Contrary to the “wisdom” of so-called experts, such facts are intuitive – stop any number of strangers in the supermarket and they will almost certainly tell you that they want everything on the shelves to be cheaper, not more expensive. They will tell you also that they would be better off if they could buy more with the money they have in their pockets rather than less. Thus it is a travesty for economists and talking heads to call for even a “modest” degree of price inflation unless they are keen to promote destitution. Such inflation means that those of us with fixed incomes are forced to sit by and watch the purchasing power of our wages drop, unable to continue to afford to buy things because the “recovering” prices put them out of our reach.

The “recovery” of rising prices is just as ridiculous when it refers to rising asset prices rather than consumer prices. This kind of “recovery” has nothing to do with whether life is getting better for Joe and Jane Average. Rather, it means that there has been a localised recovery and improvement for a select group of people – those who borrowed cheap money heavily during the boom (mostly the politically connected big banks and investment houses) and ploughed it into stocks, bonds, property, etc. They can now breathe a sigh of relief as the prices of those assets once again begin to rise with the new round of monetary inflation.

In the UK this can be seen most clearly in the specific arena of house prices. Rising house prices are great for those who already own houses, boosting their wealth and allowing them to take out second mortgages or other equity release schemes to finance increased spending on their lifestyles. At some point, however, the prices rise so much that purchasing a property becomes an almost impossible expense for those who are not yet on the so-called “property ladder”. Government schemes to help “first time buyers” simply exacerbate the situation as they permit more money to chase the existing stock of housing.

A general economic recovery is not based upon rising consumer or asset prices buoyed up by paper money. It is created by a sound monetary order that allows entrepreneurs to allocate resources to where they are most urgently desired by consumers and to, slowly but surely, increase the economy’s accumulation of capital goods. The result should be a gradual secular price deflation as more and more goods are produced, meaning that the money in the hands of the lowest earners gradually increases in value. Consequently, everyone grows wealthier and more prosperous instead of just the super rich.

Next week’s myth: “Consumption Boosts Growth”

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