Brazil and Venezuela Should Have Federal Reserve Economists Hanging Their Heads In Shame

“At age 10 in 1980s Brazil, my job was to run around the aisles of the supermarket trying to beat adults, who walked around raising prices throughout the day with comically large label guns. Since I was good at math, my mother would hand me our monthly grocery budget, and I would run through the supermarket filling our shopping cart — not having to stop to input values on a calculator saved us precious time against the labelers.” Those are the recollections of Brazilian economist Rodrigo Zeidan in a recent edition of the New York Times.

Zeidan was describing what life was like in the hyperinflationary Brazil of the late 20th century. With the value of the country’s currency in rapid decline, the ability to quickly exchange what was losing value for goods that were real and edible was essential to the wellbeing of his often lower-middle class family.  Such is life when there’s inflation. Inflation doesn’t cause prices to rise as much as inflation is a direct effect of a currency losing value such that the prices of most goods and services persistently rise. When there’s inflation, saving logically declines simply because any returns on investment will come back in “money” that is exchangeable for quite a bit less than it commanded at the time that the investment was made. Think about the latter for a moment. It’s an important input to this discussion.

Fast forward to the present, a recent report from the Washington Post’s Rachelle Krygier revealed a similar hyperinflationary event taking place in Venezuela. With the bolivar in freefall, business owners are constantly adjusting prices to reflect this brutal reality. Krygier relayed how restaurant owner Freddy DeFreitas, responding to prices of restaurant items that had doubled in a week, “turned to a computer screen and started adjusting the prices of 100 menu items on a spreadsheet.”

Crucial here is that whether in Brazil or Venezuela, what’s just been briefly described is inflation. Plain and simple. What’s sad is that what’s obvious rates a column. But it does, and it does given the desire of modern American economists to redefine inflation altogether.

Indeed, as readers of this column know very well, economists at the Fed no longer view inflation as evidence of a decline in the exchangeable value of the currency. As they see it, inflation is an effect of too much economic growth. Yes, you read that right if you’re new to this column. Fed officials believe that too many people working and prospering is a perilous sign of inflation on the way. But as the sad stories of inflation in Brazil and Venezuela make rather clear, the Fed’s definition of inflation is 100% backwards. Think about it.

To understand why, consider what’s taking place in Venezuela now, and what happened in Brazil in the 1980s. A collapsing currency in both instances was and is the surest sign of slim to non-existent growth. The reason why runs counter to the droolings of an economics profession that grows more ridiculous by the day: to economists, consumption is a sign of economic growth. That’s why real inflation (currency devaluation) doesn’t bother them very much. Since they worship at the altar of consumption, currencies that are exchangeable for less and less are just what the faux doctor ordered for the falling currency stimulating spending right here and now.

Of course, the problem with the assumptions of economists is that consumption doesn’t power economic growth as much as it’s an effect of growth. Obviously. All consumption springs from production first, so if production is the goal, it’s only logical to conclude that the letter can’t happen in ever growing amounts without rampant saving. Yes, you read that right. Contrary to the consensus of economists, the act of saving is the biggest (and nothing else comes remotely close) driver of economic growth. Figure that growth is an effect of production, and surging production springs from savings and investment that enable the creation of more and more goods and services with fewer and fewer inputs.

What all of this tells us is that economic growth is greatest when inflationary pressures are least evident. The economics profession has turned upside down what is simple. As the examples from Brazil and Venezuela make rather clear, inflation is always and everywhere evidence of a currency losing value such that those who have “money” do everything possible to exchange it for something of tangible value as quickly as possible. Why hold onto – as in save – money that will purchase fewer and fewer goods and services? Except that economic growth is driven by the act of saving. Imagine how unproductive we would be, and now primitive our living standards would be, if all of us (and all of our ancestors) relentlessly consumed? It’s no exaggeration to say we’d still be living in caves. It can’t be stressed enough that savings are what make possible the productivity increases that enable the production of more and more goods and services with fewer and fewer inputs.

All of this isn’t to say that economic growth drives down the price level as much as it is to say that economic growth drives down the prices of countless goods and services, thus enabling growing demand for goods and services formerly out of reach. The latter is evidence of rising living standards. When there’s growth, the cost of living declines thanks to copious saving and investment driving productivity increases such that we’re able to attain the necessities of life increasingly cheaply while having the means to buy more and more of what was once well beyond our station. 

Bringing this all back to the views of modern economists, they should hang their heads in shame. Economic growth causes inflation? Such a view isn’t serious, and is more realistically dangerous. Inflation is easily the greatest enemy of growth for it making the investment that lifts us all a fool’s errand. To understand what is simple, economists should quietly leave their well-appointed offices in order to see Venezuela’s inflation up close, and in doing so, see how wrong they and their biggest employer have long been about the biggest barrier to economic progress of all.