It’s increasingly unlikely that it will happen in this lifetime, but at some point in a better, more informed world words will have meaning. Presently they don’t. At least some don’t.
Consider “inflation.” To the credentialed and wise, inflation is caused by higher prices. Which is like saying coughing causes smoking. Think about it.
Higher prices can’t cause inflation simply because an economy is just individuals, and a rising price for, say, Rice Krispies, logically drains the individual wallet of extra funds such that there’s reduced demand for Lucky Charms. The simple truth is that if the prime rib on the menu costs more, that means there’s less money for the chocolate sundae you’re eying. The so-called “price level” is always and everywhere flat.
Inflation? It’s a shrinking of the value of the monetary unit. To vivify this, ask yourself how tall you would be if suddenly the foot were shrunk to six inches. Your height in feet would double, but you would still be the same size. Inflation is much the same. It’s again the shrinkage of the measure. Higher retail prices in “money” are often but not always an effect of this shrinkage.
Back to demand, it’s not just that it has nothing to do with inflation. More important, it doesn’t even lead to higher prices. See above. After which, it’s useful to ask what is demand? The only answer to the previous question is that demand is a logical consequence of supply. Nothing else. If you want things, you must produce first; that, or you must have access to generous family members, friends, or a government that has access to the fruits of the production of others.
Please keep this in mind with Wall Street Journal columnist Greg Ip’s recent assertion that “inflation is too high because demand is hot.” Which can’t be. Not only does demand have nothing to do with inflation, it logically could never cause higher prices simply because demand is a consequence of supply. They mirror one another. So simple. Ip is describing what isn’t as inflation. Only for the columnist to pursue another major falsehood.
Ip then writes that “One way to cool demand would be for the federal government to cut spending.” About Ip’s suggestion, government spending is the ultimate tax. Entrepreneurs cannot innovate without capital, which is an explicit reminder that government spending shrinks the amount of capital capable of being matched with intrepid minds. Shrink it every which way, and watch the economy grow. And with all this increased production, watch “demand” soar. It’s a long or short way of saying that if you incorrectly think demand inflationary, reducing government spending wouldn’t shrink it.
From there, Ip isn’t just incorrect in his assertion that reductions in federal outlays would reduce demand. There’s more to it, and Ip should know this. Really, why does government possess “demand” in the first place? It’s a waste of words to answer this, but federal demand is a consequence of private sector supply that the federal government has arrogated to itself. It’s a gentle reminder that if government shrinks its footprint, those who created the wealth will have a bigger footprint.
The simple truth is that capital never, ever sits idle. The federal government doesn’t warehouse the money it extracts from the private sector, and those with title to money in the private sector similarly don’t warehouse it. Demand is a consequence of supply. Always. Neither governments nor private citizens can create it without production first. This is a problem for Ip and others presently seeking to redefine inflation. They miss that who gets what of the fruits of production has nothing to do with a word they clearly don’t understand.
