New Inflation Indicator, Are Metal Prices Being Suppressed?

SpontaneousOrderSpontaneousOrder Posts: 302 Bronze ✭✭✭
Keith Weiner at Monetary Metals offers some really profound insights - this new article is one of his best IMHO: New Inflation Indicator.


  • GoldNRollGoldNRoll Posts: 207 Bronze ✭✭✭
    Very good article. I do however have an objection on hedonic adjustments. This is a classic subject in Austrian economics.

    For simplicity, assume we are on gold money, there is no mining and the population is constant. Same people, same money mass. No fractional reserves, no credit expansion. Producers sell directly to consumers (no distribution chain with wholesalers and retailers, import or export).

    It's obvious that the consumers have a specific, limited budget for cars.

    Assuming hedonic increase of price on cars counting for better performances and new features, either consumers would buy less cars, or they would spend less on other goods to afford higher prices on cars. So there would be less progress and features on other goods.

    The historic reality is that performance improvements and new features for the entire spectrum of goods and services are possible. So there should be a general hedonic price increase for everything. How could this be possible if there is no additional money in circulation? Some new money should be created to allow for such industrial progress. This is one of the fallacies of monetarists and Keynesians, a reason to create money out of nothing.

    What Keith suggests here is that the money creation is higher than the hedonic increase in prices. So the question is how much of the general increase in prices comes from hedonic adjustment, and what is the difference to be imputed on monetary creation induced inflation.

    The economic reality is that there are performance improvements and new features for the entire spectrum of goods and services with absolutely no monetary creation and somehow without price increases. The reason is more trivial that one would think: the R&D costs are included by producers in the overall manufacturing costs.

    Again for simplicity: the selling price to consumers is constant, the production cost is constant, the R&D budget as a fraction of the production cost is constant and there are continuous performance improvements, new features, new inventions. Products get better and better without any price increase. Actually, with price decreases because the manufacturing process gets more efficient and there are completely new products on the market. People can actually work less for more and better.

    On the unnecessary ingredients that the government imposes on goods and services, Keith says they push prices higher. This is true in the current fiat system with money and credit creation. In the simple sound money system that I described above, the prices cannot go higher because there is simply no money in consumers' hands to pay for them. The unnecessary ingredients would simply put producers out of business, halting the production. This is another reason for monetarist and Keynesians to lobby for money creation: the state regards the unnecessary ingredients as being necessary (for their political or ideological reasons) and because in a sound money system they can't add this ingredients without halting the production, they ask for monetary creation to cover the higher prices.

    The rest, we know it very well. Monetary creation by either increasing the money base or credit expansion does allow at the beginning the unnecessary ingredients but on the long term, this is the cause of the credit crisis (crack-up booms). The monetary creation also sends false signals to entrepreneurs to pursue R&D or production expansion projects longer and more expensive than they would be able to pursue without access to newly created money through credit. But because the R&D and expansion costs are part of the overall production costs, what we really have is an increase of the cost of production. Just like all prices in the economy, due to inflation.

    How much of this price increase is due to better performance and new features? None, as the better performance and new features would have been possible without any money creation.
    Are there any R&D projects that are started with newly created money that otherwise wouldn't be pursued? Yes, the most stupid and inefficient ones that without funding with "cheap"credit, would have been dismissed as not profitable. The pursue of such projects is the mere cause of credit crisis.

    Keith says: "In our observation, it is pretty hard for most people to get their heads around hedonic adjustments. Many people openly scoff at it, as mere Fed propaganda."

    For the reasons above, I do consider the proposed hedonic adjustments to be Fed propaganda in their attempt to hide under the carpet part of the rising prices caused by their monetary expansion.

    What is the opinion of Alasdair Macleod on this subject?
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