FacebookTwitterGoogle+RedditEmail

How Inflation Works

Anyone who has been alive very long is aware that the US government has failed on the inflation front. Soft drink machines that once delivered a bottled drink for a nickel now charge a dollar, a twenty-fold increase in price.

Until the Reagan administration indexed the income tax, inflation was a boon to government, because by pushing up wages and salaries inflation pushed taxpayers into higher brackets.  This allowed the real tax burden on labor to rise without politicians having to raise the tax rates.  Inflation also destroyed the value of depreciation allowances, thus raising the tax rate on capital as well.

It is not easy to make the young aware of the long-term rise in prices.  The inflation indices are periodically re-based, resulting in measures over time with different years as the base.  The Clinton administration further destroyed comparability by substituting a variable basket of goods for the fixed assortment that had previously prevailed.  With the Boskin Commission “reform” adopted by the Clinton administration, the Consumer Price Index (CPI) no longer compares apples to apples.  If the price of apples rises, the CPI assumes that consumers switch to a cheaper substitute.  The “substitution effect” thus underestimates the rate of inflation and destroys the comparability of the inflation rate from one period to the next.

Inflation is inherent in a fractional reserve banking system based on fiat money.  Fiat money is not subject to limits on its supply, and fractional reserve banking permits the banking system to create money by expanding loans.

Aware of the ever present threat of inflation from such a system, Milton Friedman advocated a monetary rule that would limit the growth of the money supply to the long-term growth rate of the economy. For example, if the money supply grew 2 to 3 percent annually in keeping with the increase in real output, prices would remain stable.  Perhaps it wasn’t a perfect solution, but at least Friedman thought about the problem.

In the post-WW II period, the US has experienced dramatic increases in the growth of money and credit.  One way to demonstrate the erosion of the purchasing power of money is to look at the change in the behavior of the prices of used Ferraris.  In the 1950s, 1960s, and even the 1970s, Ferraris depreciated rapidly.  Well-to-do playboys attracted by the unique cars wanted the latest model, and few other people wanted the maintenance expense associated with the high performance machines. It was not out of the question for a person with an ordinary income to become the second owner of a Ferrari.

Excepting a few models of high volume and undistinguished performance, today it is totally out of the question that a person lacking an out-sized income or a large inheritance could acquire a previously owned Ferrari.

For example, in 1973 when I left Stanford University I had an opportunity to purchase a 1967 Ferrari 330 GTS.  It was a low mileage car in new condition.  The asking price was $10,000 and could have been negotiated down.  Unfortunately, the Scottish part of my ancestry prevailed, and I did not purchase the Ferrari. Recently at the Monterey auction a  330 GTS sold for $671,000, 67 times its 1973 used car price.

As an assistant professor of economics in 1967, I cut a road test out of Road & Track magazine and filed it.  The test was one of a 1967 Ferrari 275 GTB/4.  The new price was $14,500.  I intended to find one in a few years at a substantially depreciated price. At a recent Monetary auction, a 1967 GTB/4 sold for $1,925,000.

What has happened to money that causes a 41-year-old used car to sell for 133 times its new car price?

The abundance of money from a fiat money/fractional reserve banking system raises the price of scarce items that are beautiful and unique, such as Ferraris and antiques. Few Ferrari models were produced in numbers greater than several hundred cars.  Perhaps the most famous Ferrari is the 250 GTO.  Less than 40 were produced.  The GTO, which is street legal, dominated racing and won the World Manufacturers Championship in 1962, 1963, and 1964.  The new car price was $18,000. In 1989 one sold for $13 million,  This year one sold for $28 million.  I have a friend who bought a used GTO in Europe in the mid-1960s for $9,000 and sold it six months later for the same price.

Ferraris became collectibles, a store of value, a role that the dollar no longer performs.  Today collectible cars have become items for speculation. They are flipped in auctions with bids rising several hundred thousand dollars from auction to auction, just as real estate speculators bid up waterfront condo prices and hedge funds bid up oil futures contracts.

The cars are worth so much now that you will never see one on the road, not even in the playgrounds of the rich and famous. The more than 1,500-fold rise in the price of the GTO over the last 45 years makes gold’s 28-fold price rise seem insignificant.  But both prices show the ruin inflicted on the dollar by our fiat money/fractional reserve system.

PAUL CRAIG ROBERTS was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions. He can be reached at: PaulCraigRoberts@yahoo.com

 

Your Ad Here
 

 

 

 

More articles by:

Paul Craig Roberts is a former Assistant Secretary of the US Treasury and Associate Editor of the Wall Street Journal. Roberts’ How the Economy Was Lost is now available from CounterPunch in electronic format. His latest book is The Neoconservative Threat to World Order.

Weekend Edition
August 17, 2018
Friday - Sunday
Andrew Stewart
Blackkklansman: Spike Lee Delivers a Masterpiece
Elizabeth Lennard
Alan Chadwick in the Budding Grove: Story Summary for a Documentary Film
August 16, 2018
Bruce E. Levine
“Don’t Be Stupid, Be a Smarty”: Why Anti-Authoritarian Doctors Are So Rare
W. T. Whitney
New Facebook Alliance Endangers Access to News about Latin America
Sam Husseini
The Trump-Media Logrolling
Ramzy Baroud
Mission Accomplished: Why Solidarity Boats to Gaza Succeed Despite Failing to Break the Siege
Larry Atkins
Why Parkland Students, Not Trump, Deserve the Nobel Peace Prize
William Hartung
Donald Trump, Gunrunner for Hire
Barbara Nimri Aziz
Morality Tales in US Public Life?
Yves Engler
Will Trudeau Stand Up to Mohammad bin Salman?
Vijay Prashad
Samir Amin: Death of a Marxist
Binoy Kampmark
Boris Johnson and the Exploding Burka
Eric Toussaint
Nicaragua: The Evolution of the Government of President Daniel Ortega Since 2007 
Adolf Alzuphar
Days of Sagebrush, Nights of Jasmine in LA
Robert J. Burrowes
A Last Ditch Strategy to Fight for Human Survival
August 15, 2018
Jason Hirthler
Russiagate and the Men with Glass Eyes
Paul Street
Omarosa’s Book Tour vs. Forty More Murdered Yemeni Children
Charles Pierson
Is Bankruptcy in Your Future?
George Ochenski
The Absolute Futility of ‘Global Dominance’ in the 21st Century
Gary Olson
Are We Governed by Secondary Psychopaths
Fred Guerin
On News, Fake News and Donald Trump
Arshad Khan
A Rip Van Winkle President Sleeps as Proof of Man’s Hand in Climate Change Multiplies and Disasters Strike
P. Sainath
The Unsung Heroism of Hausabai
Georgina Downs
Landmark Glyphosate Cancer Ruling Sets a Precedent for All Those Affected by Crop Poisons
Rev. William Alberts
United We Kneel, Divided We Stand
Chris Gilbert
How to Reactivate Chavismo
Kim C. Domenico
A Coffeehouse Hallucination: The Anti-American Dream Dream
August 14, 2018
Daniel Falcone
On Taking on the Mobilized Capitalist Class in Elections: an Interview With Noam Chomsky
Karl Grossman
Turning Space Into a War Zone
Jonah Raskin
“Fuck Wine Grapes, Fuck Wines”: the Coming Napafication of the World
Manuel García, Jr.
Climate Change Bites Big Business
Alberto Zuppi - Cesar Chelala
Argentina at a Crossroads
Chris Wright
On “Bullshit Jobs”
Rosita A. Sweetman
Dear Jorge: On the Pope’s Visit to Ireland
Binoy Kampmark
Authoritarian Revocations: Australia, Terrorism and Citizenship
Sara Johnson
The Incredible Benefits of Sagebrush and Juniper in the West
Martin Billheimer
White & Red Aunts, Capital Gains and Anarchy
Walter Clemens
Enough Already! Donald J. Trump Resignation Speech
August 13, 2018
Michael Colby
Migrant Injustice: Ben & Jerry’s Farmworker Exploitation
John Davis
California: Waging War on Wildfire
Alex Strauss
Chasing Shadows: Socialism Won’t Go Away Because It is Capitalism’s Antithesis 
Kathy Kelly
U.S. is Complicit in Child Slaughter in Yemen
Fran Shor
The Distemper of White Spite
Chad Hanson
We Know How to Protect Homes From Wildfires. Logging Isn’t the Way to Do It
Faisal Khan
Nawaz Sharif: Has Pakistan’s Houdini Finally Met his End?
FacebookTwitterGoogle+RedditEmail