Inflation cannot be blamed on companies
Inflation is the worst in 40 years.
Car prices have increased by 37%. Gas is up 49%.
Over the past few years, as politicians spent more and more money, the experts told us not to worry.
Jerome Powell, chairman of the Federal Reserve, said inflation would be “transient”.
Treasury Secretary Janet Yellen said: “I don’t foresee inflation being a problem.”
Now she’s saying, “I’m ready to take the word transient out.”
What went wrong?
“Big companies have taken advantage of this,” says rep Ted Lieu.
Senator Elizabeth Warren tweeted: “Greedy corporations are charging Americans extra.” This is “price pricing”.
It does not make sense.
“Greed is constant,” says economist David Henderson in my new video. “If it’s greed, how do you explain the fall in prices?” When oil prices fall, is it because “oil companies suddenly decide, ‘I’m going to be less greedy’?”
Prices change according to supply and demand.
Inflation is the result of “too much money for too few goods,” says Henderson. “If the government spends more money, it’s more money for too few goods.”
Lately the government has borrowed from the Fed and spent a lot more money. Under President Donald Trump, the national debt has grown by $7.8 trillion. Under President Joe Biden, it grew by $2.2 trillion in one year. Biden wants to spend even more — a record $6 trillion this year.
Where will they find the money? The government has no money of its own, so increased spending means politicians have to borrow more, tax more, or, easiest of all, create money out of thin air by simply printing it.
In recent years, that’s what they’ve been doing. In an untested experiment, the Fed printed more money than ever in history.
All this new money circulating in the economy makes the money we have less valuable. You notice the price increases, but you may not notice the damage inflation is doing to your savings.
If you put $10,000 under your pillow, inflation of 7% will reduce that amount to $2,342 in just 20 years.
If you were counting on those savings for retirement, so be it. Most of your savings will be gone.
Yet today’s politicians want to spend even more.
Biden says his spending bills will “reduce inflation.”
“Biden is wrong,” responds Henderson. “No economic theory says that when the government spends huge amounts of money, prices fall.”
Some people want the government to stop inflation by imposing price controls.
That would be “awful,” says Henderson.
Price control has already been attempted. In 1971, President Richard Nixon ordered a freeze on all prices.
It seemed reasonable. Too much inflation? Our intuition tells us that the government can solve this problem by freezing prices. But “this is where people’s intuition goes wrong,” Henderson says.
False because prizes are not just money; it is also information.
“Prices are signals…that guide people,” says Henderson. “Spoil it, you really ruined the economy.
Price changes tell buyers what to avoid and sellers what to produce. When COVID-19 hit, the price of face masks rose sharply. Immediately, producers did more. New Balance has gone from making shoes to making masks.
Flexible pricing allows vendors to produce what people really need.
There are now shortages of some products because COVID-19 has disrupted supply chains.
Price controls would aggravate shortages.
Shortly after Nixon froze prices, there were gasoline shortages. I drove, wasting gas, looking for gas stations that had it.
“Price control is like saying it’s really cold and I’m going to fix that by breaking the thermometer,” Henderson says. “It’s actually worse than that because breaking the thermometer doesn’t lower the temperature, while price controls cause real shortages!”
Price controls in Venezuela have led to food shortages. And yet, inflation got worse. 270%, 700%, possibly 400,000% inflation.
Once inflation starts, it’s hard to stop.
In Zimbabwe, President Robert Mugabe couldn’t raise enough taxes to pay for his big projects, so he printed more money.
A few years later, Zimbabwe was printing $100 trillion notes.
Such drastic inflation has not happened here. It probably won’t, because recently the Fed has come into its own.
But with Democrats and Republicans eager to spend more, it could happen here.
John Stossel is the creator of Stossel TV and the author of “Give Me a Break: How I Exposed Hucksters, Cheats, and Scam Artists and Became the Scourge of the Liberal Media”.