By Robert Higgs
Despite the Fed’s breathtaking increase of base money since the autumn of 2008, the money stock as measured by conventional concepts such as M2 has not increased greatly, and hence, as ordinary quantity-theory-of-money thinking would lead us to expect, inflation as measured by conventional concepts such as the consumer price index (CPI) has been fairly tame during the past five years. Between December 2007 and December 2012, the CPI for all items increased only 9.3 percent. As the chart shows, this increase represented a continuation of a slow-but-steady inflation trend that extends back to the early 1980s.
This modest consumer-price inflation serves as one of the major bases for the Fed’s continued “quantitative easing” and the government’s ongoing “stimulus” spending. The idea is that because inflation seems so well contained, additional monetary ease, near-zero interest rates, and huge government deficits will affect primarily income and employment, rather than the price level.
This conventional macroeconomic thinking, however, by virtue of its highly aggregative view and its reliance on macroeconomic models with no place for capital, fails to alert policy makers to other effects—almost certainly pernicious effects—that their policies are creating.
One form of evidence of such effects appears in the asset markets, where the rate of price increase has been much greater than it has been in the markets for final consumer goods. As Austrian business cycle thinking suggests, these effects have been greatest in the markets for the goods most distant from final consumer products and services, especially in the markets for raw commodities.
As the chart shows, the producer price index (PPI) for crude materials has followed a quite different historical path from the CPI. Since World War II, it has passed through four distinct phases: I, no-growth stability from the late 1940s to the early 1970s; II, rapid increase in two bursts between 1972 and 1981; III, no growth (but with much greater variance than in phase I) between 1981 and 2001; and IV, rapid growth with even greater variance from 2002 to 2012.
Austrian thinking associates the rapid run-up of crude materials prices in phases II and IV with a flight from monetary assets, whose real values are falling or expected to fall. Investors seek the safe haven of real assets as the Fed engages in sustained easy-money policies. In addition, producers bid up disproportionately the prices of “early stage” goods required for undertaking the longer-term projects that artificially reduced interest rates encourage.