Former budget director Mick Mulvaney recently wrote that inflation “is too much money chasing too few goods.” That he was incorrect about inflation doesn’t indict him as much as it places him in a crowded room with countless other economists, pundits and politicians who’ve long succeeded in failing to define what inflation is.
The simple truth is that money never buys or sells goods, services, and labor. In truth, goods, services and labor buy goods, services and labor. Explained more simply, market goods chase market goods, period.
No one exchanges market goods for money as much as they bring goods to market in order to get roughly equal value. We produce so that we can get. Again, market goods for market goods.
No doubt Mulvaney and others would protest that when they buy market goods, they’re exchanging dollars for them. That’s true, but what’s missed by Mulvaney is that someone, somewhere produced something first so that Mulvaney could have the means to demand. “Someone, somewhere” is operative here in that a not insubstantial portion of Mulvaney’s adult life has been spent in government. To the extent that he spent his government salary, he only had means to demand market goods insofar as taxpayers had reduced means. But that’s a digression, in a sense.
Getting back to what inflation is not, “too much money chasing too few goods” implies two falsehoods. The first is that anything other than production can instigate actionable demand. No, individuals can only demand insofar as they supply something first; that, or they have arrogated to themselves the fruits of those supplying. See government employees up above. Demand can’t just be conjured out of thin air by the idle, or indolent, rather someone must produce first so that goods can be purchased. It’s always market goods for market goods.
The second falsehood about “too much money chasing too few goods” is that it implies impressive market stupidity. Think about it. “Too much money chasing too few goods” suggests that producers will blithely accept “just any money” in return for the goods they bring to market. No, producers want roughly equal value, which is a sign that as opposed to governments, central banks or mints controlling money in circulation, producers do. Well, of course. Producers once again want roughly equal value in exchange for what they’ve produced, which means the money “chasing goods” is a distinctly and exacting market phenomenon.
To suggest otherwise is to suggest that governments lacking resources can create demand through the creation of money. Except that they can’t. If they could, Russia would still be the Soviet Union care of Gosbank, and Treasury wouldn’t need to tax at all. Why bother taxing if demand can just be generated out of thin air by governments? Well, the answer once again is that demand is always and everywhere a consequence of supply, which means inflation is decidedly not a demand phenomenon borne of too much money chasing too few goods. Sorry, but producers aren’t so stupid as to blindly and routinely accept fewer market goods for the goods they bring to market.
So what is inflation? It’s a devaluation of the unit. In our case, it’s a devaluation of the dollar. And this has nothing to do with so-called “money supply” or the impossibility of “too much money” in circulation. Instead, governments sometimes devalue. In 1933, FDR decreed that the dollar would exchange for 1/35th of a gold ounce instead of 1/20th. That was inflation. In 1971, President Nixon severed the dollar’s link to gold, which was a message from up top that government wanted a weaker dollar. In 1986, the Plaza Accord care of the Reagan administration decreed that "some further orderly appreciation of the main non-dollar currencies against the dollar is desirable."
In short, inflation is a policy choice of governments to devalue. Higher prices are sometimes the consequence of currency devaluation. What inflation isn’t is “too much money chasing too few goods” simply because devalued money disappears a lot or a little from circulation (and our pockets) precisely because exchange in the marketplace is always market goods for market goods. Mulvaney’s inflation definition unwittingly suggests markets are stupid. They’re not.
