The Price is Right

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One thing all economists agree upon is the law of supply and demand. The larger the supply of any good or service, the lower the value on the market of a single unit; as economists like to say, ceteris paribus, i.e., all other conditions being equal.

Of course, conditions in an economy are never static – they do not remain the same. Prices do not rise or fall in unison. The price of any good or service is affected by many factors. Some prices change suddenl~as gasoline prices spiked when refineries were destroyed by Katrina. Others change seasonally. And some are affected by fads in fashion. New technology and more rapid communications may lead to lower prices of many products, as when computers enable stores to improve their record-keeping, reduce inventories, and adopt just-in-time delivery systems. The prices of flatscreen TVs are now dropping sharply thanks to new production techniques, while the price of the gold used in jewelry and electronic devices is rising. The law of supply and demand applies across the board, to anything and everything.

The law of supply and demand even applies to U.s. dol- lars. If the number of dollars in circulation increases, as it has for decades, this increase imposes pressure on prices – all prices – pushing them above what they would otherwise have been. As a result, the dollar’s purchasing power lessens. In other words, when the stock of dollars is increased, each dollar becomes less valuable and it takes more dollars to buy things than before; the market prices of most goods and services rise.

The Federal Reserve reports the quantity of money as M2, Le., the money actually in circulation (currency, traveler’s checks, demand deposits and other checkbook deposits, plus retail money market funds). M2 figures over recent decades show a steady continual increase. At the start of Reagan’s administration in 1981, M2 was $1,606.9 billion. By the summer of 1987, when Reagan appointed Alan Greenspan Federal Reserve Chairman, M2 had been increased to $2,792.3 billion – an increase of $1,185.4 billion. The quantity of money has since been increased still further, throughout the Reagan, Bush, Clinton, and Bush II administrations, by means of deficit financing, credit expansion, and monetization of the U.S. debt. By January 31, 2006, when Greenspan retired, M2 had reached $6,736.9 billion!

This monetary expansion itself is inflation. The higher prices it has contributed to are only the most visible consequence of that inflation. Other still more serious consequences of the Fed’s monetary policy should not be overlooked – government expansion, the transfer of the power of the purse from taxpayers and voters (through Congress) to government bureaucrats’ distortion of economic calculation, shifts in patterns of wealth and income, the destruction of savings, the beginnings of the boom-bust cycle. But higher prices themselves are disruptive. And these higher prices derive directly from the Fed’s inflationary monetary policy and the operation of the law of supply and demand on the stock of U.S. dollars.

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