Prices and the Standard of Living

cropped-bob-shapiro.jpg   By Bob Shapiro

Prices go up, and prices go down.

Winter clothes are in big demand this time of year (as we approach Thanksgiving), so you’ll pay top dollar. Fall clothes are just the opposite as we leave that season, and you’ll find highly discounted prices. Food prices rise and fall with the seasons, and prices for many other items also fluctuate with supply and demand.

That’s the way the Free Market works! As more of an item is demanded by consumers, the price will tend to rise (and vice versa). As more of a

particular product or service is supplied, the price will tend to fall (and vice versa).

Even though we learn in school that you can’t add apples and oranges, our government number crunchers do just that, and release a figure they refer to as a general price level. If a Free Market were all there was to our Economy, the CPI would stay within a relatively narrow band up and down.

Supply & Demand Chart

However, several other factors also are affecting prices actively.

Humans, left to profit from their own efforts, tend to be a highly creative species. Not only do we create new products and services constantly, but we also show our dissatisfaction with the status quo by improving what already is available, making it cheaper to produce, and finding different ways to distribute it.

While the beginnings of modern day computers date back to the Jacquard Loom and earlier in the 1700s, continued innovation have made them commonplace marvels. “Personal” computers are so much cheaper today, and what you get for your money is so much more, than they used to be over the last 40 years.

So many discoveries and other innovations, in areas as diverse as base metals, food production, home building, and others, have worked to add value to our Standard of Living. The Free Market, plus the creativity and innovation that it fosters, tends strongly to push the general price level down, year after year.

Then there are government policies on taxation and regulation, on subsidies and prohibitions, of picking winners and losers. All these policies deflect people in a Free Economy from making what they think is the best choice.

Whole areas of commerce may be totally or mostly off limits (think electricity generation from coal), while areas which could not survive a competitive marketplace (think windmills and solar farms)  receive subsidies that waste the capital that our Economy so desperately needs to raise the Standard of Living for all Americans.

Budget Deficits, spending beyond the already burdensome load of taxation, drain off capital in the credit markets which could be available to fund innovation. Deficits crowd out the private, productive sector of our Economy.

Projected Deficits

Taxes, regulation, subsidies, prohibitions, rules, regulations, and the rest, either intentionally or accidentally, work to make Americans’ choices less good than they would be otherwise. While some of this interference may be a necessary evil, most of it is just an unnecessary evil.

The net result is that the more our government does, the higher the general price level will tend to be, and the lower the Standard of Living for all Americans. If we were to reduce government activities, prices would tend to fall.

Then there is monetary policy. While it was created by our government, the private FED, through its monopoly control over the US money supply, does two things (really two sides of the same coin).

First, it controls the amount of credit available, and the price of that money (interest rates). A business which wants to buy a new, more efficient machine, or wants to start up a new process or product, needs capital, and much of it comes from the credit markets. Diverting credit availability and interest rates away from the best choices of 300+ million Americans and toward the arbitrary levels of the best and brightest elite in Washington, will push our Economy away from the Free Market optimum. The FED creates bubble after bubble in our Economy and points at others when those bubbles burst.

Second, the FED can expand and contract the money supply, the paper (or electronic) dollars circulating in our Economy. Newly created Dollars must get their value from somewhere. That value MUST come from (is stolen from) the previous value of all other Dollars in circulation.

In the 100 years since the FED was created, they have increased the money supply by over 100 times (that’s 100 times, not 100%)! Were it not for innovation, that would translate into the price level rising by 100 times. With American ingenuity and innovation, the price level has gone up only 50-60 times.

Look at the most recent FED money printing:

FED balance sheet & gold

The monetary policy of the FED, which has been wildly expansive most years, is a force which raises the price level, working to lower Americans’ Standard of Living.

We’ve seen that Supply & Demand in the Free Market will tend to keep the general price level stable, Creativity & Innovation will tend to lower prices, and the Size of Government and Activities of the FED will raise the general price level.

For the good of all Americans, we need to reduce the size and scope of activities of our government, and abolish the FED. These two simple (!) steps will make our country, and all Americans individually, richer.

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