As we navigate through August 2022, American workers are grappling with harsh economic realities, including a recession, soaring consumer price inflation, and a government that often obscures the truth about the situation. These challenges have raised numerous questions about the state of the economy.
This week, the Bureau of Labor Statistics published the Consumer Price Index (CPI) for July. According to the data, the CPI decreased from an annualized rate of 9.1 percent in June to 8.5 percent in July.
Gas prices have seen a monthly decline of 7.7 percent, yet remain 44 percent higher than the previous year. Food prices increased by 1.1 percent from the prior month, with an annual rise of 10.9 percent, while rents climbed by 0.7 percent in July.
President Biden, often criticized for his misleading statements, seized the moment to inform the American public of what he termed an inaccuracy:
“I just want to say a number: zero. Today, we received news that our economy had 0 percent inflation in the month of July – 0 percent. Here’s what that means: while the price of some things went up last month, the price of other things went down by the same amount. The result?: Zero inflation last month.”
It’s unclear whether Biden believes his own claims, so let’s clarify how the numbers function.
Price represents a numerical value. Inflation is the first derivative of that price. The month-to-month change in inflation reflects the second derivative. While the second derivative showed a zero change, inflation itself remains excessively high.
Should consumers feel relieved that the annual rate of inflation is now only 8.5 percent instead of 9.1 percent? Does this indicate that the Federal Reserve’s rate hikes are effective? Are we nearing a pivotal change?
These concerns are certainly significant; however, for those truly invested in wealth and prosperity, more fundamental questions must be addressed. Here’s why…
Money, Production, and Consumption
Money serves as a claim on a portion of all market goods and services. It is the mechanism through which goods and services are allocated among individuals. The more money a person possesses, the larger their claim on these resources.
However, simply increasing the money supply by central authorities does not inherently boost the availability of goods and services. New money does not automatically translate to a corresponding rise in production.
While an increased money supply can stimulate new production, it primarily addresses the false demand generated by resulting price distortions. Such distortions lead to overproduction to meet this inflated demand, creating surplus and economic distress.
Moreover, the influx of new money does not enhance individual claims to goods and services; instead, it dilutes each monetary unit, best evident through rising prices.
The roots of consumer price inflation lie in the inflation of the money supply, an action taken directly by central planners. Inflation in the money supply precedes the subsequent rise in consumer prices.
Many academic economists mistakenly attribute economic stagnation to a shortage of money, advocating for credit expansion and money printing as solutions to enhance consumption. Such policies typically result in higher debt levels alongside increased asset and consumer prices.
Importance of Price
Why Price is Important
Price acts as the primary determinant of how money is spent. The cost of goods and services influences consumer choices, often leading to a preference for lower-priced items over more expensive options when quality and utility are similar.
Furthermore, prices convey vital information. Rising prices encourage businesses to ramp up production, while falling prices indicate a need to scale back.
Government intervention in money circulation distorts prices. Additionally, manipulating interest rates disrupts the entire economic framework.
Persistently low interest rates spur artificial demand throughout the supply chain. Furthermore, decades of injecting fabricated credit into financial markets have perilously destabilized the economy.
This has exacerbated wealth inequality, as financial assets—mostly owned by the affluent—become further inflated. Governments at all levels exploit inexpensive credit to expand their presence and intervention in the economy, leading to widespread consumer price inflation.
Attempts by the Fed to smooth the business cycle have often resulted in magnifying its peaks and troughs, inflicting severe harm on workers, savers, and retirees.
Eventually, the repercussions become so substantial that even the Fed cannot ignore them, leading to a course correction. After allowing credit to proliferate for over a decade, and inducing dependency on it, the Fed tightens credit, effectively preemptively collapsing financial markets and the broader economy.
Currently, the Fed is in this critical phase of its monetary policy, raising interest rates while reducing its balance sheet, leading to turbulence in credit markets.
Yet, these monetary maneuvers stem from a misguided perspective on economic dynamics…
Why Labor Productivity Has Collapsed
Increased consumption does not stem from simply increasing money; it arises from enhanced production. The more goods and services the economy generates, the greater the potential for individual consumption. In essence, production drives consumption.
This principle is vital and is one that the President notably overlooked this week. Just one day before the latest CPI report, the Bureau of Labor Statistics published its labor productivity report for the second quarter, revealing results that are concerning.
Specifically, labor productivity plummeted by 4.6 percent in the second quarter of 2022. Output fell by 2.1 percent while hours worked increased by 2.6 percent, marking the most significant drop in labor productivity since 1948—approximately 74 years ago.
This signifies that workers are putting in more hours but achieving less; in effect, they are regressing. Consequently, this translates to a decline in available goods and services, further fueling consumer price inflation.
Why has labor productivity seen such a drastic decline?
This is a question of great significance for anyone concerned with economic well-being and growth.
The drive for productive activity stems from the workers’ ability to produce goods and services efficiently and at lower costs. Economic growth is contingent upon the capacity to reduce production costs.
Unfortunately, labor productivity has fallen sharply, primarily due to several overlapping factors: excessive regulation, high taxation, money printing, manipulation of credit markets, and extensive governmental involvement in economic and business affairs.
Keep in mind, production dictates consumption. With production on the decline, a prolonged economic downturn is inevitable.
[Editor’s note: The current administration appears committed to actions detrimental to everyday lives. It is frustrating to witness how policy decisions threaten hard-earned financial stability. In response, I have spent the last six months investigating practical measures that individuals can take to safeguard their wealth and financial privacy. My findings are compiled in the Financial First Aid Kit. To learn more about this vital and unique report, and how to obtain a copy, click here.]
Sincerely,
MN Gordon
for Economic Prism
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