Inflating the Substitution Effect

Greg's note: Today Fred Sheehan presents a novel discussion on inflation. Interestingly, he goes through the article without actually referencing prices. Although he may not claim it himself, I feel that he has laid out what amounts to moral explanation of inflation - and its results. Please read on and send any responses to your immoral editor here: greg@...

      Whiskey & Gunpowder
      August 6, 2007
      by Fred Sheehan
      Braintree, U.S.A

      Inflating the Substitution Effect
      Inflation is reported -- and thought of -- as the percentage increase in prices or the declining value of money. This is visible. But it is only one side of the story. What follows is an exploration of inflation without reference to prices.

      On June 28, 1978, Federal Reserve Governor Henry C. Wallich addressed the graduating class at Fordham Graduate School of Business in New York. Inflation was on everyone's mind and Wallich was forthcoming. "Inflation," he informed the young and idealistic graduates, "is a means by which the strong can more effectively exploit the weak. The strategically positioned and well-organized can gain at the expense of the unorganized and the aged."

      How is this so? Wallich explained inflation, "is technically an economic problem. I mean the breakdown in our standards of measuring economic values, as a consequence of inflation." The strong are smart enough to understand that inflation "introduces an element of deceit into most of our economic dealings." Contracts are no longer made to "be kept in terms of constant values," but one party understands this better than the other. Contracts during a period of inflation are made with monetary terms "unpredictably shifting measures of weight, time or space."

      General Mills understands this. The maker of Wheaties and Lucky Charms has passed on the rising cost of grains without raising retail prices. It tried to increase prices in early 2005, and sales of some cereals fell by 5%. This time around, it is attempting if not a deceitful maneuver, one that is clever. According to the Minneapolis "Customers will actually see lower prices per box, but the boxes will be smaller, so the effect is a price increase of a few percent." The price increase is murky, but evident.


      The Great Ethanol Swindle of 2007 Revealed
      Don't look now, but you just got ripped off... that's right, swindled . By one of the most scandalous stock market and political SCAMS of the last 100 years!

      And it ain't over yet...

      Billions more taxpayer dollars will vanish... stock market gains will disappear... you'll pay at least $7 for every gallon of gas... and you'll watch all 11 of the stocks I name below sink like a bag of rocks!

      Yet anyone holding the four "safety net" moneymakers I'll also name below should be fine... and could even pile up a fortune in the "new power revolution" market ahead...