Despite What They Tell You, Credit Is Not An Instigator Of Inflation

Are your savings in a coffee can, or in a bank or brokerage account? The question likely answers itself, though some readers no doubt keep some cash stashed away in the proverbial can.

What’s not hidden is circulated. By definition. Banks don’t take on liabilities without creating assets. To do so would be for banks or brokerages or any other financial intermediary to bring on self-inflicted insolvency. In truth, banks and other intermediaries pay a rate of interest for savings precisely because there’s demand for those savings by others. This basic truth rejects a lot of monetary confusion promoted by the interventionist Keynesian left, along with the allegedly free market, “tight money” right.

For one, there’s no such thing as deficient “aggregate demand” as lefties assume. When we as individuals pull back on spending either because we’re parsimonious, fearful of the future, or both, our retreats in no way subtract from “aggregate demand.” Instead, what we don’t spend is shifted to others with near-term consumptive needs, or entrepreneurs and businesses with near-term desires to expand.

At the same time, what’s a statement of the obvious rejects a lot of the theorizing about inflation from the right. More than a few who fancy themselves “anti” the impossibility that is “easy money,” or who imagine they believe in “tight money,” like Michael Bordo and Mickey Levy, worry that all the unspent wealth in the past year is set to be spent; on the way to inflation. They don’t know it, but they’re making a Keynesian argument.

Their hand wringing implies that a lack of spending amounts to a lack of demand. No, it doesn’t. See above. Wealth never sits idle. What’s not spent is always and everywhere shifted. So for alleged “inflation hawks” to herald an inflationary breakout now based on consumers emerging from various states of quarantine is for them to once again misunderstand the nature of inflation, money and savings more broadly. To be clear, the increase in savings over the past year has been circulating the whole time.

To which some will reply, “Wait a second. Demand has been low for over a year to reflect the homebound nature of the world’s most acquisitive population. Now they’re ready to spend on flights, hotels, car rentals, and everything else they didn’t buy thanks to lockdowns. This will result in higher prices; meaning inflation.” As previously stated, the view of the “tight money” crowd speaks to a misunderstanding about what inflation is.

While it’s surely true that pent up demand for travel could and perhaps will reveal itself in soaring prices for goods and services related to travel, the true “price level” (assuming there is one, and assuming serious people should calculate it) is a broad measure precisely because there are times in which demand is particularly concentrated in one area. If in travel now, soaring airfare, hotel and car-rental costs will coincide with reduced demand for all manner of other market goods; thus reducing any pricing pressures there. In a market economy, rising demand in one or many sectors is matched with falling demand elsewhere. This isn’t inflation, nor is it deflation where prices are falling.

Speaking of demand, it seems those fearful of the impossibility of “easy money” or “excess credit” don’t really understand credit. To see why let’s never forget that demand is always and everywhere a consequence of supply. It’s kind of basic. To demand a market good, a consumer must produce something of market value first. It’s yet again a reminder that there’s no such thing as a lack of “aggregate demand” as Keynesians assume. There’s only a deficiency of supply, which means the only solution to light demand is a reduction in the barriers to production erected by government. Which is all supply side economics is. It’s not a tax revenue model as Keynesians and their media…