The Real Cause of Inflation

We see lots of reports on TV, newspapers, magazines, etc. about higher prices for oil or higher wages or low unemployment causing inflation. Bunk. Inflation is not rising prices. It is not rising wages (i.e. the price of labor). These are not causes of inflation but effects of inflation. A rise in the price of one thing, even something like oil that is used for many other things, does not cause a general price increase.

Considering that the USA lived through a serious bout of prolonged inflation just 25 years ago, this lack of understanding of the problem is appalling. It's not particularly surprising, though, since few understood it at the time.

The real cause of inflation becomes apparent once we use the correct definition of inflation. In a nutshell: Inflation is a decline in the value of money. The decline in a currency's value will eventually become apparent as a general rise in the the prices of goods, services and labor. However, these price changes occur simply as a reaction to the fall in the currency's value (or sometimes in anticipation of that fall).

This misunderstanding as to the nature of inflation has led to many misguided, doomed attempts to fight it. Richard Nixon imposed a disastrous freeze on wages and prices. [Has there ever been a non-disastrous freeze on prices?] Jimmy Carter contributed his own foolishness: a freeze on gasoline prices and rationing. Gerald Ford gave us the ludicrous "Whip Inflation Now (WIN)" campaign, complete with buttons.

None of these policies ever had any chance of success, because none of them addressed the real cause of inflation. They amount to fighting a fever by putting the thermometer into cold water (or in the case of WIN, cheering for the thermometer to go down).

So what causes a "decline in the value of money?" An important clue comes from the U.S. Constitution, which in Article 1; Section. 8: Clause 5 gives Congress the exclusive power:

"To coin Money, regulate the Value thereof, and of foreign
Coin, and fix the Standard of Weights and Measures;"

This is not just a coincidence. Yes, inflation is made in Washington. It is not the fault of "greedy" businessmen or unions (or foreign sheiks). The US government creates the dollar and maintains, or fails to maintain, the value of the currency by the actions it takes. Today this is done mainly through the Federal Reserve Board on a day-to-day basis. However, Congressional and Presidential actions (and statements) also impact the dollar's value in numerous ways.

Like any other commodity, the value of a dollar is ultimately determined by the laws of supply and demand. Normally, though, we think of the dollar on the "x-axis," representing the price/value of the commodity rather than being the commodity.

The chart at the right represents supply and demand curves for an arbitrary commodity, say "widgets." The supply curve (blue) represents the collective behavior of sellers of widgets. The higher the price, the more they will produce and sell. If the price drops, they will cut production. Buyers of widgets respond in the opposite way (purple line). If widgets become too costly, they will buy other things instead. If widgets become a bargain, they will buy more. The interactions of individual buyers and sellers in the market establish the point where the curves cross (i.e. number offered equals number demanded), the "equilibrium price." A shift in either the supply or demand curve will result in a new equilibrium price.

Applying the same thinking to the dollar requires some other measure of value. In principle this could be anything of stable, recognized value. Gold, the Euro, the Swiss Franc, or even interest rates would all be possibilities. Each has some advantages and drawbacks, but we'll ignore those issues here. We also make no distinction here between the domestic (e.g. Consumer Price Index) and foreign exchange value of the dollar. Ultimately, these are somewhat different measures of the value of the currency, but complementary.

The supply of dollars is often thought of as being "fixed" at a given point in time, or "controlled by the Fed." In fact even defining the "money supply" is difficult. What are the real differences among a dollar bill, a deposit in a bank, and a long term Treasury Bond? In the end, they are all just different forms of "money." There are also dollar-denominated instruments issued in foreign countries that are completely outside of the control of the Fed. The Fed has some control over the supply of money, but this control is far from perfect.

The demand for "dollars" (i.e., including dollar-denominated assests) comes from all over the world. Little old ladies in Peoria have them in the bank or under the mattress. American companies and investors large and small hold them. Foreign individuals, corporations and central banks also hold huge amounts of dollars.

People, particularly foreigners, hold dollars because of the strength and relative safety of the American economy and the political system that underlies it. Their collective desire to continue to do so is critical to maintaining the value of the dollar today (and hence, low inflation). The Fed's ability to manage this side of things is extremely limited. There is really only the control of domestic interest rates and the domestic money supply.

Given a stable demand curve, the Fed can tweak the money supply to keep inflation subdued, at least in theory. In practice, it's a bit like trying to drive by looking in the rearview mirror. However, a negative shift in the demand for dollars could bring about a big drop in the value of the dollar and a return of inflation, leaving the Fed with no good options.

The actions of the rest of the federal government are beyond the control of the Fed, but these have big impacts on the demand for dollars. First of all, we require continued robust economic growth. This depends on the private economy and good policies from the government. The government produces nothing, so it can't help directly, although it can do plenty of harm. Runaway government spending requires high taxes or high borrowing, and both of these are harmful to the economy and the value of the dollar. The byzantine federal regulatory apparatus is already a millstone around the neck of the private economy. Relief of this burden would help, and we can't afford to make it worse. Protectionist trade policies are also bad on many levels. Giving investors any reason to think we favor a "cheaper dollar" is asking for trouble. There is no example of a country becoming "rich" by destroying the value of its currency.

Maintaining the value of the dollar today, a world of fractional reserve banking and instantaneous international monetary flows, is much more complex than it was at the founding of the Republic. However, monetary stability remains the responsibility of the federal government and lack of it is directly caused by government policies. We are already seeing some signs inflation may be returning, particularly in the drop in the foreign exchange values of the dollar. Reversing this decline is critical. The way to do that is reducing the burden of government on the country (spending and regulation) and pursuing sensible trade and monetary policies.

Protest Warrior

We've taken quite a few shots at the Democrats, so in a bid to offend everyone, we offer this sign from the Protest Warrior site. The group "joins" moonbat demonstrations with its members carrying signs that appear to be standard, leftwing loony fare, until you look closer. For example, one sign we love says:

Except for ending Slavery, Facsim, Nazism and Communism
War Has Never Solved Anything

On at least one occasion Time Magazine was fooled into thinking they were authentic moonbats, protesting against Ann Coulter. Time failed to notice that the "organization" listed on the supposedly anti-Coulter sign is "Communists for Kerry."

So if there's a protest forming near you, why not pop on over to Protest Warrior and see if you can get into a counter demonstration with them. After all those people carrying the sign saying "Give Communism a Chance" really need someone to bring them back to earth.

VDH's Private Papers :: Democratic Suicide

The always thought-provoking Victor Davis Hanson has a new essay on the decline of the Democratic Party.

Democratic Suicide: "We are in unsure times amid a controversial war. Yet the American people are not swayed by the universities, the major networks, the New York Times, Hollywood, the major foundations, and NPR. All these bastions of doctrinaire liberal thinking have done their best to convince America that George W. Bush, captive to right-wing nuts and Christian fanatics, is leading the country into an abyss. In fact, a close look at a map of red/blue counties nationwide suggests that the Democrats are in deepening trouble. Why? In a word, Democratic ideology and rhetoric have not evolved from the 1960s, although the vast majority of Americans has -- and an astute Republican leadership knows it."

He goes on to analyze how each of the traditional Democratic positions on the party's key issues is losing traction and why. Is a turnaround near? Well, the first thing to do when you find yourself in a hole is to stop digging. The Democrats's leadership choices show that their plan is still to head for China.

Read the rest.

Math Wars

A raging controversy in the world of mathematics has been "settled" according to The Manila Times (Hat tip: Lyle). The winner? The local hero:

UP Math prof proves Princeton man wrong: "Edgar Escultura, a professor of mathematics at the University of the Philippines, proved that Andrew Wiles' proof of Fermat's last theorem is false.

In 1993 Andrew Wiles of Princeton University announced at a lecture in London that he had proved Fermat's last theorem (FLT). This is a conjecture by the French mathematician Pierre de Fermat in 1637 that for any integer n greater than 2, Fermat's equation that claimed xn + yn = zn has no solution in integers x, y z except 0 which satisfies the equation.

N.B. The "n's"in Fermat's equation should be exponents (e.g. "x to the n power").

The Manila Times then undermines its math credibility by mis-defining "integers." Whole numbers are 0,1,2,3,4... While all whole numbers are integers, the integers also include negative numbers, which are not part of the set of whole numbers. But we digress...

Integers are whole numbers like 8, 73, 1,257, etc. Since that time mathematicians and amateurs had been trying to find a proof but failed.

When Wiles made the announcement it was celebrated around the world. In Chicago, for instance, mathematicians marched on the streets in euphoric celebration."

Yeah, we remember that. What a night it was! You know how wild those math parties can get.

Since those heady days, Filipino mathematician, Edgar Escultura, has been pushing his "refutation" of Wiles' proof. Escultura, who is also a former Manila Times columnist and math teacher at The Manila Times School of Journalism (We are not making this up.) has finally forced Wiles to "throw in the towel," as the Manila Times continues:

On April 26, Andrew Wiles conceded an error in his proof. His letter and Escultura’s reply are below.

Tuesday 04/26/2005 6:57:33am

Dear Sir,

Your work is incredible, I read all of it just yesterday and let me tell you I respect you. I am going to review all my ‘proof’ which I am sure is wrong (thanks to you!).

Would you like to collaborate with me in this work? I have noticed some imperfections in your perfect proof (that sounds like you), and I’d like to create a perfect proof with you, great professor.

Also I’d like to have the address of the guy who let you get a PhD 30 years ago. I’d like to discuss few things with him...

Very respectfully,
A. Wiles [elipses in the original]

Call it a hunch, but we don't think Prof. Wiles is convinced just yet. The last sentence is the tipoff, of course, but there is also the statement about having read all of Escultura's work of 30 years "just yesterday."

Escultura's reply plays it straight:

Dear Prof. Wiles,

I welcome and appreciate your comments and I hope we can have a continuing dialogue. Regarding your invitation to collaborate with you, I would be glad to. But here is the situation:

My critique of mathematics is focused not on your work but mainly on the underlying fields of FLT which are foundations, number theory and the real number system. Here is what I found:

1) Two of the axioms of the real number system are false, namely, the trichotomy and completeness axioms (the latter is a variant of the axiom of choice), counter examples to them were constructed by Brouwer and Banach-Tarski, respectively.

2) I also noted a flaw in the use of the universal or existential quantifiers on infinite set.

3) To avoid contradictions, it is necessary to well define a mathematical space and its concepts by a consistent set of axioms. A concept is well defined if its existence, properties and relationship with other concepts are specified by the axioms. Most of the concepts of mathematics today are ill-defined.

Based on these findings I constructed the new real number system on three simple axioms. Its most updated version appears in the Journal of Nonlinear Analysis and Phenomena. An extended abstract of it appears in my updated website in June.

Yes, indeed, there are imperfections in my work but not on principles. And if there are major ones, I would like to know.

Regarding my academic advisor, he was the late L. C. Young, distinguished research professor and professor emeritus at the University of Wisconsin.

Again, thank you for your interest in my work and for inviting me to collaborate with you.

With my very best wishes.

E. E. Escultura

We assume Prof. Escultura understood that Wiles's letter was being sarcastic, but he decided to take the high road with his reply. Still the overall context of the article makes us wonder. And how could The Manila Times represent Wiles's letter as conceding "an error in his proof?" Is this a joke by Escultura? Could he be clueless ennough to have mistaken Wiles's sarcastic letter for sincerity?

Update 5/9: Corrected spelling of "Filipino."
Update 5/13: See also "Wiles Escultura and Fermat" and "Escultura and Wiles III."

Walter Mondale

Remember Walter Mondale? Neither do we, but he once carried Massachusetts in a presidential election. Now he's been born again as a true believer in the filibuster, writing in a "bipartisan" guest column in Minneapolis Star Tribune. Strangely, he didn't always feel this way. In 1975 he was leading the fight against the filibuster:

Power Line: Walter Mondale hits bottom: "Mondale speaks on the record (the Congressional Record, that is), 1975:

'It seems to me that a not-so-subtle difference, a profound different [sic], between 66 2/3 percent and a simple majority could be the different between an active, responsible U.S. Senate and one which is dominated by a small minority.' Cong. Rec., Jan. 17, 1975, p. 759.

And yet again: 'May a majority of the Members of the Senate of the 94th Congress change the rules of the Senate, uninhibited by the past rules of the Senate? I firmly believe that the majority has such a right -- as the U.S. Constitution, the precedents of this body, the inherent nature of our constitutional system, and the rulings of two previous Vice Presidents make clear.' Cong. Rec., Jan. 17, 1975, p. 758.

Walter Mondale and the Star Tribune are two disgraceful 'that was then, this is now' peas in a pod."

He hits bottom, but he keeps on digging.

UPDATE 6/1: We erred in stating the Mondale carried Massachusetts. In fact he carried only Minnesota and the District of Columbia. Ronald Reagan managed to eke out a victory with 525 electoral votes to Mondale's 13.

Fun with Mediation

An infinite number of monkeys typing on an infinite number of blog accounts would eventually reproduce the entire internet. It's begun:

Monica Mama
A Republican, Madam
Cow World
Ryne McCorn

The Real Reason Terry Werner Lost

Lincoln Journal Star: The City Council slate: Terry Werner:

"Six quick questions:
[...]
West Coast or the Option? 'I don't even know what that means. West Coast.'"
[emphasis added]

This Just In

Osborne is formidable political foe

It's the headline on the AP story in the Journal Star. Duh.

The Penis Monologues on NRO

This hilarious article on National Review Online was summarized in yesterday's Best of the Web Today. If you saw Taranto's summary then, you should know there is plenty more fun where that came from. If you didn't even see the summary, what are you waiting for" Get on over there.

Christina Hoff Sommers on The Penis Monologues on National Review Online: "College administrators have been enthusiastic supporters Eve Ensler's play The Vagina Monologues and schools across the nation celebrate 'V-Day' (short for Vagina Day) every year. But when the College Republicans at Roger Williams University in Rhode Island rained on the celebrations of V-Day by inaugurating Penis Day and staging a satire called The Penis Monologues, the official reaction was horror. Two participating students, Monique Stuart and Andy Mainiero, have just received sharp letters of reprimand and have been placed on probation by the Office of Judicial Affairs. The costume of the P-Day 'mascot' -- a friendly looking 'penis' named Testaclese, has been confiscated and is under lock and key in the office of the assistant dean of student affairs, John King."

Lincoln City Council Election Results

The Lincoln City Council election was held "today." (It's after midnight here.) The Lincoln Journal Star has the full story. The winners are: incumbent Ken Svoboda (R); Robin Eschliman (R) and Dan Marvin (D). Thus the previous 4-3 edge to the Democrats is maintained. However, incumbent Democrat, Terry Werner, finished 5th in the field of 6.

These results were surprising, as we did not expect Werner to lose in the absence of a Republican sweep. Despite the hard-fought campaign, there could actually be less partisan infighting on the council without Werner's polarizing influence. The turnout was heavier than in the primary, which is not saying much, but still only 29.3% of registered voters. [Beat that, Omaha. :-D ]

Voters also approved a $10 millon bond issue for storm drains and sewers. There have been considerable flooding problems during heavy rains, particularly in the south part of town, so this is welcome for people in those areas. Interestingly, it also shows that voters are willing to be taxed for something they see as necessary, just not for the Mayor's "bold ideas."

As previously noted, voters could cast up to 3 votes in a field of 2 Democrats and 4 Republicans. This meant that Republican votes would be split, and the Democratic Party encouraged its voters to withhold the 3rd vote to avoid aiding any of the Republicans. This apparently had an effect, as 113,098 votes were cast by 42,242 voters for an average of 2.68 per voter. There would have been an additional 13,628 votes, if everyone had voted for the allowed three. Of course, some of these "missing" votes may have been withheld for other reasons, including failure to realize that three votes were allowed. However, it's reasonable to assume that most of the "undervotes," perhaps 10,000, were from Democrats reluctant to vote for any of the Republicans.

From the number of voters and the votes cast for each candidate we can calculate the % of voters who voted for each candidate. These results are shown below.

Candidate	Votes	% of Ballots
Ken Svoboda * (R)	23,634	55.9
Robin Eschliman (R)	21,800	51.6
Dan Marvin (D)	18,819	44.6
Mark Koller (R)	16,709	39.6
Terry Werner * (D)	16,455	39.0
Shawn Traudt (R)	15,681	37.1

Clearly the splitting of Republican votes, combined with the withholding of the third vote by Democrats helped Marvin and Werner relative to Koller and Traudt.

In the primary Werner got 10,554 votes from about 29,500 voters, so he was on about 41% of the ballots in a field of 20. He finished 2nd behind Svoboda then, but was chosen on only 39% of the ballots this time in the smaller field.

Find the Propaganda

Three versions of the same story about the Italian government's report on the tragic death of Nicola Calipari. Find the professional journalism and the propaganda. Follow the links back to the complete versions of the stories. First the official news agency of the People's Republic of China:

Xinhua - English: "ROME, May 2 (Xinhuanet) -- The killing of an Italian intelligence agent in Baghdad by US soldiers was not deliberate, but as a result of stress, inexperience, fatigue and a lack of rules among the US troops, said the Italian Foreign Ministry on Monday night.

A probe found no evidence that the March 4 killing of Italian intelligence agent Nicola Calipari was deliberate, said the ministry in a report."

The New York Times ("All the news that fits, we print"):

The New York Times > International > Europe > Italy Rebuts U.S. Report That Cleared G.I.'s in Killing: "ROME, May 2 - Italy on Monday issued a strongly worded rebuttal to an American report clearing United States soldiers of responsibility for the shooting death of an Italian intelligence agent at a roadblock in Iraq, saying 'inexperience and stress' on the part of the soldiers were major reasons for the agent's death."

The USATODAY, hardly worth being called a "newspaper" as far as Times readers are concerned:

USATODAY.com - Italy says 'stress,' 'inexperience' played a role in death of Italian agent: "ROME -- Stress, inexperience and fatigue among U.S. soldiers played a role in the shooting death of an Italian agent in Iraq, according to a 52-page report released Monday by Italian investigators.

The probe found no evidence that the March 4 killing of intelligence agent Nicola Calipari was deliberate. Calipari had just secured the release of journalist Giuliana Sgrena from her Iraqi captors.
'It is likely that the state of tension stemming from the conditions of time, circumstances and place, as well as possibly some degree of inexperience and stress might have led some soldiers to instinctive and little controlled reactions,' said Italy's report."

The difference is even more striking when you read the whole articles. Xinhua and USATODAY stick mainly to the facts, while the Times can't resist throwing a few extra punches: "strongly worded rebuttal" and "major reasons."

So the US military gets more of a fair shake from the official news agency of the People's Republic of China than from the New York Times. How pathetic when the PRC is giving lessons in objective journalism to the "premier" US newspaper.

Is That a Burrito in Your Pocket or Are You Just Glad to See Me?

Frank Graham at Frankly Speaking found this story out of Clovis, NM, on a student bringing a concealed burrito to school. The Clovis News Journal reports:

"Extra-credit burrito leads to school scare
By Marlena Hartz: CNJ staff writer

A concerned citizen spotted a male juvenile carrying a suspiciously concealed item into Marshall Junior High School early Thursday morning.

Police were called. The school was locked down. Adjacent streets were closed and law officers were perched on roofs with weapons.

The drama ended about two hours later when the suspicious item was identified:

A 30-inch burrito, prepared as an extra-credit assignment and wrapped inside tinfoil and a white T-shirt.

'I didn’t know whether to laugh or cry,' school Principal Diana Russell said after the mystery was solved.

'Overall, I’d say we had a good learning day.'"

Well, at least they didn't arrest or suspend the student. The police responded quickly:

'We’ve trained for incidents just like this -- the training just kicked in,' said Sgt. Jim Schoeffel of the Clovis Police Department.

Thank goodness for that.