In a visit to the stores over the weekend, I found almost everything was on sale. A good deal could be had in almost every shop. Further, the papers were full of terrific housing deals, and everyone says that this is a good time to buy a car.
So where is this inflation all the policymakers in Washington and all the financial gurus in New York are worried about? This is not an idle question. They`ve decided to keep our interest rates propped up allegedly because we can`t seem to kick the inflation habit.
In the middle of a nasty recession that is spreading to all parts of the country, they cling to the belief that if price increases aren`t already out of control, they soon will be if the slightest hint of an economic recovery shows on the horizon.
The people now dominating the Federal Reserve Board, namely the hawkish regional bank presidents who have effectively curbed the power of that weak chairman, Alan Greenspan, apparently won`t be satisifed until inflation is driven to zero, no matter what the cost in jobs and income to American society.
This is occurring because the central bankers live in an ivory tower in which they incessantly recycle their old theories that there`s an evil price rise lurking around every corner of economic activity. As a result, they have forced cost-cutting upon the entire country, and that means layoffs, wasted lives and wasted resources.
But where is the inflation? What little we`ve seen of it, as reported in the official statistics, is partly overstated and partly caused by the government`s own tight-money policies.
For example, in February, clothing prices were said to be up sharply. Now anyone who ventured into a store then (and there weren`t many) knows that this is patently ridiculous. There were sales galore. So what happened?
According to Steve Roach, an economist for Morgan Stanley, a New York-based investment banking firm, it was merely a change in the way firms price merchandise. In recent years, he said, they have put items on sale before Christmas in an aggressive effort to move their goods, rather than waiting for the first of the year.
But the inflation statistics, it turns out, adjust for the old reality of big price cuts at the first of the year. So, for example, if you customarily cut clothing prices 20 percent in January, the seasonally adjusted figures would say that prices did not fall at all, since it was the normal practice.
The problem with this customary seasonal adjustment is that it works against you if firms change their pricing policies, as they have. So if prices, having been cut before Christmas, remained the same after Christmas, then that would be recorded as a price increase.
Then there is the matter of Fed-induced inflation.
Many firms forced to slash people off the payroll and cut expenses because of declining sales discovered that by raising prices to their remaining (usually loyal) buyers, they could still maintain a good profit, since their costs had been cut so low.
This is not a sustaining kind of inflation, yet it creates the unusual situation of policymakers tightening the monetary screws further based on inflation created as the result of their own policies. Tight money can feed on itself for a time.
But there is another, more serious kind of Fed-induced inflation not recognized by Federal Reserve policymakers here or by economists in general. It is the price that society pays for recessions like this. Cost-cutting by companies is often transferred to the public sector, and shows up as greater demand for the public dollar, even as governors and mayors are considering cost-cutting measures to balance their budgets too.
The federal deficit is skyrocketing too, because tax revenues are down and demands for services by the unemployed are up. And guess who is complaining most about the inflationary impact of the federal deficit? The ivory-tower boys at the Fed.
The central bankers justify putting the economy through downturns like this on grounds that the alleged alternative, inflation, robs Americans of the ability to plan their economic futures.
Tell that to a 25-year-old college graduate having a difficult time getting an entry-level job, or to a 50-year-old accountant laid off work in middle management because business has been curtailed by higher interest rates. Tell that to a firm that can`t finance new investment to compete against the Japanese because American interest rates are still too high.
Talk about disrupting planning. This recession has knocked it in the head.
The aim of an economy is to become more productive, but cutting costs is only one way, and a short-term one at that. The longer-term way, which all the tight money in the world can`t bring about, is investment in new technology and in education. The longer we delay making this possible, the more inflation-prone our economy will be.
