How to Explain Inflation to a Liberal

A reply to Ms. Hayek, UW-Whitewater: 

Inflation is, indeed, the most pressing issue of our time. Millions of Americans feel its crushing weight when they watch the meter at the pump tick ever higher; when they discover that their rent will increase by two hundred dollars at the end of their lease; and especially when they checkout at the grocery store.

But so long as Americans believe inflation to be the result of ‘corporate greed’, ‘price gouging’ or other such mistaken ideas they will not have less inflation–they will have more. Why? Because it is in the interest of those who create inflation to lie about its origin.

Inflation is not caused by greed, gouging, collusion or protectionism. It is not caused by rabid capitalists attempting to squeeze every last penny out of the consumer, or by ‘animal spirits’ run amuck. Inflation isn’t even an increase in prices! No, inflation is an increase in the quantity of money. As Milton Friedman said, “Inflation is everywhere and always a monetary phenomenon” and nothing else.

While most people believe inflation to be an increase in prices, this is only the effect of inflation, not inflation itself. If inflation is understood as an increase in prices, then anything and everything can cause inflation and we, as a society, will be at a perpetual loss as to how to prevent general increases in prices such as we have today.

Remember that during the lockdowns the federal government gave checks and subsidies to hundreds of millions of people and businesses. Where do you suppose that money came from? As it happens, that money came from thin air! It was created by the Federal Reserve, who, between January ’20 and March ’22 created more than $6 trillion by purchasing U.S. Treasuries and mortgage-backed securities. This increased the quantity of money by more than 40% which had the effect of lowering the purchasing power of the dollar and raising prices.

But for those who believe inflation is caused by greed: do you believe that government creation of money is harmless? If so, I ask you to explain the hyperinflations of Zimbabwe, Weimar Germany and Venezuela; and second, why is it that every business–both corporate and mom-and-pop alike–suddenly became greedy overnight? Were they not greedy before? Is the fact that a cup of coffee is $5 in the U.S. but 710 Yen in Japan proof that the Japanese are 140 times greedier than Americans?

These questions cannot be answered sufficiently by those who misunderstand inflation. Inflation is an increase in the quantity of money, and when the supply of anything increases its value goes down.

Our situation cannot be the result of greed or gouging or cutthroat business practices unless we choose to ignore the very real effects of government money creation. Inflation does not simply fall from the sky; inflation is a policy. And it is a policy put in place by the federal government and carried out by the Federal Reserve.