Saturday, January 14, 2012

Capitalism & Inflation

This post is for all the Austrian, gold hugging, inflation fearing bears who have no idea how or why capitalism continues to increase our standard of living.

Below is a photo I borrowed from Carpe Diem of a nice color TV set taken from the 1964 Sears catalog. The price of the top two TV sets were $750 in 1964 which equates to $5300 in 2010 dollars.  The bottom TV set was $800 in 1964 which equates to $5650 in 2010 dollars.


So, what can you buy with the same purchasing power today? Well, to put it in perspective this is what you can purchase with $5300 in today's dollars.





Since I can’t say it any better, I am going to quote Prof. Mark Perry,

"Bottom Line: For a consumer or household spending $750 in 1964, all they would have been able to afford was a console color TV from the Sears Christmas catalog. A consumer or household spending that same amount of inflation-adjusted dollars today (about $5,500) would be able to furnish their entire kitchen with 8 brand-new appliances (refrigerator, freezer, dishwasher, range, washer, dryer, microwave and blender) and buy 9 state-of-the-art electronic items (laptop, GPS, camera, home theater, plasma HDTV, iPod Touch, Blu-ray player, 300-CD changer and a Tivo recorder). And of course, even a billionaire in 1964 wouldn't have been able to purchase many of the items that even a teenager can afford today, e.g. laptop, GPS, digital camera. 

As much as we might complain about high unemployment, a sub-par recovery, a dysfunctional Congress and a huge deficit, we have a lot to be thankful for, and we've made a lot of economic progress since the 1960s as the example above illustrates, thanks to the "magic of the marketplace."


Now I’m not saying we couldn't be doing even better with lower inflation but seriously, we live better today than ever before.  At the end of the day does it matter if we only pay income taxes or a combination of income taxes and inflation? 

For those unaware, inflation is simply a reduction in the purchasing power of a dollar via theft by the government.  The cost of goods and services rise because the value of our money decreases.  Think of it this way, if the government deposited one million dollars into every persons bank account overnight would we be any richer?  Perhaps the first guy to the store would benefit but that would be about it.  Because we haven't increased our physical production of goods and services the prices would rise to reach a new equilibrium.  These higher prices are what we call inflation.  The government does this every year a little at a time because they own a printing press and dilute the purchasing power of your money every year.

Real wealth comes from production or as economists call it supply side economics.  We are a wealthy country not because of money, banks, stock markets or anything of the sort.  Those things are byproducts of a free market economy.  We are wealthy because we produce a lot of stuff.  We can do far more work with a track hoe or wheel loader than with a shovel & wheelbarrow.  We can move far more goods with a train than with a horse.  These things (capital goods) aren't going away anytime soon.  Every year companies seek to become better, faster and to produce more goods and services with less cost.  If you have ever watched the TV show "How It's Made" you will understand what this looks like. 

So the next time you hear some gloomy news, you can just smile and say life will go on. 

Please allow me to stop here for a little rant to explain what I mean.  US Retail sales numbers for December were just announced on Thursday.  If you simply read the headline at the Globe & Mail you would have gone away with the impression that December was a total disaster.  It said something like "Retail Sales gains slowed in December... missing analyst expectations." 

The reality is retail sales were up, despite what some twenty something analyst in New York feels the number should be.  Secondly, retail sales (the largest part of US GDP) have been up 17 of the last 18 months.  This point shouldn't be taken lightly.  Retail sales typically fall three to four times a year, even when the economy is health and growing.  Lastly, retail sales for October/November were revised upward by 0.2%. 

So despite what the pouting pessimist pundits may say, the economy is on the mend.  Now it may not be as fast as some would like it to be but does it really matter what the artificial "target" is.  The truth is we will live better ten, twenty and thirty years from now because of capitalism (or "the miracle of the marketplace"). 


Best Regards,

Kevin Graham

Click here to read the full post at Carpe Diem

15 comments:

  1. Kevin,

    There's much that I agree with in this post and you know that I'm a defender of capitalism. I agree that the miracle of a division of labour and the miracle of capital goods lead to a higher standard of living.

    But...

    Who are the Austrians that have no clue as to how capitalism raises our standard of living?

    As to your question ("At the end of the day does it matter if we only pay income taxes or a combination of income taxes and inflation?"), yes, monetary and price inflation matter. Two reasons:

    1. Ethically: when did theft no longer matter? I missed the memo. :)

    2. Economically: a drop in purchasing power is a large contribution to one's standard of living. The scenario from Perry is an artificial world since one's savings aren't indexed to inflation (with the exception of a federal MP's pension contributions, of course). The drop in purchasing power between 1964 and 2010 is roughly 86%. That's HUGE. Do we just ignore this since, in a world where inflation is adjusted, you can buy more stuff today than in 1964?

    Joel

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  2. Hi Joel, thanks for your comment. I am sure that many Austrian economists know and understand capitalism. I was simple poking fun at the extremists.

    The Austrians have many good things to say about economics and the business cycle. However, I have grown tired of the fact that many people use it as camouflage for their political ideology, which I don’t agree with.

    If you take the time to read FA Hayek you will get a feeling for what I mean. As you may know Hayek and Mises are considered the forefathers of Austrian economics. That said, Hayek was far more balanced than many of the current day proponents of Austrian economics. If you read Hayek’s books you will know what I am talking about.

    The best example is found in The Road to Serfdom, chapter nine. This chapter is on Security and Freedom. If you go over to the Mises institute, they decry any sort of government security including social security, medicare, employment insurance, etc. They claim security and freedom are mutually exclusive. But what does Hayek say? “There is no reason why in a society which reaches the general level of wealth which ours has attained the first kind of security should not be guaranteed to all without endangering general freedom.” (The first kind of security is defined as “security against severe physical privation, the certainty of a given minimum sustenance for all.”)

    He further asks if those receiving such security should have the same freedoms as the rest of society, another strong yet interestingly ignored point today.

    This is why I have given up on the Austrian crowd. The want to be taken seriously but really at the end of the day I see them as a front for the political ideology of libertarianism (which I don’t agree). I value liberty but some of the things they say are just wrong while some are crazy. Do you agree that a woman should be free to prostitute her body because both side are freely consenting to the economic transaction of money for sex? You keep bringing up the morality of inflation, but this example is exactly what the Austrian economists (that you like to quote) believe in among others. I could go on to other topics as well but I think you get my point.

    As for your second point regarding inflation and savings you will note I never referred to savings but purchasing power. These are the hair splitting points that Austrians love. In fun, how is Perry’s example in an artificial world? Ok instead of buying TV for $750 from 1964, take the cash and stuff it under a mattress. Take it out in 2010 and go buy a TV. Wow, you will not only get a better product with double the screen area, high definition, and better sound quality but it will cost less.

    That however misses the crucial point that it only takes a few days of labor to purchase a TV today versus a month and a half back in 1964.

    I fully understand what inflation will do to savings and it is unfortunate many people today don’t understand and appreciate it. That said you don’t seem to want to answer my question regarding what should be the correct balance of taxation, since income taxes are forced theft too.

    Sorry I must stop writing, as this comment is too long. Thanks again for your comment. Although my ideology may be wrong I am still trying to learn (and ask probing questions). It is almost like I draw from a variety of sources to build my patchwork understanding of the world. It is then the process of interweaving it all together that I just love. I’m sure you do to. It’s really too bad we didn’t know each other better back in university days. Ryan and I used to talk engineering all day long but the soft sciences like economics and psychology are so much more interesting.

    Take Care,
    Kevin

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  3. Thanks for the response, Kevin. Always enjoy interacting with you. It really is too bad we missed the opportunity to do this back in the good ole university days.

    You said, "...Hayek was far more balanced than many of the current day proponents of Austrian economics."

    Such as? Are you referring to "Austrians" that assemble on the Mises discussion forum (many of whom I think are crazy) or men like Rothbard, Rockwell, Paul, Woods?

    You said, "This is why I have given up on the Austrian crowd."

    Who in this "crowd" are you referring to? Menger, Say, Bastiat, Mises, Rothbard, Paul, Woods, Murhphy? I find you quite vague when referring to Austrians.

    You said, "The want to be taken seriously but really at the end of the day I see them as a front for the political ideology of libertarianism (which I don’t agree)."

    What do you mean by libertarianism? There are a variety of brands. I, for example, don't subscribe to Rothbard's anarcho-capitalism, but I do subscibe generally to classical liberalism, which is nowadays referred to as libertarianism.

    You said, "Do you agree that a woman should be free to prostitute her body because both side are freely consenting to the economic transaction of money for sex? You keep bringing up the morality of inflation, but this example is exactly what the Austrian economists (that you like to quote) believe in among others. I could go on to other topics as well but I think you get my point."

    Coming from a Christian worldview, I don't believe prostitution is morally right. But the civil government does not have the authority in a Christian worldview to penalize something just because it's immoral. In a Christian worldview, civil government is responsible for the ministry of public justice (Romans 13). Public justice concerns itself with public, evil acts. So, if a particular instance of prostitution qualifies as a public evil act then, yes, I believe the civil government should step in and prosecute. The same goes for all forms of theft including inflation. Theft is a public, evil act which should be prosecuted.

    Continued...

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  4. ...continued

    To clarify, not all Austrians believe that prostitution should be legal. Libertarianism is not that monolithic and uniform.

    You said, "As for your second point regarding inflation and savings you will note I never referred to savings but purchasing power. These are the hair splitting points that Austrians love."

    And this is important to our discussion because...?

    You said, "In fun, how is Perry’s example in an artificial world?"

    Because one's purchasing power is not adjusted for inflation in the real world.

    You said, "Ok instead of buying TV for $750 from 1964, take the cash and stuff it under a mattress. Take it out in 2010 and go buy a TV. Wow, you will not only get a better product with double the screen area, high definition, and better sound quality but it will cost less."

    But there will be $4750 worth of stuff that you can't buy because your $750 has lost 86% of its purchasing power. And, by the way, $750 will not buy you a top-of-the-line color TV today which, presumably, would have been the case in 1964.

    Your question after looking at this case study was whether inflation mattered. Does purchasing power contribute to one's standard of living? If so, I'd say an 86% drop in purchasing power matters. Wouldn't you?

    You said, "That however misses the crucial point that it only takes a few days of labor to purchase a TV today versus a month and a half back in 1964."

    The crucial point, I thought, was whether inflation mattered. You seem to think that being able to buy more stuff with inflation-adjusted purchasing power is all that matters. The $4750 that has been stolen from the currency since 1964 doesn't matter?

    You said, "That said you don’t seem to want to answer my question regarding what should be the correct balance of taxation, since income taxes are forced theft too."

    Taxation is not, ipso facto, forced theft, though I'm aware that some libertarians, perhaps many, believe that to be the case. Again, coming from a Christian worldview, the civil government is a divinely ordained institution and so is taxation. However, that doesn't mean the civil government can be a law unto itself and tax as much as it sees fit. The civil government's sphere of authority is public justice. Whatever costs are necessary to administer public justice should be taxed from the citizenry. I don't know what this amounts to as a percentage, but I think we can all agree that 40% of a nation's GDP is insane, no?

    -Joel

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  5. @Joel, thanks for your thoughtful responses to Kevin's stimulating post. I would like to add one point, which is crucial in this whole picture. The 1964 TV is American made in factors in the United States with US workers; back then, TVs were likely exported to other countries. The 2012 TV is made in China. The reason it is cheap is because the Chinese sell their products in exchange for the United States fiat dollars, which the Chinese can then use on world markets either to invest or to buy the raw materials that they need. The United State has a three-decade trade deficit. All that means is that the United States has been able to export its own currency receiving manufactured goods in return, currency which it costs virtually nothing to make--particularly when it is created electronically and not printed. Now the United States by inflating its currency over this period has been a big winner in global trade. And those TVs and such are indeed cheap. But I defy you to go to a country which is not able to export its currency to China. Say a poor African country. There, people still fix, e.g., 30 year old refrigerators, because the cost of labour and parts is still much, much cheaper than replacing the unit. All this means is that it is possible for the United States to overdo it--I think inevitable at this point. Then the rest of the world will reject the US dollar and there will be completely new dynamic, where the cheap money is unable to chase real goods. This is an unprecedented situation in the world today; to my knowledge, no fiat currency has ever enjoyed the ascendency of the dollar, and so no such currency has ever fallen from such a pinnacle. When it does, watch out. It will be the end of the global economy as we know it.

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  6. Hi Joel,

    I only have a few minutes to comment.

    The crucial point is not whether inflation matters, it does matter, but despite all the fear mongering by some Austrians we do live better today in real (inflation adjusted) terms. You said, “Because one's purchasing power is not adjusted for inflation in the real world.” Are you sure?

    Come on Joel, let's get "Real". To start with, inflation does not always imply a fall in the purchasing power of one’s income if your income increases faster than the inflation rate. You seem to be hung up on savings only while totally neglecting incomes and productive capacity. This is the additional amount of goods that a unit of labor can command. Are you really trying to say that you would live better 1964 or 1905, because your currency had higher purchasing power? Yes our currency has lost purchasing power but since your productive capacity has increased faster than inflation you do in fact live better and can purchase more goods with the same inflation adjusted income. Real GDP and Real Incomes, which rise in tandem, are inflation-adjusted (hence the “Real” part).

    I will throw you another piece of meat and say I disagree that the government’s only sphere is to administer public justice. I used to think that all regulations were unnecessary and a rule of law was sufficient but I have since reversed my position. First, someone can be well within the letter of the law yet are in violation of the spirit of the law. Secondly, how do we collectively deal with issues and resources that affect everyone? For example water management and the environment. These among others things must be dealt with collectively as individual property rights will not always work. (Please note: I am not intending to open another discussion).

    Best Regards,
    Kevin

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  7. By the way, Kevin, did you take into consideration that that TV you picture is in a fine piece of crafted wood furniture? I know the TV cabinet is out of style, but if you were able to purchase something comparable in quality and materials, say a buffet cabinet without the hutch, it would cost starting in the range at $2000, and that is without a the TV. How does that figure into your calculations about the benefits of inflation?

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  8. Kevin said: "The crucial point is not whether inflation matters, it does matter, but despite all the fear mongering by some Austrians we do live better today in real (inflation adjusted) terms. You said, “Because one's purchasing power is not adjusted for inflation in the real world.” Are you sure?"

    Once again, who are these Austrians, Kevin, who claim that capitalism doesn't raise our standard of living? Have you read a single Austrian besides Hayek?

    Kevin said: "Come on Joel, let's get 'Real'. To start with, inflation does not always imply a fall in the purchasing power of one’s income if your income increases faster than the inflation rate."

    Because, of course, we know that everyone's income is outpacing inflation.

    Kevin said: "You seem to be hung up on savings only while totally neglecting incomes and productive capacity."

    What about that growing percentage of the population (e.g., elderly) for whom savings = income??? You seem to be conveniently ignoring savings, and for good reason. You're smart enough to know how devastating monetary inflation is to savings.

    Kevin said: "Are you really trying to say that you would live better 1964 or 1905, because your currency had higher purchasing power? Yes our currency has lost purchasing power but since your productive capacity has increased faster than inflation you do in fact live better and can purchase more goods with the same inflation adjusted income. Real GDP and Real Incomes, which rise in tandem, are inflation-adjusted (hence the “Real” part)."

    You know I'm not saying one's standard of living was better in 1905 or 1964 than today. At least, I hope you do. I've immersed myself in Austrian literature for 4 years now and I haven't come across a single Austrian who claims that a 1905 or 1964 standard of living is better than today's.

    Real GDP and real GDP per capita are aggregrate statistics, not individual statistics. Are you going to suggest that everyone's income is indexed to inflation? Are you going to suggest that only a small percentage of the population finds their income outpaced by inflation? Furthermore, if inflationary theft matters, as you claim, how so? Why does inflationary theft matter if everyone's income is outpacing inflation or adjusting in tandem?

    Kevin said: "I will throw you another piece of meat and say I disagree that the government’s only sphere is to administer public justice. I used to think that all regulations were unnecessary and a rule of law was sufficient but I have since reversed my position. First, someone can be well within the letter of the law yet are in violation of the spirit of the law. Secondly, how do we collectively deal with issues and resources that affect everyone? For example water management and the environment. These among others things must be dealt with collectively as individual property rights will not always work."

    This paragraph illustrates some serious confusion. The law is insufficient because one can violate the spirit of the law? Regulations are immune to this problem how? Individual property rights don't always work because...? I've read several books that illustrate the disaster that comes with collective ownership of things like forests, bodies of water, etc., which really shouldn't be that surprising. As one example that's Canadian-specific, the fisheries in Newfoundland were obliterated precisely because aquaculture, unlike agriculture, does not involve individual property rights.

    Joel

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  9. @Joel: One point regarding the standard of living one could make is that there are far fewer families today living off of one income than in 1964. There are many causes for this, but a major one is that few families where both the mother and father are working believe that is even possible to make ends meet on a single income. That suggests that standards have dropped because it take two incomes to live as well as one in the earlier period. There are very few Leave it to Beaver families, when before it was normal.

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  10. Hi Joel,

    A couple of comments.

    Let me spell it out for you. I never said Austrians didn't believe capitalism raises our standard of living. I said despite all this continuous whining about inflation we do live better today.

    Joel said, "Real GDP and real GDP per capita are aggregrate statistics, not individual statistics. Are you going to suggest that everyone's income is indexed to inflation?”

    Which is it Joel, do we live better today or not? You can play the statistical game but it doesn’t change the facts.

    Secondly, since when did you turn socialist? You don’t like aggregrate statistics why? Let’s make everyone’s income the same and we’ll eliminate this problem.

    I don’t have time to respond any further. I’ll leave you with this.

    To suggest that I am seriously confused because I have a contradictory position is quite egocentric. I would suggest you read some books by insightful liberals or mainstream economists that are contradictory to your narrow absolutist point of view. Take some time to think for yourself instead of reading and rereading books that confirm all your traditional beliefs. Try to actively search out facts and evidence that are contradictory to your point of view.

    To quote a favorite psychologist, “If you don’t find yourself experiencing significant discomfort as you pursue these facts, you should question if you are taking them seriously. If you discover that your traditional beliefs were all correct from the beginning, you probably moved to a new and more sophisticated level of self deception.”

    Regards,
    Kevin

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  11. Kevin said: "Let me spell it out for you. I never said Austrians didn't believe capitalism raises our standard of living. I said despite all this continuous whining about inflation we do live better today."

    So why reference an economic school of thought disparagingly at the outset of a post if they agree with your thesis?

    Kevin said: "Which is it Joel, do we live better today or not? You can play the statistical game but it doesn’t change the facts."

    Pointing out that a per capita statistic is based on aggregate data is playing a statistical game, but using a "Real GDP" statistic is not playing statistical games? Arbitrary standard.

    Is it *possible* for a per capita stat to increase without a majority of people represented by the aggregate number having contributed to the increase?

    Kevin said: "Secondly, since when did you turn socialist? You don’t like aggregrate statistics why? Let’s make everyone’s income the same and we’ll eliminate this problem."

    This is simply demagogy. You have a bright future in politics if you decide to run for office.

    Showing the limitations of a statistic is not tantamount to calling for the elimination of income disparities, nor is it socialism. You're simply changing the channel because you don't want to deal with the difficult problems that come with the use of GDP statistics.

    Kevin said: "I don’t have time to respond any further. I’ll leave you with this."

    Of course you don't have time. You conveniently have no time when a discussion starts to get difficult.

    Kevin said: "To suggest that I am seriously confused because I have a contradictory position is quite egocentric."

    I find that you seek comfort in psychoanalysis when you're unable to defend your position. I illustrated why I found you seriously confused by asking several rhetorical questions which -- surprise, surprise -- you have not attempted to answer. When the going gets tough in a discussion -- and this has happened before -- you no longer have time to discuss and end with some psychoanalytic rambling about confirmation bias, etc.

    Kevin said: "I would suggest you read some books by insightful liberals or mainstream economists that are contradictory to your narrow absolutist point of view. Take some time to think for yourself instead of reading and rereading books that confirm all your traditional beliefs. Try to actively search out facts and evidence that are contradictory to your point of view."

    Physician, heal thyself. Read something besides "Road to Serfdom" before making narrow, absolutist pronouncements about Austrians, most of whom you've never read.

    Take care,

    Joel

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  12. Hi Joel,

    You have put a lot of words in my mouth.

    You may choose not believe me but I honestly am very busy. When I wrote before (thursday night) I had a few minutes before a meeting. Yesterday & today I was trying to spend time with my family as I have to catch an early flight tomorow. I am in Toronto tomorrow and will be in New York all next week.

    If you want me to rebut everyone of your rehetorical questions you won't get it here, sorry. I was just pointing out another area where I disagree with you and the Austrians, in addition to the Hayek example. I said I wasn't interested in another discussion (on the sufficiency of the rule of law). Then when I don't answer you, you start with this unable to defend my position. Pretty low don't you think?

    I believe you are referring to our previous discussion on banks being ponzi schemes. Again you won't believe me but I never read your reply till over a month later. I decided not to take it up again... so I guess that means I'm unable to defend my position.

    BTW, I have read many Austrians despite your scathing judgement. I like a lot of what they have to say but disagree on some points. You keep trying to nail me down to one position or another. As we've discussed, the Austrian/libertarians don't have consistent beliefs (ie income taxes, social security, etc).

    Take care,
    Kevin

    P.S I have thought about politics. You should as well.

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  13. Hi Kevin,

    How is the guy who starts every point in his replies with "Kevin said" the one putting words in your mouth?

    I know you're a busy man. So am I. I do believe that you've just recently gotten up to date on some of our previous discussions. That's the whole point. I've observed a trend based on multiple interactions within the last year or so where you quickly peter out when a discussion becomes more nuanced and sign off with some psychoanalytic tidbit that, ostensibly, characterizes everyone else but you. Maybe you do peter out because you're simply too busy. But it's happened enough times that I tend to think something else is involved along with being too busy. Maybe I'm wrong.

    For me to say you're unable to defend your position is not low since it's based on the aforementioned trend that I've observed. And, really, why are you so concerned about low blows? You insinuated in your second-to-last post that I'm narrow and absolutionist and don't read for myself.

    Once again, the "scathing judgment" that you impute to me is nothing more than demagogy. I've asked several times for you to reveal what Austrians you've read. In over a year of interactions, I've only heard you refer to F.A. Hayek and nameless Austrians over at the Mises website. You've also made statements about fractional reserve banking that lead me to believe you're unfamiliar with Austrian critiques of the system as per Mises, Rothbard, and others.

    Kevin, you're a great guy. I really enjoy our interactions despite the disagreements. All the best with your travels this week.

    Take care,

    Joel

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  14. Ok Joel,

    Thanks for the feedback.

    Here is my problem. You have countless hours for these types of interactions that can really just go on forever, I don’t. You have these going on all the time. I explained how you were wrong about inflation reducing purchasing power since real incomes have grow faster and the best you could come back with was rhetoric about savings and aggregate statistics. Ya but, ya but, ya but. It gets tiring. Yes inflation reduces the purchasing power of savings/money, I said that in my article. What is your point? You want me to reaffirm what I already said? I don’t have time for that either.

    Secondly, what is wrong with asking a person with opposing viewpoints to think critically on a subject? I am well aware that the easiest person to fool is yourself. Why do you think I stress it? Now I can’t help that you read into my comments and then believe they have some other hidden meaning.

    Lastly, I really don’t appreciate being called a liar. You said, “Maybe you do peter out because you're simply too busy.” I said I was busy, thanks for believing me.


    Regards,
    Kevin

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  15. Kevin,

    If you don't want to exchange ideas due to time constraints, that's fine by me.

    There's nothing wrong with suggesting that a person think critically on a subject. But to psychoanalyze someone -- as you have done -- is to basically insinuate they haven't thought critically. And no offense, but, it's a case of the tux calling the suit black. It's apparent from many of your comments that you haven't read much in the Austrian literature. Yet you come down fairly hard on the Austrian school.

    As to you're summary of our exchange, I think you're confused. You say, "I explained how you were wrong about inflation reducing purchasing power since real incomes have grow faster and the best you could come back with was rhetoric about savings and aggregate statistics. Ya but, ya but, ya but. It gets tiring. Yes inflation reduces the purchasing power of savings/money, I said that in my article. What is your point? You want me to reaffirm what I already said? I don’t have time for that either."

    So which is it: does monetary inflation reduce the purchasing power of money, or no? You affirm both within the same paragraph.

    The fact that you think my critique of real GDP is tantamount to "ya but" illustrates that you're not listening, all the while chiding me for being narrow and absolutionist.

    Anyhow...

    Chat again sometime,

    Joel

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