Friday, May 29, 2009
Inflation is a "supply-side" phenomenon
Where I do agree with Laffer is the argument that inflation is a supply-side phenomenon. In other words, if the supply of goods and services (the real assets that we need to live our lives) is abundant (as in Adam Smith's characterization), then there will be no inflation. It has nothing to do with money and certainly nothing to do with the level of reserves in the banking system. On the latter point, a high level of reserves tied to monetary policy that is driving interest rates to zero is deflationary, not inflationary.
The supply-side is where the Obama Administration has made a critical error in judgement, in my opinion. Because they don't understand our monetary system and, therefore, are influenced by erroneous claims such as, "taxpayer on the hook (applicable only under a gold standard). They are implementing policies that will shrink the nation's ability to produce the real assets that we need to live. That will create shortages of supply in everything from vehicles to homes to skilled and educated workers.
This will ensure long-term inflation that is not commodity based.