Inflation Continues To Surge. Interest Rates Are Next - Part 5 of 10

So, when its claimed that excess money printing, in the 1990's and after, did not cause inflation, this is not the case. Compared to the falls in unit prices that should have occurred, as a result of massive increases in productivity, and the fall in unit values of commodities, excess money tokens, thrown into circulation, prevented the corresponding fall in unit prices. More significantly, the excess liquidity led to a huge inflation of a particular type of prices, i.e. the prices of assets, be it, shares, bonds, or property and their derivatives, or other assets, each of which became a target for speculation.

The difference between these assets and other commodities, is that the supply of assets does not increase in response to a rise in prices that brings about higher profits. If the demand for cars rises so that the market price rises, then profits for car producers rise. Competition means that they each then seek to obtain their share of this increased demand, and the profits from it, by increasing their supply.

Generally, because larger-scale production brings economies of scale, the result of this increased production is a lower unit value for cars, so that, as demand and supply adjust to this higher level, the market value/price of production for cars is lower than it was before. Orthodox economics comes to the opposite conclusion to this, because it assumes diminishing returns, so that increased production/supply entails proportionately higher costs. That may be true, in some conditions, as far as short run costs are concerned – and is a factor, now, as firms face supply shortages and bottlenecks – but it is not true in the medium and long-term. In the long-term, because rising productivity leads to lower unit values, it should always result in lower prices, were money supply adjusted accordingly. The fact that money prices, instead, rise over time is evidence that central banks always deliberately create inflation, by increasing liquidity more than is required.

But, this increased supply/production, in response to higher prices/profits, does not apply, when it comes to assets. If the demand for land rises, say, because house prices rise sharply, due to speculative demand, and builders want more land to build on, its not possible to create additional land. This is what is meant by a monopoly of land ownership. Someone can't just go out and produce more of it, in the same way they can with cars, or mobile phones etc. Moreover, when demand for land rises sharply, causing land prices to rise, there is a clear incentive for its existing owners to hold on to it, in the expectation that its price tomorrow will be higher than it is today. It creates the potential for a speculative capital gain, which, in turn, creates the conditions for more such speculation.

With shares, its true that, when share prices rise, this creates an incentive for companies to create additional shares, as a means of borrowing money, because it means they can borrow more cheaply. They can raise any given amount of money by issuing fewer shares at these higher prices than they would have had to do at a lower share price. 

If companies were actually controlled by their collective owners, the workers and managers within them, then they would have done that on a massive scale over the last 40 years. But companies are not controlled by their collective owners. Instead they are controlled by a specific type of creditor of the company, i.e. the shareholders. Those shareholders, like landowners, have had a clear interest in restricting the supply of new shares, over the last 40 years, because, as speculative demand for shares has risen, along with speculative demand for bonds, land, property and all other assets, in the hope of large speculative gains, fuelled by central bank money lending and QE, the prices of shares, and all these other assets have soared, massively inflating the paper wealth of all the owners of this fictitious capital. So, instead, of companies creating additional shares, they have used profits to buy them back, so reducing the supply, and causing the prices to go even higher.

With commodity prices, its often said that the cure for higher prices is higher prices, i.e. as set out above, the higher price results in increased supply, which then reduces the price. But, with assets the consequence of higher prices, is even higher prices, as they set off a speculative frenzy, prompting existing owners of such assets to want to hold on to them, and those without them to want to buy them. So are bubbles created, until such time as those bubbles burst, and then the opposite becomes true, lower prices lead to even lower prices, as the owners of the assets seek to avoid making even bigger capital losses, by selling as fast as they can.

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