Chavez: The Inflationator

Chavez, in all his infinite wisdom, has discovered a method of curbing inflation in Venezuela and Latin America in general. The elected Fidelista has decided to strip the bolivar of three zeros, thus converting a 1,000 bolivar note into a 1 bolivar note and so on with the rest of the denominations. As ridiculous as it sounds, this is an attempt by dictator Chavez to end the strong presence of inflation in Venezuela. Economists and bankers disapprove of the plan saying that businesses will most likely increase prices in the process of rounding up their inventories to meet the new bolivar specifications.

Being an Austrian, this is one of the funniest articles I have read. Its incredible that people still believe that central banking and inflation are independent of one another. If Chavez really wanted to end inflation in his country, strengthen its economy and currency, then all he would need to do is abolish the central bank and allow a free market in money. That said, communists and free markets obviously don't go together. Communists, like Chavez, love price-fixing, and interest-rate/inflation targeting is no different. Individuals tend to think that price controls on commodities and goods are harmful but apparently the same doesn't apply the financial sector. We have come along way in the field of economics to still believe in central planning, central banking, and financial-market price-fixing.

We'll see where Chavez and his cronies go. It seems that Venezuela will be the Cuba of the 21st century and the Venezuelan people will have egg on their face.

The CPI and Government's House of Mirrors

The Consumer Price Index (or CPI) was first released by the Bureau of Labor Statistics in 1919 and has been published every month since. It uses a statistical measurement of market prices to capture inflationary trends in select markets. The Bureau of Labor Statistics believes that by observing changes in the prices of a wide variety of goods over a period of time, inflationary tendencies can be accurately tracked. Therefore, the CPI aims to measure the rate of inflation every month and what effect this is having on the prices of certain goods.

The CPI is, generally, pretty straight forward but there are different types of indexes. The CPI-W (or CPI for Urban Wage Earners and Clerical Workers) seeks to calculate the rate of change in the prices of goods that clerical or wage earners consume. The CPI-U (or CPI for All Urban Consumers) observes the rate of price changes for goods that are purchased by all urban consumers. The reason a certain CPI is cited over another depends on what the statistic will be used for. Laborers and wage earners tend to use the CPI-W to calculate the needed percentage increase in wages so that their salaries can keep up with inflation. The CPI-U is primarily used to understand the effect of inflation on the average consumer in an urban setting. For most intents and purposes, the CPI-U is what is primarily used when discussing inflation and positive changes in the general price level.

There is yet another CPI and it is called the "core" CPI. The core CPI also tries to measure changes in prices of goods and services that urban consumers purchase. The main difference between the core CPI and the CPI-U is that the core CPI discriminates against certain "volatile" products. "Volatile" products are consumption goods that are said to have very "unstable prices" and would subsequently bring about unwanted sporadic movements in the CPI if not otherwise removed. As a result, the core CPI usually excludes commodities such as food products and energy goods which are said to experience sudden seasonal changes in price.

The core CPI is not used as often anymore and has been overshadowed by the Federal Reserve preferred "core Personal Consumption Expenditures Price Index" (or core PCE) that is published by the Bureau of Economic Analysis. The core PCE uses data on personal consumption expenditures -calculated by the National Income and Product Accounts- to arrive at the rate of inflation. The core PCE also leaves out "volatile" food and energy prices. The difference between the core PCE and the core CPI is in method and not necessarily what basket of goods is chosen.

The Austrian school position on indexes such as the CPI and the PCE is best understood via business cycle theory and the effects of monetary inflationary policies. First of all, the CPI is an average of the changes in price of particular goods and services that consumers enjoy purchasing. When mainstream economists and politicians obtain at the rate of inflation put out by the CPI, they use it as a yardstick with which to measure the price changes of all goods. If there is a good that is increasing in price quicker than the CPI then it must mean that there is some non-inflationary explanation for the occurrence.

In all reality, inflation is not a positive change in the general price level but an increase in the money supply. When the Federal Reserve prints out money, certain industries get the newly-printed money first. This "new money" is then used by the industry workers to purchase the certain goods and services that they desire. Austrian business cycle theory holds that the prices of those goods that come in contact with the "new money" first will rise first and a chain reaction will then occur with almost all prices throughout the economy. It would be too complex to get into a discussion here as to why these prices rise and in what manner they rise but the idea is that increases in the income of wage earners -propagated by Federal Reserve inflationary policy- increases the monetary demand for certain goods and also tends to increase the real demand. Sometimes, inflationary spending is concentrated in one or two industries. This results in what has come to be called economic "bubbles" or isolated pockets of inflationary price movements.

In addition, the use of such measurements as the CPI tends to steer the public's focus away from the idea that inflation could be anything other than a general increase in prices. It is because of CPI indexes that individuals have come to think of inflation as a positive movement of the prices of goods and not an increase in the quantity of money brought on by Federal Reserve Open Market Operations. In other words, the CPI informs people that the cause of a rise in prices is, well, a rise in prices. The CPI hides the idea that inflation can be independently measured from an increase in prices.

What has been discussed is more of a normative economic analysis of CPI as opposed to a positive economic analysis yet there are many economists who also have problems with the way the CPI is actually calculated.

So there you have it. The CPI and the PCE are just two more ways government gets away with the crimes it's committing.

Libertarianism: Beyond Left and Right

It seems that the time has come for me to briefly explain the libertarian philosophy and set it aside from the modern “right” versus “left” construct. The concept of “right” versus “left” is one that is highly skewed and does not address the vast differences in the philosophy of individuals on either extreme. In fact, there are many people that fit into neither "right" nor "left." For instance, an individual who adores capitalism and believes that individuals should be able to consume marijuana at their own risk does not fit into the conventional "left" versus "right" construct; this individual displays elements of both philosophies. Can it be that this person is confused or is it that we have a false understanding of the make-up and determination of political orientations? The answer is: most likely the latter and libertarianism provides the proof. Libertarianism does not see the political atmosphere as simply “right” versus “left,” healthcare spending versus war spending, trees versus guns, socialism versus capitalism, etc. but instead libertarians view the make-up of ideologies as a spread between anarchism and totalitarianism.

On one end of the spectrum there are statists and on the other end there are anarchists. One group favors a government that intervenes in all human affairs -both economic and social- while the other believes that no government has the right to dictate actions between individuals, regardless of the circumstance. Such extremist groups exist but more common are variations of either side. Libertarians tend to think that "rightists" and "leftists" are actually one in the same, namely, statists. We believe that the true emphasis is not how government spends the money of the people but that it is in fact spending it at all. We do not necessarily care in what direction government is growing larger but instead that it is growing at all. It is nothing short of an exercise in ignorance to label a libertarian a "leftist" or a "rightist" for true libertarians find very few fundamental agreements with either sect.

As a result of this interpretation of political ideologies, libertarians would tend more to the anarchist side of the political spectrum. That said, an overwhelming majority of libertarians are not anarchists and believe that government, as much of an inefficient force as it maybe, is necessary to carry out certain tasks such as maintaining a military, police force, and a court system. It is not that libertarians favor anarchy over any other type of extreme political orientation but instead it is anarchy that most resembles the minimalist government libertarians tend to drift towards.

In essence, libertarianism is the philosophy that the individual knows what is best for their life and that they know how they must conduct themselves so as to reach their goals. Libertarians are champions of capitalism in that they understand that human productivity is engaged through the profit and loss mechanism. Capitalism is what naturally arises by way of profitable human interactions and it is the logical result of individuals trying to maximize their utilities. Libertarians see socialism as a destructive system that ruins the productive mechanisms of free human interaction and trade. It is socialism (government ownership of the means of production) and fascism (government ownership of the direction and totality of output) that rob the people of their natural productive abilities. These governmental institutions try to mimic an economic system that can only exist outside of central planning. Only when there is an absence of central planning and business regulations can capitalist productivity reach it's crescendo.

Individuals also tend to believe that fascism and socialism are diametrically opposed; this can not be further from the truth. In reality, socialism and fascism are ideological cousins and variations of the same line of thought. Both systems are embrace certain aspects of central planning and both try to forcefully manipulate the social and economic normalities of the citizenry. These institutions also seek to control their economies or the output of their economics and as a consequence force society to accept the lifestyles of another group of individuals.

One will find that there are strong black markets in societies that are or were under the grip of socialism or fascism. This is a result of their respective governments banning certain economic transactions and criminalizing select "anti-social" behaviors. For instance, the United States Federal Government has been immersed in a drug war since Franklin D. Roosevelt and as a result has spent billions of dollars fighting the use of drugs in the United States and abroad. Though the government can attack the supply side of the drug community all it wants, the demand side will never recede. In fact, many will argue that the demand for drugs has increased significantly because of the existence of the drug war and the "taboo" nature of illegal drugs in modern social circles. Before the drug war, crack-cocaine never existed but a few years after Richard Nixon increased funding for the drug war, crack-cocaine was introduced as a cheaper version of cocaine. In essence, because the drug war had run the price of cocaine through the roof, the black market sought new ways to deliver to their clients the same effects but at a cheaper (both in quality and price) rate. The market for heroine also changed dramatically since the inception of the drug war. A drug that used to be diluted is now incredibly pure and has caused -as a result of its increasing purity- a number of overdoses. People believe that whenever an individual overdoses on heroine or cocaine it is because of the inherent properties of the drug itself yet this is not the reality of the situation. If heroine and cocaine were legal, the market would regulate it's purity down to a level that minimized overdosing.

Many individuals also believe that libertarians are "doves" and that they fear or are inherently against war; again, this is also false. The mainstream libertarian opinion of war is that in certain incredibly rare cases, war is necessary. That said, we are also against "jumping-the-gun" and understand that war is not only incredibly costly in terms of dollars but also in terms of lives. Many times wars wipe out an entire generation of individuals and not at a profit either. All wars have a certain direct cost but few see the indirect costs of the war. For instance, everyone speaks of the billions of dollars spent on the war in Iraq but few add-in the lost lifetime productivity of those killed in the conflict. Libertarians understand that not all countries or individuals are moral and just, this is why we believe very strongly in the right to bear arms as a method of self protection. At the same time, we believe that only true threats should be engaged and that there have been very few instances in the history of the United States that serious threats have arisen overseas. With respect to certain tragic events such as 9/11, libertarians would see such occurrences as the logical conclusion of an overgrown government. Aside from the negative effects our government has had in the middle east during the entirety of the 20th century, the government has severely limited the second amendment rights of it's citizens. On 9/11, thousands of people were murdered by terrorists with simple box cutters. If individuals were able to carry guns -as allow in the second amendment-the events of 9/11 would have never occurred. Those terrorists wouldn't have been able to even mention that the planes were being hijacked before a passanger stood up and shot them.

It would be impossible to explain the totality of libertarian thought within the constraints of a single essay. That said, what all individuals must understand is that libertarianism can not be comprehended using the "right" versus "left" false dichotomy but must be understood using the "no-government" versus "totalitarianism" spectrum. Libertarianism is the only philosophy that aims at preserving individual liberty, laissez-faire capitalism, and confronting all threats with a sound heart and mind. Therefore, a libertarian would state that they are the most anti-communist of all political ideologies and that many of those non-libertarian individuals that label themselves as anti-communist are out-of-touch with the reality and that they themselves practice variations of the same ideology they supposedly despise. As Ayn Rand once said when asked to explain her philosophy while standing on one foot:

My philosophy, Objectivism, holds that:

1) Reality exists as an objective absolute—facts are facts, independent of man's feelings, wishes, hopes or fears.

2) Reason (the faculty which identifies and integrates the material provided by man's senses) is man's only means of perceiving reality, his only source of knowledge, his only guide to action, and his basic means of survival.

3) Man—every man—is an end in himself, not the means to the ends of others. He must exist for his own sake, neither sacrificing himself to others nor sacrificing others to himself. The pursuit of his own rational self-interest and of his own happiness is the highest moral purpose of his life.

4) The ideal political-economic system is laissez-faire capitalism. It is a system where men deal with one another, not as victims and executioners, nor as masters and slaves, but as traders, by free, voluntary exchange to mutual benefit. It is a system where no man may obtain any values from others by resorting to physical force, and no man may initiate the use of physical force against others. The government acts only as a policeman that protects man's rights; it uses physical force only in retaliation and only against those who initiate its use, such as criminals or foreign invaders. In a system of full capitalism, there should be (but, historically, has not yet been) a complete separation of state and economics, in the same way and for the same reasons as the separation of state and church.