So what causes inflation? It’s not the free market. The
price of a good in money is just the exchange ratio between the money
and the good in question. When the quantity of the good increases, it
price falls. If new immigrants arrive in the country to work, wage rates
go down. But Bank of Canada economists would say that because of the
increase in labour, wages will rise too quickly, making it difficult for
employers to maintain optimal performance. I’m not sure if the Bank
follows its error this far, but it does ignore the fact that if you’re
at a farmers market haggling with a seller over the price of apricots,
and then another seller enters with a fresh box of apricots, your
bargaining power has increased. The larger the output, the lower the
price will be. Of course one cannot divide total output by total
quantity of money and come up with a “price level.” Supply and demand
matter. Regardless, the reasoning holds and the free market does not
create inflation intrinsically.
So what causes price inflation? Not corporations. They can
influence the price of goods and services, but they can’t raise prices
in general. If Wal-Mart succeeds at shutting down every small business
across North America, then decides to raise their prices to exorbitant
levels, all this means is that Canadians will have less to spend on
other goods (and that Wal-Mart must have some good lobbyists). But
prices in general will not rise. Unless of course, Wal-Mart’s market
share encompasses the entire market order, at which point the price
system will be subverted into some kind of “Wal-Mart Communist Planning
Board”…
But what about the Bank of Canada? It engages in something
called “open market operations,” where it buys Canadian bonds from the
Big Five Banks and then credits their accounts with BoC money. Now where
did the central bank get its money? It based on gold? Nope. Does the
Bank of Canada get debited when the Big Five accounts are credited?
Nope. The BoC simply adds numbers to the balance sheet of whatever bank
it is crediting. This is how they control interest rates. To add insult
to injury, the Big Five Banks engage in fractional reserve banking with
these new reserves, pyramiding it into an even larger stockpile of
money.
Other things being equal, when you increase the money
supply, its price in terms of other goods will fall. So when the price
of money falls, the prices for goods and services increase. In other
words, money loses its purchasing power. It is worth less than it was
before. Let’s look again at the Bank of Canada’s intended goal: “to
contribute to solid economic performance and rising living standards for
Canadians by keeping inflation low, stable, and predictable.” They
create inflation! If the market economy were allowed to prosper with a
market-based money (like gold, silver, cowries or bitcoin) and a free
banking system (no more Chartered cronyism) there would be no inflation!
Just the criminal act of counterfeiting money.
Also available at Mises Canada
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