Inflation: Worth a look.

Inflation is like sin; every government denounces it and every government practices it.

Frederick Leith-Ross

Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.

Ronald Reagan

Inflation is taxation without legislation.

Milton Friedman

Inflation: Everyone’s illusion of wealth.


By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.

John Maynard Keynes (Yes! Even Keynes recognized this snake in the grass! – RF)

The financial markets and the Federal Reserve Board watch inflation very carefully. They seem to like an inflation rate of 2%. I’m not sure why that is a “magic number.” And for reasons that also elude me, they seem to be terrified of deflation. Personally, I’m more concerned with hyperinflation (just ask the Venezuelans: inflation > 4000%).

The Federal Reserve was formed in 1913. Since 1913 the dollar has lost 96% of its value. As you already know, that loss in value was due to inflation. I’m not sure what that says about the “stewardship” of the Federal Reserve. But, of course, you and I are interested in today, not 1913. Here are the price statistics in graph form over the past 10 years.

Some of these comparisons are a challenge to make. TVs, for example, have gone down both in price and up in quality (they are much larger and have far higher definition). So can we actually compare the 1997 price with today’s price?

[Source: Inflation and honest data, by John Mauldin]

Perhaps a better example is to go back to when the Fed was hatched. [Financial Times writer Tim Harford] (We have a problem) adjusting inflation for changes in quality. To some extent this is an intractable problem. The Edison phonograph cost $20 (when the Fed was formed); an iPod Nano costs about $145 today. What inflation rate does that imply over the past 105 years? There is simply no good answer to that question. [Inflation and honest data, by John Mauldin] $20 in 1913 would be $598 today, roughly 30 times inflated, which means that the iPod Nano, which can hold literally 1 million more songs than the original Edison phonograph, costs less than one dollar in 1913 dollars. While they are both ways to play music, comparing their prices in two different eras is like comparing apples to polar bears. But the phonograph and the Nano do illustrate the problem of measuring the progress of technology and improvements in lifestyles just in terms of dollars.

I am a little embarrassed by hospital prices leading the inflationary list since I spent my career as a physician. However, technologic advances in medicine happen consistently and do contribute to costs. However, I’m not sure what technologic advancement occurred in college textbooks (unless you consider government intrusion a “technologic advancement”).

I’m certain my readers have their own informed thoughts about these issues so I will not drone on.

Roy Filly



About Roy Filly

Please read my first blog in which I describe myself and my goals.
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4 Responses to Inflation: Worth a look.

  1. Anthony L Filly says:

    “And for reasons that also elude me, they seem to be terrified of deflation.”
    Deflation increases debt burden…. Deflation increases the real value of money and the real value of debt. Deflation makes it more difficult for debtors to pay off their debts. Therefore, people have to spend a bigger percentage of disposable income on meeting debt repayments.
    Who carries the biggest debt around (maybe in the $20 Trillion range)???

  2. Christian Mani says:

    My opinion is that deflation became more of a worry after the industrial revolution and we moved away from agrarian economies. Deflation in industrial economies is a killer: dropping prices slows production, which causes lower inventories, which then leads to increased unemployment. Ask Japan how deflation felt during most of the 90’s and early 2000’s.

  3. David L. Wood, MD, (ret.) says:

    My career was also as a physician. I began my practice before Pres. Johnson pushed through Medicare in 1965. When I retired 32 years later, I was in a position to write my observations of government’s negative effects upon the profession of medicine, which I did a few years later in a self-published book. I am convinced that the huge increases in prices in the medical field have been due to medicine’s attempts to remain viable under the great political power of the lay-politicians continual pressures, restrictions and forced provisions for everyone’s care to the point of almost destroying the free-market medical insurance industry.

    Roy, you should not be “embarrassed” by political factors beyond you professional control. The travesty of government’s intrusion into the field of medicine is cause for it to be embarrassed; but don’t hold your breath.

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