There is much confusion around the relationship between rising prices and employment, and this is only exacerbated by the rhetoricians in government and elsewhere. This is the confused notion that rising prices and the labor market carry a positive relationship, that rising prices are generally positively correlated with lower unemployment. In economics, there is a drawn correlation between inflation and employment, illustrated by what is known as the Phillips curve. The graphic is used to argue that employment and inflation are positively correlated. The failure of this interpretation, however, is that the lower unemployment figures fail to capture the real improvement of the marginal productivity of labor and the overall standard of living enjoyed by those economic agents. It is the responsibility of any shrewd surveyor to distill all of the available data in order to determine the true qualitative relationship between those sets and what they actually mean. This is where the quality of any data set can be wildly distorted, and why this kind of data and these kinds of models are so useful to the deceivers and the dishonest.
As for the matter of prices, there is one particular sector in which rising prices are a tell tale sign of economic weakness. On the whole, all else equal, a rising price in precious metals (or any physical asset for that matter) is generally, but not always, an indication of a depreciating currency. In fact, historically each chairman of the Federal Reserve used to make a habit of checking precious metals prices, particularly the contracts for gold, first thing in the morning; this being the most objective and fundamental gauge of market sentiment, the general strength of the currency and the health and direction of the overall economy. Of course, in the event of any rising prices, this is often taken as “good news” by those asset holders and the people who think they have found routes to quick riches through specific asset classes; price action generally indicative of rising scarcity, whether genuine or artificial, or a decline in market productivity. Once again, this price action can operate to the specific benefit of specific parties but only so far as the conditions remain and the trends continue.
It is worth noting that there is much confusion around not only the nature and the real origins of currency and credit, but the effects of a strengthening economy; much of that confusion stemming from a misunderstanding of or an ignorance to the differences between economies driven by artifice (i.e. debt, subsidies, monetary inflation, or artificial interest rates) and others driven by profits and built upon market rates of interest set by the actual supply and demand of capital (or, in modern context, currency). The prevailing price of that capital, expressed by interest rates, represents the time value of money, the value placed on taking possession of cash now, spending and accumulating debt, as opposed to deferring these activities.
One particular confusion arises between the conflation of investment with spending and speculation: while the former, sound investment in capital formation, the development of land, labor and capital, can — if we extrapolate — cause a temporary rise in asset prices, the general direction of sound investment is toward lower prices and the purging of malinvestment, each generally attributable to the signaling of profits, the advent of labor-saving devices, the benefit of streamlined production processes and lower marginal costs of scaled production; with those advantages creating real, reciprocal demand and birthing still new businesses and more productive forms of employment, a phenomenon explained in economics by Say’s law.
Of course, spending and speculation do not produce the same results. While it is certainly true that there is naturally always some element of speculation in business investment, capital formation at minimum results in the creation of real plant and equipment, whereas pure speculation on the price action in assets (i.e. those in stocks, bonds, real estate, et cetera) tends generally to rearrange resources and express speculated future prices and thus the speculated future conditions of scarcity, supply and demand; that speculation is not inherently productive. In the event that prices rise, this is indicative of either sentiment or the actual conditions and direction of resource scarcity, and the continuation of widespread price increases will generally indicate that resources have been utilized unproductively; this is despite the preferred political notion that higher prices reflect higher demand which is said to represent business and consumer optimism, whereas it can, and often does, indicate a decline in the value of and demand for the common currency.
The same is true of consumer spending, where rising prices reflect increased scarcity and lower market productivity, in many contemporary cases due to an unsustainable redistribution of resources and thus an allocation of resources toward wasteful or unproductive ends. An artificially low rate of interest creates an environment conducive to wasteful extravagance and exorbitant spending, and, as a consequence, more people come to view this environment as a prime opportunity to bring consumption forward and meet their wants immediately — critically exacerbating the results in both rising prices and waste, and exposing the buyers and debtors to future risks attending their eventual ability to repay, the stability of wages, and their hope of a continued easing in interest rates for the same purposes: the purposes of sustaining debtors’ appetites and their wages, the nominal value of the latter determining their ability to repay or take on more debt.
As for the major blue chip stock market indexes, with the talking heads primarily focusing on the Dow Jones Industrial Average and the S&P 500 (at the exclusion of various other indices telling a different tale), they can reflect the time value of money and thus the sentiment and prospects of business, often also serving as another metric leveraged by politicians to misrepresent the state of the economy; however, that rise in valuations would eventually — extrapolated across a free market — present those aforementioned advantages attending enhanced market productivity; those advantages taking the form of abundance and lower general prices, the latter then benefitting real wages while threatening their nominal value and therefore laborers’ (as well as debt-leveraged businesses’) ability to repay their debts. This is one of the reasons that the Federal Reserve pursues its “dual mandate” of maximum employment and a stable currency defined by rising prices on the order of at least two percent per year.
Here we have the primary reason that rising prices — including the prices in stocks — are regarded positively by many: they benefit the debtors who rely on nominally high values in equity and wages, they benefit the asset holders who are thereby made wealthier on paper (through equity by appreciation), and they benefit government and politicians who can boast of higher numbers in Gross Domestic Product (GDP) to fool the unwitting public into believing that the economy is strong and sound; and this perception tends to “justify” progressively more debt by driving the confidence of consumers and foreign creditors, and to likewise “justify” higher government spending.
Of course, as with the contemporary case, nominal paper gains are illusory, buoyed by artificially-low interest rates that belie the status of real savings and productivity. These trends can be sustained only so far as debtors and external creditors are convinced that the debts can be repaid, not nominally but ultimately in real forms, in terms of actual resources; and that is precisely why higher prices are regarded positively by many, even despite the very real threats posed by the debasement of the common currency, the progressive erosion of real savings and thereby the virtual elimination of low-risk (or “risk-free”) assets.
I address these matters and much more in my book Death by Socialism, required reading for anybody who seeks to truly appreciate the total ramifications of a kind of system based on illusion, dishonesty and deception.
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