The beast that tamed the tiger of inflation, so we are told, is rising productivity, courtesy of new cost-cutting technologies. This approach overlooks the important fact that in the absence of inflation increasing productivity would cause prices to fall and real incomes to rise, possibly even faster than money incomes. Because without inflation prices would have fallen by 5 per cent instead of rising by 2.2 per cent. Most economists fail to see this because they always confuse inflation and deflation with general prices changes. Using a more sophisticated approach, the Austrian school distinguishes between price changes caused by changes in monetary policy and those caused by changes in the supply of goods and services.
Austrian analysis concludes, therefore, that America is in a highly inflationary state.
Something that Greenspan instinctively knows from his study of the greatly misunderstood 1920s boom. I suspect the benefits of rising productivity, as was the case in the 1920s, are not being as widely spread as would be the case in the absence of inflation because as monetary policy distorts the pattern of production it follows that it must also distort market earnings. Monetary growth has been criminal. Money supply figures for the end of 1999 gave an annualised growth of 27 per cent. It beggars belief that anyone could argue in the face of this figure that inflation is a non-problem.