Need We Fear Inflation?By Thomas E. BrewtonContrary to the popular understanding, higher wage rates and higher  oil prices do not cause inflation.  They are symptoms of the real  danger.News reports express concern that the tightening labor market and  increasing oil prices will lead to increased inflation.  This is an  upside-down view of reality.Inflation is nothing more nor less than an increasing ratio of money  to available goods and services.Higher prices – rising wages or higher oil prices, for example –  result from two things.First is excessive money supply creation and the resulting excessive  amount of bank credit pumped into the economy.Second is a change in the balance between supply and demand.  Wages  will rise whenever increasing business activity necessitates hiring  more workers, with the requisite skills and experience, than are  available in the needed locations.  Oil prices will rise because  demand exceeds current or anticipated supplies in the locations where  oil is needed.In either case, price increases are the result, not a cause.Free markets are automatic and self-correcting.  If wages rise,  businesses will decide either that the wage costs of increased  production will leave too little profit to warrant hiring more  workers, or the higher wages will induce more people to enter the  labor market to meet the increased demand.  In either case, wages  will level off or decline.This means that Congress's raising the minimum wage or imposing  threatened price controls on gasoline and heating oil do nothing  whatever to curb underlying inflation.  Raising the minimum wage just  lowers the point at which businesses will stop hiring more workers.   Gasoline and heating oil price controls, as we learned again when  President Nixon tried them, will simply divert oil to other markets  without price controls.This also means that Keynesian economic orthodoxy, as employed by the  Federal Reserve Board, is still as misguided as ever.  Keynes  believed that business production and investment in expanded capacity  could be supported only by welfare-state transfers to consumers,  whose spending would lever up economic activity and employment.  This  remains sacred dogma for liberal Republicans and liberal Democrats.The problem is that government spending precedes increased  production.  The rising ratio of money supply to goods imparts an  inflationary bias.Moreover, unlike the automatic, free-market mechanism that reduces  demand to supply, or increases supply to meet demand, government  propensity to spend has no built-in limit, nor has ill-informed  voters' desire for more spending.Debasing the dollar via excessive government spending, in  historical  precedent, will be checked only when other nations refuse to accept  more dollars in payment for imports and begin demanding payment in  some other, sounder currency.  We are moving closer to that point.Only once in the post-World War II era has the Fed dealt  realistically with the real cause of inflation: excessive increases  in the money supply.In the early 1980s, confronting our Great Society stagflation with  inflation in the teens, the Fed’s new Chairman Paul Volcker acted on  the economic reality that inflation is no more than too much money  chasing too few goods and services, that the way to curb inflation is  to control the money supply.In a PBS interview in more recent years, Mr. Volcker described it  this way:"Well, the Federal Reserve had been attempting to deal with the  inflation for some time, but I think in the 1970s, in past hindsight,  anyway, [it] got behind the curve. It’s always hard to raise interest  rates."......we adopted an approach of doing it perhaps more directly, by  saying, “We’ll take the emphasis off of interest rates and put the  emphasis on the growth in the money supply, which is at the root  cause of inflation” - too much money chasing too few goods …- “so  we’ll attack the too-much-money part of the equation and we will stop  the money supply from increasing as rapidly as it was.”Interest rates rose to very high levels in the short run, but  inflation was broken and stagflation ended.This was a classic illustration of supply and demand economics.  When  the supply of money is decreased, the price of money – interest rates  – will rise until consumers are unwilling to pay the costs of  additional consumption, or businesses' costs rise enough to make  added production unprofitable.  Either way, equilibrium between  demand and supply is restored and prices (including interest rates,  the price of money) stabilize.Since then, unfortunately, the Fed has reverted to the old,  completely discredited Keynesian faith that government planners can  fine-tune the economy via government spending and interest rate  manipulation in order to attain full employment, price stability, and  steady GDP growth.Rather than stabilizing the money supply, the Fed now indirectly  raises short term interest rates.  The effect of higher interest  rates works its way backwards, from the Fed to businesses and  consumers, making production and consumption more costly.This is upside-down.  Interest rates in a free market, following the  law of supply and demand,  will  rise in reaction to increased  production that necessitates  increased borrowing by businesses.Instead, the Fed attempts to forestall increased production by  raising interest rates.  The risk is that the Fed's arbitrary rate- setting will either precipitate a recession, or allow inflation to  get out of hand.Finding the correct balance point, about which former Fed chairman  Alan Greenspan often worried, requires more analytical brain power  than socialist state-planners possess.  With 300 million consumers  and many thousands of businesses independently anticipating Fed  policy and future economic conditions, the world's largest  aggregation of supercomputers would be inadequate for the task, even  if there were enough analysts to input all the data on a real-time  basis.By default, the Fed has to make an informed guess about where  interest rates ought to be.  Which is why we read that some Fed  governors are worried about mounting inflationary pressures, while  the Fed Board votes to keep rates unchanged and Chairman Bernancke  tells us that "core" inflation is still not too worrisome.Meanwhile, the real source of inflation – the money supply –  continues its unchecked growth as the Fed finances ballooning  government expenditures.Keynesian and other liberal-Progressive-socialistic theories, as  history demonstrates, do not work as advertised, because they are  founded on a false theory of human nature.  The underlying assumption  is that, after government taxes and spending have equalized income  among economic, ethnic, and social classes, the populace will happily  settle into homogenized equality, every person  working to the best  of his ability, taking only what he needs.Needless to say, in real life, since the New Deal when Presidents and  Congresses got the bit in their teeth and realized that unceasing  spending  buys votes, there has been no turning back.  We wallow in  the spoils system, with the Fed debasing the currency to "pay" for it.Thomas E. Brewton is a staff writer for the New Media Alliance, Inc.  The New Media Alliance is a non-profit (501c3) national coalition of  writers, journalists and grass-roots media outlets.His weblog is THE VIEW FROM 1776http://www.thomasbrewton.com/