OK first, let me show what a fair guy I am. (If I were a single lady I’d be the fairest maiden in the land.) Let me admit that the really catchy phrase from Milton Friedman–inflation is always and everywhere a monetary phenomenon–only makes sense if he’s using it to mean “rising prices.”
Now then, down to business. I think most free-market economists like to say things like:
“The government has three ways it can finance its spending: taxation, borrowing, and inflation.”
“Inflation acts as a tax, but a hidden one.”
Well guess what kids, those statements only work if you use inflation to mean “increasing the quantity of money.” Because the government can’t finance a deficit through rising prices. Nope, a government can finance a deficit by printing more money.
Now you might say, “Oh, but when it comes to making the public poorer–effectively ‘taxing’ them–the mechanism is through rising prices, so ‘inflation’ must mean rising prices for this to work.”
Wrong again, Zod. When the government prints money (or electronically creates new reserves, to be more accurate) it makes everyone holding dollar-denominated assets poorer than they otherwise would be, regardless of what happens to the level of some price index. When they arrest people for counterfeiting, they don’t go look at the trend in CPI to make sure the guy was hurting anybody by printing off $100 bills on his laser copier. No, when it comes to citizens doing the counterfeiting, everybody seems to get–it’s obvious–that the introduction of extra money, per se, makes everybody else poorer. Even if prices go down, the other holders of dollar-denominated assets are poorer because of the counterfeiter, because without the counterfeiting the prices would have fallen even further.
Now it’s true, if the government has been “counterfeiting” since 1913, we’re going to see a big rise in the price level; it is an indication of just how much skullduggery has been afoot. The fact that wages rise doesn’t negate the fact that the initial counterfeiters benefit; wages would rise if your neighbors doubled the quantity of money from their laser copiers, too. (That’s the point I made in this article, which Blackadder somehow thought proved that I used “inflation” in today’s conventional sense.)