The less the prices reflect the scarcity of the goods, the worse the resources are allocated, so the relationship between the profitability and the benefit of every business (that is influenced by deformed prices) is disturbed.
In the article “State interventions as information destroyers” I have described why the manipulation of market prices is harmful; the less the prices reflect the scarcity of the goods, the worse the resources (that are involved) are allocated, because instead of achieving the highest profits by satisfying the most urgent needs of consumers and the loss being a consequence of wasting (which is an inherent characteristic of the free market, as explained in previous articles), there is a disruption of the relationship between profitability and the benefit of each business that is influenced by deformed prices. The ways in which the state manipulates the prices were mentioned only marginally in the previous article, so I would like to speak about more detailed example of one of them: artificial inflation under the direction of the Czech National Bank (the author lives in the Czech Republic); although it is not a deforming effect in the most fundamental way, but it is a topic that has recently been very up-to-date and widely debated, so I would like to devote a little more attention to it (and I have to apologize for some simplifications I will have to make in this article due to the complexity of this topic, but the substance remains the same).
So... what terrible things is the Czech National Bank doing? The simple and true answer is that it is causing inflation, which at the same time is trying to maintain within some limits (typically it is small units per year), sometimes it is not so bad, sometimes worse; the process by which the central bank creates inflation is very complex (the evil language even claims it is deliberately so complicated so the average voter does not understand it), but for our purposes the simplified version will be enough: CNB allows other banks to release more and more money into circulation; and the greater the amount of money circulates in the system, the lower the value of one unit is, ergo for the same amount of Czech crowns, people can buy fewer and fewer goods, which is compensated by the fact that the number of crowns held by the average person increases at a corresponding rate, so at the first glance it does not seem to matter at all. The problem, however, is that the new money is not spread evenly into the economy. If at one moment all money in cash, in accounts, the debts, prices and the salaries were multiplied by hundred, nothing would happen. It would have no effect; but there is no such thing in practice, because the money is being released in a gradual fashion, so anyone who gets the money first is buying goods for old prices which is very advantageous for him because after the new money gets into circulation, the prices logically grow up. And those, who get the new money last, pay that (prices around them rise, but they do not have the new money yet).
Although I described only one wave of the new-coming money into the economy in the previous paragraph, in fact, this phenomenon does not happen at one time but it is happening gradually just now, so it is not that one would get rich at the expense of another at one time, but it happens constantly: those who borrow money from banks, but also, for example, those who pay invoices late earns because of this system. The biggest problem is, of course, the artificial manipulation of prices – I have already detailed the harmfulness of this in the past; the CNB’s activities (here rather the ECB’s and the FED’s) are still causing economic cycles and economic crises (unfortunately, the theoretical justification is beyond the scope of this text, but this reasoning may be enough: as long as the states did not manipulate the currency, no cycles existed).
The main reason for the alleged necessity of inflation is typically the alleged danger of deflation, which is supposed to inhibit the economy by motivating people to postpone consumption. Even though this assumption is contradicted, for example, by consumer behavior with regard to electronics, the price of which typically falls by tens of percent every year without causing any problems on the market, so even if the average person postponed the consumption of some goods for example by half a year, complications related to this would only occur for the first half a year, as the trades would still take place at the same intensity, but would be half a year later (let’s say that in 2018 one and a half million cars will be sold, in 2019 a million, 2020 a million and a half and so on; if every year half a million people choose to postpone their consumption by a year, in 2018 million cars will be sold, but in the years to come, it will be exactly the same as if no delays were made; the question then is whether the defense against this temporary economic downturn is worth the existence of central banks, currency manipulation and economic crisis.
Česky: https://www.mises.cz/clanky/navysovani-penezni-zasoby-1543.aspx
Author: Urza
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