We have deviated, these past several weeks, from matters monetary. We have written a lot about a nonmonetary driver of higher prices—mandatory useless ingredients. The government forces businesses to put ingredients into their products that consumers don’t know about, and don’t want. These useless ingredients, such as ADA-compliant bathrooms and supply chain tracking, add a lot to the price of every good. Of course higher prices are reflected in the Consumer Price Index. And people say it is inflation.

We have also discussed a nonmonetary driver of lower prices. Every productive business is constantly working to remove useless ingredients too. They are not allowed to remove government-mandated useless ingredients, but all other ingredients are open season. In the research for his Forbes article on falling wages, Keith discovered that dairy producers found ways to eliminate 90% of the ingredients that go into producing milk between 1965 and 2012. For example, they reduced by two thirds the labor hours that support each cow.

Big Increase in Useless Ingredients, Small Increase in Price

Today, we look at the monetary driver of lower prices. Wait, what? Monetary? Lower prices?! Doesn’t monetary policy increase the quantity of dollars? Shouldn’t that cause prices to increase?

Not necessarily. Between September 2008 and September 2014—six years—the M0 measure of money supply increased from $875 billion to $4,150 billion. This is an increase of almost five times (M1 doubled, and M2 went up 50%–all data from the St Louis Fed). During this time, the consumer price index rose from 219 to 237. 8%.

All the while, you can be sure that the US Congress, plus state legislatures from Sacramento to Albany, and thousands of City Halls, were busy creating new costs for businesses to pay, not to mention new taxes. Governments at every level were driving up prices. Despite this relentless onslaught, prices rose only about 1% a year. We do not have data to quantify it, but we know it was, and is still, going on in a big way.

Some other countervailing force must be at work, else prices would have risen much faster. Last week, we wrote of one such force—the drive to reduce what business managers call waste

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