Friedman was a vicious critic of centralised control and particularly government power that creates artificial barriers, hampering the effectiveness of markets through excessive regulation and protective practices. These prevent the positive effects of price deflation from filtering through to consumers and almost invariably do more harm than good.
Price deflation via lowered demand does drive efficiency, most often achieved by cutting labor. If this causes a feedback loop it can be difficult to stop. Safety nets exist not to help the unemployed, but to backstop supply chains with injections of federal money to set a bottom for demand. To significantly lower prices in this manner would involve excessive suffering by depriving the unemployed of sufficient funds to purchase necessities.
A healthy (2+%) inflation level shores up the demand for labor and gives an advantage to the working class that spends most of its income. The upper-class gains from savings in deflationary cycles and has less incentive to make higher-risk investments that benefit workers. It provides a bonus for keeping money in non-productive bonds. The proceeds from bonds provide interest payments to the already wealthy without adding productivity. However, the bond market is also dependent on federal spending and rates the borrower controls completely. No deficit spending means no new bond issues and the money supply is drawn down by trade deficits and the savings of first traders who will always save, come hell or high water.
While tightly controlling federal spending can limit consumer price increases, it also leaves no safe store of value from commerce to enable savings of profits. That drives those profits to look for other safe havens, most often real estate or other durable investments. This is rent seeking and is just as, if not more, inflationary as increasing the money supply but doesn’t offer the increased economic activity that comes from increased spending. Wages remain stagnant while prices of basic necessities rise sharply. Clinton’s highly celebrated surplus budgets had this effect and, like the six times before we attempted to “profit” from taxes, led to an almost immediate recession.
n practice, of course, governments have been desperately trying to inflate their way out of ballooning government debt levels. By pushing up inflation, governments hope to erode the value of their debt piles without having to raise taxes. The primary mandate of central banks to maintain positive price inflation may, therefore, be nothing more than a slight of hand trick, hiding the true cost of spendthrift governments to society by increasing the cost of living for all.
Minus a gold reserve to defend, why would the monopoly issuer of the currency ever “need” to borrow its own currency back to enable spending? It doesn’t. If you understood reserve banking you’d also understand that the only source of currency to “lend” to the government is its own deficit spending. That’s why Treasury bonds disappeared during Clinton’s years of surplus budgets which we never fully recovered from. The private sector was forced to fund its rapid growth from the tech boom with actual borrowed money created by banks at the same time as record level imports dragged down the real money supply. That debt cannot be retired without available “real” reserves that only Congress can create and depends upon constant GDP growth, which is never sustainable, to “roll over” existing debt into new debt.
Treasury bonds are totally unnecessary to the funding of the government since we left the gold standard and we should eliminate them, or set a permanent ZIRP (zero interest rate policy), that can only be raised with Congress’ approval. Bonds are now just welfare for investors and give the Fed the ability to manipulate interest rates, which is too much power to give to the banking industry, even if it is a quasi-government agency. It is Congress that is charged with creating money “for the general welfare” (Article 1: Section 8 of the Constitution) not private banks.
Our Congress has totally abdicated its responsibility to the people to conduct effective fiscal policy to the Fed and uses the people’s general econ illiteracy against them by promoting household budget thinking in government budgeting. Weaponizing the debt, which is nothing more than a record of existing currency in the economy not yet taxed away, to villainize any spending for the public purpose has resulted in crumbling infrastructure and the disappearance of the middle class’ wealth into the coffers of the wealthy. If the people ever figure out that a “balanced” budget is actually a 100% tax rate that effectively “steals” resources from the private sector it will be able to move forward. Whether that movement is the result of political or violent means is yet to be decided.
