Inflation, deflation, and technology

I was recording some thoughts regarding price inflation on my tiny digital voice recorder yesterday, and it made me reflect on the 1.5-ounce gadget I was holding in my hand.

Fifty years ago this year, spent nine months on a sailing/jeeping adventure through Mexico and Central America. Our equipment included the latest portable reel-to-reel tape recorder, a bulky affair weighing around fifteen pounds. 

In the photo my partner, Hank Young, is using a hydrophone to record underwater sounds in an El Salvadorean lake. The price of the bulky reel-to-reel recorder when we bought it in 1955 was approximately $250. Adjusted by the CPI, that’s the equivalent of $1,600 in today’s purchasing power.

Today, I slip my tiny digital voice recorder in my shirt pocket. It’s a remarkable music-quality device that can hold 32 hours of music or voice recordings, runs on a single AAA battery, and with its built in USB port, plugs directly into my computer. Yet this digital voice recorder, which provides vastly higher quality, cost me just $150. There has been a ten-fold decrease in price, accompanied by an unmeasureable increase in functionality.

Throughout our lives, the quality of literally everything we consume has risen with the onslaught of technological progress, while the amount of human labor and capital investment required to produce the things we use has plunged.

So, if we’re producing more and doing it more cheaply, why has the price level risen so relentlessly?

Government debasement of money, of course.

Imagine a world in which there had been no expansion of the money supply. For example, imagine we're back to a time in which gold was money. Would that mean stable prices? Not at all. It would mean plunging prices for just about everything.

Would this be bad?

To bankers like those at the Fed, it would. They would rage and predict catastrophe! Check back again tomorrow and I’ll tell you why what would be good for you, and would be bad for them.