Warning: call_user_func_array() [function.call-user-func-array]: First argument is expected to be a valid callback, '' was given in /home/content/50/8762750/html/wp-includes/class-wp-hook.php on line 298

‘INFLATION’S DRIVER’ PART 4 OF THE SERIES

‘INFLATION’S DRIVER’ PART 4 OF THE SERIES

INFLATION DRIVERS: PRICE CONTROLS #4

Along with subsidies (which we discussed yesterday) and tariffs (which will be covered in our next memo), price controls are a common but destructive economic tool.  They are politically motivated and substitute the intelligence of bureaucrats for the intelligence of the marketplace by telling companies and individuals the prices they can charge for goods and services.  Often, the prices are slow to reflect cost increases, and companies and individuals can experience losses and dislocations in profits if the price controllers are not proactive, effective and accurate.

The way they hurt an economy depends upon many variables, like whether they are all-inclusive, whether they are instituted in concert with wage controls, how much free trade the world and the country enjoys and so forth.

Like subsidies and tariffs price controls cause a misallocation of resources, non-economic behaviors on the part of the government, and antisocial behavior on the part of the public.

Price controls often go hand in hand with: shortages, conniving behavior by businesses and consumers, declines in production, declines in quality, and many other problems.  A common problem in price controlled economies is that capital will not be invested to grow businesses because a fair return on capital can not be obtained.  So, the manufacturing and employment capacity of the economy will usually fall.  This may have the unintended consequence of slowing economic activity and increasing unemployment.

Price controls cause the creation and growth of bureaucracies to administer the controls.  These bureaucracies often develop lives of their own and become difficult to remove, causing the controls to last years longer than they should…which further diminishes economic growth.

The biggest problem is that price controls cause a build-up of unfilled price increases and diminished production (people don’t produce for a loss if they can help it).  When shortages and economic dislocations caused by the controls finally become politically unpalatable, and politicians remove the controls…INFLATION ACCELERATES.

These make up reason #4 why inflation will be here for a while, and why it is not being driven solely by food and energy price rises.

Respectfully yours,

Monty Guild


These articles are for informational purposes only and are not intended to be a solicitation, offering or recommendation of any security.  Guild Investment Management does not represent that the securities, products, or services discussed in this web site are suitable or appropriate for all investors.   Any market analysis constitutes an opinion that may not be correct.  Readers must make their own independent investment decisions.

The information in this article is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation, or which would subject Guild Investment Management to any registration requirement within such jurisdiction or country.

Any opinions expressed herein, are subject to change without notice.  In addition, there are many market, currency, economic, political, business, technological and other risks that are beyond our control.  We make reasonable efforts to provide accurate content in these articles; however, some content and some of the assumptions, formulas, algorithms and other data that impact the content may be inaccurate, outdated, or otherwise inappropriate.  In addition, we may have conflicts of interest with respect to any investments mentioned.  Our principals and our clients may hold positions in investments mentioned on the site or we may take positions contrary to investments mentioned.

Guild’s current and past market commentaries are protected by copyright.  Apart from any use permitted under the Copyright Act, you must not copy, frame, modify, transmit or distribute the market commentaries, without seeking the prior consent of Guild.