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#1 The business cycle is the credit cycle.
#2 Inflation is a net increase in money and credit, not just prices (mainstream opinion) and not just money (common misconception among contrarians).
#3 Deflation is a net decrease in money and credit.
#4 There cannot be both inflation and deflation at once.
#5 The central bank and the government bring about inflation by absolving banks of the responsibility for their actions. 9:1 fractional reserve lending would not be rewarded in a free market devoid of FDIC insurance and a central bank to print the money to pay for it and other bailouts for bankers.
#6 Price increases themselves are not inflation. If you have a fixed expense budget and your grocery and energy bill goes from $500 to $700, you must cut back $200 somewhere else (for instance, many are deciding to forgo eating out).
#7 Aggregate prices tend to increase as a result of inflation, but they are just an effect, and a lagging one at that. Note how CPI is still highly positive while defaults are soaring and lending is contracting.
#8 We are not experiencing stagflation. In stagflation, wages and total expenditures increase. We are in deflation with high energy and food prices. CPI ignores the 20% decline in housing and the actual prices being paid for goods like cars and clothing, which are selling at big discounts. With wages flat, unemployment rising, and credit being withdrawn, less money is being spent overall.
#9 Wages must fall to sustain employment in deflation. People can’t afford the high prices we have experienced for the past few years. Actually they never could, but just borrowed to pay them. With credit withdrawn, companies that relied on these prices are being squeezed. Many will go under, and those that survive will have learned to economize on labor and other inputs (think Dunkin’ Donuts Vs. Starbucks).
#10 Prices can increase as a result of shortages and increased demand as well as inflation. If oil goes to $200 this fall because we bomb Iran or in 2011 because crude production has dropped by 10 million barrels per day, that will not be inflation or inflationary. But if the world’s central banks socialize all of the current credit losses and recapitalize or nationalize the banks, and carbon credits then go to $10,000 per ton because of easy margin loans, that will be inflation.
#11 Inflation is coming, and it will be extreme. Not this year, not next year, probably not until after 2010, but after all of the bad debt is wiped out and the governments and central banks have had time to spend and print their brains out, we will see the final failure of this paper money regime. Don’t look forward to it, because these events are not pretty. Such an event lead to la Terreur, the worst phase of the French Revolution, as the corrupt and populist oligarchy tried to force the bourgeoisie to accept its worthless script, the assignats (photo at top of page).
But not all gold bugs are libertarians. Guess who restored the gold standard in France?
TM
August 16th, 2009 at 12:45 am
Two clarifications:
First, inflation is the result, not a cause of higher prices. The cost of a service, or manufacture, rises (inflates) as demand for it rises until sufficient supply meets demand.
Second, fractional- reserve lending pre-dates the FDIC and the emergence of the Federal Reserve Act of 1913.
Now, the consummate concern.
I suggest, inflation may result not only by an economic expansion dictated by monetary growth through easy-terms, but may even in an environment of economic contraction when easy-terms become less so.
Let us explore how.
We know the US Federal Reserve Note is not a commodity-based currency. It cannot be redeemed for gold, silver, or even, toilet paper, for that matter.
It is only paper, a fiat - currency that has achieved hegemony over the world through our long, glorious economic expansion, but that has also become debased in the process.
There may come a time, however, when this de-basement becomes internationally recognized. When our beloved Treasury obligations no longer sell without a steep-premium to Libor rates. Or, when business conducted in US currency throughout the world demands another, safer currency. That, even, the trade of most commodities, goods and services move toward the next hegemon.
My friend, when a nation-state has nurtured uninterrupted deficits in its private and public houses of business thirty-five years and running, you are bound to arrive at a point, beyond which, your creditors are no longer willingly finance those deficits, or at least, in a fiat-currency.
It is not hard to imagine then what would happen to the value of the USD, as we struggle to buy currencies of our trading partners to finance our own debt. Or, what would happen to it should the demands of interest become so onerous our obligations swell.
Yes, demand and supply, as in any other good or service provided, cannot be escaped. The value of the USD would plummet without a foundation in a redeemable commodity, and may do so in a domestic environment of aggregate contraction for goods and services.
Too much currency around and a slumping demand for goods and services. Sound like a recipe for price inflation ?
Indeed, it can get you to a place rarely visited by developed nations, but once: The Grand-Inflationary terminal. Where most world economic- powers do arrive., eventually. It only requires a few stops along the currency de-basement highway from a commodity currency to a baseless, politically- driven currency motivated by the feckless demand of its citizenry and government alike.
Therefore, do not be mistaken. Should the debt of our nation become repugnant to its creditors, its currency will too. Then, shall you see inflation!