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What's inflation?
Town Hall ^ | November 16, 2005 | Walter E. Williams

Posted on 11/16/2005 9:38:57 AM PST by Sonny M

Last month, President Bush nominated Dr. Ben S. Bernanke, currently chairman of the President's Council of Economic Advisors, as chairman of Federal Reserve Board to replace the retiring Alan Greenspan. Alan Greenspan's replacement comes at a time of heightened fears of inflation resulting from the recent spike in oil prices.

First, let's decide what is and what is not inflation. One price or several prices rising is not inflation. When there's a general increase in prices, or alternatively, a reduction in the purchasing power of money, there's inflation. But just as in the case of diseases, describing a symptom doesn't necessarily give us a clue to a cause. Nobel Laureate and professor Milton Friedman says, "[I]nflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output." Increases in money supply are what constitute inflation, and a general rise in prices is the symptom.

Let's look at that with a simple example. Pretend several of us gather to play a standard Monopoly game that contains $15,140 worth of money. The player who owns Boardwalk or any other property is free to sell it for any price he wishes. Given the money supply in the game, a general price level will emerge for all trades. If some property prices rise, others will fall, thereby maintaining that level.

Suppose unbeknownst to other players, I counterfeit $5,000 and introduce it into the game. Initially, that gives me tremendous purchasing power, whereby I can bid up property prices. After my $5,000 has circulated through the game, there will be a general rise in the prices -- something that would have been impossible before I slipped money into the game. My example is a highly simplistic example of a real economy, but it permits us to make some basic assessments of inflation.

First, let's not let politicians deceive us, and escape culpability, by defining inflation as rising prices, which would allow them to make the pretense that inflation is caused by greedy businessmen, rapacious unions or Arab sheiks. Increases in money supply are what constitute inflation, and the general rise in the price level is the result. Who's in charge of the money supply? It's the government operating through the Federal Reserve.

There's another inflation result that bears acknowledgment. Printing new money to introduce into the game makes me a thief. I've obtained objects of value for nothing in return. My actions also lower the purchasing power of every dollar in the game. I've often suggested that if a person is ever charged with counterfeiting, he should tell the judge he was engaging in monetary policy.

When inflation is unanticipated, as it so often is, there's a redistribution of wealth from creditors to debtors. If you lend me $100, and over the term of the loan the Federal Reserve increases the money supply in a way that causes inflation, I pay you back with dollars with reduced purchasing power. Since inflation redistributes (steals) wealth from creditors to debtors, it helps us identify inflation's primary beneficiary. That identification is easy if you ask: Who is the nation's largest debtor? If you said, "It's the U.S. government," go to the head of the class.

So what about the president's nomination of Ben S. Bernanke as Alan Greenspan's replacement? I know little or nothing about the man. What I do know is that it's not wise for one person, or group of persons, to have so much power over our economy. Here's my recommendation for reducing that power: Repeal legal tender laws and eliminate all taxes on gold, silver and platinum transactions. That way, Americans could write contracts in precious metals and thereby reduce the ability of government to steal from us.


TOPICS: Business/Economy; Constitution/Conservatism; Editorial; Government; News/Current Events
KEYWORDS: bernadeke; business; economy; fed; friendman; greenspan; inflation; monetarypolicy; money
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A good read.

And something that seems to escape almost every liberal when it comes to economics.

The ignorancy of the left where they credit everything but monetary policy (i.e. wal mart, billy joe bob with one glass eye, oil companies, etc) with inflation or undercutting it annoys me to no end.

1 posted on 11/16/2005 9:38:58 AM PST by Sonny M
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To: Sonny M
One price or several prices rising is not inflation.

Increases in money supply are what constitute inflation, and a general rise in prices is the symptom

A good read.

And something that seems to escape almost every liberal when it comes to economics.

I'm not sure you could get many Freepers to acknowledge the bolded statements of fact. Heck, look at how many Freepers support the "Fair Tax" and you can see that the level of understanding of economics isn't high here.

2 posted on 11/16/2005 9:45:14 AM PST by SolidSupplySide
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To: Sonny M

I thought inflation was when the money suppy increased faster than the GDP. Increasing prices do not cause inflation, inflation causes increasing prices.


3 posted on 11/16/2005 9:45:52 AM PST by Da Bilge Troll (Defeatism is not a winning strategy!)
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To: Sonny M
It gets better.

The prices of all commodities go up in times of inflation. This includes labor. Now, those wage increases seem initially like a good thing, right? Of course not. First of all, employees are only making about as much as they were before because inflation is eating away at their purchasing power. Second, the savings that they have stored up are also losing their potency (savers are creditors, after all). Third, the increased dollar-amount income (albeit with little or no corresponding increase in purchasing power) bumps people into higher tax brackets than they would otherwise be in, thus causing them to pay a greater portion in taxes than they otherwise would, thus reducing the purchasing power of their paycheck as a whole, not just of each individual dollar.

So beware a raise in times of inflation; you could just be sprinting forward to stay right where you are.

4 posted on 11/16/2005 9:46:45 AM PST by Gordongekko909 (I know. Let's cut his WHOLE BODY off.)
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To: Da Bilge Troll
I thought inflation was when the money suppy increased faster than the GDP.

You are correct!!

Milton Friedman says, "[I]nflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output."

5 posted on 11/16/2005 9:48:50 AM PST by Toddsterpatriot (If you agree with Marx, Krugman and the New York Times please stop calling yourself a conservative!!)
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To: Sonny M

Same thing: discovery and development of new deposits of precious metals [be it Cortez/Pisarro in 16th century or Alaskan and SA gold around 1900] was inflationary. Yes, to find a juicy gold deposit is a bit harder than revving up a printing press, but still eminently possible.


6 posted on 11/16/2005 9:50:19 AM PST by GSlob
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To: Sonny M
seems to escape almost every liberal when it comes to economics

Actually liberals count on it. So do some conservatives. Governments historically have run up great debts and then defaulted by means of inflation. President Bush is doing it now, big time.

7 posted on 11/16/2005 9:50:51 AM PST by ThanhPhero (di hanh huong den La Vang)
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To: Sonny M
First, let's decide what is and what is not inflation. One price or several prices rising is not inflation. When there's a general increase in prices, or alternatively, a reduction in the purchasing power of money, there's inflation.

That's true by definition, but in practice inflation doesn't show up everywhere at once. Ultimately inflation is the same thing as currency devaluation, therefore one would look to something like the dollar index (a measure of the dollar against major currencies) as an early indicator. Another place to look is commodities. The Bush dollar was made weak by Greenspan keeping interest rates well below market levels (reckless government growth has also helped). The dollar index has reflected the devaluation of the dollar and has shown up in commodities, especially oil and housing prices are linked to the low interest rates that were used to weaken the dollar.

By the time inflation shows up in the general price level it's already been known for quite some time by people who follow market indicators.

8 posted on 11/16/2005 9:54:28 AM PST by Moonman62 (Federal creed: If it moves tax it. If it keeps moving regulate it. If it stops moving subsidize it)
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To: ThanhPhero
Governments historically have run up great debts and then defaulted by means of inflation. President Bush is doing it now, big time.

Really? What's inflation now?

9 posted on 11/16/2005 9:59:41 AM PST by Toddsterpatriot (If you agree with Marx, Krugman and the New York Times please stop calling yourself a conservative!!)
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To: Sonny M; A. Pole

This is how we're sticking it to the ChiComs foolish enough to buy our national debt.


10 posted on 11/16/2005 10:00:36 AM PST by Incorrigible (If I lead, follow me; If I pause, push me; If I retreat, kill me.)
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To: Moonman62
Ultimately inflation is the same thing as currency devaluation, therefore one would look to something like the dollar index (a measure of the dollar against major currencies) as an early indicator.

So the current strength of the dollar means what?

11 posted on 11/16/2005 10:00:54 AM PST by Toddsterpatriot (If you agree with Marx, Krugman and the New York Times please stop calling yourself a conservative!!)
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To: Toddsterpatriot

It means the yield curve is flat eleven months after GWB said "Greenspan knows what to do" when he was asked about the weakness of the dollar. The dollar is still much weaker than when GWB took office. Even so, we should see a relaxation in the inflationary pressures we've been seeing the past few years.


12 posted on 11/16/2005 10:09:03 AM PST by Moonman62 (Federal creed: If it moves tax it. If it keeps moving regulate it. If it stops moving subsidize it)
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To: Moonman62
It means the yield curve is flat eleven months after GWB said "Greenspan knows what to do" when he was asked about the weakness of the dollar.

So a strong dollar leads to a flat yield curve? Or does a flat yield curve lead to a strong dollar?

Even so, we should see a relaxation in the inflationary pressures we've been seeing the past few years.

Sounds good.

13 posted on 11/16/2005 10:19:05 AM PST by Toddsterpatriot (If you agree with Marx, Krugman and the New York Times please stop calling yourself a conservative!!)
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To: Sonny M

Money can be viewed as a country's stock.

It I print more money (issue more stock) than there is value in the underlying (company) country, I devalue the existing money (or dilute the existing stock).

As the existing money is devalued, it takes more of it to buy the same thing.

If the country's "value" goes backwards quickly, you get what will be referred to as hyper inflation.

In a country with money backed by a limited quantity of a thing of value, like gold for example, the money would actually increase in purchasing power as time went on. The price of things would go down in dollar terms.

But it is not possible to have that kind of system and to steal from the common man at the same time.

So our countries money is based on what, good faith?? Yes and nothing more.


14 posted on 11/16/2005 10:24:24 AM PST by Pylot
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To: Toddsterpatriot

A flat yield curve leads to a stronger dollar but so does a strong economy and a restrained government, which would be the preferable mechanisms. Whipsawing the dollar one way or another is only good for making the government somehow look relevant when it comes to managing the economy.


15 posted on 11/16/2005 10:31:34 AM PST by Moonman62 (Federal creed: If it moves tax it. If it keeps moving regulate it. If it stops moving subsidize it)
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To: Sonny M
I don't disagree with the article, I think it's excellent and thanks very much for posting it, but I am hazy on something.

Wasn't there a huge increase in the money supply in '99-'00 and, if my memory is correct, why wasn't there a corresponding inflationary reaction?

Granted productivity did go up, but I recall the increase in the money supply to be fairly significant.

Appreciate any clarification.

16 posted on 11/16/2005 10:37:21 AM PST by Proud_texan ("Moderation in the pursuit of justice is no virtue." - Barry Goldwater)
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To: Pylot
So our countries money is based on what, good faith?? Yes and nothing more.

Yep. Most of our country's "wealth" today really is nothing more than an IOU of some kind or other. The system generally works OK... as long as everyone doesn't try to cash in on their IOUs at the same time!

17 posted on 11/16/2005 10:40:40 AM PST by jpl
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To: Proud_texan
Wasn't there a huge increase in the money supply in '99-'00 and, if my memory is correct, why wasn't there a corresponding inflationary reaction?

Supposedly that money went into stocks and helped fuel the NASDAQ bubble. Then Greenspan pulled it out too quickly and caused the market to tank and the recession to begin.

18 posted on 11/16/2005 10:41:37 AM PST by Toddsterpatriot (If you agree with Marx, Krugman and the New York Times please stop calling yourself a conservative!!)
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To: Moonman62
A flat yield curve leads to a stronger dollar but so does a strong economy and a restrained government, which would be the preferable mechanisms.

I understand that a strong economy would lead to a stronger dollar but have never heard that a flat yield curve leads to a stronger dollar. Do you have any links that deal more with that assertion?

19 posted on 11/16/2005 10:43:35 AM PST by Toddsterpatriot (If you agree with Marx, Krugman and the New York Times please stop calling yourself a conservative!!)
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To: Proud_texan
Wasn't there a huge increase in the money supply in '99-'00 and, if my memory is correct, why wasn't there a corresponding inflationary reaction?

If I got it right, I think we were actually hiking rates at that time.

Its part of the reason so many folks blamed Greenspan for "bursting the bubble".

Also, I'm not sure if it was then exactly, but Bernandke might have made (or stolen) his friedman quote about "helicopters" to combat deflation.

I'm pretty sure we were decreasing the money supply around then, because only a couple of years later we started to rapidly increase it via rate cuts.

20 posted on 11/16/2005 10:47:19 AM PST by Sonny M ("oderint dum metuant")
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To: Da Bilge Troll; Moonman62; Toddsterpatriot
"I thought inflation was when the money suppy increased faster than the GDP."

No, that is incorrect.

Inflation is simply the process of creating more money than there was to start with without the benefit of any real worth backing it.

Yes, you could print more money with real worth, but that new money would have to be backed by an identical increase in whatever valuable commodity that is backing it, such as gold, for instance.

Do not confuse a rise in prices with inflation.

21 posted on 11/16/2005 10:48:31 AM PST by Designer (Just a nit-pick'n and chagrin'n)
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To: Pylot
So our countries money is based on what, good faith?? Yes and nothing more.

Ever wonder why the federal government owns so much land? I think that it is part of having 'something' to back the dollar.

22 posted on 11/16/2005 10:51:17 AM PST by Centurion2000 ((Aubrey, Tx) --- America, we get the best government corporations can buy.)
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To: Toddsterpatriot
.."helped fuel the NASDAQ bubble

Agree, instead of a bubble one could call it inflation but confined to a specific market? Seems like some of that money would have fallen over to other markets and commodities as well and trickled into the CPI.

Thanks, at one time I thought I had a good handle on this but the Greenspan era really caused me to question what I thought I knew and I've never since felt like I had my arms completely around it.

23 posted on 11/16/2005 10:52:49 AM PST by Proud_texan ("Moderation in the pursuit of justice is no virtue." - Barry Goldwater)
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To: Incorrigible; Willie Green; Wolfie; ex-snook; Jhoffa_; FITZ; arete; FreedomPoster; Red Jones; ...
This is how we're sticking it to the ChiComs foolish enough to buy our national debt.

ChiComs have a different objective. They want US manufacturing to be transferred to China. They care less about short term profits, virtual economy, bank accounts or property titles - they are Marxists after all and as such they believe in the physical reality of production.

24 posted on 11/16/2005 11:01:57 AM PST by A. Pole (TR: "Of all forms of tyranny the least attractive and the most vulgar is the tyranny of mere wealth")
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To: Designer; Da Bilge Troll; Moonman62
Inflation is simply the process of creating more money than there was to start with without the benefit of any real worth backing it.

Yes. Inflation is when money supply increases faster than GDP. That's what's backing the dollar. That's what we said.

25 posted on 11/16/2005 11:03:29 AM PST by Toddsterpatriot (If you agree with Marx, Krugman and the New York Times please stop calling yourself a conservative!!)
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To: Sonny M
"I'm pretty sure we were decreasing the money supply around then"

You may well be right as I'm relying on memory as I can't find any historical money supply numbers. Weird, I'd of thought they'd be all over the place.

26 posted on 11/16/2005 11:04:30 AM PST by Proud_texan ("Moderation in the pursuit of justice is no virtue." - Barry Goldwater)
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To: Proud_texan
Seems like some of that money would have fallen over to other markets and commodities as well and trickled into the CPI.

Some went into high salaries for techies.

27 posted on 11/16/2005 11:05:03 AM PST by Toddsterpatriot (If you agree with Marx, Krugman and the New York Times please stop calling yourself a conservative!!)
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To: A. Pole
Then they can enjoy the lowest margin and lowest value segments of the world economy while Americans prosper.
28 posted on 11/16/2005 11:08:02 AM PST by wideawake (God bless our brave troops and their Commander-in-Chief)
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To: A. Pole
they believe in the physical reality of production.

You say that like it's a bad thing...

29 posted on 11/16/2005 11:09:48 AM PST by null and void (The enemy of my enemy is my tool...)
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To: null and void
You say that like it's a bad thing...

It truly is a bad thing because of this reality, which you didn't dispute: ChiComs have a different objective. They want US manufacturing to be transferred to China

30 posted on 11/16/2005 11:18:01 AM PST by Paul Ross ("The nine most terrifying words in the English language are: 'I'm from the govt and I'm here to help)
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To: Pylot
So our countries money is based on what, good faith?? Yes and nothing more.

One of the editors of The Atlantic Monthly agreed with that in the December 2005 issue:

Our Faith-Based Future
The White House remains unperturbed by the growing prospect of economic calamity
by Clive Crook

Once upon a time Democrats were big spenders and Republicans were fiscal conservatives. That was a while ago. Ronald Reagan's defense buildup and tax cuts caused deficits to soar in the 1980s, and it was Bill Clinton who brought the budget back into surplus in the 1990s, partly by curbing spending. But those fiscal role reversals were timid by today's standards. Since 2000 the Democratic Party has been left in the dust when it comes to spending.

The Republican Party is the new, undisputed champion of big government. The Bush administration has presided over an explosion of public borrowing, fueled partly by tax cuts but also by huge new outlays. Both sides of the public accounts were out of control even before the enormous increases in spending to cope with Hurricane Katrina and the persistently dire situation in Iraq (see "Disasters and the Deficit," next page). The administration's incompetent handling of the hurricane will exact its own price over and above disaster relief, as the White House tries to buy its way back up in the polls. The Republican Party's former reputation for prudent fiscal management is no longer merely compromised; it is ruined, perhaps for good.

Article continued at link here with registration

31 posted on 11/16/2005 11:25:38 AM PST by Paul Ross ("The nine most terrifying words in the English language are: 'I'm from the govt and I'm here to help)
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To: Sonny M
Increases in money supply are what constitute inflation

Increasing the money supply is just of several ways by which inflation may manifest itself. You can also see a decrease in purchasing power arise from a devaluation of the currency that is driven by political instability, or competitive pressure. Prices may also rise on supply issues; where the cost of production, or scarcity of a key component (such as refined oil), results in a broad ranged cost increase which constricts supply and boost prices.
32 posted on 11/16/2005 11:26:46 AM PST by ARCADIA (Abuse of power comes as no surprise)
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To: Sonny M
"The ignorancy of the left.."

LOL!

Like "normalcy"?

LOL again.

33 posted on 11/16/2005 11:29:42 AM PST by Designer (Just a nit-pick'n and chagrin'n)
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To: ARCADIA
Increasing the money supply is just of several ways by which inflation may manifest itself.

I think you have cause and effect reversed. Inflation doesn't manifest itself in increased money supply, increased money supply manifests itself in inflation.

You can also see a decrease in purchasing power arise from a devaluation of the currency that is driven by political instability, or competitive pressure.

Devaluation of currency means an increased supply is needed to buy the same items.

Prices may also rise on supply issues; where the cost of production, or scarcity of a key component (such as refined oil), results in a broad ranged cost increase which constricts supply and boost prices.

If output is reduced and money supply remains constant, the extra money supply is manifested in inflation.

34 posted on 11/16/2005 11:32:10 AM PST by Toddsterpatriot (If you agree with Marx, Krugman and the New York Times please stop calling yourself a conservative!!)
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To: Sonny M
Link: If you understood Williams' article, then you are ready for the next level. It is not your money.
35 posted on 11/16/2005 11:41:48 AM PST by Jason_b
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To: GSlob
Yes, to find a juicy gold deposit is a bit harder than revving up a printing press, but still eminently possible.

Then go find one, and report back when you do. We'll all be waiting.

36 posted on 11/16/2005 11:43:13 AM PST by Travis McGee (--- www.EnemiesForeignAndDomestic.com ---)
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To: Pylot

So you *want* deflation to happen? Say goodbye to credit of any kind.


37 posted on 11/16/2005 11:44:51 AM PST by Seamoth
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To: Sonny M; CodeToad

In an interesting development, the Fed has decided that the amount of new M3 money doesn't matter any more, and so they are no longer going to provide statistics on new M3.

Icebergs ahead? Turn off the radar--at least the one in the passengers' lounge.


38 posted on 11/16/2005 11:45:53 AM PST by Travis McGee (--- www.EnemiesForeignAndDomestic.com ---)
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To: Toddsterpatriot
Devaluation of currency means an increased supply is needed to buy the same items.

Or, we keep the supply as is and sink the population into poverty. (The austerity solution)
39 posted on 11/16/2005 11:45:56 AM PST by ARCADIA (Abuse of power comes as no surprise)
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To: Da Bilge Troll

Think about this:

Every day more virtual money changes hands in the form of electronic transactions, wired funds, PayPal payments and so on than there are printed dollars to represent. When I get paid by my employer via direct deposit, the only paper that changes hands is the stub they mail me. Aside from that, the number in their bank account goes down, and the number in mine goes up by a corresponding amount. When I buy groceries on my debit card, the number in my bank account goes down by the price of my groceries, while the number in the store's account goes up by a corresponding amount.

So, considering that, what does the term "money supply" actually mean?


40 posted on 11/16/2005 11:46:22 AM PST by Oberon (What does it take to make government shrink?)
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To: Travis McGee
When I find one, I will not be reporting back. You'll find about it in the newspapers.
41 posted on 11/16/2005 11:46:27 AM PST by GSlob
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To: Designer

Where did you get the word "normalcy" from?


42 posted on 11/16/2005 11:48:36 AM PST by Sonny M ("oderint dum metuant")
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To: Paul Ross
*shrug* I believe in the physical reality of production.
43 posted on 11/16/2005 11:49:06 AM PST by null and void (The enemy of my enemy is my tool...)
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To: Sonny M

"What's inflation?"

John Kerry's opinions of himself.


44 posted on 11/16/2005 11:49:40 AM PST by DarthVader (Do something positive for your country today: Punch an America hating leftie in the mouth.)
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To: Sonny M

Inflation is what you get when you elect an idiot president. Oh....say.....someone like Jimmy Carter.


45 posted on 11/16/2005 11:50:14 AM PST by Casloy
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To: null and void

Heh. It certainly is a tempting belief....


46 posted on 11/16/2005 11:50:42 AM PST by Paul Ross ("The nine most terrifying words in the English language are: 'I'm from the govt and I'm here to help)
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To: Paul Ross

Especially for an engineer...


47 posted on 11/16/2005 11:51:28 AM PST by null and void (The enemy of my enemy is my tool...)
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To: Travis McGee
In an interesting development, the Fed has decided that the amount of new M3 money doesn't matter any more, and so they are no longer going to provide statistics on new M3.

I thought it was odd they decided to stop putting out the stats for that.

Granted, you can figure it out on your own, if inclined too, but why make extra work when the FED could just provide it?

If its important to someone, they can and will be able to figure it out, but whats the point of just removing it?

Its like a baseball team refusing to give out batting averages, but giving the relevent numbers (hits and abs) to get it anyhow.

48 posted on 11/16/2005 11:52:17 AM PST by Sonny M ("oderint dum metuant")
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To: Oberon

The form that money takes is irrelevant. The number of dollars in the economy, virtual or otherwise, is a creation of government while GDP is a measure of actual wealth.


49 posted on 11/16/2005 11:52:41 AM PST by Da Bilge Troll (Defeatism is not a winning strategy!)
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To: ARCADIA
Or, we keep the supply as is and sink the population into poverty.

Reduced supply (of imports) with the same money supply is inflationary.

50 posted on 11/16/2005 11:53:07 AM PST by Toddsterpatriot (If you agree with Marx, Krugman and the New York Times please stop calling yourself a conservative!!)
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