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.
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.
Ever wonder why the federal government owns so much land? I think that it is part of having 'something' to back the dollar.
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.
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.
Yes. Inflation is when money supply increases faster than GDP. That's what's backing the dollar. That's what we said.
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.
Some went into high salaries for techies.
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
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.
LOL!
Like "normalcy"?
LOL again.
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.
Then go find one, and report back when you do. We'll all be waiting.
So you *want* deflation to happen? Say goodbye to credit of any kind.
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.
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?
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