What cost $1.00 in 1981 would cost $2.36 in 2006. Also, if you were to buy exactly the same products in 2006 and 1981, |
Posted on 06/16/2007 1:07:44 AM PDT by bruinbirdman
Headlines are blaring about resurgent fears of inflation. Our publisher, Rich Karlgaard, has a lively debate going: Is the global flood of liquidity coming from the new savings of hundreds of millions of emerging middle classers around the world or from printing-press-happy central banks or from a combination of both?
Even before Ben Bernanke became Federal Reserve chairman, he was churning out papers about savings growing faster than investment opportunities. But he is wrong. You get excess capital only when politicians put obstacles in the way of opportunities. The classic case is the Great Depression. It was the horrific antitrade legislation, massive tax increases and other government blunders that were the genesis of the Depression in the 1930s. People and companies who had cash clutched it. Investment plummeted.
One can never say it enough: The only monetary measure you need look at is the price of gold. The yellow metal is constant in true value, a monetary version of the fixed North Star. The Federal Reserve's mistaken creation of excess money in 2003--04 was faithfully reflected in the price of gold, which went from the sound level of $350 to today's $650-to-$700 range.
None of this is to gainsay the extraordinary things happening in the global economy, particularly the emergence of China, India and the formerly communist countries of central and eastern Europe. But that kind of prosperity and globalization does not create an overabundance of money. In the late 19th century globalization roared ahead while monetary policy was tight, which helped fuel agricultural dissent in the U.S. and William Jennings Bryan's antigold campaign of 1896. But in the U.S. and globally, vast amounts of new wealth were created, tens of millions of people saw living standards improve, inventions proliferated and life expectancy soared.
Monetary mistakes helped stoke the high-tech boom of the late 1990s, but the subsequent crash hardly negated the extraordinary power of the microchip and the Internet in reshaping the economy and creating an unimaginable array of new products and services.
The current concern about inflation sadly confirms the staying power of bad ideas, in this case the notion that economic growth creates inflation. The Phillips curve, which posits that there is a tradeoff between inflation and unemployment, has long been discredited by events and academic research. Since Ronald Reagan became President in 1981, for example, the U.S. has had a fantastic expansion, and inflation virtually disappeared until recently. Yet the media are full of stories and pundit head shaking that global capacity for producing goods could soon run out.
There is still astonishing confusion between price changes that reflect normal supply and demand and those that reflect monetary blunders. Moore's Law says that the real price of computing power decreases 50% every 18 months. That's productivity, not deflation. When ticket prices for a hot rock concert soar, that's not inflation, it's demand. However, when the cost of living in the U.S. and elsewhere sharply rose in the 1970s, it was, as the late Milton Friedman never tired of pointing out, the result of excess money creation. Central bankers finally began to grasp that inflation was indeed a monetary phenomenon, but the lesson still hasn't stuck.
Investors need to realize that monetary misfires have political consequences, usually bad. The 1970s led to a malaise in the U.S., which paved the way for Jimmy Carter's election as President. He gutted our military; undermined the shah of Iran, which led to the current hideous Iranian regime; and engendered a passivity that emboldened the Soviet Union to invade Afghanistan, which in turn fueled the rise of the Taliban and al Qaeda. Interest rates rocketed, and the stock market tanked. The only good to come out of that period of inflation was a push for the deregulation of our trucking, railroad and airline industries.
This inflation, thankfully, is very mild compared with the last one, but it could well lead to political mischief in the form of protectionism and higher taxes.
Well... socialism certainly hasn’t died; it’s alive and well and living right here in the USA. And communism, one of the worst and most tyrannical afflictions ever visited upon humanity by the sheerest variety of idiocy, is also maintaining its longevity around the globe.
I don’t buy it. The “yellow metal” is also subject to the rules of economic supply and demand. If a huge supply was suddenly found in some mountain that was easy to retrieve the “true” value would drop, not stay constant. Likewise if industry suddenly had no demand for gold for making things the “true” value of gold would also drop.
The picture is much more complicated than the author’s statement.
“political mischief in the form of protectionism....”
Mr. Forbes makes some great points but the premise that a strong pro-domestic trade/tariff bias is ‘mischief’ is what gets us:
* State Department Lenovo computers that are rejected for possible bugs
* cheap imported foodstuffs and food supplements and toothpaste with harmful contents
* reduced capacity for rapid war footing if necessary
* outsourced jobs and internal layoffs that cost a fortune in human misery here—while subsidizing slave wages and profound human misery in Third World countries.
* and so on and so on.
Ahhhh.... What a perfectly wonderful word these two letters make!
If sand were water, the deserts would be lakes!
If gold weren't rare, it would be ordinary! You qualify for today's MASTER OF THE OBVIOUS award!
* State Department Lenovo computers that are rejected for possible bugs....but they were rejected, then, you say. We weren’t forced to use them.
* cheap imported foodstuffs and food supplements and toothpaste with harmful contents....Like that kind of thing has never happened with domestically produced products....
* reduced capacity for rapid war footing if necessary....Sounds plausible in theory, but I haven’t seen any evidence of this in real life, have you>
* outsourced jobs and internal layoffs that cost a fortune in human misery here—while subsidizing slave wages and profound human misery in Third World countries....Get real! American outsourced jobs are a boon in the countries lucky and smart enough to grab some of this business. These create some of the best paying, most desirable, fought for jobs available in these countries and have sparked off real improvemnts in peoples’ lives. And the competition continues, driving down consumer costs here in the US.
* and so on and so on.
Tijuana site to produce Chinese cars (China meets NAFTA!)
http://www.freerepublic.com/focus/f-news/1851037/posts
Who Gets Chrysler Next?
http://www.freerepublic.com/focus/f-news/1841455/posts
MASTER OF THE OBVIOUS award!
Here’s another nomination: “U.S. Capitol full of crap.”
http://www.freerepublic.com/focus/f-news/1851224/posts
What cost $1.00 in 1981 would cost $2.36 in 2006. Also, if you were to buy exactly the same products in 2006 and 1981, |
If that theory were to hold true, then the price of gold would go up/stay steady, but rarely go down. On the other hand, I cringe when the experts talk about how all those slave-labor communist goods flooding the country “keep inflation low.”
The USD is a terrible investment. I use it as a measurement of inflation. Investment goods I bought two years ago have gone up about 25%, as indicated by sales I made the past few weeks. But the FED tells us inflation is only 2, maybe 3%.
The Fed has their measuring tools, but I prefer mine - the USD.
Also, if you were to buy exactly the same products in 2006 and 1981, they would cost you $1.00 and $0.42 respectively.
This is a little deceptive. I would make the case that for many products and/or services, the real cost is actually lower -- and in some cases MUCH lower -- in 2006 than in 1981.
IMO, what you're talking about is true, but it's more a function of productivity than deflation.
How would you measure the TRUE inflation/deflation in a nation's economy?
Listen to Hillary Clinton and you will find Marxism alive and well.
Socialism can never be as successful economic system as one based on liberty. Socialism is based on three violations of the Ten Commandments: lies, coveting and theft.
But this begs a moral question that goes to the heart of the fiat money/central-banking system: where does wealth come from, and whose money is it?
Government, as Friedman also pointed out, does not have any money of its own to spend. Friedman said that taxes are not as important as spending when it comes to controlling the size of government simply because government must get the money it spends from somewhere. It can either print it, borrow it, or get it via taxation.
When government printed money that was “backed” by gold or silver, the money served as a substitute. The US paper currency used to be Silver Certificates. A holder could go to a bank and exchange the paper for the same value in silver. The paper currency was a kind of warehouse receipt.
At one time, the value of the dollar was coded into law at 1/20th of an ounce of gold. In 1933 it was devalued to be 1/35th of an ounce of gold and private citizens were forced to exchange their real gold for paper money from the Federal Reserve, a private corporation.
But the key point is that government must get the gold and silver through legal taxation in order to have it to devote to the monetary system.
But today, our money is no longer based on gold or silver. It is just based on supply and demand. And what happens when government prints money based on nothing? It is “borrowed into circulation”.
This is a very sophisticated form of theft from citizens.
When the founders of Google created $150 billion in new wealth, the Federal Reserve says the economy “expanded” by that amount, which is a small percentage of the total. Under the theory that they must keep the money supply expanding in parallel with the expanding economy, they will have to “borrow into circulation” a certain billion of dollars to grow the money supply by that same percent.
The money was created simply by notational entries in a computer ledger, so the money cost the government nothing, yet it will be used to buy real goods and services. When this money comes into circulation, it does in effect, compete with the existing money to bid up prices.
In short, private wealth is being taken from every holder of dollars when the economy is expanded when these same individuals work and produce new wealth. This is theft by government. It manifests itself in the way that prices behave and in the steady erosion of the purchasing power of the dollar. We can see it most easily in the price of real assets such as oil, gasoline and gold.
Central Bankers know full well what they are doing. Government itself is addicted to this system because of the rivers of money that it brings in to be spent and controlled, and the debt it makes it so easy to accumulate and seemingly never to have to repay. Every country on earth uses this system. If fear it will be all but impossible to wean any government from it.
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