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.
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.
One price or several prices rising is not inflation.A good read.Increases in money supply are what constitute inflation, and a general rise in prices is the symptom
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.
I thought inflation was when the money suppy increased faster than the GDP. Increasing prices do not cause inflation, inflation causes increasing prices.
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.
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."
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.
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.
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.
Really? What's inflation now?
This is how we're sticking it to the ChiComs foolish enough to buy our national debt.
So the current strength of the dollar means what?
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.
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.
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.
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.
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.
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!
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.
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?
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.
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