What's inflation?

Town Hall ^ | November 16, 2005 | Walter E. Williams

[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.

[Sonny M]

Many Americans are falling into a debt trap and, recent bankruptcy law revisions aside, at some point they'll demand a way out that will be hard to ignore.

The problem is figuring out who is who.

The same folks who may be in debt may also be waiting to collect on debt.

And thats just the begining.

Inflation also does wind up destroying jobs eventually and causing prices to rise.

Fear of inflation is such that alot of folks do lean towards having unemployment then inflation (one of the drawbacks of believing in keynesian economics).

Give voters a choice of getting out of debt but not being able to afford food, they'll choose to be hawks on inflation.

[Oberon]

Naturally, the published values for both "money supply" and GDP are estimates.

Oh, that explains it. It's numbers pulled out of the air.

Okay, thanks.

[Da Bilge Troll]

LOL

[Question_Assumptions]

Give voters a choice of getting out of debt but not being able to afford food, they'll choose to be hawks on inflation.

If the choice were that clear. Food is so cheap now that the idea of not being able to afford it will be pretty alien to most people. The biggest expense that most people have is real estate related -- rent or mortgage -- and thus often also related to debt.

And please note that I'm not saying that this will be a good thing or a fair thing. I simply think that, at some point, society will bail out debtors at the expense of creditors simply because there are more of the former than the latter.

[Jason_b]

Wow, that Alan Greenspan sure is wicked!!

Strawman. I never said that. Communism is wicked. Socialism is wicked. Honest money is good and what is prescribed by our Constitution. I for one don't see the problem as being with one individual or group of individuals. The problem has taken on a life of its own and everyone is involved, myself included. I'm aware of how dependent I am on this system. Most people are not.

You have me pegged, just as I have you pegged.

If I'm a crank then so was Roger Sherman who gave us Article 1, Section 10, Clause 1; and so were many others who considered themselves not friends of paper money.

How do you figure that a Federal Reserve note has to be paid back with interest?

Understand, in addition to FRNs, I'm speaking of all that is considered modern dollars including what is in your bank account (bits in the computer that represent your balance). You know how some people have credit cards and pay off their balance every month. You also know others have credit cards and far from paying off their balance, they acquire new debt and/or roll over the existing debt. It gets to the point that almost all their income is dedicated to servicing their debt. The fact that they choose to roll it over does not mean the debt does not exist. Our nation is now the latter kind of debtor. We as a nation roll over old debt and borrow to pay the interest service. Am I wrong about this too? If so, then explain where the national debt comes from: years of deficits and debt rolled over. We have a debt, it must be comprised of something, that something would be dollars, wouldn't it? Not being swiss francs, not being tobacco or wampum. What else would it be? Why would you not think the national debt is denominated in dollars to include FRNs, with some obligation or pressure to pay them back, even if we are choosing to roll it over instead? Do you think we get to use them for free?

Do you get a monthly bill charging you for the cash in your wallet?

Would it matter if I did? Some have suggested moving the April IRS deadline to November when people vote so that they can think about taxes when they are voting. Also the idea was put forward to eliminate withholding, so people would have to write a check. Unfortunately, if I am charged for the cash in my wallet, it is not an individual charge like my cable bill. The fees are taken out of that large mass of cash that goes through the IRS, as will be the UN taxes that are on the way. This is how unaccountable UN bureaucrats will be able to tax us and we won't be able to refuse by not paying some bill when it arrives in the mail. And this is appropriate. Since we are using private bank money for currency as a nation, it is only appropriate that we pay for it at the national level rather than an individual level. Otherwise, I did pay monthly for money I borrowed as an individual to buy an house.

How do you figure a Federal Reserve note is debt?

I thought I had already explained that. By virtue of the fact that they are not natural. Silver is natural and can be made into money and used as money. You don't have to pay it back to the Earth once it is removed. Even in the case of the US Note, it is the silver that is the money, and the Note is a lightweight symbol for the money. Even though the US Note is not natural, it is an accepted representative, a receipt, for something that is.

What is the FRN a symbol for? Not silver money. It is self referential. An FRN is an FRN and it is defined only by what you can do with it: buy stuff and pay taxes. It is no more than a piece of paper with some green ink, a certificate, which is recognized to fulfill a few legal purposes. They cannot be found naturally in the Earth, they are an invention of man. They are not given away. If they are tell me where from so I can get some for me! If they were given away, there would be no point in having a national debt which by definition implies and makes me figure that they, along with money that exists in the computer, must either be paid back, or the loan rolled over ad infinitum.

I'm watching your next questions, if there are any, to see if there are strawmen, or questions that ask what I have already answered, or are red herrings meant to expose anti-semitic tendencies on my part; I assure you I have none, and wish to discuss only the merits of debt freedom over indebtedness. And I'd honor questions that serve the debate, but not questions that waste my time and lower the tone of the discussion, such as the greenspan one.

Thanks.

[Toddsterpatriot]

Strawman. I never said that.

We're talking about money and the Fed. You brought into the argument public schools, unwed mothers and Kelo. If only we still had gold and silver backed money we would be living in a utopia. LOL.

If I'm a crank then so was Roger Sherman

You and your gold bug, the Federal Reserve is stealing our precious bodily fluid buddies are the cranks. Leave Roger Sherman out of it.

Understand, in addition to FRNs, I'm speaking of all that is considered modern dollars

Topic change, nice try.

Would it matter if I did?

So, that's a no.

Silver is natural and can be made into money and used as money.You don't have to pay it back to the Earth once it is removed.

Paper is natural and can be made into money and used as money. You don't have to pay a FRN back to the Fed once it's issued.

I'm watching your next questions, if there are any, to see if there are strawmen, or questions that ask what I have already answered, or are red herrings meant to expose anti-semitic tendencies on my part;

I guess it is nice to meet a crank who isn't anti-semitic for a change.

So, the fact that the Fed gives its evil profits back to the Treasury and not to some evil cabal of bankers doesn't eliminate the rationale behind your preference for US notes?

[expat_panama]

... almost all their income is dedicated to servicing their debt ...   ...Our nation is now the latter kind of debtor. We as a nation roll over old debt and borrow to pay the interest service. Am I wrong about this too?

Sounds like you're saying that most of America's income is going to service debt.   Actually, debt service is falling as percentage of revenue on the federal level, just as assets are increasing faster than liabilities on the private level.

You won't hear it from the MSM, but the US is really a lot more solvent than America-bashers are willing to admit.

[expat_panama]

This squeezes shorts, causing them to purchase, leading to more demand, which triggers the demand chain...

For a second I was surprised Robinson was allowing one of those shorts and chains threads, and then I realized what you were really talking about.

Every day, US equity markets handle hundreds of thousands of trades on over ten thousand listed stocks.  People all over the world bring their capital business to American markets because they know that Americans are the most honest, hard working, and efficient merchants in the world.   The Democrat MSM want everyone to think that members of the US business community (typically Republicans) are more prone to crime than say, convicted drug dealers (typically Democrats).   You have got to be aware that the MSM are lying.

[Toddsterpatriot]

Shhh....the PPT will hear you. LOL!!

[Jason_b]

I don't disagree with what you are saying. We are solvent so far as we can acquire legal tender to pay our debts. You seem to be aware of our relative ability to do so.

And I don't mean to be difficult or contrary, or even conspiratorial. But what we consider solvency is defined differently today than it was under a gold or bimetallic standard. I'm not claiming to be an expert here.

But takes no expert to figure out that if you didn't have enough gold and silver to pay your debts, back in the days of the standard, you were insolvent. Today everyone is excused from having gold and silver to pay debts, because we have accepted the idea that it is ok to pay debts (more accurately discharge them with limited liability) with legal tender pieces of paper (LTPOP) OR without changing the subject the computer bits that represent dollars in an account, that signify a bank credit, debt to us. Now because evidence of someone else's liability is going around changing hands, I have a chance to earn it with my work. When I get hold of this paper, I can make a car payment. But I can only do this because someone else borrowed that LTPOP and spent it sending it forth into the economy. The person who did this will either have to roll his debt over, or try to get someone else's LTPOP to repay his loan according to schedule, or default which would leave his debt in the economy, but changes who expects to receive future payments of legal tender. The ability to do this does not mean we are not bankrupt! We are bankrupt within the gold/silver and constitutional frame of reference. But we seem solvent in the fiat money frame of reference only because of our understanding that we can roll the loans over and borrow more. We have changed financial frames of reference from wealth based gold and silver, to debt based fiat, and we get along this way now. This is why the national debt can explode the way it is. Imagine if our central bank called all its original loans that have rolled over year after year; you'd see cascading defaults and the economy would stop with the only economic activity left a few people with gold trying to buy and everyone else trying to survive in a state of nature.

I'm not saying we're poor, or dooomed, or in the grip of eeeevil bankers.

I'm only saying we are continuing commercial operations in backruptcy using a commercial instrument that benefits us by allowing us to operate outside Constitutional bounds, and that it is not free. There are associated costs and detriments that affect our society.

The old saying, "gold is the only financial asset that is not simultaneously someone else's liability," is true, more or less, you can pick at the way it is phrased and leaves out silver, but the point is made. Our currency today, is someone else's liability. All of it. And since it, and not gold, is what we use as a frame of reference, it is no surprise that reckoning our ability to service our debts is made with respect to our official debt-based currency, not gold.

Even an United States Note is a liability, the Treasury would have been liable to redeem the Note for the value on the Note's face, in silver coin. This was accepted when the Treasury was honoring redemption. But when you redeemed it you at least got silver that could be used as money in the same manner, and had to be paid back to no one, nor rolled over into the next loan.

There is nothing of substance to redeem FRNs for, all they'll do is get the taxman off your back temporarily and let you buy stuff at stores. As I said earlier, they are a certificate of debt that accomplishes a few legal ends, creates a perpetual obligation, and that is it.

I don't think you were accusing me of America Bashing. I didn't take it that way. But others may have. And it is not bashing America to want to see her debt-free once again.

[phelanw]

1. I posted a link to an article I thought put forth an interesting thesis. It's only a thesis, but IMO one worth investigating.

2. FinancialSense.com is not the mainstream media. It publishes articles from investment pros that are usually contrarian, which I also tend to be.

3. Nothing illegal was alleged by the article. Manipulation by the Working Group, yes. Crime, no.

4. The fed itself was created to manage the money supply to prevent boom and busts, which implies a macro manipulation of the economy. Therefore it is not crazy to talk about fed/treasury actions to influence the market one way or another.

[expat_panama]

We are solvent so far as we can acquire legal tender to pay our debts....  ...we are continuing commercial operations in backruptcy using a commercial instrument that benefits us by allowing us to operate outside Constitutional bounds...

I like your refreshing courteous tone and sense of reason; if you can add focus I'll give you half of this years' citrus crop. 

What I'm getting from you is that even though we may be able to "acquire legal tender to pay our debts", you're concerned that we'll still face bankruptcy because of two things: constitutionality and the substance for which FRNs can be redeemed.

First, Article I Section 10 of the Constitution forbids the States to make treaties a use anything but gold and silver for tender.  The fact that the federal government sees fit to make treaties and use anything but gold and silver for money hasn't bothered the courts yet.  You can let me know if that ever changes, but in the mean time lets deal with the fact that the federal government chooses to make treaties and use anything but gold and silver for money.

Second, in 1801 a dollar could be redeemed for dollar's worth of gold or a dollar's worth of everything else.  Two hundred years later that gold is worth $14.38, but everything else is worth $14.67.   You can go ahead have the gold, I take everything else.  

The bottom line is that whether the dollar says FRN or SC, we can still redeem it for gold.  The difference is that inflation is now stable and before it flew all over the place. 

It's one thing for people to say they like gold because it's really neat-- I agree, it is neat.  That said, let's agree that feeding our families and keeping America strong is more important.   America was never as strong or as wealthy until we chucked that silly gold nonsense and assumed a sense of responsibility over our affairs. 

Financial upheaval is really serious business.  During the havoc wrought by the gold standard, people suffered and died horrible deaths.  We don't ever want to go back to that again.

[phelanw]

Source

HOW STOCKS TURNED BACK FROM THE ABYSS

John Crudele

SOMETHING happened at around 1 p.m. our time yesterday that pulled the stock market back from the edge of the cliff.

Traders say it was almost like divine intervention. One minute the Nasdaq was down 11 percent -- say it out loud, "Eleven percent in one day" -- and then it suddenly rallied several hundred points in the matter of an hour.

The Dow followed suit. Down 500 points around mid-day, the blue chip index's decline -- along with the horrible showing of over-the-counter stocks -- was destined to make yesterday's market an unqualified disaster for investors and the country.

Then, traders said, someone started buying large amounts of stock index futures contracts through two major brokerage firms -- Goldman Sachs and Merrill Lynch. These transactions are usually done on the QT so we don't really know how many of these contracts were purchased.

And unless the brokers tell, there is no way of knowing which of their clients were making the purchases. Goldman wouldn't comment on this and Merrill did not return a call for comment.

But traders said enough were bought to catch everyone's attention. In fact, the buyers seemed to want people to know they had an appetite for stocks.

Then the market rebounded.

It didn't go all the way back. At the end of the day the Dow Jones index had still lost lost 56 points or half a percent on the day. And the Nasdaq lost another 74 points, or the equivalent of a 1.77 percent drop. Yesterday's loss by over-the-counter stocks nearly put the Nasdaq index back to ground zero for the year -- in two days all but 2 percent of its gain for the year was gone.

It was real nice of Goldman and Merrill to stick their necks out like that. In fact, it was downright uncharacteristic for Wall Street outfits to put the thought of possible losses aside for the greater good.

Because of the purely unselfish nature of what went on, traders are naturally suspicious. Hell, so am I.

"I think some one or more persons saved the market today. There was a suspicious urge to buy stocks at an opportune time," says one trader. "Why drive the Dow up 350 points in a half hour? That's never serious buying. That's someone trying to establish prices," he adds.

I'm especially suspicious when the market suddenly rebounds at nearly the very same moment that a member of the Clinton administration -- economic advisor Gene Sperling -- is on TV telling investors not to worry.

And there's the obvious connection between Goldman Sachs and the administration, the Wall Street firm having given Robert Rubin to the Clinton administration as its Treasury Secretary.

Plus, what better way to make investors not worry than by having the stock market recover a lot of the ground it had just lost. That gesture almost makes a guy want to buy some stock -- bottom fish, if you are into sporting analogies.

I'm not saying that government intervention in a collapsing market is wrong. In fact -- except for the obvious contradictions with the free-market system -- it is politically and socially a very right thing to do.

I've written about this before. And I've mentioned that Washington has had a secretive group call the Working Group on Financial Markets, made up of investment industry and government people, that would be in just the right position to rescue the market.

Informally the folks on Wall Street call this the "Plunge Protection Team." In February 1997, the Washington Post did a piece on this team, just in case you don't believe it exists.

And while I can't swear that Goldman and Merrill are captains of that team, they sure acted like it yesterday.

Please send your e-mail to: jcrudele@nypost.com

[Iris7]

CRB is useful for watching credit, that is, money supply, (pretty close, anyway) expand and contract in the USA. The GSCI gives a more world economy view, a bit. Nowadays all of the central banks pump in unison or at least are all going in one direction most of the time.

The Feds are going to stop publishing M3. Hmm. Bernanke going to put the pedal to the metal? Going to try to keep housing bubble bubbling?

[Moonman62]

The GSCI gives a more world economy view, a bit. Nowadays all of the central banks pump in unison or at least are all going in one direction most of the time.

Except for the EU. They hate our guts and will do anything to fill the void left by the Soviet Union.

The Feds are going to stop publishing M3. Hmm. Bernanke going to put the pedal to the metal? Going to try to keep housing bubble bubbling?

I think Bernanke gets a bad rap because much of what's being criticized about him is what he said when deflation really was a problem. It's not now of course. We need a Fed chairman who will do what's best for the country, not what is best for his career in the political realm. That means breaking some long held misconceptions such as that inflation is the only evil (Bernanke already passes that test), or that economic growth and full employment cause inflation. Above all we need someone who will use market indicators to adjust the money supply, rather than thinking he is God and that his personal feelings are the only indicator.

[expat_panama]

the article? Long term repos, called term repos, would allow a market manipulator to buy securities today and sell them back at a specified date in the future

There may be some confusion here over the word securities.  In the stock market, we're talking about company shares.  With the repo component of M3, were talking about federal government notes.  I take it that you're saying the Fed wants to use the M3 to change stock prices.  In my experience, the only two entities that really know what people want are our creator and my wife.  The rest of have to deal with what is.  Namely, M3 does not affect stock prices, whether it wants to or not.

Nov '02, M3 up and DJ up.  Nov '03 M3 level and DJ turns down.  Mar '04 M3 up and DJ goes down.  Aug '04 M3 level and DJ goes up.  Mar '05 M3 goes up DJ goes down -I mean up --I mean down -up.   Well, there really are some pretty good indicators of future stock price trends, but maybe the M3 ain't one of them.

[Toddsterpatriot]

Then, traders said, someone started buying large amounts of stock index futures contracts through two major brokerage firms -- Goldman Sachs and Merrill Lynch. These transactions are usually done on the QT so we don't really know how many of these contracts were purchased.

You understand how this is completely different from your original assertion? This guy thinks that the Treasury, I guess, told Goldman and Merrill to go into the stock futures pit, probably on the Merc, and start buying large quantities of futures contracts. These would be public (not private) transactions that hit the floor of the exchange and would cause the market to rise.

Because these are public trades they cannot, by any stretch of the imagination (even yours and Robert McHugh's), be considered in any way shape or form, repos. So, the decision to stop publishing M3 would not hide these supposed transactions because they aren't currently shown in M3.

Thanks for the clarification.

[expat_panama]

Maybe we need to be honest here.  The reality is that Todd and I actually are active members of a group that changes stock prices in order to eliminate sever dips or excessive peaks.  We do this not only for the sake of market stability, but also for our own personal gain and (through our taxes) for national solvency.

Here's how we do it.  We determine which equity securities are being dumped on the market below fair market value.  We use are own life savings to buy them and we've found that this not only prevents prices from falling further, it can even force prices up..   Later on, when we see a shortage of these same financial instruments --because they're being artificially withheld from those who really need them, we offer our own assets up for sale at prices lower than that of the cartels.

Don't bother to thank us, that just the kind of people we are.

[Toddsterpatriot]

We use are own life savings to buy them and we've found that this not only prevents prices from falling further, it can even force prices up..

I wish the PPT would help me out with my Pfizer. That POS is the only loser in my portfolio.

[expat_panama]

The only reason you can't get a living wage price for selling Pfizer is because of all the foreign sellers of the stock that are willing to sell it for next to nothing.  We need Willie Green to cough up his fair share on tax hikes needed for Pfizer stock price supports; but he won't because he wants all the profits to go America's enemies and not to you.

The fact that Pfizer is a POS is only secondary.