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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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To: Sonny M

Good stuff, simple and easy to read.

Inflation is what is going to ultimately shrink the national debt, again.


61 posted on 11/16/2005 12:06:55 PM PST by Radix (Wishful Thinking: A Tag Line Field which actually contains enough places to complete a serious thou)
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To: CodeToad

Meanwhile, the crew of the ship have turned off the M3 transponder monitor down in steerage. They are calling down "All is well! No worries! Return to your cabins!" as they prepare the lifeboats.


62 posted on 11/16/2005 12:09:22 PM PST by Travis McGee (--- www.EnemiesForeignAndDomestic.com ---)
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To: cynicom

Bingo.


63 posted on 11/16/2005 12:10:07 PM PST by Travis McGee (--- www.EnemiesForeignAndDomestic.com ---)
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To: cynicom

Moo.


64 posted on 11/16/2005 12:10:37 PM PST by CodeToad
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To: Oberon
Your example indicates how shares in the money stock changes hands and how we account for it. But the money stock came from somewhere: the money supply.

A pond is equivalent to the money stock, and the creeks which feed it, the money supply.

In the old days, the money supply was gold and silver mining, and the gold and silver provided means for wealth storage and more efficient trade and markets rather than inefficient barter. So people with wealth, farmers; would trade wealth, wheat; for gold and later buy a tracter which would increase productivity; or some consumable the farmer doesn't have the time to make for himself.

Today, the money supply is the central bank and its relationship with treasury to conduct open market operations, and back money with bonds the interest and principal of which will be paid for out of the hides of 1040EZ taxpayers.

The government has a great position because it gets to use the new money first, when it has the greatest purchasing power. By the time it passes hands a few hundred or thousand times, prices have risen and the last person to earn that dollar sees the price tag and squeals about the "high cost of living."

Under the old way, prices were more or less stable for over 100 years. Since 1970, prices have gone up ten times. This inflation robs the holder of FRNs. Old folks like my dad have to pay $300 for medicine with money that was saved when it would buy the same medicine for $30. The difference, 90% of the purchasing power that my dad lost, was expropriated, stolen, by the criminals in government, and in the central bank.

Neglecting the 1980 crisis peak, and 20 years following of dropping prices in gold: If he had bought gold coins at $35/oz, and kept them 30 years, TODAY, he'd find his wealth was preserved. Generally: Gold preserves wealth. Paper currencies erode wealth.

65 posted on 11/16/2005 12:23:04 PM PST by Jason_b
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To: Jason_b
You can get a portion of your wealth out of the trust by selling some FRNs for gold and holding it privately.

But if you can sell FRNs for gold, doesn't that mean FRNs have real value? I mean, who would sell gold to someone for, as you describe it, "symbolic money"?

66 posted on 11/16/2005 12:27:16 PM PST by SolidSupplySide
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To: Seamoth

I did not mean to infer that I wanted deflation to happen.

Just that the house of cards is less stable every day.


67 posted on 11/16/2005 12:29:11 PM PST by Pylot
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To: Travis McGee
What does our Constitution say about money? Remember, our FF knew all about deflation, hyperinflation, fiat currency etc. They had just lived through it!

They limited stuff in the constitution to compromises.

Hamilton and Jefferson led just 2 factions that were split on monetary policy.

Ironically (or not so), several other founding fathers had different views.

To really get into it, you have to go back and read either their biographies or essays or writings.

That said, just about any founding father in approach, would be raising hell today about us being off the gold standard, to all of them it was a basic common sense thing.

68 posted on 11/16/2005 12:31:38 PM PST by Sonny M ("oderint dum metuant")
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To: Sonny M
"When inflation is unanticipated, as it so often is, there's a redistribution of wealth from creditors to debtors" . . .

Nonsense.

Look at all the 'real estate millionaires.' Just look at them, basking in their self-reflected glory. NOT! Real estate has been hyper-inflated approximately 20% + per year for the past four years. It has been inflated by the Fed easy money lending policies. This is all smoke and mirrors and is a house of cards. It is all hype and B.S. Real estate used like an ATM machine is not real wealth.

Example: Shoe box sized houses in La La Land drug town selling for over $ 600,000? Get real. It's all B.S. people. Los Angeles County increases its property taxes accordingly. Piling more B.S. on top of B.S. Portland, Oregon is hyper-inflating at about 25% + a year for the past three years. Drug houses only sell for $ 250,000 here. Wake up, people. This entire economy is smoke and mirrors. Just like Wal-Mart represents a 'vital U.S. economy.' LOL, LOL, LOL! That one company represents China getting richer while America is losing more jobs every day. (Learn More?)

There has been no "redistribution of wealth from creditors to debtors." No way! The redistribution never happened. Not really. When the real estate bubble bursts, these debtors will still owe the money to lenders. Even after they have lost their homes to foreclosure, debtors will pay, and pay, and pay for years. Under the new Bankruptcy Act, lenders win and debtors lose. Thank your corrupt Congress who accepted bribes from lenders to change the law. And thank "Mr. Bubbles" himself, Alan Greenspan.

69 posted on 11/16/2005 12:36:45 PM PST by ex-Texan (Mathew 7:1 through 6)
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To: Jason_b

Ah, a zero-sumist.


70 posted on 11/16/2005 12:42:16 PM PST by Seamoth
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To: A. Pole

Something about "siezing the means of production?" ;)


71 posted on 11/16/2005 12:44:16 PM PST by GOP_1900AD (Stomping on "PC," destroying the Left, and smoking out faux "conservatives" - Take Back The GOP!)
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To: ex-Texan
Look at all the 'real estate millionaires.' Just look at them, basking in their self-reflected glory. NOT! Real estate has been hyper-inflated approximately 20% + per year for the past four years. It has been inflated by the Fed easy money lending policies. This is all smoke and mirrors and is a house of cards. It is all hype and B.S. Real estate used like an ATM machine is not real wealth.

Odd you mentioned Real Estate.

I happen to work in the field.

Even better, I've always done better after a "bubble" has burst then during one.

And I have yet, in my years, ever lost to the lendor....though inflation while it may hold some benefits for me, would cause other different problems.

If money borrowed is still owed (and it is) but is now worth less, lendors are not walking away winners.

72 posted on 11/16/2005 1:00:36 PM PST by Sonny M ("oderint dum metuant")
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To: Sonny M
Gold cannot be inflated by printing more of it; it cannot be devalued by government decree, and unlike paper currency it is an asset which does not depend upon anybody's promise to pay. A significant fact is that gold is an asset that is no one else's liability. All forms of paper assets: bonds, shares, and even bank deposits, are promises to repay money borrowed. A PIECE OF GOLD IS INDEPENDENT OF THE FINANCIAL SYSTEM, and its worth underwritten by 5,000 years of human experience.

Comparing prices in gold in U.S. of 1833 with 1933, just prior to the abandoning of the domestic gold standard, the index of wholesale commodity prices increased only of 0.9 percent in one hundred years. Since then the index increased 350% by 1971 when president Nixon announced that no more gold would be given in exchange for dollars. In the last twenty years ('03) the index has gone up around 400%.

73 posted on 11/16/2005 1:05:24 PM PST by fight_truth_decay
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To: ex-Texan
"Thank your corrupt Congress who accepted bribes from lenders to change the law."

Are you talking about campaign contributions or actual cash bribes to people in congress? Regarding one of your other statements, I can assure you that no "shoe-box sized" houses in LA county sell for $600K. A house selling for that price would have to be in a good area in LA county and at least 1,500 sq ft. I'm concerned that you don't do enough reading, research, and thinking before you post at FR.

74 posted on 11/16/2005 1:06:31 PM PST by defenderSD (What do Bush, Blair, Aznar, and Berlusconi know about Saddam's regime that Democrats don't know?)
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To: Sonny M

I've read the coin act, or whatever it was called. The bottom paragraph declares that anyone in the mint who debased the coins would be given the DEATH penalty. It's pretty clear about what they meant by Money: Gold and Silver.


75 posted on 11/16/2005 1:06:57 PM PST by Travis McGee (--- www.EnemiesForeignAndDomestic.com ---)
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To: Sonny M
Williams is brilliant at explaining things that most people talk about, but about which they have no real understanding.

He is a national treasure. I'm feel quite fortunate to have corresponded with him and made his personal acquaintance.

76 posted on 11/16/2005 1:17:37 PM PST by Protagoras (Inflation is everywhere and always a monetary phenomenon..Friedman)
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To: SolidSupplySide
An excellent question! I never said the FRNs didn't have real value. You can use them to temporarily satisfy your government's appetite for taxes. And who would part with gold for symbolic papers? Anyone who had a sizable store of gold and insufficient FRNs to pay the taxes. That is a very real value! Taxes is the main factor which imputes commercial value into FRNs, legal tender status for debts public and private.

So to pay taxes, you must use FRNs, and to use them, you must enter into a commercial relationship with the entity or group of entities that maintain them, government and central bank. To do this you must accept their terms, their rights against you. Next time you withdraw $10,000 for a lawful purpose and are told they will file a report so the authorities can keep an eye on your money flow, and you feel spied on, your privacy violated, remember this.

This is what I mean by symbolic, to get what you need to pay your taxes, you must not offer anything real of your own, you must agree to allow the bank to symbolically represent part of your wages and wealth in their media allowing them to be trustees for your wealth until the transaction is complete. And often people just stay in the system and keep their savings there too. But people with excess wealth, if timed properly, can preserve it in gold, and prevent erosion from inflation, and buy back cheaper dollars at a later time with some gold, enough to pay taxes. This plan wouldn't have worked well between the 1980 peak and the 2000 double bottom. But it would have worked well between 1970 and today. Everything has its risk of not working out.

Our forefathers were once free from this burden, as they could just pay their just taxes with their own property, gold coins. With no one in between, there was no spying, no extra fees, etc. Their money was not symbolic, it was simple.

Gold is a sought after commodity for many reasons, and its natually occurring demand in the market is what gives it its value relative to other goods and services. And it could be used to buy those other goods and services.

It is intresting to note that I could print a paper with my picture on it and it would not have any value because I cannot enforce legal tender laws.

Is it fair that our government enforces legal tender laws for paper money that belongs to a private bank? No it is not the government's money! The last time we had a shot at government's money was with JFK United States Notes, and he was shot and the EO repealed. Since then, FRNs, notes of private banker phonies who pass as government.

Final point: Alan Greenspan is quoted as having said, "Gold is the ultimate form of payment on the Earth."

It is no accident he places gold at the ultimate position for payment and all other things beneath it. I never speak of buying gold. There is no substance "higher" than gold with which to buy gold. Gold buys lesser things. Lesser things do not buy gold. I also don't speak of selling gold. Instead, I buy dollars with gold.

It is a mental game to some degree. In my mind, gold is money, the only money. FRNs are low quality tickets that are a money substitute and allow me to do some of the same things I could with real money: buy and sell. Not to go too far off the deep end but what you do with FRNs is you discharge your debt with limited liability. This is the benefit the central bank gives us. Since this nation is insolvent with respect to gold coin.

77 posted on 11/16/2005 1:24:52 PM PST by Jason_b
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To: ExitPurgamentum

ping


78 posted on 11/16/2005 1:39:15 PM PST by RipSawyer (Acceptance of irrational thinking is expanding exponentiallly.)
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To: null and void
they believe in the physical reality of production.

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

IT IS BAD for USA. It is good for China.

"Let London manufacture those fine fabrics of hers to her heart's content; let Holland her chambrays; Florence her cloth; the Indies their beaver and vicuna; Milan her brocade, Italy and Flanders their linens...so long as our capital can enjoy them; the only thing it proves is that all nations train their journeymen for Madrid, and that Madrid is the queen of Parliaments, for all the world serves her and she serves nobody."
(Prominent Spanish official - Alfonso Nunez de Castro in 1675)

79 posted on 11/16/2005 1:44:09 PM 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: Sonny M

Too many dollars chasing too few goods?


80 posted on 11/16/2005 1:45:46 PM PST by GOPJ (Frenchmen should ask immigrants "Do you want to be Frenchmen?" not, "Will you work cheap?")
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