But Now You Know

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Where’s the Hyperinflation?


When the unaccountable, secretive arm of the banking industry known as the Federal Reserve started lending itself (the banking industry) billions of newly invented dollars, late last year, responsible people all over America were horrified.

Some of the soundest economic minds even started predicting “hyperinflation”.

Well, it’s been three quarters, now…soon it’ll be a year.

“Where,” other people are saying, “oh where is that oh-so-scary hyperinflation?”

The answer comes in several parts:

What is Hyperinflation? Hyperinflation is a specific thing. It’s not the three percent inflation we normally “enjoy”, any more than it’s a flavor of cream pie. We must define what it is, in order to know if it happens.

What Causes Hyperinflation? Having defined it, we need to know if the things that cause it are happening. The Fed has printed new money for nearly 100 years, never with hyperinflation. Is what happened recently sufficient to change that?

How Long Would it Take? Is it too late? It’s been nine months; are we safe?

Well, Let’s See

What is hyperinflation?

An actually hyperinflated currency, the Zimbabwe dollar was so weak that this is a single note for one hundred TRILLION. The Fed would have to print fifty times as much as it did last fall, in order to match this ONE bill.

(caption: An actually hyperinflated currency; the Zimbabwe dollar was so weak that this is a single note for one hundred TRILLION. At the rate it printed money for two months last fall, the Fed would still need over eight years just to print enough to equal this one scrap of paper)

Well, “inflation” is when you increase the amount of money, or the supply of it compared to the demand for goods in society…but when non-economists say “inflation”, they usually mean “prices go up”.

And so “hyperinflation” is just “prices going up really, really fast”. The amount necessary to count is generally said to be “100% per year for three years”, for long-term hyperinflation, or else “50% per month” for short-term hyperinflation.

The most inflation we’ve ever suffered, in the 1970s, was less than 14% per year. Normally, it’s between 2% and 3%.

Right now, prices are going DOWN most months, not up. There isn’t even price stability now, much less price inflation.

But why would prices be going up OR down, in an unhealthy way?

Super-quick history:

Almost exactly 100 years ago, in 1907, the US suffered yet another in a long series of destructive depressions and panics, generally caused by money shortages creating runs on banks, price failures, stock market crashes, et cetera.

But this one was stopped dead in its tracks by a group of wealthy entrepreneurs who made very short-term loans to various financial groups, allowing banks to pay off depositors, et cetera. The result was the downturn cut short, never becoming a full-blown depression.

A brilliant lesson was about to be learned, but unfortunately government prevented that. Instead of a newish industry of short-term finance lenders/insurers springing up, the Federal Government announced it was going to act in that role, from now on. It created the Federal Reserve, which would use its coercive power to print imaginary new money to lend to financial institutions in times of crisis.

(Sadly, it did the opposite; it lent out newly minted money in good times, but tended to cut it off whenever there was a financial panic, which was the only time it was supposed to lend in the first place…this is part of what triggered the start of the Great Depression in 1929)

Well, the Fed is a whole other discussion, of course, so we’re going to skip ahead, now

Today:

So instead of lending out money during a crisis, the Federal Reserve increases the amount of money a few percent per year, lending it out in good times. This is part of why we have (usually moderate) inflation…the amount of money increases faster than the demand for goods, so there’s more money to spend than stuff to buy, and prices increase.

But from 2004 through 2008, the Fed did something it hadn’t done since 1938 when we went off the Gold Standard: It started DECREASING money supply:

(caption: Notice that M1, paper money and money in US banks, shrinks (goes below 0 growth) from 2004-2008)

(caption: Notice that M1, paper money and electronic money in US banks, shrinks (goes below 0 growth) from 2004-2008)

Notice that the most important line, the red M1, goes below zero (to shrinking money), and stays negative longer than it had been at any but one time in fifty years. And currency (actual paper money) falls lower than ANY time in that span.

This is because M3, which includes money in foreign banks, was going up so quickly: Money was fleeing the US because of our wars, and the 700% inflated oil prices, and our billions in new foreign aid. We would buy oil that should have cost a few hundred billion, but instead cost us trillions, and send the money for that oil to Saudi Arabia, and other foreign countries.

Over the course of four years, this added up to a shortfall of between two and three trillion dollars in the domestic US economy. That money was all overseas.

Here comes deflation

The Federal Reserve cannot possibly keep money supply balanced, as illustrated by the recent deflation

(caption: The Fed's monopoly could never work better than any other monopoly, and now it's produced deflation)

This didn’t even leave enough money to pay for our normal goods, much less allow the economy to grow…plus, of course, the cost of making things was shooting up from the high oil prices, as all things require energy, while there was LESS money to cover that universal new expense.

The result? Deflation, and therefore a money shortage, that led to the economic depression starting in 2008. There was not enough money to run the economy, so prices began FALLING, the US suffering what appeared to be a “loss” of about three trillion dollars. This was simply the change in prices to represent the trillions missing because of M1 shrinking for four years.

The Federal Reserve’s response? It actually CUT its offered money supply in 2008, by refusing to lend to banks suffering financial trauma…once again failing to act in its sole official role of “lender of last resort” as in 1907.

But it couldn’t keep that up, because deflation destroys a market economy.

So, once this cutting off of emergency money caused the banks to start failing, the Fed belatedly loosened its purse strings: It lend out over two trillion dollars to financial institutions, in just a few months.

Is It Enough to be Hyper?

Now if the Fed did this all the time, lending out a trillion dollars each month when the economy was just fine, we might really have hyperinflation.

But, instead, the Fed did this ONE TIME, starting from a money deficit of three trillion dollars.

So, in fact, what it did was produce enough new money to, hopefully, make up for the money shortage.

Being down trillions of dollars, then adding two trillion, could not make prices double every year. Or even once.

Even if there had been no shortage, two trillion is not enough to increase prices by 50% every month, nor 100% every year, because it is a fraction of the many trillions of dollars in our economy, and only happened one time. Hyperinflation requires more money to be printed even as prices are going through the roof, so that people come to expect it and overprice things ahead of time.

But, even if it had been enough to cause hyperinflation, there’s one last big factor:

Time delay.

How Long?

We can’t guarantee that there will be NO backlash from this infusion of money, until about 18 months have passed. Historically, changes in money supply take between 6 and 18 months to hit prices in an economy. It has to gradually spread throughout the system, being spent, invested, and saved over and again, until its full impact is felt and absorbed.

So we have until mid 2010 to see whether there are SOME effects from the unhealthy throwing of two trillion unearned dollars at our socialized banking institutions.

What About Government Spending?

For better or worse, it is actually impossible for government spending to “stimulate” an economy, at all. And since the current “stimulus packages” are financed by bonds and deficit, not the printing of money, they are actually DE-Flationary. Read the above link, to understand exactly why these things are so.

Sorry, Not Even Close

But, ultimately, whatever backlash there is, it cannot be hyperinflation. With an economy of, depending on how you count, eight to twelve trillion dollars, you can’t make prices jump even 50%, even for ONE month (and it must keep happening, to be hyper), by printing two trillion new dollars. Not even if there were not already deflation to counter.

The great danger, to this day, is deflation, not inflation, which can produce a long-term spiral of economic depression

The great danger, to this day, is deflation, not inflation, which can produce a long-term spiral of economic depression. What's worse, is that the Consumer Price Index, adjusted to compensate for annual cycles like Christmas spending and winter energy prices, showed deflation six months earlier than this chart.

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July 25, 2009 - Posted by | Economy, Politics | , , , , , , , , , , , , , , ,

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  5. I must admit, you got the gears in my mind turning. Here is my defense of the gold standard and why we still could possibly face hyperinflation.

    1. Government debt can be very inflationary. A large percentage of the treasury bonds are 10+ years, which means it takes many years before that money unwinds and the deflationary effects take hold. In the interim time it takes for that money to unwind, market inbalances can grow to be catastrophic (like the housing bubble).

    2. The privlege of printing the worlds money (instead of needing gold to pay for things) deindustrializes us by creating a situation where we can have huge defecits, making the money flow into the hands of foreigners. A deindustrialized economy would eventually fail as we would have nothing to offer the world in trade. At this point hey’ll have so many dollars that they’ll be able to buy up what’s left of our economy. With gold, you can’t just print it, which would reduce the size of these harmful defecits (other countries would be much more hesitant to give us huge loans if we were forced to pay with a commodity instead of something that can be made on a computer or printing press).

    3. There would be a lot more trust in money if it was gold or silver. It would always hold some value and we wouldn’t have to worry about its value being inflated away by overextending the money supply to where it doesn’t properly represent the output. Elderly people wouldn’t need government subsidies because their retirement money in gold wouldn’t lose it’s value. “Moderate” 2-5% inflation yearly is an exponential curve, not linear.

    3. The ability of the Federal Reserve to loan out money at very low interest rates leads to corruption, as those who are connected will get easy money made on a computer or in a printing press. At least with gold, some work is required in mining and refining this rare precious metal, keeping its value high.

    Comment by Andrew | July 30, 2009 | Reply

    • 1. Government debt is DEflationary, because it competes against private investment, which is part of what’s been going on for the past eight years, in which the socialist Bush administration was racking up huge debt…the end result was depression, not inflation.

      2. First, the alternative to fiat money isn’t a gold standard: that is just a different kind of government fiat.

      The alternative to fiat money is a free market in currency. A gold standard is just different socialism, even more harmful than the destructive fiat system we have now.

      But we should not BE industrialized, any more than we should be agrarian. We are technologically beyond needing to base our society upon manufacturing, instead of information. A century ago, over 90% of all our workers were in agriculture. Then most of them were in manufacturing…that change was good, not bad. And moving them out of manufacturing is just as good. Technology advances, and the old jobs should be left behind.

      3. No, using gold would shatter our trust in it, as it has before. Imagine the economic destruction wrought by the value of your money changing by 300% in just a few years, up or down…as has happened to gold more than once, in recent generations. When our economy was indeed too dependent upon gold, we DID have disasters like that, when gold’s price or supply changed too suddenly.

      Money should not HAVE a value, outside of its utility as a medium of exchange for accounting. We have outgrown barter, and for good reason.

      3.(presumably 4.) Absolutely, the Federal Reserve is a bad thing. It was a bad thing during the thirty years we had it AND the gold standard at the same time, and it’s been bad (but not AS bad) since the gold standard ended. And we had horrible times before the Fed, too, thanks to that gold standard.

      Comment by kazvorpal | July 30, 2009 | Reply

      • 1. I don’t believe that because government competes with the private market, that it makes government debt deflationary. The government just doesn’t save the money, it spends it unproductively. Since this money enters the economy inefficiently and for unproductive purposes, it only fuels inflation more than if the money was actually given to the free market, which would be more likely to spend it on capital investments that increase production.

        2. The Constitution says that Congress should issue currency through gold and silver. I hate big government, but this is one area where the constitution allows them to have power. The Federal Government also is centralized and powerful enough to audit and enforce fraud laws throughout the US and even the world these days. Yes, technology should allow us to have less people employed to manufacture the same amount of goods, but we will still have to produce things if we want to have this service/technology based economy. You can’t have computer programmers unless you have computers. If we transition all of our manufacturing overseas, then we leave ourselves vulnerable for when these foreigners wake up and start enjoying the fruits of their labor instead of trading it for paper that continues to (and can easily) be devalued.

        3. The price of gold would initially sky rocket if we went to a gold standard, but the value of gold and silver has remained for the most part stable for thousands of years.

        4. Well we agree on one thing, which is nice. The Federal Reserve’s version of the gold standard failed when they issued more notes than what could be converted into gold, which is breaking one of the rules of the gold standard.

        3.2 (aka 4 lol) We also had a lot of good times with the gold standard. With the archaic communication, information techonolgy, centralized auditing, and traveling infastruction of the times when the gold standard had its problems, it could be argued that any kind of currency would have issues.

        Finally, if any natural disaster or catastrophic event were to occur, the people would be better protected with gold currency, because that has more intrinsic value than paper.

        I would certainly welcome what you propose, as a free market paper currency is better than one controlled by a secret shadow government organization where wall street pulls the strings, I would just prefer gold.

        Comment by Andrew | July 31, 2009 | Reply

        • 1. Under some circumstances, you may be correct. But in a deflationary spiral, the opposite is probably true…which explains why Hoover and FDR’s massive spending (despite socialized education’s spin to the contrary, Hoover was a Bush, taxing, spending, and regulating more than anyone previously), the depression only worsened.

          This is because a vicious circle occurs, where production becomes more important as a producer of demand, than as a creator of wealth that could offset additional money. Government spending produces less demand, and in fact robs the private sector of demand production. Wealth creation in this country has become increasingly stagnant, as the Bush administration competed against private investment…and now Obama does the same…and now that we’re in a deflationary spiral, that will simply exacerbate it.

          2. First, we should stipulate that the liberty newbies who claim the Federal government is supposed to directly issue currency, ergo the Fed is unconstitutional on that account, are entirely wrong; From the beginning, the Federal government authorized PRIVATE entities to issue money.

          Second, you are mistaken; the Constitution says Congress has the power:

          Section 8 – Powers of Congress
          To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures“.

          The only mention of gold and silver is:

          Section 10 – Powers prohibited of States
          No State shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts

          So Congress can “coin money”…we would have to examine whether the original intent was specifically that it be coins made of precious metal, or if the wording was just an assumption based on their world mostly lacking obvious alternatives.

          The STATES can make nothing but gold and silver into legal tender.

          There is nothing harmful with importing most of our goods…although we surely would not, if laws didn’t effectively stagnate the automation of production. Break the monopoly of the UAW and one of the reasons the cost of manufacturing automobiles would plunge is that most of those jobs could be done by machines, which is a GOOD thing.

          Anyone whose job COULD be done by a machine, but is protected by coercion, is living as a burden on society, with a makework job, stealing from the people who buy what they make.

          We’re in ZERO danger of having our production cut off just because it’s overseas. Any one country who tried that would become bankrupt…would become a Cuba or Clinton-era Haiti…because their loss of wealth would hit far faster and harder than our minor loss of manufacturing. And, in the nearly impossible scenario that EVERYONE tried to cut us off from trade at once, the result would be a worldwide depression that is double impossible because they all realize that. They would gain nothing.

          Note that China is NOT doing what everyone keeps predicting, and killing the US by dumping our money, but in fact has bent over backward to accommodate and help our economy, buying and holding money when the dollar was weak, and now trickling the money back when we’re suffering deflation. They know that, without America to trade with, they would fall apart.

          3. That the value of gold and silver have remained stable for thousands of years is one of the absolutely silliest, most completely unsupported assumptions in all of modern politics. It makes the useless Labour Theory of Value look wise and accurate, by comparison. The value of gold has vacillated wildly throughout history, even bringing down a number of empires. This includes crippling the US economy two or three times in the 19th century.

          The myth that its fluctuation in price reflects only a fluctuation in the value of the currency buying it is completely shattered by considering the price of most other items bought by that same currency…which NEVER change in value at that same rate. When gold went from $35/ounce to $900/ounce in less than ten years, no other price went up even one tenth that amount, in the same time, unless it was suffering a trade embargo or other catastrophic shortage.

          4. You are speculating, when you say that their allowance of the pre-existing fractional reserve bank printing of extra notes is what broke the economy when the Fed was on a gold standard. What we know, as a solid fact, is that the Fed STOPPED producing money, and in fact drew down the money supply by over 30%, and we had a Great Depression.

          Claiming that it wasn’t this sudden move…that would bring depression to any economy, under any circumstances…that caused the depression, but was the PREVIOUS behavior, and the cut in supply was a coincidence that simply kept things from getting worse, is wild guesswork.

          Doctor: “I know think you’re healthy, but you are secretly ill, and it will manifest soon! You must take this chemotherapy in order to save yourself!”

          Patient: “Doctor, you’re right, I went home, started taking the chemo, and sure enough I happened to become horrendously ill within days! I’m so lucky, we cut it so close!”

          Maybe the patient had cancer…or maybe the “treatment” is the sole source of suffering. Hell, many deaths attributed to cancer ARE actually caused by the chemotherapy, even when the cancer DID exist.

          > 3.2 (aka 4 lol)

          I’m answering this through the WordPress interface, ergo cannot see our previous posts, except your latest reply…and now, having gone from 4 backward to 3.2/4, I’m entirely lost.

          No, we had HORRIBLE times on the gold standard.

          Have you not read The History of Economic Downturns in the US?

          https://butnowyouknow.wordpress.com/those-who-fail-to-learn-from-history/history-of-economic-downturns-in-the-us/

          Note the severity and length of the depressions under the gold and bimetal standards, versus the relatively short and minor recessions once we were off of them.

          If you got in a time machine and went back to 1925, or any previous year in that century, but slipped up and mentioned “the Great Depression”, people would not look at you blankly. They would assume you meant the horrible depression we suffered from 1873-1896. TWENTY THREE YEARS. It was literally known as the Great Depression, until 1929, when it became known as the Long Depression. The worst depression in US history, up to FDR’s administration.

          Guess when Congress forced Americans, against their will, onto the gold standard…

          That’s right, 1873.

          It was known almost universally, by the end of the Long Depression, as The Crime of ’73.

          Check out Milton Friedman’s writeup of the event: http://bit.ly/crimeof1873

          And no, if any natural disaster ever were to occur, we would need to have all of our assets in cigarettes. Hey, maybe the war on tobacco is actually an attempt to rob us of a means of trade TRULY independent of government in a crisis.

          Are you saying, in your final paragraph, that you would prefer a gold standard over a free market in currency?

          Surely you mean that you would prefer a free market, but under it you’d (initially, unless such ventures prove untenable) choose to deal with banks issuing gold, instead of companies issuing other forms of trade media.

          Comment by kazvorpal | August 1, 2009 | Reply

  6. I believe his essay overlooks

    1) The return of trillions of US dollars back into the US as foreign reserves are spent buying us up a fire sale prices that won’t stay fire sale very long as the oversupply in real estate here is snapped up from abroad.
    2) The reduction in output of both industrial and consumer goods – restricted supplies vis a vis the tidal wave coming back above.
    3) The reduction in spending, either through savings, debt service, loss of income, or permanently deferred purchases – restricting M1 circulating which in part caused (causes) # 2 above – as companies reduced forecasts and curtailed production, which is restricting supply, possibly permanently. US industry has been hollowed out or gutted to a great extent. We have more to import to meet our needs, fueled by debt, and less to sell to earn income abroad.
    4) The monopolization or “cornering” of key raw materials supplies around the world by non-US investors (i.e., China, which is no longer sitting on our money, but cashing out around the world) increasing the costs of all finished goods for US consumers as they set the prices, as owners now, for these raw materials on a go forward basis (and demand payment in their currency, see below). Note they already control the supply of most finished consumer goods in the U.S. Their strategy is control of the raw materials as well. This is called vertical integration of the demand chain. They are using it as a weapon.
    5) The substitution of the US dollar as a world reserve currency – in other words the crushing of the US dollars purchasing power, which as we know is based on smoke and mirrors.

    For hyperinflation to have an effect as predicted, the US economy has to be gutted, and the amount of goods and services in it has to be depressed, and the dollar crushed. The last part hasn’t happened just yet – and the full effect hasn’t been felt yet either.. Under these conditions, once the dollars come back, assuming no-one wants them, they’ll be here in our wallets, worthless, trying to bid on a restricted supply of finished goods and real estate that we will eventually not be able to afford (that will happen eventually). Compounding the problem will be foreign producers (who we are now very conveniently dependent on) insisting on payment in their own currency instead of the US dollar. They can charge a premium in their own currency, exposing us to exchange risk (and we may not hold enough reserves of their currency to pay), and once again, pay higher prices, adding a profiteers insult to hyperinflations’ injury.

    In case that doesn’t bring to light the points overlooked in your essay, here’s an approximate illustration:

    Before this particular hyperinflation Tsunami hits, as with all Tsunami’s – the water (M1) frighteningly withdraws from the shoreline for several thousand feet – this is the deflation, which is the force of gravity responsible for pushing and holding prices down temporarily, everything that floated is sitting on the bottom – but once the wall of water (all the M1 abroad)finally speeds towards the U.S. shoreline, everything will float up very very quickly to levels that will defy understanding. Why? because unlike a beach, the US economy in this comparison is a swimming pool, where the splash of M1 leaving the system was so large you saw the bottom, like with a Tsunami. But very unlike a Tsunami, we ADDED water to the pool (TARP) and made the pool SMALLER (dead industries, weak supply, little income or M1 circulating to prevent falling prices or deflation) before the splashed out M1 wall of water had a chance to slam back into the pool from abroad. A place where they will probably not want to keep their dollars if it stops being a world reserve currency. It will go to our tiny backyard splash pool and to that one only. Hyperinflation will come. Better put on some very large water wings.

    Comment by Inconvenietly Yours | July 30, 2009 | Reply

    • > 1) The return of trillions of US dollars back into the US as
      > foreign reserves are spent buying us up a fire sale prices
      > that won’t stay fire sale very long as the oversupply in
      > real estate here is snapped up from abroad.

      Yes, I was forced to cut some points in order to make the article short enough to read.

      But you’ve just pre-explained why that will NOT cause hyperinflation: The trillions that we agree are overseas will only trickle back into the economy as long as there are “fire-sale prices”. This will, if we are lucky, cause a price stabilization…but once the price stabilizes, the fire-sale is over, and the flow stops.

      The world still needs US dollars, which are its exchange medium. In fact, what you describe will probably strengthen the dollar on the exchange markets, as the foreign part of M3 declines.

      > 2) The reduction in output of both industrial and consumer
      > goods – restricted supplies vis a vis the tidal wave
      > coming back above.

      Same answer.

      > 3) The reduction in spending, either through savings, debt
      > service, loss of income, or permanently deferred purchases –
      > restricting M1 circulating which in part caused (causes) # 2 above…

      Wait, I had assumed you’d be arguing for hyperinflation…but now I’m thinking you’re actually pointing out more reasons why there could be a deflationary spiral.

      Obviously, you ARE describing deflationary impetus, here.

      Hopefully, the unhealthy ejaculation of two trillion dollars last fall will help offset that, a bit, as well the “fire sale” attraction of foreign dollars.

      But I agree that a deflationary spiral is still possible.

      > 4) The monopolization or “cornering” of key raw materials supplies
      > around the world by non-US investors (i.e., China, which is no longer
      > sitting on our money, but cashing out around the world)

      China is “cashing out” a small part of our money in order to help us fight off deflation. But it will not do so enough to cripple the US economy with inflation (at least it will try not to), because it is abjectly dependent upon the US for its own economic survival.

      In this situation, China is forced to consider our own well-being above its own, because its own depends upon ours.

      > increasing the costs of all finished goods for US consumers as
      > they set the prices, as owners now, for these raw materials on a go
      > forward basis

      I believe you are describing one of the arguments used to claim that Japan was going to destroy us, when we were suffering our last big economic downturn in the late seventies and early eights.

      You know how that turned out, right?

      > Note they already control the supply of most finished consumer goods
      > in the U.S. Their strategy is control of the raw materials as well.
      > This is called vertical integration of the demand chain.
      > They are using it as a weapon.

      I assume you are imagining China to be run by idealogues who wish to destroy the Evil Capitalist West. But, in fact, it’s run by unprincipled, selfish tyrants who have realized that American capitalism is the key to their own greater power and wealth.

      They appear to have not the slightest intention of harming the US.

      Again, this is reminiscent of the claims that Japan was going to harm us, when Japan was desperately investing in the US to save our economy. The result was win/win for us.

      > 5) The substitution of the US dollar as a world reserve currency –
      > in other words the crushing of the US dollars purchasing power,
      > which as we know is based on smoke and mirrors.

      No, it’s not, because it’s not a form of barter, but a transaction tool. This has been recognized since Plato, so it boggles my mind when ostensible free marketers fail to grasp it:

      The function of money is solely to facilitate transactions. It need not, and SHOULD not, have its own separate, tangible value. When it does, you suffer the kinds of economic crises we did from 1873-1938.

      The Federal Reserve is bad. It is incompetent to maintain the money supply properly. But the lack of a barter basis for money is NOT part of the problem.

      There is no such thing as objective value. This is a fundamental principle of capitalism. A dollar is worth what people will trade for it. There is no need for it to be tied to a physical object…those objects do not have objective value, either.

      In other words, the only “objective” value is subjective value: whatever someone will trade for something. It doesn’t matter whether it’s an abstract unit of currency, a bundle of wheat, a lump of metal, a song, or whatever.

      TARP, by the way, was not funded by the printing of new money, and therefore is deflationary, not inflationary.

      A lag in production hurts money velocity FAR more than it benefits the supply/demand ratio of prices. It is deflationary, not inflationary.

      If that were not the case, we would not have had a deflationary spiral during the Great Depression.

      Comment by kazvorpal | July 30, 2009 | Reply

  7. Interesting analysis. One criticism I want to bring up is the inflation data you are citing. That “Annualized Inflation/Deflation” chart you are using from inflationdata.comis quite misleading. It is not the current monthly inflation rate annualized, instead it is the net inflation over the last 12 months. This obscures the fact that there has actually been (significant) inflation over the last six months. There was deflation during the last half of 2008. But as soon as the Fed started pumping in money, that turned around and we have been seeing inflation consistently since January. The actual interest rate for the last month was over 10% annualized. It’s not hyper, but it is significant.

    This graph show the data quite clearly. The red line is the monetary base, clearly showing when the Fed turned on the spigot. Almost immediately following this, the deflation turned into inflation, as can be seen by the blue line (CPI) turning from a downward trend to an upward trend.

    Comment by NOTAL | July 30, 2009 | Reply

    • First, there could be no relationship between the monetary base and inflation/deflation. It takes at least six months for a change in the money supply to become reflected in prices, this has been apparent throughout the history of modern inflation tracking and the Fed.

      Meanwhile, no CPI is a good measure of actual inflation/deflation. Even the Fed’s inflation numbers are not…they never address, for example, items on sale, changes in packaging, discount stores, changes in buying habits, or a number of other things that can radically change real pricing…all of which are negative, now.

      Comment by kazvorpal | July 30, 2009 | Reply

      • “Meanwhile, no CPI is a good measure of actual inflation/deflation.”

        I find it odd that you use CPI numbers to try to prove your point, then once I show you that the CPI numbers actually show the opposite, you say “well, you can’t look at CPI, those numbers are no good”. If you want to make the argument against CPI numbers, fine, I’m not a huge fan myself, but you can’t use them to support your point at the same time. That seems pretty dishonest.

        “…there could be no relationship between the monetary base and inflation/deflation. It takes at least six months for a change in the money supply to become reflected in prices.”

        Which is it? is there no relationship between the base and prices or are they related with prices lagging six+ months? You can’t have it both ways.

        If you prefer, look at M1 and CPI, M1 has also been increasing significantly since late 2008. M1 is the money actually out in the hands of the public. You said that M1 was the most important measure, and it has been growing significantly over the last 12 months. This is real money in the hands of the public, actually driving up prices, which are indicated by the CPI numbers. The last six months there has been significant inflation, both in the Austrian sense of an increase of the money supply and in the mainstream sense of an increase in prices.

        Comment by NOTAL | July 30, 2009 | Reply

        • I didn’t use CPI, in fact CPI charted deflation six months BEFORE the standard inflation source I’m using above.

          You understand that CPI and “inflation” are two separate things, right?

          They are calculated in completely different ways.

          On the other hand, both fail to take into account many important deflationary factors, understating deflation…as well as both failing to take some inflationary factors into account.

          This produces a situation where, when there’s inflation, it may well be understated (as the missing factors are greater than the missing deflation factors), but when there’s deflation, IT is likely to be understated, too.

          As for M1 finally increasing in late 2008, note that it declined for the four years before that. We have a lot of ground to make up.

          Oh, and I failed to mention another deflationary factor, in the article: Energy prices. Those had gone through the roof back when we had a money shortage in the domestic economy. They then fell to a fraction of their peak, allowing prices to snap downward. This is part of the source of the deflation, and its full effects have yet to be felt, as it takes quite some time for cost of energy to work its way entirely through the economy.

          Comment by kazvorpal | July 30, 2009 | Reply

          • “You understand that CPI and “inflation” are two separate things, right?

            They are calculated in completely different ways.”

            Do you know who inflation is calculated? You should really check your sources before you make the claim that they are calculated completely differently.

            From your source:
            “The Inflation rate is calculated using the Current Consumer Price Index (CPI-U) published monthly by the Bureau of Labor Statistics.”

            To be specific, your source (inflationdata.com) takes the current CPI, subtracts the CPI from 12 months ago, and divides the difference by the earlier CPI. So, instead of inflation numbers being completely different than CPI, as you claim, it is actually based exclusively on CPI (according to your source).

            I think your criticisms of CPI are legitimate, but you can’t use CPI (or CPI based inflation numbers) to back up your thesis, and then when I show you that the CPI actually indicates the opposite, say that the CPI numbers are no good.

            You do make a good point about energy prices. They are a huge factor in price level. If you take a look at CPI less energy it looks like an extremely steady trend compared to CPI including energy.

            I’m interested in in your thoughts about the money supply, You say that money supply declined from 2004 to 2008. The chart of M1 does bounce around a bit, but it actually looks really stable to me over the span as a whole. Do you follow Milton Friedman in thinking that the money supply should be increased by 2-3% a year? would that be better than a stable money supply? I think that, ideally the market would decide the best amount of money instead of the government.

            Comment by NOTAL | July 30, 2009 | Reply

            • Absolutely, we desperately need a free market in currency, instead of a monopoly currency issued by the federal government…regardless of whether that monopoly currency is fiat, or gold-standard.

              What Friedman said is really denied by no serious Austrian: that it’s the ratio of money/velocity to wealth/demand that is important, not the raw number of dollars.

              In order to maintain a stable money supply, therefore, you need to maintain a stable ratio, not a stable number of dollars.

              Imagine if our economy was only half of the United States, and suddenly the other half were added, but we only kept the number of dollars we’d used when half-size. You can recognize the disastrous deflation that would occur, with twice the wealth and demand for the same block of money, right?

              M1 remains below 0 from 2004-2008…is this unclear?

              Comment by kazvorpal | July 30, 2009 | Reply

              • I tend to agree with Friedman myself that the best monetary system would grow at about the same rate as the economy. Keeping a stable ratio is the only way to have really stable prices, which makes future predictions in business and life much more accurate. I’m generally opposed to giving that mandate to a government (or quasi-government) orginazation that has a monopoly control on the money supply. I don’t trust any government official to properly regulate the money supply. As long as the government maintains monopoly control of the money supply, I tend to favor a commodity backed money which would limit how much the bureaucrats can distort things. But I think we can agree that a free market monetary system would solve the problem of the “proper” money supply better than any single person or group of bureaucrats.

                Regarding M1, M1 July 2004 was 1.35 trillion, M1 July 2008 was 1.38 trillion. That’s actually an increase, but you could probably pick different months to show a small decrease. I was just commenting that it was quite stable compared to other times.

                Comment by NOTAL | July 31, 2009 | Reply

  8. Have you heard of Argentina, Venezuela, or pretty much any country south of the border that have printed money to either steal it or pay off for their government debts?

    For a complete Fed’s history (not a short version to justify your erroneous conclusions) see this link: http://www.youtube.com/watch?v=N–ecIbbTpY&feature=related

    The price of gold in 1970 was around $37/oz. By the end of 2008, that price was $880/oz (that is roughly 8% inflation per year if the gold were going to be used as reference). That means that our “monopoly” money has lost 2,378% of its value against gold since the 1970’s (look it up!).

    Other goods have definitely increased in cost. People don’t see it because companies cannot sell those items anymore. Instead, manufacturers find ways to cut down the cost of products or sell it to customers with creative finances (6-year car leases, 4 easy payments of $99.99, does that ring a bell?). Today, you buy a car and most of it is plastic while 40 years ago, cars were mostly steel. The cost of manufacturing goods has drop dramatically because otherwise, nobody would be able to afford buying the things we were buying 40 or 100 years ago. Although it is a good thing that manufacturers have been improving their processes and found cheaper ways to make products, the rush to do it would be a lot less if inflation would not be pushing them otherwise).

    About hyperinflation, just wait until the banks ACTUALLY start spreading whatever money the Feds gave them from the trillion dollars the they have produced. The inflation clock will only start clicking once that huge amount of money goes into the economy (if it ever does) and the government, as usual, will be the first to benefit.

    The Federal Reserve has been producing money for the longest time and giving it to powerful bankers who have been defrauding our country for the last 100+ years. How do you know that what the Fed reports as what amount of money they produce per year is true? Nobody has been able to AUDIT the Feds for the last 40 years, have you? It is like asking a thief to guard your house while you are out.

    From the moral and principles perspective, who do you think bankers and the Feds are that THEY have the right to double the amount of money we use to trade our goods and labor for, cutting the value of our exchange currency in order to tax or STEAL from us? If we would do just that, we would all be in jail and most people would never accept our fake money. The only reason people would knowingly accept fiat money is because they know that the government will take whatever assets they need from the people to cover their currency by FORCE (never mind the loss of our freedom and private property rights in the process). In an economy without fiat money and fractional reserve banking, the currency value would INCREASE so people would use LESS money to buy the goods and services they need. The currency would be STRONGER, not more diluted as it is now.

    Comment by Yuraforyou | July 29, 2009 | Reply

    • > The price of gold in 1970 was around $37/oz.
      > By the end of 2008, that price was $880/oz
      > (that is roughly 8% inflation per year if the gold
      > were going to be used as reference). That means that
      > our “monopoly” money has lost 2,378% of its value
      > against gold since the 1970’s (look it up!).

      It is really unfortunate, when people on the side of liberty have such a poor understanding of either economics or history, and yet put themselves out as advocates in such detail.

      It serves as a straw man for the socialists, when you know so little.

      In 1970, the price of gold versus the dollar was controlled by the Breton Woods accord. This is basic financial history. The entire industrialized world agreed to make the price of gold $35 an ounce, no matter what the dollar, or gold, was actually worth. You should not be making mouth-noises on the topic if you don’t know the basics of it.

      In 1971, you see, Nixon broke the Breton Woods accord, disconnecting the price of gold from the dollar.

      The REAL price of gold had drifted, over the years (the US had been on a monopoly gold standard from 1873 through 1938, and a bimetal standard from 1792, which meant the prices of gold and the dollar had never a chance to sync, fully, since that earliest date) so above its forced price that it immediately spiked up to ten times its original value.

      You are talking about it going up to $880 by 2008…but this just shows MORE ignorance. It went up to $880 by 1981.

      This did not reflect a watering down of the dollar, but an increase in the price of gold, itself. First it was headed for its natural price…but then this excited people so much that it got into a speculative bubble, EXACTLY like real estate prices two years ago.

      And in 1981, that bubble burst, like real estate prices last year, and it plunged to a FRACTION of that amount. And NEVER, ever recovered.

      Does this say to you, in your wisdom as outlined above, that the dollar suddenly became un-watered? Did it suddenly become 300% more valuable? Did the Fed suddenly un-print 66% of it?

      Of course not.

      Once the price of gold was unsynced, its inherent dangers as a medium of exchange became apparent, as its price began to wobble between fluctuating wildly or declining in a way that no tolerable investment ever would.

      From 1981 through 2001, the price of gold, when adjusted for inflation, actually fell.

      When you cited the $880 price of gold in 2008, you show that you had not the slightest clue what happened to gold BETWEEN 1970 and 2001. You need to take responsibility for yourself, and actually learn about that.

      > Other goods have definitely increased in cost. People don’t
      > see it because companies cannot sell those items anymore.
      > Instead, manufacturers find ways to cut down the cost of
      > products or sell it to customers with creative finances (6-
      > year car leases, 4 easy payments of $99.99, does that ring
      > a bell?). Today, you buy a car and most of it is plastic
      > while 40 years ago, cars were mostly steel.

      Chalk up another liberty issue you need to learn about:

      Cars are made mostly of crappy materials today, because of socialized standards, like CAFE forcing unsafe gas mileage, and “safety” standards that are actually more dangerous than helpful.

      > The cost of manufacturing goods has drop dramatically
      > because otherwise, nobody would be able to afford buying
      > the things we were buying 40 or 100 years ago.

      That is patently untrue. In fact, until 2001, incomes rose EVEN WHEN ADJUSTED FOR INFLATION. Only in the subsequent buildup to economic depression, caused by increased state intervention, needless warmongering, a 700% increase in oil prices, and a cut in our money supply, has that even become seriously debatable.

      > About hyperinflation, just wait until the banks ACTUALLY
      > start spreading whatever money the Feds gave them from the
      > trillion dollars the they have produced.

      Did you actually bother to READ the article, above? It looks unlikely that you generally do that with pro-liberty articles at all, or you’d know some of the basic facts.

      In this case, I already noted that you need price increases of, at the minimum, 100% per year to have “hyperinflation”.

      How, precisely, is the “trillion dollars” you cite going to cause an annual doubling of prices, when there were (depending on how you count) between 8 and 16 trillion dollars already in the economy?

      And how are you going to explain why even TWO trillion (it wasn’t “a trillion”) dollars is going to increase prices at all, considering we’re suffering deflation because our economy was SHORT two or three trillion dollars, before that money was printed?

      > From the moral and principles perspective, who do you think
      > bankers and the Feds are that THEY have the right to double
      > the amount of money we use to trade our goods and labor
      > for, cutting the value of our exchange currency in order to
      > tax or STEAL from us?

      They don’t, and it should be illegal.

      But it didn’t magically start producing hyperinflation, just now, just because you happen to only now have learned (in the vaguest, sketchiest non-detail) it was happening.

      > The only reason people would knowingly accept fiat money is
      > because they know that the government will take whatever
      > assets they need from the people to cover their currency by
      > FORCE (never mind the loss of our freedom and private
      > property rights in the process).

      Actually, no, that’s untrue. The reason people accept the dollar is that it has retained more utility as an accounting medium of exchange than any other means available.

      Of course a free market in money would be far better…but, ironically, it may very well be that under economic freedom, people would choose some other non-commodity medium of trade, instead of barter.

      > In an economy without fiat money
      > and fractional reserve banking

      BZZZZZZZZZZZZ!!!

      Don’t pretend to be an advocate for freedom, if you’re going to talk about banning the consensual Fractional Reserve Banking system.

      And that’s the only way you’d ever get rid of it…you’d have to impose socialist tyranny against it.

      Fractional reserve banking is, by far, superior as a tool for economic freedom than sticking all of your money in a scrooge-mcduck vault. If you don’t think so, you’re welcome to start rending a safe deposit vault for your money, instead of using banks.

      > the currency value would INCREASE so people
      > would use LESS money to buy the goods and services they
      > need

      So, on top of everything else, you think that universal deflation (not caused by increased efficiency of production in specific industries, but by a decline in wealth/currency ratio forcing ALL prices down) would somehow be GOOD for the economy?

      Read this:

      https://butnowyouknow.wordpress.com/2008/12/16/why-deflation-is-badfor-you-private-property-and-capitalism/

      Actually READ it, like you appear not to have done with the article above.

      It explains, in clear and precise detail, why deflation DESTROYS capitalism. Karl Marx would be thrilled with the outcome you’re describing

      Certainly it was a socialist’s wet dream, when a deflationary spiral happened last…we call it the Great Depression.

      Comment by kazvorpal | July 30, 2009 | Reply

      • http://www.nma.org/pdf/gold/his_gold_prices.pdf

        http://goldprice.org/gold-price-history.html

        http://www.goldprice.net/historical-gold-prices.php

        These are only three links out of a bunch. I am sorry to tell you but your gold price data does not match most records.

        “This did not reflect a watering down of the dollar, but an increase in the price of gold” and as the gold price went up, everything else went down with respect to gold. It is a devaluation of the dollar against gold. Once the gold was let free in the market, its price was adjusted to its real value at that time. Anybody having gold stuck under their beds were suddenly able to buy twice as much as those who were not so lucky.

        “And in 1981, that bubble burst, like real estate prices last year, and it plunged to a FRACTION of that amount. And NEVER, ever recovered.” I sincerely don’t know what you are talking about. There was a gold price spike during the 70’s, but not as large as the gold price went up in 2008. None of the charts related to gold prices match your account of history.

        Regarding product prices, evidently you have never worked in a manufacturing company. I am an engineer and my work is to remove cost from products. Years ago, brass and copper were good enough materials to make products; today, you only use it where it is absolutely necessary. Customers, however, pay a little more than they did ten years ago for our products (counting with inflation) while business continues to grow in profits. The products people buy nowadays, however, are NOT the same that they could buy ten or fifteen years ago. If you compare apples to apples, you will realize what I am talking about.

        Both inflation and the resulting deflation are both bad for capitalism (and freedom) and they are both direct result of the government’s credit expansion (which I think you are all for). Where did you learn that fractional reserve banking was a consensual agreement and with whom? It was imposed to the American public by bankers who were in deals with president Wilson to implement those banker’s dreams in the same way that Obama is trying to sell his health care reform, cap and trade and all revenue / taxation methods he is planning for us. Twenty years after the creation of the Federal Reserve, Americans lived through one of the worst economic depressions that ever existed until now. I just hope we are not repeating history again.

        Comment by Yuraforyou | July 30, 2009 | Reply

        • > “This did not reflect a watering down of the dollar, but an
          > increase in the price of gold” and as the gold price went up,
          > everything else went down with respect to gold. It is a
          > devaluation of the dollar against gold.

          Ah…no. If it were, then the price of everything else would remain STABLE versus gold.

          Because it was just a gold price bubble, other prices did not match it.

          You just argued against your point.

          > “And in 1981, that bubble burst, like real estate prices last year, and it
          > plunged to a FRACTION of that amount. And NEVER, ever recovered.”
          > I sincerely don’t know what you are talking about. There was a gold price
          > spike during the 70’s, but not as large as the gold price went up in 2008.
          > None of the charts related to gold prices match your account of history.

          Oh yes, it does. Naturally, the mining industry is trying to hype the current prices, so the show you only lower annual numbers for the past, when the peak numbers were fifty percent higher.

          Goldprice.net, even more laughably, is a company wanting to scam you into investing in gold at the peak of the bubble…that’s like asking a tobacco scientist for advice on addiction.

          Goldprice.org is equally suspect, and sure enough they also fail to adjust for inflation…but note that they DO show a chart that identifies the peak price of gold in 1980, near where it is now. Of course it first focuses on charts that show the temporary price bubble in isolation, as if it were normal for gold prices to increase, when it’s actually normal for gold prices to decline.

          But, far more importantly, look at what happens if you adjust the price of gold for inflation:

          http://inflationdata.com/inflation/images/charts/Gold/Gold_inflation_chart.htm

          Gold’s price, adjusted for inflation, shows that the current “peak” is the FOURTH highest…and that each subsequent peak fails before it reaches the previous one.

          > Both inflation and the resulting deflation are both bad for
          > capitalism (and freedom) and they are both direct result of
          > the government’s credit expansion (which I think you are all for).

          No, I’m against all government coercion. It has no business involving itself in money at all, except to protect private property rights.

          > Where did you learn that fractional reserve banking
          > was a consensual agreement and with whom?

          Who forces you to use fractional reserve banks?

          Who would seriously pay several percent of the money they store, each year, just to keep money in a bank, when other banks offer to PAY you for the honor of storing your money?

          The marketplace has favored fractional reserve banks ever since they came into existence, and for very good reason.

          > It was imposed to the American public by bankers who were in deals
          > with president Wilson to implement those banker’s dreams in the same
          > way that Obama is trying to sell his health care reform, cap and trade
          > and all revenue / taxation methods he is planning for us.

          Wilson, a slimy socialist like FDR and Johnson…and Teddy Roosevelt, Hoover, Nixon, and the Bushes…most certainly did promote socialist laws that gave an unfair advantage to his favorite bankers. Those being the ones who bribed him the most.

          But that’s not where fractional reserve banking started. You might as well say that all telephones are an evil socialist plot that nobody would choose to use, just because Ma Bell was a state-mandated monopoly for generations.

          There were fractional reserve banks long before Wilson, and there will continue to be fractional reserve banks as long as they are not explicitly banned by some other slimy socialist.

          > Twenty years after the creation of the Federal Reserve,
          > Americans lived through one of the worst economic
          > depressions that ever existed until now.

          I think you need something clarified for you:

          Thirty-six years before the creation of the Federal Reserve, Americans lived through the worst depression they’d ever suffered up to that point. It lasted 23 years. It started the year that the US adopted a gold standard, and lasted until the very year they loosened it, in 1896.

          Before that, sudden fluctuations in the price of gold caused several other depressions, during the bimetal era. They weren’t as bad, because the standard was SILVER and gold. Each of those depressions lasted at least as long, most of them longer than, any recession we’ve had since the gold standard ended.

          Do you know WHEN the gold standard ended?

          Not when the Federal Reserve was created.

          It was ended in 1938…followed quickly by the end of the Great Depression.

          Comment by kazvorpal | July 30, 2009 | Reply

  9. Are you the same guy that was going to refute everything on the mises site?

    Still waiting, pal…

    Comment by Misesian | July 29, 2009 | Reply

    • No, I fall on the Austrian side in methodenstreit, so I cannot imagine I’d have said that about the Mises site. /Human Action/ was the most significant book in economic history, and I’d stand by most of it despite the enormous advances in economic knowledge made in the intervening generations.

      I have debated gold bugs on Mises.org, but that is because I’m being consistent with my Austrian philosophy…as the mises.org article the previous poster cites points out, a gold standard is still the imposition of a coercive government monopoly, causing more harm than good.

      Another recent mises.org article arguing for a free market in money, INSTEAD of a gold standard and socialist prohibition of fractional reserve banking:

      http://mises.org/story/3548

      Comment by kazvorpal | July 29, 2009 | Reply

  10. This information posted above is factually inaccurate. Please read the following article from Jörg Guido Hülsmann called “Deflation and Liberty” to counter the inaccuracies of the above blog: http://mises.org/story/3231

    It would be nice if we had deflation but rather instead the $24 Trillion from the bailouts is going to cause very expensive prices once this money gets circulated.

    Also read the following from George Reisman: http://mises.org/story/3556

    Comment by liberty | July 29, 2009 | Reply

    • The article you cite, while correct in most of what it says (because it mostly doesn’t address deflation at all), makes several mistakes, and therefore is completely wrong in its conclusion.

      Part of this comes from drawing too much from Rothbard, who was brilliant rhetorically, but often didn’t really understand the principles of human action as well as he made it sound. This is the guy who claimed that parents should be allowed to kill their own children, up to the age of majority.

      Anyway, what the article fails most miserably at is examining the anti-capitalist consequences of deflation. It attacks the very roots of the free market, punishing investment and economic transactions. This is why artificially causing tremendous deflation (reducing the money supply in the US by 30%) was so useful to the socialists during the Great Depression.

      Actually READ this article, which explains some of the mechanics of deflation’s attacks on liberty:

      https://butnowyouknow.wordpress.com/2008/12/16/why-deflation-is-badfor-you-private-property-and-capitalism/

      There are good reasons why we have not HAD a depression, for seventy years…that was the period in which, because the gold standard (which your mises.org author sneers at) ended in 1938.

      The relationship between deflation and depression is not even seriously denied by the author…but then he is enough of an ivory-tower academic to fail entirely to address the consequences of that. Were things really WORSE from 1948-2007 than they were during the Great Depression, that avoiding the consequences of deflation were so desirable?

      > It would be nice if we had deflation but rather instead the $24 Trillion
      > from the bailouts is going to cause very expensive prices once this money gets circulated.

      No…the trillions in bailout spending are going to DEPRESS the economy and prices, not stimulate them, just as similar “stimulus” spending did from 1929-1938. Read https://butnowyouknow.wordpress.com/2009/07/15/why-stimulus-spending-depresses-the-economy/ to understand why.

      Comment by kazvorpal | July 29, 2009 | Reply

  11. Just dropped in to say nice site and great posts!

    Keep up the good work and let me know if you’d like to be in our blogroll and exchange links http://r3publican.wordpress.com

    Blessings/sc
    @scrosnoe on twitter

    Comment by Sandra Crosnoe | July 26, 2009 | Reply


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