Inflation vs. Deflation Part I

The case for inflation
Inflation is more of an opaque concept than most people believe. In fact, I have a hard time formulating a cogent theory at times as well. This is particularly a problem today, as signals appear to be mixed, depending on how they are filtered through your own biases or preconceived notions.

Generally, most people think of increasing prices as inflation. However, one must disentangle supply and demand factors in consumables such as petroleum before it could be considered monetary inflation. In the Freidman sense, inflation is always and everywhere a monetary phenomenon. Others term it as an erosion of buying power. Another more specific term is to say a “rise in the general price level.” This could be attributed to supply and demand factors as resources either become more scarce, or demand intensifies.

Under this final notion, it appears as though we can effectively say that yes, inflation is and has been present for some time.

Several exhibits reinforce this conjecture. Note the intensity of the M2 money supply, in the final months of measurement. This is presumably why so many individuals are riding gold to increasing heights, not seen in the recent generation. Most individuals do not trust congress or the president or the treasury department to be solid stewards of the peoples cherished money. Nor do they trust Professor Bernanke and the other chosen ones that have so much influence on our lives. Nevertheless, simple mistrust does not necessarily mean inflation is present, although the giant leap in M2 appears to be one causal variable that makes the inflation story plausible.

The CPI is supposed to measure inflation indeed shows abrupt inclines, enough to further inspire gold hawks and others that mistrust fiat money. Why the mistrust? Simply because governments throughout history have been shown to crush grandmothers savings. Instead of a balanced budget, cat food is on the menu instead. This has been an old trick. If Nero had a hip-hop name, it would be d-baser. Nero and other Roman emperors debased Roman coins until they contained very little, if any,  precious metal. Are the angels trying to organize our society really that much different?

Returning to the CPI, this is another statistic that much of the public distrusts. MIT’s Billion prices project gives us another indicator. Their results paint a similar formation, although at a somewhat higher basis. This gives credence to theories of inflation, but not yet hyperinflation. Find the index here: http://bpp.mit.edu/usa/.

So, while the exhibits below denote inflation, what is provoking the hyperinflationists? One, is the “crisis of confidence” model of hyperinflation. This is when people just no longer believe in the currency. With gold approaching $2,000 per ounce, one wonders if we are on the brink of the “crisis of confidence.”

Next time, the case for deflation, cognitive dissonance. Enjoy!

John

 

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