Posted by A.B. Dada on 26th September 2007
Zion, IL
By A.B. Dada
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Over at the new mises.com forums, I posted a reply to a topic titled The Myths surrounding the phenomenon of inflation…:
The problem in defining what causes inflation is that the two parties generally do not agree what the definition of inflation is.
Austrians, such as most of us, believe that the definition of inflation is “the increase in money supply,” therefore the cause of inflation is “increasing the money supply.” Non-Austrian Economists tend to believe that the definition of inflation is “the increase in prices in a market,” and is caused by an increased demand for a market, or a decreased supply of that market (services or product). For them, inflation has more to do with increased demand/decreased supply than a change in the money supply.
Many of us Austrians can agree that inflation (the increase of money supply) usually causes some or many markets to move up in price as new money floods towards a fixed or previous supply of a market’s product or service, but inflation doesn’t necessarily cause ALL prices to go up. Over the past 2 decades, the money-supply-adjusted price of computers has tended to go down, which non-Austrians would call “deflation,” but we would call “price drops.” Even in an inflationary economy (i.e., the rising of the money supply), prices don’t always tend to go up. It is possible that new money is hoarded outside of the banking system (mattress, vault, wallets and purses locally and foreign lands, etc). It is possible that new money is deposited into accounts that have high reserve requirements and isn’t loaned out.
Whatever the basic premise is for the cause of inflation, it is important to understand that more often than not, we are looking at two different subjects: money supply inflation (which can and usually does cause some price increases), and price increases (which can and usually is caused by either money supply inflation or by new demand or reduced supply for a given market product or service).
Posted in Banking, Inflation, Federal Reserve | No Comments »
Posted by A.B. Dada on 7th September 2007
Zion, IL
by A.B. Dada
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Gold broke US$700 today, for the first time in 16 months. For the past year and a half, gold has been moving up and down and up and down, but never coming near the US$700 mark. It also broke EURO$500 recently, as well.
For the most part, the U.S. dollar’s steady decline to worthlessness has taken generations, and it is only lately that the average media outlet has really peeked into its fall. Rarely does a mainstream outlet tie the rise in US stock markets as a response to the fall in the value of the dollar. That’s how inflation works.
Now, we have some foreign media outlets warning about the fear that I’ve had for years: that China will dump U.S. Treasuries to put their reserves in safer currencies and investment tools. From the Telegraph: “A sharp drop in foreign holdings of US Treasury bonds over the last five weeks has raised concerns that China is quietly withdrawing its funds from the United States, leaving the dollar increasingly vulnerable.” [link] While we don’t know for sure that China is dumping Treasuries, the possibility has been raised for years as the dollar has weakened in its status as a global reserve currency. China’s purchases of U.S. Treasuries has had an effect of reducing inflation concerns by taking dollars out of the market. If China was to dump a large portion of their reserves of Treasuries, we could see massive inflation overnight — and the price of gold versus the dollar skyrocketing.
Another idea behind gold’s price, and one that I’ve seen spoken of nowhere except for in my own thoughts, is how a halted credit market can let gold skyrocket, too. When credit isn’t available, gold mines find themselves without the quick liquidity they need to keep mining. When mines close, gold’s additional supply is halted, putting added price pressure on the spot price of gold for those who actually need it. Gold that is used up in industrial uses and manufacturing is usually replaced by newly mined gold; stop that mining, and the supply of gold drops enough to effect the price.
On top of all of this, the dollar’s fall is virtually ignored by every Presidential candidate except Dr. Ron Paul. He’s the only one from any party to acknowledge that gold is the only solid currency that government should operate in, and he also understands that a deregulated money system would let the market provide currency in a way that is good to each individual. I’ll be talking about how a free market in money will work next week.
Posted in Banking, Inflation, Debt, Federal Reserve | No Comments »
