Tuesday, November 22, 2005

Bernanke vs. Inflation

Well, maybe Mr. Bernanke can manage all this stuff--but he has a daunting task ahead of him.

Inflation is commonly measured by "increasing prices;" that is, when the CPI moves up, it's called "inflation." This common definition is wrong.

Inflation is actually a surfeit of money--more dollars than there used to be. This debases the "old" dollars, meaning that one needs more of them to purchase goods. Clear?

Good. But not so good. In the last year or so, M3, the broadest measure of money in the US, has increased by roughly $1 trillion--and in the last 5 years has increased from $6.5 trillion to around $10 trillion. That's a lot of monetization goin' on out there.

Some will argue that "rates are going up, which should be anti-inflationary." Not really. Rates are rising to protect the value of the USDollar on world markets. The Fed makes dollar-denominated investments (particularly in US Bonds and Bills) more attractive by hiking the rate of return. This keeps the dollars flowing into the country AND prevents the USDollar from collapsing on global markets--an eventuality which is too horrible to contemplate.

So as you notice that the Labor Department keeps insulting your intelligence by telling you that there's no real big "inflation" going on (so long as you don't count food, housing, and fuel), be sure to ask your Congressman how he explains the rapid expansion of M3.

Should be fun to listen.


M.Z. said...

...prevents the USDollar from collapsing on global markets--an eventuality which is too horrible to contemplate.

I agree with you that we are talking an eventuality. The question is how do we prevent this from occurring. BTW, in what profession are you?

Dad29 said...

I doubt that it can easily be prevented, because it will call for a complete reformation of both Congress AND the general public, to wit: pay down the friggin' debts. ALL of the friggin' debts. Now.

Thanks for your question about my "non-blog" life--but as I've mentioned to another correspondent, I prefer not to reveal much, if anything.

I have over 35 years' experience in business, if that helps.

M.Z. said...

That is quite alright. I was more curious if economics was a casual interest or more integral to your work. I know enough now to be content.