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Inflating the Money Bubble

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There has been much talk about bubbles lately. One was the bubble in the real estate prices. Another was the bubble of consumer debt. And stock market bubbles were all the rage just a few years ago when (then) Federal Reserve Chief Alan Greenspan made a comment about "irrational exuberance" after investors used his easy money policies to bid up the price of any company even remotely connected to the "dot com" industry. (His remark was quite premature when he made it, but the warning proved correct after a time.)

No one minds Bubbles too much as long as they own some of the assets on the "up escalator."
During one such ascension in stock prices, my former colleague and close friend on the exchange floor, "Geo", used to wear a badge on his trading jacket that said, "Never confuse brains with a bull market." Good advice, but rarely taken.

The problem with bubbles, of course, is that after they inflate too much, they tend to burst. The bigger the bubble, the bigger the bust. And when that happens even those not chewing the gum can get sprayed with the residue. Witness the last few years, when most of us got hit with financial debris as the value of our homes imploded after a real estate bubble with which very few of us had any connection.

As bad as that situation is, the next implosion may make it seem like a smallish pop by comparison. Absent any meaningful action to correct the expansion of the money supply, our once great experiment in democratic republicanism is headed for the laboratory trash can faster than almost any of us can imagine. And since no such action is yet on the radar screen, the Republic we live in threatens to become the banana variety in a historical blink of the eye.

The current President, like the last, is in denial. Just yesterday he essentially declared that the "stimulus" pork spending and big business bail-out preceding it saved the world. Nothing personal, but if he actually believes that, he is a buffoon. If not, well, let's just say he is worse than any of his critics actually realized. My hope is that  it is the former. That way he can just blend in with most other politicians.

So, a refresher course in "inflation 101" is in order for all of us. In fact for many, it may actually be a primer since they have been misinformed for so long about what inflation actually is. It's not a text book concept, it is an "up close and personal" theft of all of your savings.

"Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output".- Milton Friedman.

What this means is that rising prices themselves are not inflation, they are the symptom of it. In other words, when your nose runs, it's because of the cold you have. That's why Kleenex and NyQuil don't correct the problem. The rising prices are the sneeze, inflation is the virus which caused it. People don't die from colds, but countries often die from inflation.

And that is why having a slowing economy can't regulate inflation. Decreased spending can stifle rising prices when they are caused by high economic activity, but since inflation is caused by devalued money (not increased demand) restrained spending can not work against it. 

In the initial stages, inflation lags somewhat as the newly printed money takes a while to work through the economy, and this time around is no different. The vast amount of new spending by the economic illiterates running this country has hardly begun. And there is very little demand for new "stuff" when much of the country is unemployed. That is the reason we haven't experienced the pain as of yet. (I know it's hard to stay awake during these dissertations, but our future is at stake here.)

So it might be time for alert level one when you should "get a helmet" as comedian Ron White advises, because the time is approaching for alert level two, when you should "put the damn helmet on." When the current inflated money balloon bursts you will need one with a chin strap.

People my age still remember the 21% interest rates of the 70s quite vividly. This time around the bubble is exponentially larger, so go figure. Trillions of dollars of deficits have the presses at the treasury printing Franklin's faster than the "hope" is fading, so your retirement budget may need a few changes. Maybe a "cat food" category to replace the "cabin at the lake" category.

If you have read this far perhaps you will read the essay which will follow shortly. That piece will deal with the personal consequences of continuing the insane policies which are rendering the US dollar worthless. As a bonus, I'm going to tell you how to make the Social Security and Medicare funding problems disappear, the "Chicago way."  Stay tuned.


Sara said...

The economic illiteracy in our country is shameful. I already know we will have to spend time teaching our kids about it, because I doubt highly they will learn it in school (and we plan on sending our kids to private school to boot!)

Wolfgang Sheehy said...