Couple of things: 1. what causes inflation. From a macro basis its demand and supply. When demand skyrockets and supply is flat prices go up. Alternatively if supply drops and demand remains flat, prices go up. Food products such as wheat are an example of the latter. Farmers are turning to corn for ethanol, wheat and other products are being ignored.....the price of wheat for breads, pasta etc. are going up. Oil...ugh. Demand is increasing world wide. Within a relatively few years India and China have quadrupled their demand for oil. That is probably one of the reasons for oil prices going up. Money? That is a tougher one. The cost of money are interest rates. Another impact on the cost of money is the exchange rate. The American dollar is losing value fairly consistently and more recently consistently and rather rapidly. That will impact the cost of foreign goods which are very significant within the economy. That will drive prices up. Interest rates. American interest rates have been dramatically low for about 20 years. There can be a variety of impacts on interest rates. By the way base interest rates are set by the FED which lends money. If buyers of American debt stop buying debt the fed has to raise interest rates. Bingo. the cost of money goes up to lending institutions and they increase the cost of borrowing. Various elements within the business cycle can cause changes in the dynamics of the economy and cause fluctuations in interest rates. Oooh I forgot something that drives down inflation, referring back to your reference to telephone calls above. Competition, and productivity (in that case technological advances) dramatically lowered telecom costs during the late 70's through the 90's. Very dramatic. It absolutely drove down costs in a remarkable way. My opinion is that the Fed has done a terrific job for the last 25 years or so in primarily focusing on the inflation aspect...and primarily focusing on the potential money side of inflation. In fact, I believe the current Fed chairman recently addressed this very astutely identifying potential impacts on the economy (foreign economies, the loss of value of the dollar, rapid increase in the price of oil, and other items) and attempting to watch impacts and then react. I agree, the reference to adults was uncalled for. Anyone with significant experience in dealing with operating a business, borrowing for development/operations etc. and with a history of doing so is very attuned to the ebb and flow of the economy. I think those people would have a very hard time reverting to old theories. I will read your references. Dave
In 1983, the cost of a local phone was $10.55. This included fixed fees for access to long-distance service, installation and wiring costs. I just checked Verizon for local service in Michigan. Cheapest plan is $36.24 month. Yes, supply and demand of commodities, labor, services and technology influences inflation. But what about the size of the monetary supply? If there are $1 trillion in a currency, and an additional $500 billion are printed/created, what might the likely effect upon the buying power of an individual dollar be in this scenario? Seeing as how there is an inflation in supply one might surmise that the purchasing power of an individual dollar drops. The purpose of a reserve is to back the notes of credit issued by an institution. A central bank, regulates all of the domestic currency, by maintaining adequate reserves, either in securities or commodities. However, the Federal Reserve engages in Fractional Reserve Banking. When a Member Bank (1 of 12) conducts an "open market" operation, they buy back notes for reserve purposes. These notes, are deposited by the requisite bank, and then the Federal Reserve credits the depositing institution with capital credit to be dispersed into the economy in the form of loans. However, the capital credit created is frequently a factor of 10 for the reserve deposit. http://en.wikipedia.org/wiki/Fractional-reserve_banking In times when the FED is most active, the monetary supply inflates rapidly. This is one of the primary reasons why the US dollar has fallen so rapidly and consistently in foreign exchange markets. You see, the US dollar has no intrinsic value. It's only value is consumer confidence, and the expectation of being backed by political and military might. You see, the disconnect between the price inflation you reference, and the monetary inflation I reference, is that the US is spending and buying at a much higher rate than in the past. And yet the dollar is worth less relative to the 1970s baseline of 100 (at last glance, a 76). To catch up, our money is per dollar worth less globally over 30 years, and yet we pay more for goods and services. So we have a massive increase in the monetary supply, facilitated by the FED and the practice of fractional reserve banking, and at the same time, we have a consistent increase in the CPI. So much the same that it is almost eerie. http://en.wikipedia.org/wiki/Image:Components_of_the_United_States_money_supply.svg http://en.wikipedia.org/wiki/Image:US_Consumer_Price_Index_Graph.svg Then factor in, that currently, the external and macro global forces you mentioned have come into play (as they inevitably will for a society and currency based heavily on credit and debt see: Rome, British Empire, USSR) and the dollar index is now in a freefall. http://en.wikipedia.org/wiki/US_Dollar_Index Bear in mind, the ideas behind Austrian Economics are applicable to the fall of the USSR, which is a fairly recent event. Historically, nearly all empires, totalitarian/authoritarian regimes and socialist economies bankrupt, for the very principles this discipline talks about. Overextension of the money supply and destruction of the currency. When the government can create currency to fund debt spending for wars and maintenance of an empire, that currency devalues. The current operations by the US military in 130 countries, as well as the wars in Iraq and Iran are fueled by debt (the credit lender of first resort) and as the Chinese have recently pronounced that they will be decreasing their dollar holdings, the lender of last resort (inflation). With no direct war taxation, the money has to come from somewhere, and the idea that a devaluing dollar will continue to be funded by credit from foreign lenders is false. The market inevitably corrects itself, as lenders seek to get out of losing investments. The problem with a speculative dollar is that it's macro domestic influences are monetary policy and debt. A truly free market is self correcting, but an interventionist market (such as the FED era US economy) is managed, and prevents the market from correcting itself, and instead creates business cycles and bubble periods, as the management inevitably cannot prevent the correction entirely, only ease and prolong the necessary adjustments. We have been in an extended period of using inflation to ease inflation. As the market demands write downs and bankruptcies, the economy is propped up by increasing the money supply, devaluing the debt, but also devaluing earning and savings. It's the ultimate in pushing the problem forward, building the supreme bubble to burst. When debt growth outpaces GDP over 10 years, the process of currency destruction has begun. This is the basis of Austrian economics, the school of thought attributed to Ludwig Von Mises, furthered by Murray Rothbard, and inspiring such economists as Nobel Prize winners, Milton Friedman and George Stigler, who belong to the Chicago School, heavily influenced by Friedrich Hayek. Austrian economics is a philosophy of economic liberty in the spirit of the Founding Fathers. Unlike Keynesian economics which are quantitative, Austrian economics are qualitative. I'd invite you to read Rothbard's The History of Money. http://www.mises.org/books/historyofmoney.pdf Skip the introduction, I'm sure you will find the early history of American money in Chapter 1 a great starting point based upon your passion for deeper understanding in threads here. To answer your first long response, with a statement at the end, Economists do question Dr. Paul on this. He's considered one of the most prominent American Austrian Economists with the deaths of Friedman and Rothbard. This is not black helicopter mumbo jumbo conspiracy theory, it's a historically consistent philosophy, and one that gets him a lot of respect from the economic pundits. The only downside to discussing these issues, is that the lay American does not have a foundation in market fundamentals or the history of economies. It's stuff most "adults" today cannot even grasp because we never look to why the business cycle or bubbles occur, only how we "patch them up" (as Dr. Paul told Ben Bernanke). AFAIK, Dr. Paul has more economic policy endorsements from investment experts (Jim Rogers, Peter Schiff, Richard Russell) than any other candidate running.
That's the CME; most of those are currency & commodities futures traders and not stock traders. Anyway, Ron Paul did make valid points, and Ben Bernanke answered the questions well. The problem with Ron Paul is that he is barking up the wrong tree. He should really be focusing more on the issue of fiscal policy rather than monetary policy.
Bernanke did not answer the questions well. He tried to say that if you have US dollars and you buy US goods, you are safe from devaluation. That is a fallacy in an economy driven by a trade deficit because the American economy does not exist in a bubble. He rambles that it only affects imports, but this is an import economy. The middle and lower class have to shop at Walmart and buy foreign made goods, the same goods which are inflating so quickly. Bernanke was also fishing on MzM when he said that people are "probably taking money out of risky investments and putting it into the bank". Our savings rate is at an all time low. He knows the banks are undercapitalized, and if there is a demand rush, there will be a collapse of the banking system because the reserves simply do not exist. I was pretty depressed that Bernanke wouldn't address the fact that a weak dollar vs. oil makes transportation costs on imports, exports and domestic sales much more expensive, but again, we all know CPI is a joke, no one who actually shops and pays bills really believes we are in a period of sub 3% annualized inflation. Paul is addressing fiscal policy as well, it's the core of his platform. But he recognizes that without monetary reform, bad fiscal policy will occur again and again. He's trying to lead a revolution, not put another patch on the system. As long as the government can deficit spend with foreign investment and the creation of new money, the system will always trend to inflation. That's basically Gresham's Law. We're seeing it in practice with all of the Bears advising commodities and foreign investment over domestic investment, and the legion has been growing for the last 4 years on this.
I'm not seeing a significant amount of inflation as you suggest. The Fed caused the increase in crude oil prices? I thought that maybe the war had something to do with it? Collapse of the banking system... that is such an old concept. The Fed under a fiat currency system will not allow that. On the other hand, the gold standard will. Under the gold standard, the amount of money that gets issued by the central bank (or the government) is limited by the amount of gold in the system. However, commercial banks can still continue to create money. I haven't noticed much inflation as a consumer. The only real noticeable price change would be in gas. As an investor, I have benefited from it. Where's the outrageous inflation? The government does not deficit spend based on creation of new money. The Fed operates in the open market; the government must find a way to fund its deficit fully without relying on the Fed. Countercyclical fiscal policy was introduced by Keynes when the Fed had gold reserves. Politicians will continue to spend money regardless of the system. Why would the gold standard stop them? Honestly, I agree with you that the debt should be reduced, but you are blaming an entity that has nothing to do with fiscal policy.
Compare the price of a car in 1965 to the price of a car today, and you can clearly see the effects of inflation. I don't know about you, but I was paying a lot less for my power bill three years ago as compared to today. The Fed isn't the primary cause in the rising cause of oil, you also have to take artificial scarcity into consideration. Do you honestly believe this? Where do you get the idea that a banking collapse is such an old idea. They recently had bank runs over in Britain due to the sub prime mortgage crisis, and the banking system in Argentina collapsed in 1999. History shows that bank failures can, will happen, especially when the government practices bad monetary policy. By the way, when people in Britain recently tried to pull their money out of the bank, and there were long lines, suddenly the "bank's computers mysteriously malfunctioned," and the bank couldn't give everyone there money. If you believe that, I've got a mansion on Neptune I want to sell you for $5 million. If we lived under a gold standard, I wouldn't use a bank that used fractional reserve banking, and didn't have any true reserves. To do so would be a risk to my own finances. When you talk about inflation, you should talk about the falling value of the dollar over a long period of time, not just over the last few years. Did you know that if you had $100,000 in 1913 dollars, today you would only have about $4,000 worth of purchasing power, and could only buy 4 grand worth of goods? At the same time, if you had $100,000 in gold and silver in 1913, and held onto it today, you would have about $3 million. This is the effects of long term inflation. You want to know about inflation? Go look information on the cost of a house in San Francisco in 1955, and then compare it to the average cost of a house in San Francisco today. In 1955, $500,000 would have purchased you a luxurious mansion with 25 rooms. Today, you're luck to get a three or four bedroom house in San Francisco for $500,000. There is another example of inflation at work.
I think I'm going to download this book and read it. But first I need to finish reading the 33 Strategies of War by Robert Greene, which I picked up at Borders yesterday. I haven't even finished reading the preface yet, but this book is spectacular.
One more thing. Just in case some of you here at DP try to come in this thread, and argue that Americans make more now than they did in the 1950s, so this reduces the rate of inflation, I have two reason for why you're wrong: 1. Even though Americans earn more today than they did in the 1950s, this increase in earnings is still affected by inflation. Americans "have" to earn more today than they did in the 50s to maintain the same standard of living. 2. The price of goods and services has not kept pace with the income of the average American. The typical American makes about $33,000 per year, the average price of a brand new car is about $12,000-$15,000 which means over 40% of the Average American's income would have to go towards the purchase of a new car if they wanted one, which is precisely why millions of Americans get car loans. What this clearly shows is that inflation robs you of your wealth, destroys the Middle Class, and consolidates all wealth into the hands of a wealthy elite at the top. Ron Paul says it very well when he says that "the only people who benefit from our current monetary policy are those who get to use the newly created money." The income of the average American is small when you look at the average cost of a house, car, or tuition at a four year college. The simple fact is that most Americans can't afford to get any of these goods without getting car loans, mortgages, and student loans. While some people borrow and succeed, using the money to start a successful career or business, and others are responsible and pay off their debt, the fact remains that the bank is the true master, owning everything in the society. The people own nothing, and their wealth is largely borrowed.
I have read materials, some time ago, on Austrian Economics. All these problems caused by Fed will be solved, if you allow privatization of money, so there is no need for cartel to act as a monopoly. Let the market decide and chose the money. Just like any other products. Most of the people are so stupid regards to Fed and how the money supply works. I tend to like Austrian Economics more than Keynesian Economics.
It is actually cheaper now for phone service. In 83', it was $10.55 just for the privilege of having the phone line. That was just the basic charge. Then you had taxes, state, federal and local. You had your phone rental fee... (yeah, how many can remember you used to have to rent your phone from the phone company?) Then you paid, X cents per minute to make a call.. This was for local, and long distance.. Now you pay a flat fee no matter how many calls you make, PERIOD!!! My vonage phone is $15/mo. flat and I can call anyone anywhere for $15/mo. PERIOD... My TW phone at home is $39/mo. and includes unlimited calling as well.. My Nuvio phone is $29.95/mo, and again, unlimited calling... I have TW Business phone at work (we were the first business to get it), and it is $120/mo. for a 3 line roll over, fax line and 800 line, again, all unlimited calling... Back in 83', with the few extra features you could get, you paid extra for it.. Everything is cheaper now than it ever was.. Falling dollar or not, my dollar buys much more than my parents ever did!!!
This is incorrect. The FED did not cause an increase in oil. It caused a devaluation of the dollar. See the dollar index chart I posted. I'm getting a little tired of people saying, "old" with regards to economics, as though there is this blind assumption that crashes, depressions etc. are no longer possible. It's hubris. Fiat currencies always collapse. If you use fractional reserve banking, at one point, the expansion of the money supply exceeds the reserves to such a point that even a minor bank run can bring the system to it's knees. Remember, our dollars are not "money". They have no intrinsic value. They are merely bills of credit. You can only exchange them for what the market will give you for them, and the more there are, the less demand there is for them in the market, causing inflation. A gold standard, without fractional reserves is one of the most stable forms of money one can have. At any time, you can exchange your bills of credit for a commodity, and the gold reserves (when properly managed, not under fractional policy) means that the bank cannot increase it's lending base by decreasing the value in gold of your savings. You wouldn't call the 200% increase in the cost of a domestic telephone line over 24 years inflation? As far as hyper inflation, you might start seeing it soon. Low interest rates + weak dollar, the impact on foreign imports generally takes 2~4 months to materialize. Now we're talking. This is Austrian Economics. The FED is the lender of last resort. Open Market operations facilitate debt monetization of government securities. C'mon now. The gold standard without fractional reserves would stop the government because the government would have to tax to redeem any loans it took. There is a limit to the amount of deficit spending a government can do when the citizenry have to pay for it NOW and in REAL dollars. Those election cycles are a check and balances, as is a sound monetary policy. If the government couldn't fund the war with debt, they would have been overthrown by now. Keynes can rot in hell for all I care. Incorrect. The FED is the instrument that facilitates bad fiscal policy. You can change the policy, until another administration comes along and utilizes the instrument again. Sound money is a must.
This is incorrect. Your dollar does not buy as much. The dollar index, M3, consumer price index etc all prove this fact. There is more stuff to buy, it does not buy more.
Guerilla, do you realize that gold standard under full-reserve banking is a theoretical concept? You'd have to start paying a hefty fee to banks for the services that they provide since they would have a RRR of 100%. What if prices get sticky? There's only a fixed amount of money that the economy can work with. Rich people are the ones with all the money, so are we going to have to rely on them to stimulate the economy? A zero-sum economy would only benefit the rich; it would create a scenario where every dollar they gain is taken from someone else. It's a game of monopoly.
You could trade credit notes for any commodity. It doesn't have to be gold, or only gold. Rich people are the ones with all of the money now because the FED facilitates a transfer of wealth, as the rich get to earn interest on all new money introduced to the economy, and they frequently are involved in the various industries that benefit from deficit spending.
Click the more button for this video.. It is just another RP propaganda post. Why you RP supporters choose to instill fear to achieve your goals, I will never know.
The only reason you say that is because you have a high income. You just haven't felt the effects of a weak dollar yet. You should go talk to poor Americans, or those on fixed incomes, and see things from their point of view. It is easy to sit here and talk about how your dollar buys more than it ever did, when you probably have an income which is much higher than the average American. But if the dollar completely bottoms out, it doesn't matter how high your income is, eventually everyone will realize the true nature of the situation. People keep trying to downplay the economy, but the only ones who do are either those who have lots of money, who can't see whats going on at the bottom of their ivory towers, or those who are completely ignorant of the economic system. No, it is the current administration in the White House that uses fear to achieve its goals.
Now it isn't. It's what the bears are saying, and not just a few of them, all of them. Surely you believe in hearing both sides Jeremy? Dollar is at an all time low, the credit markets are under duress, gold and oil are at all time highs, and these are facts. Pure facts.