Re: It would be nice if $930 held
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TYHEE GOLD CORP
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Message: It would be nice if $930 held
Silverharp, thank you for your thoughtful response, that must have taken some time. I suspect we will eventually agree to disagree; but that is not a problem. Here, in italics, are the portions of Adam Hamiltons arguments which struck me. Sadly inflation is woefully misunderstood in popular culture. People tend to think it is simply "rising prices", but this is incorrect. The formal dictionary definition of this word is "a persistent, substantial rise in the general level of prices related to an increase in the volume of money and resulting in the loss of value of currency". The key is the rising prices have to be driven by an increasing money supply. (emphasis mine) Currently many dictionaries explain inflation differently. Here is the definition from the American Heritage Dictionary. "A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services." This definition adds that inflation is represented in "a persistent decline in the purchasing power of money." It also adds credit into the definition of money supply. There are so many definitions that people cannot talk to one another on this subject anymore unless every deatail of a person's definition is spelled out. (I think that's by design; but that's another subject altogether.) I am old school economically speaking. The definition I accept of inflation is the most basic and simplest. The one that existed before all the monetary nonsense of the past 100 years. "Inflation is an increase in the supply of money," period end of quote. As Adam Smith's article develops you will see why I feel that is still the best definition. Prices are a complex thing and people have written and rewritten the definitions of inflation and deflation to try to capture that complexity. In this they err for the complexity defies a simple defitnition and requires a treatise. That is why Hamilton's presentation IMO is outstanding. He leaves inflation and deflation as the simple concepts they are (even more simple by the old definition I prefer) and shows the complexity of prices. Consider an example. If the Fed doubles the money supply and hence gasoline prices ultimately double, this is inflation. More dollars are bidding on the same amount of gasoline, driving up its nominal price. But if some calamity takes Saudi Arabia offline, and gasoline prices double, that has nothing to do with inflation. Supply contracted sharply, demand remained constant, and hence prices rose. These are two different scenarios leading to the same outcome, but only one is inflation.
And the reality is the prices of everything are derived from a complicated mix of the supply and demand I would add yet another set of complexities in today's prices. There is market intervention by governments with political agendas and additionally huge price swings caused by hedge funds with too much money so that prices do not reflect the fundamentals in the shorter term. Since separating out price effects is virtually impossible, it makes far more sense to look at the cause of inflation. That is money supplies increasing at faster rates than the underlying economy. If you think of price inflation as smoke, an effect, then why not look for the fire that creates it, the cause? This fire is excessive monetary expansion. When a fire initially flares brightly, there might not be smoke right away. But there sure will be if it keeps burning! Indeed if one follows his logic then this statement though odd can be true. We can be and are suffering what can be considered as "deflationary effects" in the midst of an inflation. It is true that credit is collapsing and loans are hard to come by. It is true that prices are down for many retail goods as retailers cut prices to compete to sell things. When the created money, still being held by banks, starts coming into the economy, when the dollar's role as the world's reserve currency tumbles, when the U.S Bond market breaks down, then the blazing fire that is the current monetary creation will begin to produce the smoke of rising prices. And I am terrified of how high they will go even for our simplest necessities. I did not respond to some of your questions e.g. "Where is your line in the sand" because I have no other view. To me, even though I could be wrong - wouldn't be the first time, the concept is as basic as 2 + 2. There is to me only one answer. The housing collapse is not yet complete - many more resets are coming - so there may be more deflationary symptoms on the road to inflation...but inflation is coming. The monetary base has been increased substantially...by definition there can only be one outcome. P.
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