In the bigger picture which takes place over a number of years and perhaps decades the continuing inflation/deflation debate is asinine.

Do you remember hot fudge sundaes with real whipped cream and a maraschino cherry for $0.25? Do you remember gasoline for less than 30 cents per gallon? Do you remember nickel candy bars? Do you remember getting a hamburger, french fries, and a vanilla milk shake at MacDonalds and getting about fifty cents change from a dollar?

Why aren't those items still the same price? Was it the continual printing of money that caused the rise in prices or was it caused by credit? Was the 1950's dollar which bought so much stuff worth as much as the 1913 dollar? Why did Nixon have to close the gold window in 1971; was that credit related?

The statement is often made, particularly by deflationists, that both credit and money must be taken into account when considering what the state of affairs at any point in time is. That statement is correct but stupid. We aren't interested in what's happening at any point in time; we are interested in what is going to happen. "I'll build my house on this floodplain; it isn't flooded now." If the time frame of one's interest is the lifetime of a flea we are experiencing deflation, OK!

But surely the above questions should have stimulated the grey matter to ponder which caused the change from 1913 to today in the price of the goods we buy now. I trust you have not concluded it was an increase in credit.

Here is the relationship that governs. We are on some remote island in harmony with our "Survivor" title. Today's "reward" is the ability to eat some of those foods we love. We are each given $1000. We can't take the excess unspent money home with us. Up for auction is a juicy hamburger with all the fixin's. There are five more items up for auction and the auction itself can be closed at any time without warning. What am I bid for the hamburg? I seriously doubt the auction will close for less than $500. What if we were given $1 at the beginning? The auction would close for about 50 cents wouldn't you think? And if we were give a million dollars the auction would close for about $500,000 dollars.

The predominant price mechanism is dollars relative to the supply of goods and services.

And prices, given a stable society that was not continually printing money, would stabilize at some level and stay there. So the primary driver of prices is the supply of currency available to exchange for the goods and services; period end of quote. Increase currency and you increase prices. One hundred years of U.S. history confirms that fact. And it is true everywhere else in the world too.

Now credit admittedly affects prices as well. But it does so as an adjunct. It serves a secondary and subservient role. Credit recently has taken on a much larger role than it usually has relative to prices because there was a huge credit bubble; the like of which has probably never been seen before.

What does credit as an adjunct to the amount of currency do? It creates an illusion. If credit is loose and anyone can get it, then people will seem to have more dollars to spend and prices will increase accordingly. But do they actually have more currency? Not if one does a true balance sheet look at their position; looking at assets AND LIABILITIES.

So credit can cause a rise in prices but it is an illusory rise. It will come back out of the system in time and the prices will fall. The same would be true of currency, but currency systems never have the currency removed because it is not politically acceptable. Particularly is that true here in the U.S. where politicians need to be elected every two or four years. They have not and will not vote against their own personal interests. They became politicians for the benfits it could bring them and they will not jeopardize that. To finish out the thought regarding credit, it cycles like the tides to some extent, and we just came off a high tide with the moon in perfect alignment and a high snowmelt from a rainy winter. Still the credit will drain and we will go back to the relationship where prices are primarily determined by currency in the system.

Now, a credit based monetary system, as opposed to monetary based system with gold and silver coinage, will always have some credit in it. It has to have some credit to function. If it has more than the usual prices will be higher than just the currency relationship would dictate. If it has less than usual prices will fall to a level below what the currency relationship would dictate.

Credit has been blowing up all over the place and as a result there is very little credit in the system and the prices are well below what the currency relationship alone would dictate. If credit is restored to normal, prices will rise because the currency in the system HAS BEEN DRAMATICALLY INCREASED. Stop looking at how things are now. That is a temporary illusion caused by credit. Another way of saying this is that currency controls prices and credit controls the mispricing that takes place within a society.

The only way the deflationists win the argument is if the failed credit causes the entire financial system to come down. If that happens dollars will not become scarcer and more valuable, they will become a useless novelty object and the world will move on without the U.S. in any kind of dominant role. The U.S. will be using some other country's currency or one that has been made to deal with the situation. Likely, it will be a new one with a gold component. After 40 years of inflating their own currencies and complicating their own economies by money printing to avoid a competitive trade disadvantage, the rest of the world has had enough. They are saying so, plainly and loudly.

Case (1) The U.S. recovers and gets their credit back to normal again. Prices within the U.S. rise very substantially.

Case (2) The U.S. in an effort to get their credit relationship back to normal overprints and causes a currency crisis which devolves into hyperinflation.

Case (3) Huge credit failure overwhelms the U.S. government's ability to print quickly enough and the entire financial system collapses. At that point who outside the U.S. system wants U.S. dollars? They don't become scarce as they did in the 30's they become superfluous.

In all cases gold rises substantially in value to the currency held by U.S. citizens at the time.

P.