School Me On Inflation

[ShaneEnochs]

How does inflation work in relation to the Federal Reserve and interest rates? I know inflation happens when the FED prints more money, thus devaluing the dollar, but what about interest rates? Do low interest rates drive inflation, or is it high interest rates?

If someone could respond as quickly as possible, I'd appreciate it ^_^

 

[hazek]

The only way the FED can artificially lower the interest is by contributing to the demand side of supply and demand of government bods deciding their price and rate. If the government couldn't sell all the debt they'd have to make it more lucrative for buyers by lowering their price and inversely raising their interest rates. I don't know how exactly they do it, it has something to do with buying bods from primary dealers, but that's basically it.

 

[Bossobass]

Monetary Inflation: Inflation is printing of money in excess of GDP.

There is no other definition.

Price inflation is a consequence of Monetary Inflation, not the cause.

The establishment loves to blame inflation on an increase in the price of widgets. "The average price of a barrel of oil has increased x%, sparking fears that inflation has reared its ugly head."

The establishment loves to blame inflation on the phenomenon of supply and demand. "The OPEC oil embargo has caused a severe shortage of oil, causing inflation in the price of gasoline."

The establishment likes to blame inflation on fear. "Fear of another war in the ME has sent oil prices soaring causing concerns over inflation across the board."

The establishment gets away with these headlines only because people aren't aware of the true cause of inflation.

Inflation is caused solely by the printing of money in excess of GDP.

Lowering interest rates causes an artificial demand for money. That would not work for very long without inflation because the demand would suck up the money and rates would rise. The artificial demand causes malinvestment which causes a bubble. Using regulations, tax incentives, immunity to prosecution and other carrots, the path to the preconceived bubble is greased to insure its success. The bubble bursts and there you have the business cycle.

Those who orchestrate the bubble get in on the ground floor, get out on the top floor and everyone else suffers the consequences.

Since the Fed took control of the USD, there has been a recession or depression every 4.2 years.

Bosso

 

[tod evans]

In only a few words, "A dollar buys less of a tangible item."

Here's a graph of gold from 1800-2010.

 

[Bruno]

$20 gold coin from 1913 is now worth $1600+
$20 bill from 1913 is now still worth $20, but doesn't buy what it used to. The gold still can.

The value of the gold remained relatively stable, the value of the dollar, not so much.

Prices rose as a result of monetary inflation.

 

[Travlyr]

Think of inflation like inflating a ball with air. The same concept applies to fiat money. As more and more money is printed and distributed throughout the markets it inflates the economy.

If inflation (money printing) is really rapid like doubling the money supply, then eventually prices of goods pretty much double because you have twice as many dollars chasing the same number of goods.

Imagine that it was legal for you to go to your basement and print as much money as you wanted without fear of going to jail. If you print a million dollars, then that is a drop in the bucket to the trillions already circulating so as you spend you million prices of goods would rise but it would be undetectable for the most part. But if you print a quadrillion dollars and spent it, then you would cause rapid price increases. Since you have a money printing machine you would not have any trouble buying food and shelter. The people that suffer are the people on fixed income, savers, and anyone who's income is not tied to inflation.

In fact money cannot be created out of nothing just like cars cannot be created out of nothing. It is an illusion. Printing irredeemable currency is really a transfer of money from production to the money printer.

 

[hazek]

Actually think of inflation as adding water to lemonade. The more water you add the more you dilute the lemonade and so the lemonade loses more and more of it's taste.

 

[Travlyr]

Actually think of inflation as adding water to lemonade. The more water you add the more you dilute the lemonade and so the lemonade loses more and more of it's taste.

This is a great way to see it.

 

[ShaneEnochs]

On the topic of gold, would an oz of gold now buy the exact same amount of stuff that it would in 1920? Or am I completely missing how this works?

 

[Travlyr]

On the topic of gold, would an oz of gold now buy the exact same amount of stuff that it would in 1920? Or am I completely missing how this works?

It is similar, but central bank money printing distort and manipulate the markets so much that it is really tough to know what value anything really holds presently.

Murray Rothbard's "The Mystery of Banking" is an excellent resource to understand sound money vs. fiat money.

 

[The Binghamton Patriot]

the manifestation of inflation, hoping we can make this a sticky

How does inflation work in relation to the Federal Reserve and interest rates? I know inflation happens when the FED prints more money, thus devaluing the dollar, but what about interest rates? Do low interest rates drive inflation, or is it high interest rates?

If someone could respond as quickly as possible, I'd appreciate it ^_^

I would concur with many of the previous statements, however I will go a step further and speak of the mechanization of inflation. When the federal reserve talks about "keeping interest rates low" through their open market committee, what they do is this: they have a rate which currently stands at 0%, called the LIBOR rate- its also called the "interbank" rate. I like to call it "the spigot". Under a fractional reserve banking system, which we have, it is a requirement for a bank to keep a certain percentage of all their liabilities (what they owe to their depositors) on hand in case people want to use their money (usually around 5-6% of all deposited money at one time will be held in "reserves" by the bank). The rest is lent out to whomever (banks, private firms, real estate developers etc) for a rate-which is ALWAYS higher than the rate at which the bank pays interest to its' depositors. The difference between the rate at which the bank lends, and the rate at which the bank pays is called the SPREAD. It covers the overhead and operational risk of the bank, in addition to providing a pretty consistent profit. When "The spigot" is at zero, it pretty much means that the credit flows like water. My point is- The higher the rate, the more vigilant the bank will be in lending, because it realizes it cannot get "cheap money" from the FED.

Now to the meaty part:

When a bank experiences a business day when its' depositors withdraw enough of their resources to essentially force the bank's level of "reserves" below the 5-6% rate at which they are held, the bank has to make up for this shortfall by borrowing, either from another member bank or from the FED itself. NOW- when the fed is forced to lend money to the banks so that they can meet their reserve requirements, they LEND IT TO THEM AT ZERO PERCENT. THEY GET FREE MONEY IN THE FORM OF NEWLY PRINTED ANDREW JACKSONS AND artificially created numbers, just placed on their balance sheet. Because the bank has lent the VOLUNTARY, REAL, savings of people, in order to make up for this, the fed must "create" the funds to provide for the shortfall. The best way to understand this is to think about wealth creation. You and me have to work everyday, and produce either a tangible good, or a service that remunerates us for our labor. The difference between artificial credit and voluntary savings is that voluntary savings is the end result of man's productive efforts.

Next, to the REAL deception.

Alot of people ask "Why does the fed buy so much of our debt, and where do they get the money?"

Here is the answer to that: When the gov't looks to borrow money, the usual purchasers of their debt are institutions (money center banks, investment houses etc). When the institution wins the bidding for the gov't bonds, they create accounts on their books from which the treasury department can "draw". So, essentially, the treasury department is drawing the VOLUNTARY SAVINGS of depositors from the banks, who, following the purchase of gov't debt, almost immediately "sell" the government paper to the federal reserve in exchange for actual cash, or line item values on the balance sheet. THIS IS WHY THE BANKS ARE CRIMINAL. They are the middle man between the FED, and the Treasury dept, and why so many people complain about the revolving door. The bank essentially takes the real wealth created, and replaces it with paper that on it's face resembles money. With sound money, the three way between the treasury, fed, and banks would be forced to lend REAL ASSETS, and be accountable for bad risks. This is why gold is so important.

Now, in terms of prices going up, this should be very easy. Imagine you are at an auction, I will call it the "worlds auction". At the world's auction you have one hundred products, that represent all the exchangeable goods in the world. There is also 1000 "dollars" in circulation, and all of them will be used at "the worlds" auction. So we go to the world's auction and we find out that each product, on average will sell for about ten "dollars" (1000/100=10). Now, lets say the guys controlling the medium of exchange decided they want to print more of it, and they inject 1000 more dollars into the economy of the world. Now, there is 2,000 "dollars" to spend at the worlds auction. What happens? Each product is now worth 2000/100 = 20. When people go to bid for all the products at the worlds auction, since they have more money, they will essentially "bid up" the prices of goods, as they will be competing with others, who have more money. What do you notice? No more products have been created, and no wealth has been created. Productive capacities have not changed. The only thing that has changed is the nominal, face value of what people are holding in their hands at the auction. The reason why inflation is so hard to track and predict, is due to the varying times at which the new "dollars" enter circulation, and when they are spent. When a significant number of players bid for raw materials (to produce their value added products), they are often times forced to compete with players who get the money FIRST (the military industrial complex, the banks, healthcare companies, PUBLIC EDUCATION INSTITUTIONS). These players who get the money first, naturally get it straight from the gov't printing presses and could care less about where it came from (taxpayers and real savings). For those of you wondering why all the prices of raw materials are going up, here is your answer. Its important to understand, that because they get the money first, they will suffer the effects the least. By the time the profits and wages are paid to the factors of production (people who work for the player, and the firms that make the staple, base good that the player augments), the prices have been bid up, and the little guy is forced to PAY HIGHER PRICES.

that is the manifestation of inflation. The mods better make this a STICKY.

Source: MBA, 2 years experience as an Equity Analyst, level 2 CFA and I currently price, structure, and source inventory/real asset based loans for money center banks and private equity groups. Feel free to PM me with questions.

 

[hazek]

On the topic of gold, would an oz of gold now buy the exact same amount of stuff that it would in 1920? Or am I completely missing how this works?

If the supply of money was constant which is one half of every transaction then the prices we have on goods and services would depend solely on the supply and demand of those goods and services. Imagine the money supply as a ruler that the supply and demand for goods and services measures up to all the time and when the FED increases the money supply they effectively change this ruler distorting the prices and making it impossible for the market to figure out what the real price of goods and services is.

An ounce of gold wouldn't buy exactly the same goods and services as it did in 1920 because:
-1st there is more gold mined today than there was back then making the ruler bigger
-2nd the supply and demand of those goods has probably changed

 

[Steven Douglas]

An ounce of gold wouldn't buy exactly the same goods and services as it did in 1920 because:
-1st there is more gold mined today than there was back then making the ruler bigger
-2nd the supply and demand of those goods has probably changed

-3rd - the real scarcity of physical gold in circulation, which would otherwise be a determining factor of its value, is massively distorted by many of the inflated paper derivatives, with multiple conflicting claims to the same physical gold which the paper misrepresents, which FREELY CIRCULATE as if it really was gold.

Whether talking about gold, another commodity, services, or even irredeemable fiat currency, it is not the total "quantity in existence" that determines its value (relative to demand). It is the total supply IN CIRCULATION, which is ALWAYS a fraction of the total in existence. That's why China could wreak havoc on both our economies if it simply dumped US dollar holdings onto the market all at once, even if the Fed stepped in an "bought" it all up.

Supply = Amount Available for Circulation, which is why savers are absolutely vital - traditionally the best friends of the spenders in the economy - because taking a unit of something out of circulation increases the value of all like units which are in circulation.

Gold has been produced at an average of 2% per year since 1850. The economy itself has grown MANY times that amount.

So no, gold should not have just "kept its value", any more than silver should have. It should have increased in value in a growing economy, which means that it should buy many times more goods and services than it did back in 1920. Like an order of magnitude more.



As for inflation, it's funny to me that everyone knows automatically that counterfeiting is wrong - but try to search for anyone who has described the actual mechanics of counterfeiting for the reasons why it is wrong - and especially as it relates to counterfeits which are SO good that they remain in circulation. Good luck with that search. If you find it, you'll understand monetary inflation.

If the Fed, banks, government, and mainstream economists had their way, we would have NO WORD to describe monetary inflation. They want inflation described and defined SOLELY in terms of a general increase in prices - REGARDLESS OF IT CAUSES (which, naturally, and doncha know, has many causes).

Price inflation is an effect with many possible causes. Currency inflation is a single cause with many effects, the long term of which IS price inflation.

There are many ways to describe the mechanics of monetary inflation. But one of the analogies I prefer, although not perfect, describes a dynamic which hides the effects of inflation:

A vampire injects a liter of water (fake blood) into one vein while drinking a liter of real blood from another. The victim is weakened, but not dead. Bone marrow will produce more blood over time, so the vampire can simply rinse and repeat. You can multiply the victims by chaining them all together, hooking them to a giant dialysis machine of sorts which pools the blood into a single collective supply. Now you don't have to touch any of the victims. You can inject water into the pooled supply and siphon blood from a single spigot. If the vampires is not too greedy, it can sustain this practice for a very long time (like a hundred years in the case of the Fed).

Likewise, monetary inflation dilutes the lifeblood - the actual productivity of the economy - by injecting it with something of ZERO value, while siphoning real value. As long as it says "dollar" there is no way for the "blind" economy to know whether it is an old blood-rich dollar they are accepting, or the new, clear, worthless fluid of a counterfeit.

The VALUE of what is injected comes straight from the total supply - NOT the supply in circulation. What makes it especially pernicious is that by injecting worthless currency into circulation, it places MORE DEMAND on the total currency in existence (like a victim with diluted blood which needs to pump more blood to get the same oxygen and other nutrients flowing to cells).

That's what is meant by "stimulate" the economy. If I take nutrients from the food you eat, your body WILL FEEL IT. And you will be forced to consume more to get the same nutrients as before.

Part of the delay between currency inflation (CAUSE) and price inflation (EFFECT) is that those who have first use of the counterfeited money are bidders of specific goods and services (like houses and construction in the case of a bubble). It takes time before that money is then spent to other uses, which eventually drives those prices prices up in return. Then, of course, the entire system is distorted by those who are in a position to raise prices in anticipation of inflation, leading some true boneheads to conclude that fear, greed and speculation is a "cause" of inflation, rather than the practice which SPAWNED such fear, greed and speculation in the first place.

 

[Seraphim]

Sticky. I agree.

Anti-Counter fitters unite.

I would concur with many of the previous statements, however I will go a step further and speak of the mechanization of inflation. When the federal reserve talks about "keeping interest rates low" through their open market committee, what they do is this: they have a rate which currently stands at 0%, called the LIBOR rate- its also called the "interbank" rate. I like to call it "the spigot". Under a fractional reserve banking system, which we have, it is a requirement for a bank to keep a certain percentage of all their liabilities (what they owe to their depositors) on hand in case people want to use their money (usually around 5-6% of all deposited money at one time will be held in "reserves" by the bank). The rest is lent out to whomever (banks, private firms, real estate developers etc) for a rate-which is ALWAYS higher than the rate at which the bank pays interest to its' depositors. The difference between the rate at which the bank lends, and the rate at which the bank pays is called the SPREAD. It covers the overhead and operational risk of the bank, in addition to providing a pretty consistent profit. When "The spigot" is at zero, it pretty much means that the credit flows like water. My point is- The higher the rate, the more vigilant the bank will be in lending, because it realizes it cannot get "cheap money" from the FED.

Now to the meaty part:

When a bank experiences a business day when its' depositors withdraw enough of their resources to essentially force the bank's level of "reserves" below the 5-6% rate at which they are held, the bank has to make up for this shortfall by borrowing, either from another member bank or from the FED itself. NOW- when the fed is forced to lend money to the banks so that they can meet their reserve requirements, they LEND IT TO THEM AT ZERO PERCENT. THEY GET FREE MONEY IN THE FORM OF NEWLY PRINTED ANDREW JACKSONS AND artificially created numbers, just placed on their balance sheet. Because the bank has lent the VOLUNTARY, REAL, savings of people, in order to make up for this, the fed must "create" the funds to provide for the shortfall. The best way to understand this is to think about wealth creation. You and me have to work everyday, and produce either a tangible good, or a service that remunerates us for our labor. The difference between artificial credit and voluntary savings is that voluntary savings is the end result of man's productive efforts.

Next, to the REAL deception.

Alot of people ask "Why does the fed buy so much of our debt, and where do they get the money?"

Here is the answer to that: When the gov't looks to borrow money, the usual purchasers of their debt are institutions (money center banks, investment houses etc). When the institution wins the bidding for the gov't bonds, they create accounts on their books from which the treasury department can "draw". So, essentially, the treasury department is drawing the VOLUNTARY SAVINGS of depositors from the banks, who, following the purchase of gov't debt, almost immediately "sell" the government paper to the federal reserve in exchange for actual cash, or line item values on the balance sheet. THIS IS WHY THE BANKS ARE CRIMINAL. They are the middle man between the FED, and the Treasury dept, and why so many people complain about the revolving door. The bank essentially takes the real wealth created, and replaces it with paper that on it's face resembles money. With sound money, the three way between the treasury, fed, and banks would be forced to lend REAL ASSETS, and be accountable for bad risks. This is why gold is so important.

Now, in terms of prices going up, this should be very easy. Imagine you are at an auction, I will call it the "worlds auction". At the world's auction you have one hundred products, that represent all the exchangeable goods in the world. There is also 1000 "dollars" in circulation, and all of them will be used at "the worlds" auction. So we go to the world's auction and we find out that each product, on average will sell for about ten "dollars" (1000/100=10). Now, lets say the guys controlling the medium of exchange decided they want to print more of it, and they inject 1000 more dollars into the economy of the world. Now, there is 2,000 "dollars" to spend at the worlds auction. What happens? Each product is now worth 2000/100 = 20. When people go to bid for all the products at the worlds auction, since they have more money, they will essentially "bid up" the prices of goods, as they will be competing with others, who have more money. What do you notice? No more products have been created, and no wealth has been created. Productive capacities have not changed. The only thing that has changed is the nominal, face value of what people are holding in their hands at the auction. The reason why inflation is so hard to track and predict, is due to the varying times at which the new "dollars" enter circulation, and when they are spent. When a significant number of players bid for raw materials (to produce their value added products), they are often times forced to compete with players who get the money FIRST (the military industrial complex, the banks, healthcare companies, PUBLIC EDUCATION INSTITUTIONS). These players who get the money first, naturally get it straight from the gov't printing presses and could care less about where it came from (taxpayers and real savings). For those of you wondering why all the prices of raw materials are going up, here is your answer. Its important to understand, that because they get the money first, they will suffer the effects the least. By the time the profits and wages are paid to the factors of production (people who work for the player, and the firms that make the staple, base good that the player augments), the prices have been bid up, and the little guy is forced to PAY HIGHER PRICES.

that is the manifestation of inflation. The mods better make this a STICKY.

Source: MBA, 2 years experience as an Equity Analyst, level 2 CFA and I currently price, structure, and source inventory/real asset based loans for money center banks and private equity groups. Feel free to PM me with questions.

 

[Steven Douglas]

An ounce of gold wouldn't buy exactly the same goods and services as it did in 1920 because:
-1st there is more gold mined today than there was back then making the ruler bigger
-2nd the supply and demand of those goods has probably changed

-3rd - the real scarcity of physical gold in circulation, which would otherwise be a fundamental determining factor of its value, is massively distorted by many of the inflated paper derivatives, with multiple conflicting claims to the same physical gold which the paper misrepresents, which FREELY CIRCULATES as if it really was gold.

Whether talking about gold, another commodity, services, or even irredeemable fiat currency, it is not the total "quantity in existence" that determines its value (relative to demand). It is the total supply IN CIRCULATION, which is ALWAYS a fraction of the total in existence. That's why China could wreak havoc on both our economies if it simply dumped (sold at a massive discount) US dollar holdings onto the market all at once - even if the Fed stepped in and "bought" it all up.

Supply = Amount Available for Circulation, NOT the total in existence. Whatever is not in circulation (not put up for sale, not competing, not in circulation) does NOT determine the value. It is only when a unit is put on the market and made available for consumption that it becomes a value determinant. In other words, the gold you have buried in your backyard only means that the value of all other gold does not drop accordingly. But that amount buried could be one ounce or a trillion tons, and the effect would be the same. Even if everyone knew the amount that was buried, or withheld from circulation, it would only place precautionary limits on a rise in value, but if left buried long enough, normalcy bias would take over, as it would be assumed that whatever was left buried would continue to remain buried.

Amount in Circulation as a value determinant is why savers are absolutely vital - traditionally the best friends of the spenders in an economy with a sound currency - because taking a unit of something out of circulation increases the value of all like units which are in circulation. The Fed system deliberately negates this natural effect with an artificial counter-effect which erodes the power and value of savings, in the name of "price stability". And by "stability" they mean moderate perpetual increase in prices = GOOD, while a general decrease in prices = BAD. For whom it is good or bad is another question altogether. Pay no attention to that, because it's "the economy" which is most important; not "whose economy".

As for gold, it has been produced at an average of 2% per year since 1850. The economy itself has grown MANY times that amount.

So no, gold should not have just "kept its value", any more than silver should have. It should have increased in value in a growing economy, which means that it should buy many times more goods and services than it did back in 1920. Like an order of magnitude more.


As for inflation, it's funny to me that everyone knows automatically that counterfeiting is wrong - but try to search for anyone who has described the actual mechanics of counterfeiting for the reasons why it is wrong - and especially as it relates to counterfeits which are SO good that they remain in circulation. Good luck with that search. If you find it, you'll understand monetary inflation.

If the Fed, banks, government, and mainstream economists had their way, we would have NO WORD to describe monetary inflation. They want inflation described and defined SOLELY in terms of a general increase in prices - REGARDLESS OF IT CAUSES (which, naturally, and doncha know, has many causes).

Price inflation is a generalized effect with many possible causes. Currency inflation is a single specific cause with many effects, the long term of which IS price inflation.

There are many ways to describe the mechanics of monetary inflation. But one of the analogies I prefer, although not perfect, describes a dynamic which hides the effects of inflation:

A vampire injects a liter of water (fake blood) into one vein while drinking a liter of real blood from another. The victim is weakened, but not dead. Bone marrow will produce more blood over time, so the vampire can simply rinse and repeat (while encouraging its victim to work hard, eat right and stay healthy for that reason). Vampires can come together in a cooperative which multiplies the number of victims by chaining them all together, hooking them to a giant dialysis machine of sorts which pools the blood into a single collective supply. Now you don't have to touch any of the victims directly. You can inject water into the pooled supply and siphon blood from a single spigot. If the vampires are not too greedy (like those stupid, greedy Zimbabwe vampires), they can sustain this practice for a very long time (like a hundred years in the case of the Fed).

Likewise, monetary inflation dilutes the lifeblood - the actual productivity of the economy - by injecting it with something of ZERO value, while siphoning real value. As long as it says "dollar" there is no way for the "blind" economy to know whether it is an old blood-rich dollar they are accepting, or the new, clear, worthless fluid of a counterfeit.

The VALUE of what is injected comes straight from the total supply - NOT the supply in circulation. What makes it especially pernicious is that by injecting worthless currency into circulation, it places MORE DEMAND on the total currency in existence (like a victim with diluted blood which needs to pump more blood to get the same oxygen and other nutrients flowing to cells).

Part of the delay between FOCUSED currency inflation (CAUSE) and DIFFUSED price inflation (EFFECT) is that those who have first use of the counterfeited money are bidders of specific goods and services (like houses and construction in the case of a bubble). It takes time before that money is then spent to other uses, which eventually drives those prices prices up in return. Then, of course, the entire system is distorted by those who are in a position to raise prices in anticipation of inflation, leading some true boneheads to conclude that fear, greed and speculation is a "cause" of inflation, rather than the practice which SPAWNED such fear, greed and speculation in the first place.

 

[Seraphim]

Also a good sticky candidate!

STICKY! STICKY!

**Chants**

lol.

-3rd - the real scarcity of physical gold in circulation, which would otherwise be a determining factor of its value, is massively distorted by many of the inflated paper derivatives, with multiple conflicting claims to the same physical gold which the paper misrepresents, which FREELY CIRCULATE as if it really was gold.

Whether talking about gold, another commodity, services, or even irredeemable fiat currency, it is not the total "quantity in existence" that determines its value (relative to demand). It is the total supply IN CIRCULATION, which is ALWAYS a fraction of the total in existence. That's why China could wreak havoc on both our economies if it simply dumped US dollar holdings onto the market all at once, even if the Fed stepped in an "bought" it all up.

Supply = Amount Available for Circulation, which is why savers are absolutely vital - traditionally the best friends of the spenders in the economy - because taking a unit of something out of circulation increases the value of all like units which are in circulation.

Gold has been produced at an average of 2% per year since 1850. The economy itself has grown MANY times that amount.

So no, gold should not have just "kept its value", any more than silver should have. It should have increased in value in a growing economy, which means that it should buy many times more goods and services than it did back in 1920. Like an order of magnitude more.



As for inflation, it's funny to me that everyone knows automatically that counterfeiting is wrong - but try to search for anyone who has described the actual mechanics of counterfeiting for the reasons why it is wrong - and especially as it relates to counterfeits which are SO good that they remain in circulation. Good luck with that search. If you find it, you'll understand monetary inflation.

If the Fed, banks, government, and mainstream economists had their way, we would have NO WORD to describe monetary inflation. They want inflation described and defined SOLELY in terms of a general increase in prices - REGARDLESS OF IT CAUSES (which, naturally, and doncha know, has many causes).

Price inflation is an effect with many possible causes. Currency inflation is a single cause with many effects, the long term of which IS price inflation.

There are many ways to describe the mechanics of monetary inflation. But one of the analogies I prefer, although not perfect, describes a dynamic which hides the effects of inflation:

A vampire injects a liter of water (fake blood) into one vein while drinking a liter of real blood from another. The victim is weakened, but not dead. Bone marrow will produce more blood over time, so the vampire can simply rinse and repeat. You can multiply the victims by chaining them all together, hooking them to a giant dialysis machine of sorts which pools the blood into a single collective supply. Now you don't have to touch any of the victims. You can inject water into the pooled supply and siphon blood from a single spigot. If the vampires is not too greedy, it can sustain this practice for a very long time (like a hundred years in the case of the Fed).

Likewise, monetary inflation dilutes the lifeblood - the actual productivity of the economy - by injecting it with something of ZERO value, while siphoning real value. As long as it says "dollar" there is no way for the "blind" economy to know whether it is an old blood-rich dollar they are accepting, or the new, clear, worthless fluid of a counterfeit.

The VALUE of what is injected comes straight from the total supply - NOT the supply in circulation. What makes it especially pernicious is that by injecting worthless currency into circulation, it places MORE DEMAND on the total currency in existence (like a victim with diluted blood which needs to pump more blood to get the same oxygen and other nutrients flowing to cells).

That's what is meant by "stimulate" the economy. If I take nutrients from the food you eat, your body WILL FEEL IT. And you will be forced to consume more to get the same nutrients as before.

Part of the delay between currency inflation (CAUSE) and price inflation (EFFECT) is that those who have first use of the counterfeited money are bidders of specific goods and services (like houses and construction in the case of a bubble). It takes time before that money is then spent to other uses, which eventually drives those prices prices up in return. Then, of course, the entire system is distorted by those who are in a position to raise prices in anticipation of inflation, leading some true boneheads to conclude that fear, greed and speculation is a "cause" of inflation, rather than the practice which SPAWNED such fear, greed and speculation in the first place.

 

[No Free Beer]

bing

+rep

 

[Kregisen]

Inflation is caused by many things. Fractional banking causes inflation. Printing money causes inflation. But another big area of inflation is determined by the propensity to consume, which differs in different health levels of the economy. For example, in a recession, deflation many times occurs because people start saving the money they receive because they don't know how much longer they'll keep their job. This is the logic behind the "economic stimulus" that many economists recommend during recessions, to combat deflation/lack of spending. I'm against the economic stimuli not because they may help, but because the federal government shouldn't have that role in the economy.

When a bank experiences a business day when its' depositors withdraw enough of their resources to essentially force the bank's level of "reserves" below the 5-6% rate at which they are held, the bank has to make up for this shortfall by borrowing, either from another member bank or from the FED itself. NOW- when the fed is forced to lend money to the banks so that they can meet their reserve requirements, they LEND IT TO THEM AT ZERO PERCENT.

The discount rate (rate which banks get from the fed) is extremely low, but has it ever hit 0%?

The federal funds rate (rate which banks trade with eachother) on the other hand, did get very low to 0% in 2010...

I don't have an MBA like Birmingham Patriot but I've taken several finance and economics courses.

 

[The Binghamton Patriot]

Inflation is caused by many things. Fractional banking causes inflation. Printing money causes inflation. But another big area of inflation is determined by the propensity to consume, which differs in different health levels of the economy. For example, in a recession, deflation many times occurs because people start saving the money they receive because they don't know how much longer they'll keep their job. This is the logic behind the "economic stimulus" that many economists recommend during recessions, to combat deflation/lack of spending. I'm against the economic stimuli not because they may help, but because the federal government shouldn't have that role in the economy.







The discount rate (rate which banks get from the fed) is extremely low, but has it ever hit 0%?

The federal funds rate (rate which banks trade with eachother) on the other hand, did get very low to 0% in 2010...

I don't have an MBA like Birmingham Patriot but I've taken several finance and economics courses.

Nominal rate= real interest rate+ inflation. Although I hate to cite Irving Fischer, I think this equation holds true in this case, and in many others as well.

If the fed is loaning out money @ 0-1%, the amount actually gained (earned by the fed) through the overnight/30/day/6 month/1 year loan is actually closer to ZERO and in fact NEGATIVE when you factor in the erosion of value driven by the inflation. So real rates are probably closer to zero. Libor rates are the interbank rates, which I cited above. I probably should have cited the difference between the real, and nominal rates because the lack of clarity will lead to some confusion, and for that I apologize. But that is a lesson for another day. The fed is also called the "Lender of Last Resort" for a reason. Banks are encouraged to lend @ libor rates, but are occasionally forced to borrow from the fed. Sorry for the SLIGHT confusion.

http://en.wikipedia.org/wiki/Libor

Also:

It's BING. BINGHAMTON.

 

[Steven Douglas]

Whatever you do when discussing inflation, DO NOT REFER TO IT SIMPLY AS INFLATION. If you do, the word magician ideologues will pounce and immediately obfuscate, because they have long managed to define inflation, by default, as A general increase in prices and fall in the purchasing value of money..

Currency Inflation ≠ Price Inflation , even though they very much do have a cause and effect relationship.

Price Inflation = general and diffused effect, with multiple causes
Currency Inflation = identifiable and specific causes with multiple effects

Don't buy into or get caught in the trap of discussing "price inflation" alone. Be VERY specific when referring to inflation, so that such confusion is impossible.