What Causes Inflation

Price inflation is commonly thought to be caused by "too much money chasing too few goods." The general price level is indeed correlated with the money supply, but correlation should not be confused with causation. In a modern economy, prices are seldom driven by the money supply. More commonly, the money supply reacts to changes in the general price level.

Credit Money versus Commodity Money

It's easy to understand how the money supply can drive prices when a commodity like gold is used as money. In the gold rush days, California was basically on a barter system in which gold traded for goods and services. Gold was an asset for the holder and a liability for no one. As more gold was mined by private enterprise, monetary wealth in California increased. Indeed it increased much faster than the available supply of goods and services, so prices in terms of gold naturally rose.

Gold once comprised the monetary base, but today it is just another commodity. In a modern fiat money system, the monetary base is created by the central bank. However base money is a minor part of the money supply. Most of the money we use is credit issued by private banks in the form of deposits. Bank deposits are accepted as money because of the promise that they can be converted into base money on demand.

A bank loan increases the money supply but does not increase net wealth. The borrower receives a deposit that he can use as money, but he owes the bank that amount. Thus bank money behaves differently from base money. A bank can issue credit up to a prescribed multiple of its own capital. Within that constraint, the growth of bank money depends only on the demand from the public and the willingness of banks to lend. To understand what causes inflation today, we must therefore determine what creates the demand for credit.

Effects Related to the Price of Credit

The amount of bank money created is a function of many economic variables, including the price of credit which the central bank controls. The central bank can easily increase the price of credit enough to make borrowing unprofitable, stifle growth of the money supply, and even reduce total economic output. That would result in increased unemployment and possibly price deflation.

Conversely the central bank can easily reduce the price of credit, but the results are not symmetric. When the economy is operating well below capacity, cheaper credit will usually increase output without a significant increase in prices up to the point of nearly full employment. Thereafter the effects of cheap credit will generally lead to higher prices.

Demand for Credit and its Effects

The demand for credit arises mainly out of the desire to finance (1) new enterprise, (2) consumer spending, or (3) speculative investment. Let's briefly examine how each of these affects the money supply and prices.

1. A new enterprise or an existing enterprise planning to expand production requires funds well ahead of the expected return from sales. New production is often financed with bank money, and the whole process has little effect on current prices. As the economy grows however, the amount of credit must grow in support. Indeed if credit were curtailed, the economy would stagnate for lack of adequate liquidity.
2. Money borrowed for consumer purchases implies the availability of existing products whose prices have already been set by the sellers. Such borrowing increases the money supply without affecting those prices. However where supply falls short of demand, prices on consumer goods may rise, at least temporarily. But supply shortages tend to occur in isolated cases and are usually short-lived. They seldom have a lasting effect on the general price level.
3. Money borrowed for speculative purposes mainly affects asset prices, particularly stocks and real estate. If the borrowing cost is set too low for an extended period, asset prices can become inflated. This creates a money illusion that can lead to a relaxed attitude by consumers toward higher prices, and result in an increase in the general price level.

Effects of Government Deficit Spending

Government deficit spending is normally financed by borrowing from the private sector. On balance, such borrowing and spending has no effect on the amount of base money, though it does increase the net financial wealth of the private sector in the form of Treasury securities. However contrary to conventional wisdom, there is no significant correlation between government deficit spending and price inflation.

If the government were unable to obtain funds through taxes or bond sales, it may resort to printing money to spend. If continued long enough, such spending would end in hyperinflation. This occurs infrequently and mainly as a result of serious corruption, revolution, or war. Hyperinflation is quite different in origin and character from the low level inflation that exists in most fiat money systems today.

A Case History - Inflation in the 1970s

During the 1970s, the US experienced a significant inflation in which the consumer price index rose at an annualized rate of 7.5%. However M1 rose relative to the real GDP at an annualized rate of about 3%. Clearly something besides an excess of transaction money drove that inflation.

A major factor was the roughly ten-fold increase in the price of oil resulting from two oil embargoes by OPEC. That led to a sharp increase in material costs in several important industries which had to be passed on as higher consumer prices. However that was not the only important cause of the inflation during the period.

Key industries were dominated by powerful corporations, some of which had the clout to set prices. This in turn enabled strong unions to gain generous wage contracts, sometimes well above the growth in labor productivity. Cost of Living Adjustments [COLAs] in the contracts added a positive feedback effect on wage growth. The benefits achieved by unions were mainly in the manufacturing sector, but gradually spread to the service sector.

With labor the main cost in most consumer items, the result was a cost-push inflation that became a serious wage-price spiral. Increasing wages helped enable consumers to absorb the rising prices imposed by producers. However these factors, together with the demands for expanding production, required a larger money supply to support it. As profit-seeking enterprises, banks were more than happy to lend to creditworthy borrowers, and so the money supply grew.

There are numerous forces that apply upward pressure to prices which are not driven by money supply growth. Global competition now limits the power of many domestic producers to set prices. But less competitive sectors still exist and contribute to a long term upward bias in prices. As prices rise, the money supply growth must necessarily keep pace.

Disclosure: long

Comments

[Alan von Al...:]

"The central bank can ... reduce total economic output. That would result in increased unemployment and possibly price deflation."

Oh, that's what happened, eh?

2008 Dec 25 07:33 AM

[patio:]

"The demand for credit arises mainly out of the desire to finance (1) new enterprise, (2) consumer spending, or (3) speculative investment. Let's briefly examine how each of these affects the money supply and prices"

I see no demand in any of these areas, for a long time to come.
And where demand exists, the banks are back to very tight criteria to qualify for credit, as it should be.

2008 Dec 25 08:32 AM

[paxjds:]

A 1935 dollar bill will not buy you a couple of loaves of bread anymore at the grocery today. A 1 0z. St Gaurdens gold coim has gone up from $35 to over $850 since 1935, a 2400% increase, More than enough to keep up with the rising cost of bread. Gold was and still is the ultimate commodity through good times and bad times. The author can keep apparent love for fiat currencies. As money suppies increase and INFLATE around the world due to governments bailouts and stimualant packages, gold will raise again to a new base level much higher than today. A fiat buck, pound, yen etc will buy even less bread. GOLD is the ultimate currency, not governments printing presses.

2008 Dec 25 08:42 AM

[NOWHEREMAN:]

It doesn't really matter what currency or commodity one wishes to use. You can wail over the cost of Bread or a Hamburger or whatever in the language of your choice.

In a worldwide crunch, the consumer decides what they are willing to spend and for what. Right now the world's consumers are unwilling to add on debt.

They have seen their own wealth disappear, see no respite and are waiting to lose their jobs.

The Media Hype is 24/7. Politicians are Corrupt. Enron Madoff and the Idiot Governors from the Land of Lincoln, the stock market is also corrupt.

Good luck getting people to spend. IMHO

2008 Dec 25 09:19 AM

[Dave Wrixon:]

Yes, but in the current environment, money supply is being rapidly expanded by the Fed at a time when consumer demand is imploding. By your own argument that can only result in a huge increase in inflation in the medium-term. Of course in the longer-term that inflation will be reined back in, but what all this means is that means to growth is that it is collapsing in the short-term, stability will return over the medium term, but the long term prospects are very subdued. In other words the Binge Drinker that has been making Merry will stop being violently sick, will feel a bit better after taking medication, but will have a prolonged hangover.

2008 Dec 25 09:21 AM

[Sigmund:]

As I recall there is the monetary base, currency in circulation and bank reserves. Bank reserves are a fractional component of bank deposits and bank capital. Banks create money by making loans. If the fractional reserve rate is 10%, a dollar of deposits, or bank capital can become ten dollars. How quickly we get from one dollar to ten dollars depends on how fast the banks and borrowers enter into transactions. The velocity of money matters greatly. As to prices, if the quantity supply of money (the monetary base), and its velocity are constant, the general level of price will be constant. You may well want to buy a great many goods and services, if you are limited to your currency in hand, your consumption will be moderate. If you can readily obtain credit money, your consumption will expand. If the rate of credit money expands faster than production, prices will rise. That rise in prices is the result of excess credit money. As Dr. Friedman said, and I paraphrase; 'money is everywhere and always the cause of inflation'. Your explanation gets it wrong.

2008 Dec 25 09:23 AM

[Dave Wrixon:]

Frankly this is rubbish. The reputation of Gold has evaporated. People generally no longer think of money as being backed by Gold. The Ultimate currency is that which is on the ascendancy. Despite temporary set backs against a dollar that is being over inflated by technical factors and misguided faith, the currencies that will perform over the medium term are the Yuan, Ruble and Rupee. The Euro will continue on its path of temporarily assuming the status of the International medium of exchange. The dollar by contrast is about to tank, and this time it will stay tanked for the foreseeable future. I am sure many Americans will buy gold in desperation and, as safe haven against the collapsing dollar, it will be better than holding cash in dollars.


On Dec 25 08:42 AM paxjds wrote:

> A 1935 dollar bill will not buy you a couple of loaves of bread anymore
> at the grocery today. A 1 0z. St Gaurdens gold coim has gone up from
> $35 to over $850 since 1935, a 2400% increase, More than enough to
> keep up with the rising cost of bread. Gold was and still is the
> ultimate commodity through good times and bad times. The author can
> keep apparent love for fiat currencies. As money suppies increase
> and INFLATE around the world due to governments bailouts and stimualant
> packages, gold will raise again to a new base level much higher than
> today. A fiat buck, pound, yen etc will buy even less bread. GOLD
> is the ultimate currency, not governments printing presses.

2008 Dec 25 09:30 AM

[Dave Wrixon:]

Word


On Dec 25 09:23 AM Sigmund wrote:

> As I recall there is the monetary base, currency in circulation and
> bank reserves. Bank reserves are a fractional component of bank
> deposits and bank capital. Banks create money by making loans.
> If the fractional reserve rate is 10%, a dollar of deposits, or bank
> capital can become ten dollars. How quickly we get from one dollar
> to ten dollars depends on how fast the banks and borrowers enter
> into transactions. The velocity of money matters greatly. As to
> prices, if the quantity supply of money (the monetary base), and
> its velocity are constant, the general level of price will be constant.
> You may well want to buy a great many goods and services, if you
> are limited to your currency in hand, your consumption will be moderate.
> If you can readily obtain credit money, your consumption will expand.
> If the rate of credit money expands faster than production, prices
> will rise. That rise in prices is the result of excess credit money.
> As Dr. Friedman said, and I paraphrase; 'money is everywhere and
> always the cause of inflation'. Your explanation gets it wrong.

2008 Dec 25 09:32 AM

[William Hum...:]

Banks create the money supply used by the public, not the Fed. The Fed has greatly expanded the monetary base since August, most of which sits idle as excess bank reserves on deposit at the Fed. There is no inflationary pressure from those reserves. Not until banks begin to lend freely again will there be any inflationary pressure. The current problem is how to get out of the deflationary spiral.


On Dec 25 09:21 AM Dave Wrixon wrote:

> Yes, but in the current environment, money supply is being rapidly
> expanded by the Fed at a time when consumer demand is imploding.
> By your own argument that can only result in a huge increase in inflation
> in the medium-term. Of course in the longer-term that inflation will
> be reined back in, but what all this means is that means to growth
> is that it is collapsing in the short-term, stability will return
> over the medium term, but the long term prospects are very subdued.
> In other words the Binge Drinker that has been making Merry will
> stop being violently sick, will feel a bit better after taking medication,
> but will have a prolonged hangover.

2008 Dec 25 10:05 AM

[William Hum...:]

Yes, demand is very low because we are caught in a deflationary trap in which simply increasing the monetary base has little positive effect. There is little that can be done at present through monetary policy. A Keynesian fiscal policy is about the only way the economic slump can be turned around.


On Dec 25 08:32 AM patio wrote:

> "The demand for credit arises mainly out of the desire to finance
> (1) new enterprise, (2) consumer spending, or (3) speculative investment.
> Let's briefly examine how each of these affects the money supply
> and prices"
>
> I see no demand in any of these areas, for a long time to come.

>
> And where demand exists, the banks are back to very tight criteria
> to qualify for credit, as it should be.

2008 Dec 25 10:23 AM

[William Hum...:]

No, Friedman said "money is everywhere and always a MONETARY PHENOMENON." That has a quite different meaning, namely that money and inflation are correlated. It does not imply that money causes inflation.


On Dec 25 09:23 AM Sigmund wrote:

> As Dr. Friedman said, and I paraphrase; 'money is everywhere and always the cause of inflation'. Your explanation gets it wrong.

2008 Dec 25 10:41 AM

[Tesa:]

No matter how low the employment goes or how deep a recession goes, commodities are produced at the rate that the market consumes them at any given steady state if the maximum supply rate is not exceeded.

Markets do not overproduce commodities after the the initial run down period as they shut down their facilities and production to reduce the oversupply and that period in the past have been longer than our times. Markets are more integrated using information technology, the responses are rapid and periods are much shorter. Even the industries crashed and burnt very rapidly and many have already shut down their facilities.

So I wouldn't expect an oversupply period in future, because the prices are way too low to pay for any production as they deteriorated way too rapidly. Just look at oil, oil is selling way bellow the production costs of new wells within 2 months!. Who is going "dig dig dig" wells to sell oil bellow the cost.

Now whether inflationary period will a ahead of us would be related to recovery. If there is going to be recovery, there would be an inflation. The shut down facilities will only restart if the price is right. The more the prices go down the more inflationary the recovery will be.

2008 Dec 25 11:01 AM

[GeorgeS:]

Good article. But when I researched this in the 1970s, every nation I looked at had an exact correlation between M1 and inflation. In Canada when inflation was 15%, M1 was increasing at 12%. That was from printing money for deficits faster than your 3% growth rate. I'm not sure about your US figures. In NO nation did oil prices cause inflation when M1 was under control.
I keep hoping, but want confirmation, that the govt is now financing by printing money, if the amount of money is deflating. That fits Keynesianism doesn't it? Another thing - doesn't this make Keynes a monetarist?

2008 Dec 25 11:11 AM

[GeorgeS:]

I think you've got it right. But I don't think any three of us has the text handy. I expect Friedman said "inflation is always a monetary phenomenon". That's simply because the money is spent.


On Dec 25 09:23 AM Sigmund wrote:

> As I recall there is the monetary base, currency in circulation and
> bank reserves. Bank reserves are a fractional component of bank
> deposits and bank capital. Banks create money by making loans.
> If the fractional reserve rate is 10%, a dollar of deposits, or bank
> capital can become ten dollars. How quickly we get from one dollar
> to ten dollars depends on how fast the banks and borrowers enter
> into transactions. The velocity of money matters greatly. As to
> prices, if the quantity supply of money (the monetary base), and
> its velocity are constant, the general level of price will be constant.
> You may well want to buy a great many goods and services, if you
> are limited to your currency in hand, your consumption will be moderate.
> If you can readily obtain credit money, your consumption will expand.
> If the rate of credit money expands faster than production, prices
> will rise. That rise in prices is the result of excess credit money.
> As Dr. Friedman said, and I paraphrase; 'money is everywhere and
> always the cause of inflation'. Your explanation gets it wrong.

2008 Dec 25 11:59 AM

[gordon:]

The dollar ($USD) is not actually tanking until it breaks 79.50 chart>
stockcharts.com/h-sc/u...=$USD&p=D&yr=1...

The m3 money(shadow statistics) supply is running close to 20%! The Treasury reserves are
being hoarded by banks in exchange for their toxic assets,
then being paid interest on them also. The Treasury is printing bonds(electronic)
and the Fed is buying them, like check-kiteing I think they call that, to drive down 30-yr mortgages. Once this
money is unleashed, I am sure it will fuel speculation. Oil will rise, I think $35
will remain support level. Dollar is key, a break of 79.50 should be watched for.
This massive intervention will backfire into speculative money, imo.

2008 Dec 25 01:04 PM

[gordon:]

SORRY- here's the USDollar chart condensed link

tinyurl.com/6tzn5f

2008 Dec 25 01:05 PM

[retired avi...:]

To paxjds:

Gold also rose to $800 per ounce in 1980, and then died a slow death for 20+ years to a low of around $250 in 2003. The loss was much greater inflation adjusted.

Don't get me wrong, I like gold as a hedge investment and diversification. It's just that it doesn't produce income or growth.

Your dollar bill in 1935 was not an investment of any kind. Currency is to be spent, not held. Nobody claims currency is an investment that will even keep up with inflation.

But if you put that $1 in 1935 into the Dow Jones Industrial Average, it would be worth today about $59 plus you would have received dividends for the last 73 years. It would have bought a ton of bread over the years.

Gold bugs just don't get it. They come out of the woodwork in crisis times and spread their religion like zealots. Then the economy eventually recovers and gold languishes in price, just sitting on the shelf and producing nothing.


On Dec 25 08:42 AM paxjds wrote:

> A 1935 dollar bill will not buy you a couple of loaves of bread anymore
> at the grocery today. A 1 0z. St Gaurdens gold coim has gone up from
> $35 to over $850 since 1935, a 2400% increase, More than enough to
> keep up with the rising cost of bread. Gold was and still is the
> ultimate commodity through good times and bad times. The author can
> keep apparent love for fiat currencies. As money suppies increase
> and INFLATE around the world due to governments bailouts and stimualant
> packages, gold will raise again to a new base level much higher than
> today. A fiat buck, pound, yen etc will buy even less bread. GOLD
> is the ultimate currency, not governments printing presses.

2008 Dec 25 01:14 PM

[William Hum...:]

You are right. In the 1960-1980 period both inflation and M1 correlated positively, although the money growth rate lagged behind the inflation growth rate significantly. After that period the correlation actually became negative. Inflation dropped while M1 rose slightly. See wfhummel.net/inflation....

In the 1970s when oil prices quadrupled, M1 grew at its highest rate ever. I don't know how you can conclude "In NO nation did oil prices cause inflation when M1 was under control." M1 is created by the public itself. It simply reflects the amount of liquid assets needed to make payments. The Fed doesn't control M1. When prices rise, M1 normally rises too.



On Dec 25 11:11 AM GeorgeS wrote:

> Good article. But when I researched this in the 1970s, every nation
> I looked at had an exact correlation between M1 and inflation. In
> Canada when inflation was 15%, M1 was increasing at 12%. That was
> from printing money for deficits faster than your 3% growth rate.
> I'm not sure about your US figures. In NO nation did oil prices cause
> inflation when M1 was under control.
> I keep hoping, but want confirmation, that the govt is now financing
> by printing money, if the amount of money is deflating. That fits
> Keynesianism doesn't it? Another thing - doesn't this make Keynes
> a monetarist?

2008 Dec 25 01:34 PM

[scotty1560:]

so are we headed for the dreaded "stagflation"?

Assets like real estate, stocks, metals tread sideways while those resources humans must have to exist like food, water, energy trend higher.

Without easy credit and in fact fraudulent credit, luxury assets will experience a long painful sideways cycle. High end assets represent a big part of the growth engine from construction, services, lending, government taxes, and much more. More downside this coming year followed by years of sideways.

As posters have commented, that loaf of bread and gallon of gas will continue to go higher, so stagflation?

One way out is through wars or energy or technology. Examples are WWII, oil discoveries, internet and pc revolution. That next boom could be 5-10 years away. Maybe green technology - I wish I knew?

Societies depend on cheap resources to grow economies. History books document all the failed advanced cultures that failed without resources. Technology can create more resources via lower costs and advances extraction methods.

IMO we are going to have to wait for some dramatic event for the next real boom. Government actions are short term band-aids and the phony economy based on easy credit are over. World's resources are running low while populations are still increasing- not sustainable to economic growth in the long run. Less resources = less growth.

2008 Dec 25 01:34 PM

[scotty1560:]

One final note again on resources.

If a country is denied cheap and plentiful resources, it dies.

Ask the great tank commander "Erwin Rommel". Take away his gas and he's a failure. In the meantime the Patton's and Montgomery's plow forward.

Ask Robert E Lee on trying to win a war without resources.

Ask the natives of "Easter Island" about resources.

Ask late pre-WWII Japan about oil and resources.

So I am saying in a smaller way that the US culture was built on cheap oil. What happens in 5-10 years if "cheap" oil is really peaking? Again, financial gurus can come up with short term band-aids, but again they will eventually loose the war.

This oil issue will be back big in a couple of years, along with fresh water. Sustainability will be heard more frequently in 10 years. I don't see the next leap in growth without answers to sustainable "cheap" resourses. At some point the planet reaches it's limits on human growth and therefore government and corporate growth.

I'll be curious how places like Phoenix and Atlanta plan to deal with
water issues down the road. Maybe they pipe it from Canada?

2008 Dec 25 01:55 PM

[acudoc:]

This is a very interesting article in support of the current system of fiat, debt-based currencies controlled by nine white men sitting around an oval table at the Federal Reserve Headquarters in D.C. (Den of Charlatans) artificially setting interest rates. The author has gone to great pains to bring out the subtleties of the relationship between money supply and inflation. While not disputing the points he does make in explaining the many complicated influences on inflation, I liken his argument to that of someone at a fire pointing out the differences in the spectrum emitted by various parts of a building being engulfed in flames.

The fundamental problem with a fiat, debt-based money system in a "Republic" of free citizens is that it gives too much control over the medium of exchange to so-called financial experts and the politicians who collude with them. Gold and silver may not be perfect (I happen to think they are, however, having arisen as an archetypal solution to the problem of exchange in a division of labor economy) but they are not interest-bearing, and once mined can be used over and over again to facilitate exchange. In a debt-based money system money is created when loans are made and destroyed when loans are paid back, after first subtracting off the interest which is recycled back into society as the purchasing power of the FIANANCIAL ELITE who have been legally empowered to do this legerdemain of money creation ex nihilo by the politicians, whom the financial elite reward of course. (By financial elite I do not mean the productive, rich people of the world, with whom I have no quarrel other than their poor taste and selfish tackiness, as at least in a free market they have provided something tangible to exchange and I am given the option to buy or not buy. My objection is with those who are given this immense power to control the market's money, and they are only given this power by governments willing to give it away.)

No thank you to fractional-reserve money systems anywhere, anytime. They are fundamentally dishonest and are designed to reward an elite for what is essentially a bookkeeping operation----a bookkeeping operation with devastating consequences to the world. This will be seen in the coming years when the derivatives tangle unwinds and our money is driven down to the point of worthlessness. Then there will be no arguments over the fine points of managing inflation. You don't argue fine points when someone is attempting to cut your throat.

2008 Dec 25 02:29 PM

[John Lounsbury:]

William Hummel - - -

At last I am reading a thorough monetary analysis on Seeking Alpha. While I think some of your statements are controversial, I think you have covered many areas accurately.

I would like to expand on your discussion of credit activity 3. (speculative borrowing). We have just gone through a period of speculative borrowing for something you did not specifically mention: the creation of additional financial paper. This had the effect of piling leverage on top of leverage for no other purpose than building a paper pyramid. This created illusory wealth and the mirage is now vanishing with the collapse of the pyramid. We might still have a severe recession had the same amount of debt been used to fund things of economic utility (means of production) because we would have created significant over capacities that would have to be worked off. At least the overcapacities would be in physical facilities that could be adapted to other uses. The only use for defaulted I.O.U.'s is to build an expensive fire.

A second area of comment is that many economists, including the oft quoted (in this comment stream) Milton Friedman, have proposed that a low level of inflation is the most conducive monetary condition to support economic expansion. Friedman proposed that an ideal monetary expansion would be 2-3% annually, and that would accompany a similar average inflation rate. I don't want to get into the argument here (but more on the subject below) of which is the cause and which is the effect. But I think all agree the two are correlated, whichever leads the other.

I agree with the concern of many that the current reflation attempts are creating a reservoir of balance sheet currency (bank reserves) that have the probable risk of exceeding the amount needed to stop a perceived potential deflationary spiral. This produces the very serious risk of that reservoir dam bursting at some point, flooding the streets with new liquidity that could create a money supply driven inflationary spike. This would require the return of a Paul Volker interest rate policy to slam on the monetary velocity brakes until the economy could adjust to the higher volume of currency. For this specific situation I have to disagree with the causation hypothesis of Mr. Hummel. This situation is one which could produce an inflationary spike where money supply was the cause and not demand for goods and services.

I do agree with Mr. Hummel that, in modern economies, supply and demand trade-offs drive price levels and monetary supply follows (quantity times velocity). That does not mean that money supply can not ever produce inflation.

A lot of the comment stream strikes me as having meritorous logic but some is lacking in continuity of thought across a logical minefield. Let me comment on some of the good points made.

GeorgeS - - - In your comment, the key concept is control. Where inflation takes hold, controlled expansion of money (again, amount times velocity) to meet but not exceed rising costs is difficult. In the 1979-1982 time period the control was exercized by throttling velocity.

Tesa - - - You make a valid point. I don't know why someone gave you a thumbs down. If the thumber reads this, perhaps he (she) could post again to let us learn the reasoning behind the vote.

gordon - - - Good points. I wanted to comment on $35 for oil. Very risky prediction - you might have to eat crow tomorrow. I really can't call a possible bottom here, but I'll share my strategy. I will start buying below $30 (if it happens) and back up the truck if $20 is broken. If we keep trading above $30, I may nibble but will not make a more significant commitment until there is a break-out above $45.

mohbull - - - You get it! Gold is a hedge, not an investment. Oil is an investment. These opinions go back to my commitment to economic utility.

acudoc - - - Most of the time the "Den of Charlatans" are merely reacting to interest rates driven by commerce and their primary function is to serve as a clearing house for transactions. On rare occasions, like now, they try to get ahead of the curve. (They haven't yet succeeded, by the way.) Because of their lack of experience in being proactive, we all get nervous about how well they will help or how much they will damage the outcome.

2008 Dec 25 05:58 PM

[Gedankonomist:]

Well, if printing too much money doesn't cause prices to rise, let's just remove all the laws that prohibit counterfeiting.

(Not just the FED's ability to counterfeit.)

2008 Dec 25 06:17 PM

[goldstriker:]

The US constitution gave power to Congress to "coin" money, not to print it. They new that once the printing press was used, your money wouldn't be worth a "continenntal buck." By using the power to print "fiat" (fake) money, they could gain tremendous power over the people and expand their government to an unlimited size, using that money for their own influence.

The printing press is not the answer. The American people need to return to the basics of being an industrialized nation which would sustain local employment and we need to be freed from government interference of private enterprize. Once the incentive to be creative and produce is gone, there's is nothing left. Remove the dream and the hope, and its over!

2008 Dec 25 06:20 PM

[Alan von Al...:]

Hummel: "New production is often financed with bank money"

It's sad that this error is repeated endlessly. In reality most production and corporate investment is funded by retained earnings (profits). It must be so, else debt would balloon endlessly and capital lost -- which is exactly what happened at GM.

Likewise bank lending to consumers, except in the narrow case of funding big ticket purchases by creditworthy customers with adequate security, must not be expanded beyond prudent conservation of bank capital and liquid reserves. It's absurd that banks gave unsecured credit to anyone who could make interest-only minimum payments.

Hummel is an apologist for unpayable Federal debt, bankrupt states, failing banks, and HELOC helots.

2008 Dec 25 07:26 PM

[John Polomny:]

I would suggest that some on this comment thread would benefit from reviewing Mervyn Kings 2001 paper "No Money, No Inflation" which can be found here
www.banque-france.fr/g... . I think this comment thread has fallen into the trap that many of these inflation discussions seem to end up. What are the defintions of inflation, deflation, and money? If one argues that inflation is a rise in prices and I argue that inflation is an increase in money and credit then we are talking apples and oranges. and the discussion is almost pointless.

2008 Dec 26 12:43 AM

[Moon Kil Woong:]

Although there has been a lot of comments can I point out a much clearer fact. When money supply is increased when supply does not increase or is falling that causes inflation. I don't see any new factories, drilling, or any form of new production going online. If you try to support the money supply from adjusting to this fact you are in essence causing inflation.

Any form of real stimulus must have a corresponding creation of productive goods or services. TARP and fed money dumps are critically lacking in real valuable expansion of goods and services and the corresponding rise in employment and economic stability the world needs.

A trillion dollars without any goods or services is 100% worthless to people besides the ones who got it. This is just a redistribution of wealth from you to someone else. And you thought welfare was expensive. Welfare for rich people is 10,000x more expensive.

2008 Dec 26 04:07 AM

[Alan von Al...:]

constructe, sorry to quibble but Milton Friedman made an observation when he coined the 'helicopter' concept. Paper money would fall on some people, not all people (that was your gripe - redistribution and welfare for a select few). Well, it turns out that it doesn't matter who was under the helicopter. The lucky few start bidding up prices for land and production. After 18 months the inflation is secular and broadly speaking nothing will have changed (except that preinflation savers get hurt).

2008 Dec 26 04:45 AM

[Moon Kil Woong:]

Alan: I agree money without justifiable increases in goods and services going to anyone is bad. What I was referring to was the fact that welfate programs don't approach $700 billion like in TARP or backstopping $8 trillion dollars in loans to just about every unscrupulous lender.

2008 Dec 26 06:45 AM

[peterthepai...:]

in the 1970's prices rose because eveyone was trying to buy before they rose further....wages...hou... up up...

today the opposite is true...

where is the demand for real estate?...cars...oil.....

in 1979 every job was unionised i had a 16% pay rise...in 1980...21.5% payrise...1981...no job!

wage bargainers are toast...expect falling wages...

add in internet price info...savvy consumers...new savers?

globalisation is deflationary...as is overcapacity...

face it GM, Crysler must go...as will many more before overcapacity is removed...

in the 1970's...China, USSR...remember them? no capacity
...India...BRICS....no competition there...

beware the rowing boat my son...

2008 Dec 26 09:29 AM

[CitizenPete:]

Deflation and Depression - Where's the link? Mises

mises.org/story/1583

2008 Dec 26 11:31 AM

[flow5:]

During the 60's money growth was more than double the 50's. Opec did not contribute to the 73-74 inflation-recession. But increases in oil prices did allow other nations a significant opportunity to increase their proportion of the car industry. COLAs did however impact prices. Cost-push, wage-price inflationary forces are the direct of monetary mismanagement, not the other way around. The only base for the expansion of credit & money are legal reserves. The monetary base is not such a base. The primary factor responsible for inflation in the 70's was the hugh increase in the transactions velocity of money (not Friedman's income velocity). I.e., no money supply figure standing alone is adequate as a guide to monetary policy.

2008 Dec 26 11:45 AM

[flow5:]

Forecasts are impossible to miss. Monetary lags are always the same length. There has been no variation in the U.S.

2008 Dec 26 11:47 AM

[Tony Petroski:]

We know the gold standard is dead, but I had no idea that Christianity is dead (not in my home). So many comments on Christmas and none asking for the Almighty's help during this crisis. Render unto Caesar what is Caesar's.

2008 Dec 26 10:24 PM