There seems to be a lot of talk about inflation — or the lack of it.
Many mainstream economists argue that inflation can’t happen because of high unemployment or the lack of bank lending.
I believe these individuals don’t understand how inflation is created.
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Here is a quick overview of inflation and what I believe really causes it.
I don’t think that the economy has to be strong, employment high or the banks vigorously lending to cause inflation.
Inflation is always a monetary phenomenon, as economist Milton Friedman said. Zimbabwe is operating at 5 percent capacity and no one is hiring, but inflation got pretty high there.
The weakest economies always have high inflation and unemployment in double digits. Low-inflation economies are the strongest and have the highest employment (see Switzerland for the last 200 years), so employment doesn’t cause inflation because employment is productive.
I don’t believe the argument that "Well, the Fed can print money, but if the banks don’t lend, there will be no inflation."
Bank lending doesn't really cause price increases other than asset-price increases. However, the banks, even if they aren’t lending, are speculating with the Fed’s money, so that, in turn, is pushing prices higher.
There is a lot of talk of Alt-A Option ARM loan refinancing that is circulating around the Internet. While I believe this talk overstates the immediate risk (a lot of these loans have already been defaulted on, for example), it shows show that there is still bad debt from 2010 through 2012.
However, when these bad loans dry up in 2012, the destruction of credit associated with them (which is acting as a deflationary force offset by inflationary money printing) will end and then inflation will begin to take hold.
I don’t think gold predicts inflation, like many do, but more so instability in the system.
For example, if the euro really got out of control to the downside, gold would go up to protect against currency volatility.
In 2008, at the top of the inflation cycle, the government reported that inflation was in the 5 percent to 6 percent range. You can't tell me with oil at $140 and when every soft commodity spiked in 2008 that inflation was 5 percent.
The government will continue to understate inflation because of Medicaid and Social Security.
The United States has a lot of liabilities that are indexed to inflation. I think the true inflation measures are insurance, health and education costs — all of which have been going up about 7 percent to 8 percent, on average, for the past 10 years.
Just go to John Williams’ shawstats.com Web site, where he shows the real inflation rate if they calculated it honestly and if they had calculated inflation 20 to 30 years ago.
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