M3 Money Supply Chart, Inflation, Fiat Currency
People are running around trying to figure out why in the heck the price of everything from gas to food to electricity is going nuts.
Many, including some not so well educated financial analysts call this inflation.
The truth is, inflation is not the price of things increasing. When prices rise, this is merely the symptom of what true inflation is: adding more currency to the money supply.
This is not rocket science. When you have more of something, it is worth less. Therefore, if you add more dollars to the available supply of dollars, obviously each dollar is worth less. Preposterous you say? Well let me put it another way, if dollars were as common as rocks lying on the ground, how valuable would they be? Obviously they would not be worth much. Therefore one of the key requirements of any form of currency is that it remains somewhat scarce. So, when the Fed pumps billions of dollars into the economy to rescue our financial system, people cheer because the system goes on for another day.
What many do not realize, is that every time they do, it raises the costs of everything from bread to gasoline.
This of course causes devaluation of the dollar, and inflation, which are essentially the same thing. Devaluation means the dollar is worth less, and inflation means (to most people) that things cost more. It is not that the things we buy are actually worth more, its just that our dollars are worth less, so it takes more dollars to buy the same thing that less dollar bought in the past.
My dear reader I know you are a smart cookie, and you arent so dumb that you will actually fall for the governments reported statistics on inflation. Especially since they have chosen to change the way inflation is measured, by leaving out little things like the cost of food and energy.
The chart below shows the rate at which the Fed is continuing to add dollars to the available pool of currency. As you can see, it is approaching 20%, yet the government reports “core inflation” (a term that is applicable only to the aliens living on planet Washington, because they obviously dont shop for groceries where you and I do) at less than 4%.
Now we come back to my ‘forever rant’. Gold and silver are some of the only ways you can protect the value of your wealth given todays financial landscape. If you are storing it in dollars, I feel sorry for you because it is being devalued at a horrendous rate. If you are storing it in the stock market, again, I feel sorry for you, because it is only a matter of time before the baby boomers who put all their retirement money into the stock market, causing it to rise, start taking their money out to finance retirement, which will obviously cause it to fall. The question is, will you be the first, or the last to get your money out?
Gold on the other hand has retained its purchasing power for thousands of years. Did you know, that an ounce of gold would clothe a man in the finest clothing available thousands of years ago? Guess what, today, an ounce of gold will still, clothe a man in the finest clothing available. 75 years ago $20 would likewise buy you an entire wardrobe, yet what can you buy today with that same $20?
Got gold yet?
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June 1st, 2008 at 12:04 pm
[...] The problem we face to day in skyrocketing commodities, debt, a crashing dollar, sky high gas prices, food prices going up, electric bills going up, and on and on can be attributed to one thing: Inflation of the Money Supply. [...]
June 9th, 2008 at 1:30 pm
[...] was talking about inflation. His point was, that the US continues to inflate (we are talking about monetary inflation here), and that all other countries are forced to inflate in order to maintain some semblance of [...]
June 24th, 2008 at 3:51 pm
[...] is caused by one thing, and one thing only! Adding more currency to the money supply! This is not rocket science! Oil prices are a symptom of the cause, not the cause [...]
June 28th, 2008 at 11:24 am
[...] What Causes Inflation? [...]
September 20th, 2008 at 12:18 pm
[...] To understand why this is BAD, we have to understand why inflation is bad. [...]
January 29th, 2009 at 11:28 am
Great article. I also think that inflation is going rapidly increase as the Federal Reserve is forced to buy US treasuries in the coming years. Although gold and silver are not the best long term investments, I believe that for the next couple of years they are going to rise rapidly.
February 18th, 2010 at 2:35 pm
to those who are simplifying inflation as solely linked to printing money, you are wrong. inflation is defined as an increase in the price of goods and services. so as supply side inputs increase, you will have inflation even if you don’t print more money. as energy becomes more and more expensive we will see inflation, even if we don’t print more money.
that being said, printing money certainly is a huge, and controllable, contributor
February 19th, 2010 at 6:49 am
reality, thanks for commenting.
At this point I think we have to agree to disagree.
Your viewpoint and definition of inflation comes from Keynesian economic theory, but there are many Doctorates in Economics who disagree with this theory.
For the alternate viewpoint, you can take a look at Austrian economic theory (same school of thought that Ron Paul subscribes to). A great resource for this is the Ludwig Von Mises Institute ( http://www.mises.org )
Simply put, yes, if your supply side costs go up, your prices will go up. Austrians do not define inflation as prices going up however, Austrians define prices going up, as…well…prices going up.
Money creation, that is inflation.
The key is in having a “stable measure of value”. If all values float (such as value of currency, and then value of goods, or supply inputs as you call them), then there is no stable method of truly measuring anything, and anything quantifiable must start with accurate measurement.
This isnt a new concept. In the Bible, there is a proverb which states that “Unjust weights and measures are an abomination unto the Lord”. This thought is a few thousand years old at this point.
In other words, the currency unit must be a “just weight and measure” – in other words, it doesnt change. The USD on the other hand, has been proven to have lost over 96% of its buying power since the inception of the Federal Reserve system in 1913. That isnt exactly what I would call a “just weight and measure”, because its value (its buying power) is obviously not stable.
If a carpenter tried to build a house and the slide rule he pulled out to make measurements as he was building changed the actual size of the inch every time he pulled it out, how stable would that house be?
Obviously it would be a catastrophe waiting to happen. And then people wonder why the US Economy is so unstable right now…maybe it has something to do with a broken currency unit of measure.