[FoRK] inflation / deflation; small point on currencies vs. money

Jeff Bone jbone at place.org
Sun Sep 27 06:52:55 PDT 2009


To follow up from yesterday's bit re: the meaning of that zerohedge  
graph and general comments about deflationary / inflationary pressures:

   http://seekingalpha.com/article/163524-the-inflation-deflation-forces-battles-on?source=feed

An excellent summation.  The point he doesn't make strongly enough,  
IMHO, is that depending on timing one or the other of these forces  
could easily get on a non-linear trajectory, outpacing the other,  
depending on the vector in which it enters and impacts the real  
economy.  As mentioned yesterday, I think that inflationary potential  
edges out the deflationary potential just slightly --- two primary  
reasons, one being our dependence on imports, particularly from Asia,  
and second being the bias of our central bank.  If that occurs, then  
we could easily and rapidly see not just inflation in terms of  
currency vs. CPI or (better) WPI, but actual hyperinflation.

The Mises quote in particular explains the zerohedge graph much better  
than I did;  it is in the equity markets that this new currency is  
entering the economy first, hence we see significant price inflation  
in that environment *first.*  That it has been in bull rally mode  
while the real economy has continued to decay is not at all, IMHO, a  
leading indicator of recovery;  quite the opposite.

Also as mentioned previously, Kling's been wrestling with this lately,  
and his point has some merit (and runs counter to the traditional  
monetarist points-of-view, synthesizing both positions into something  
that better explains what we're seeing today.)  This following post is  
a summation of a several-post thread on that topic;  if you haven't  
been following it, backtrack from here for a couple of weeks...  But a  
good summation in any case, stands on its own:

   http://econlog.econlib.org/archives/2009/09/responses_to_tw.html

$0.02,


jb


PS - Beberg --- while I (mostly) don't entirely disagree with you  
regarding fiat currency vs. money anymore, it's worth noting that  
*all* currencies and moneys (read:  arbitrary stores of value) have a  
faith-based component.  Even if you agree to give me some quantity of  
atoms with 79 or 47 protons in exchange for some other good, there are  
only two reasons I might have for agreeing to the trade.  Either I  
have a direct, utilitarian application for that quantity of those  
metals (unlikely) *or* --- if I'm using it merely as a storage  
mechanism for value --- its use as such is dependent on my belief that  
somebody else will accept it in turn for some other good that I value  
more than the agreed-upon quantity of metal.  That, too, is a faith- 
based notion.  Real value comes in the form of something with actual  
utility in itself;  "currencies" and "money" are just arbitrary and  
largely psychological storage mechanisms, whether fiat or coin.


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