What is inflation? and the current mess

Article by Colonel Nogov on Jan. 23, 2015

I read an article the other day by an author who was trying to refute arguments made by Peter Schiff in one of his television interviews.  This author, in  a very snarky tone, kept saying how Peter Schiff just didn’t understand basic economic concepts.  Of course, it was the author who was the one not understanding economic concepts.  One specific economic concept was inflation.  Like all Keynesian economists, his definition of inflation was wrong.  When you start with the wrong definition of something, your conclusions will be wrong.

Inflation is NOT a general rise in prices.  Inflation is NOT more currency chasing fewer goods.  Keynesians define inflation this way in an attempt to make their flawed economic models work.  Inflation is an increase in the money supply, period.  It makes no difference how the money supply is increased.  For instance if the central bank prints new money, that is inflation.  If banks extend additional credit due to fractional reserve banking, that is inflation.  If gold is the medium of exchange in a society and someone finds buried treasure, that is inflation.

Often times there is a general rise in prices due to inflation, but that is not what inflation is, that’s an effect of the inflation.  The thing about inflation is that it is unpredictable what the effect will be.  The federal reserves quantitative easing program is massive inflation.  The media, the government, the keynesian economists try to say there’s no or low inflation because the cost of consumer goods are not rising faster.  They’re using the flawed definition of inflation as a general rise in prices.

When there is inflation, it depends on who gets the money first and where they spend it to figure out what the effect of inflation will be.  Currently, the Dow Jones is at or near its all-time high.  The S&P 500 is at or near its all time high.  The 10 year US treasury bond is at or near its all time high.  The price of chicken is at or near its all time high.  Housing prices are nearing their all time high of several years ago.  The general price of consumer goods are increasing at a pace of around 10%.  Despite the government claim that they’re increasing at less than 2%.  Fed interest rates are at zero.

Financial and commodity markets are where the inflation flowed.  It drove the prices to all time highs in most cases.

A few markets are now beginning to crash since the federal reserve has allegedly stopped its QE program.  Oil, beef, pork, lumber to name a few.  All markets will crash without additional inflation.  The thing about inflation is that it’s artificial.  It’s an attempt to defy the law of supply and demand.  Economics has laws just like other sciences. (I will soon be doing a series on economic laws).

When the government attempts to defy the law of supply and demand through legislation or money manipulation, the law is always trying to reassert itself.  In this case it’s inflation of the money supply.  The inflation of the money supply was boosting economic activity higher than it would otherwise be, the financial markets were the beneficiary this time.  When that inflation stops, the economic activity begins to return to where it should be.

Think of it like this.  If you throw a baseball straight up into the air, you’ve added energy to the ball in an attempt to defy the law of gravity.  The ball goes up for a while appearing to defy gravity, but when the energy runs out the ball begins to descend back to the ground.  Gravity has reasserted itself.  It’s the same with the law of supply and demand.  As soon as the manipulation, inflation, stops it all begins to return to normal where it should be.

In order to keep the ball or market up, more energy or manipulation is needed.  The ball cannot suspend in mid air nor can the markets.  More and more energy is needed to keep the market up.  If the artificial stimulus stops, it comes crashing down.

You might think, so what?  If the stock market crashes, it doesn’t effect me.  It probably will.  Remember back in 2007 when the Real Estate market crashed.  Bankruptcies skyrocketed, unemployment skyrocketed, millions of people were wiped out financially.  Imagine that, but 10 times worse when all the markets crash at once.  That’s what’s happening.

If they can keep the market afloat with more stimulus, why don’t they?  They will.  That’s what I think.  But remember, it takes more and more energy to keep it afloat.  The next dose of inflation will need to be much bigger.  Where will the next round of inflation flow?  Also, with every round of inflation, the current dollars in circulation become worth less, they buy less.  Imagine your grocery bill being double.  Imagine your electric bill being double.  imagine your rent being double.  Will your income keep pace?  Also, if they keep inflating, it will push the dollar into hyperinflation.

Hyperinflation and inflation are two different things.  Hyperinflation isn’t just a bigger dose of inflation.  It’s much, much worse.  I’ll be writing an article soon on Inflation vs. hyperinflation.

Physical gold and silver in your possession is the only protection from what’s to come.