The Inflation Question

Someone recently asked me what my thoughts are regarding the potential for a resurgence of inflation, given the copious amounts of money being printed by most central banks. Following are some of my thoughts:

  1. I believe it is a foregone conclusion that we will have a resurgence of inflation; i.e., an expansion of the money supply—it’s already happening.
  2. Central banks are committed to a policy of inflation (they are all Keynesians now and under the spell of inflationomics.) because the governments they serve are committed to the idea of bailing out the banks and large employers in an attempt to avert social chaos (and incorrect voting). Part of this program is to make people believe that governments can solve their constituents’ economic problems by spending money they (the governments) don’t have. Eventually, governments will realize that they can’t bail out everyone and they will begin choosing favorites. Everyone who isn’t a favorite is an enemy. (Governments operate under the notion that there is a limited pie from which we are all eating and whoever can bring the most force to bear will get their piece first.)
  3. The central banks’ masters are large debtors who benefit from inflation. They will do their masters’ bidding and provide as much money (inflation) as is needed to prevent their masters’ bankruptcies (in the short run).
  4. The central banks will try to delay the consequences of their masters’ resource misallocations as long as possible, even if it means destroying their currencies. See Zimbabwe.
  5. The recent loss of worldwide credit is in the trillions. Governments will try to make up for this loss of credit by bailing out banks, companies, state and local governments, homeowners, etc., in an attempt to return things to the way they were; i.e., inflated. This will be done more aggressively than has been done in the past. What took 95 years (1913–2008) will have to be done in 9.5 years or less. Voters can be very impatient when they are unemployed and faced with the foreclosure of their houses.
  6. So the real question is, when will the expansion of the money supply be felt in the form of rising prices. Obviously, rising prices won't be uniform, some will rise faster/sooner than others. For example, in my local supermarket, the price of sugar just jumped from $1.59/five pounds to $1.99/five pounds. An aberration or a trend? We'll see.
  7. Since 1971, when the U.S. dollar became a fiat currency, (and was already the world reserve currency) the U.S. central bank (the Fed) has been able to export its inflation worldwide (thus, worldwide inflation and depression).
  8. Countries that purchased U.S. government debt instruments helped keep rising prices in check, to some extent. When these foreign countries can no longer afford to lend money to the U.S. government (because they have to address domestic problems with their “excess” funds) or because they no longer trust the U.S. Government to safeguard the value of their (foreigners') U.S. investments, prices (in U.S. dollar terms) will rise. The dollar will plummet because it will become painfully clear that inflating the money supply will be the only way for the U.S. government to meet its obligations at that point.
  9. But the real problem the world faces is that there currently isn’t an adequate substitute for the U.S. dollar as a world reserve currency (at least not among the fiat currencies). And it will take some time to convince government authorities that gold is the only viable “reserve” currency in the world.
  10. On the other hand, most people are limited in the money they can use by the legal tender laws in their country. People who understand that gold and silver have passed the test of time will stock up on them and wait for the ultimate destruction of their fiat currencies. Of course, sugar might not be bad to have, too!

Robert Jackson Smith

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