Printing money not low interest rates, is true inflation.

Economics Political Theory
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I have a “theory” that the true, permanent cause of rising prices is when the government actually prints money (M0), not when they lower interest rates(M1-M3). It seems to me when they lower interest rates it’s not going to cause a permanent rise in prices, but a bubble that is going to pop. The reason is that lower interest rates will cause a TEMPORARY increase in the money supply because the money created from low interest rates has to be PAID BACK. When people have to start repaying their loans the effect from the low interest rate wears off and causes the bubble to burst because no one has money to spend. Contrast this with actual money printing where the money is created out of thin air and doesn’t have to be paid back. I believe this is what causes permanent price increases that can never be reversed.

This would explain why Japan didn’t have any price increases despite massive debt. From what I understand Japan was only increasing their monetary base by somewhere around 3 or 4% a year during the 90s. The US has increased M0 by 150% in the last year and they’re just getting started!

*Interest rate threads*
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I agree, true inflation is increasing the money stock.

The effect of this is prices going up because the increase in money stock dilutes the real value (purchasing power) of each individual unit of the currency.

Artificially lowering interest rates, as I understand it, is like the Fed’s method of getting their newly printed money in circulation, and while it’s certainly a part of the inflationary process, it’s doesn’t seem, to me, to be the actual cause of inflation, which is an increase in the money stock.

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We seem to be in the minority on this. I’ve argued with many free market types who think that since money stock is so small compared to M1,M2,M3 that it is not important. But since M1,M2,M3 all come from multiplying M0 it seems that it all begins with the money stock.

My next question is how accurate do you think the government money stock data is? I’m wondering how hard this data is to “fudge”.

For example this chart:

http://research.stlouisfed.org/fred2/series/BASE

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  1. How can anyone argue that the total amount of money in circulation is not at the foundation of the value of each unit? How can they see scarcity power as the foundation of value in everything else except money?

  2. As you point out, the money stock data is far more telling and harder to misinterpret than any other metric the Fed likes to use. I mean…let’s just be honest here, the Fed uses a slight of hand to try to get people looking in the wrong direction all the time. The European central banks pay much more attention to the money stock than the Fed does, and incidentally, their currencies are now much more valuable than ours. Coincidence? I think not.

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The argument is that although the money has been printed it may not be in circulation. But to me it’s only a matter of time before the money gets out. And the only way to keep the money from “getting out” is to do damage by things like increasing the interest rate above the market rate.

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Exactly. Manipulating the velocity of money with price controls on interest rates only prolongs and delays the inevitable decrease in purchasing power of each individual currency unit. But it does provide a perfect mask for inflation doesn’t it?

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I think another problem is that people are so used to electronic banking that they forget it is backed with actual currency. Check out this article on why we won’t supposedly get inflation. What I would like to know is, “How do you destroy electronic currency?”

Are Peter Schiff and the Gold Bugs Wrong Again?

From The Business Insider, March 23, 2009:

We really enjoy the critique of guys like Peter Schiff, who slam our system of banking. But in terms of using his philosophy as investment advice, it’s dicey, since he’s been saying the same thing for years and the collapse hasn’t happened yet.

Then in the last year, the financial system really did start to collapse, but the bet went the wrong way for Schiff.

Still, Schiff and his ilk are confident that vindication is right around the corner. The the dollar will collapse and gold will regain its crown. It’s just a matter of being patient – and in the view of many, at this point we’re basically there.

Indeed with the Fed now literally creating money for so-called quantitative easing, serilus currency debasement may be close at hand.

Matt Stiles, who writes at Stockhouse.com, who also happens to identify with the Austrian School of economics, argues why these hyperinflation fears are way overblown, and why we won’t see a Zimbabwe scenario here:

It is often said that we live with a “fiat currency” or with “paper money.” This is not entirely accurate. A very small portion of our total supply of money and credit is in the form of physical currency. It depends on how you count it, but regardless, it is under 10% of the total. This is what differentiates our monetary system with that of Zimbabwe or Weimar Germany circa 1920’s. Their economies were based on nearly 100% physical currency because nobody would accept the promises of government in order to issue credit.

The vast majority of our money supply is in the form of electronic credit. Electronic credit can be destroyed, while physical notes issued by a central bank cannot. This is why deflation is possible in a credit based monetary system, but not in a paper based monetary system.

…

All in all, the central banks are not nearly as powerful as they’d have you believe. The amount of the total money supply that is controlled by them is minimal. They won’t tell you that. They’d prefer you to think that just by them moving their lips they can affect the entire economy’s decision making processes. It simply ain’t so.

This begs the question: why is gold going up? Who knows. It has a mind of it’s own. But if it really only moved due to inflation concerns, it wouldn’t have declined 75% over two inflationary decades (80’s, 90’s) would it? If inflationary concerns were real, we would see TIP yields rising along with the gold price. They’re not. We’d also be seeing other typical inflation hedges rising - like property prices. That is obviously not the case. A better explanation is that gold is rising because of increased instability…For more coverage and to view the full post, see The Business I