The debt hawks are to economics as the creationists are to biology. Those, who do not understand Monetary Sovereignty, do not understand economics. If you understand the following, simple statement, you are ahead of most economists, politicians and media writers in America: Our government, being Monetarily Sovereign, has the unlimited ability to create the dollars to pay its bills.
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Peter Schiff, who is running for one of Connecticut’s Senate seats and is president of Euro Pacific Capital, writes: “Almost every dictionary defines inflation as an expansion of the money supply, not rising prices.”
Untrue. I have no idea what dictionary this guy is using, but he probably is using the libertarian “inflation is monetary inflation,” meaning supply = inflation.
Money is a commodity. It is a surrogate in what otherwise would be a barter transaction.
Inflation is the loss of money’s value compared with the value of goods and services. Like all commodities, the value of money is based on supply and demand. Increasing the supply does not cause inflation if the demand (interest rates) increases proportionately.
[Note: Schiff may be influenced by the widely discredited and essentially worthless Austrian school of economics definition for inflation, a definition that has no real-world value, in that it does not include actual price changes.]
Schiff also says, “Although more money may not immediately translate into rising prices, over time the correlation is extremely reliable.”
There is no historical relationship between M3 (green) or M2 (red) growth and inflation (blue). The reason: Money supply is only half the demand/supply story.
When the Fed gets a whiff of inflation it raises interest rates, which by increasing the demand for money, increases the value of money (i.e. prevents/cures inflation).
Rodger Malcolm Mitchell
http://www.rodgermitchell.com
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No nation can tax itself into prosperity, nor grow without money growth. It’s been 40 years since the U.S. became Monetary Sovereign, , and neither Congress, nor the President, nor the Fed, nor the vast majority of economists and economics bloggers, nor the preponderance of the media, nor the most famous educational institutions, nor the Nobel committee, nor the International Monetary Fund have yet acquired even the slightest notion of what that means.
Remember that the next time you’re tempted to ask a dopey teenager, “What were you thinking?” He’s liable to respond, “Pretty much what your generation was thinking when it screwed up my future.”
MONETARY SOVEREIGNTY
#Monetary Sovereignty - Mitchell 
Both CPI and RPI figures are manipulated for political purposes. If you look at the figures for regular necessaries of life (rather than once in a while luxuries) the rate has been far more. Presently food and groceries are increasing by between 10 and 15%.
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aetna is absolutely correct. Check out http://www.shadowstats.com for a different set of time series and see if you can draw correlations from those.
The other error in your reasoning is that the Fed prevents inflation. The Fed is not a perfect, all-knowing monetary machine. It is managed by people, who each have their own ideas about the economy, and despite its “independent” status it is still a political entity. While the actions of the Fed *can* counter inflation, there is no reason to believe that it will do so reliably. Furthermore, it can just as easily implement the wrong policy at the wrong time, making matters worse.
Just because the mission of the Fed is to maintain stable growth and minimize inflation does not mean that it accomplishes that mission.
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What correlations do you see? What is your inflation-controlling alternative to the Fed?
Rodger Malcolm Mitchell
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Dear Rodger,
You have a very interesting perspective. I have a couple questions:
Is there any relationship between expansion of money supply and inflation? If not, where does the extra money go if not into bidding up prices?
Is there any danger in expanding the money supply?
What is the the exact mechanism whereby raising interest rates “cures inflation”? Is it ever desirable to cure inflation?
Thank you,
Lyndon
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Lyndon,
The federal government wants a small amount of inflation. The target is about 3%. So we’re talking about “excessive” inflation.
If expansion of the money supply caused excessive inflation, one would expect to see a positive relationship between federal deficits and CPI. We don’t see that relationship. See: Thoughts on Inflation
If there were a fixed amount of goods and services, additional money could bid up prices. However, additional money tends to stimulate the creation of additional goods and services, which is why a reduction in federal debt growth leads to recession. See: SUMMARY
I suspect there is a point at which the money supply grows so fast it can cause excessive inflation. We are nowhere near that point.
Preventing and curing inflation requires increasing the value of money, which is determined by risk and reward. Increasing the reward for owning money by increasing interest rates, increases the value of money.
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Thank you Rodger.
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Peter Schiff and his Euro-pacific mutual funds have ridiculously bad performance histories. It is inexplicable as to how and why this guy gets media attention as some kind of investing expert. Maybe it’s because he is trying to sell gold?
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