Where Is The Inflation?

Will printing money work?

Certainly, there are governments and economists advocating that as way back to prosperity.

In the United States, a great deal of money has been printed in the last three and and a half years.  So why is there no obvious inflation?  More money – same goods should mean higher prices.

There are two reasons I can see.

1)      The inflation is there but the government creates the CPI index differently now.  Look at Shadow Government Statistics.  They think inflation is close to 10% using 1980 methods.  They think unemployment is over 20%

2)      The money is not moving around as much.  Velocity of money matters.  How frequently does a given chunk of money change hands?  If it changes often then it appears that there is more currency in circulation.  If it changes less frequently, there will seem to be less.  If you put a $100 in your sock drawer and leave it there, for economic purposes, it is no different from it does not exist at all.  The velocity of money in Mid-2012 was under seven.  In late 2008, it was more than 10.  There are many $100 bills in the sock drawer.

Be careful, once the velocity of money goes up, there will be serious inflation even using the government’s numbers.

Asking, “Will printing money work?” is equivalent to asking, “Will heroin work?”

Here is an interesting observation from the New York Herald/Tribune 27 April 1933

“As the effects of the first jab in the arm wear off, the country is plainly more than a little worried over the cure-all drug called inflation.  The first dose was just a promise – and what beautiful dreams it produced!  Exchange was about to be stabilized, stocks and commodities were to go kiting, everyone was to be prosperous – long live the 50-cent dollar!

Now the headache of the morning after is already unmistakable in many quarters.  Such is the familiar inevitable history of the inflation treatment, and it is interesting to see even the first preliminary stage following the classic formula.  Nothing is more certain to produce a temporary thrill, a delusion of well-being; nothing is more certain that, as the effects wear off, the patient feels worse than ever.  That is the chief viciousness of inflation.  It is in literal truth a habit-forming drug requiring ever larger and larger doses to keep the patient satisfied. “

Insightful, and coming up on 80 years old.  You would think that governments would have learned the lesson by now.  As the quote points out, ever-larger doses are required to gain the required euphoria.  Surely, they have noticed.

The story should go further still.  Eventually the required dose reaches a point where there is a tiny difference between what will make you feel good and what will kill you.  Any mistake is the end.

Is a mistake possible?  Who will prevent it?

In 1928, 84 years ago, George Bernard Shaw in his book “The Intelligent Woman’s Guide to Socialism and Capitalism,” wrote

“You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government.  And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold.”

If you have to risk your future on “the natural stability of gold” or on “the natural stability of the honesty and intelligence of the members of the Government” which will you choose?

Same as Shaw I suspect.  It is pretty simple isn’t it?

Every portfolio should have a defense portion.  Gold, silver, platinum, diamonds, kegs of nails, a warehouse full of lumber, whatever.  Anything durable and recognized as value in trade or as value in use will do.

No one knows what will be right.  On 28 August 1933, the government of the United States confiscated the gold at the old price of $21.67 per ounce.  They printed the money they needed to do so.  So holding gold may be problematic.

I think the best prescription is to be alert.  Even vigilant.  You cannot know exactly what you need to do but you should have some ideas, act on them and look for more direction.

The rule will be:

Do not panic, but if there comes a time when you must panic, panic first.

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