What is the connection between prices, inflation and the money supply.

Inflation and the money supply

The US government has created a category 5 storm regarding inflation and the economy. Get ready for 15% inflation or more.

Inflationary perfect storm



Why people are skeptical about inflation

Many people say there will be no inflation because the money supply was increased when demand for money was low, therefore, the only thing that has happened was financial and real estate assets stopped their downward spiral and banks shored up reserves.

The investment experts were wrong why will the money supply experts be right

Economists in charge are wrong because they do not understand economics. This is exactly why there will be inflation.  People who are in charge do not understand, really understand economics or do not want to understand. Despite their impressive degrees and positions they have lead us to doom.  I only have a Masters in Economics but I will explain why we are headed for the inflationary perfect storm.

Austrian school of economic thought and inflation

Ludwig Von Mises wrote:

“A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed”

Role of the market and prices

The markets role in the economy is to adjust prices based on value and risk. What happen was the market was not allowed to adjust, and people who took too much credit and too much risk  for too many years got a nice golden parachute complements of the US central bankers.

This prevented the adjustment of their financial assets to the level in which the market would have valued them properly.  They were rewarded for their stupidity.

Why inflation is inevitable in the US

Financial assets did not adjust like they should have, and the market will start non price rationing and other forms of non price adjustments.  We will have a flat price level for a while.  The housing market will stabilize. This is the calm before the storm.

What will happen next has happened in every country where the government does not allow prices to move as they should, based on natural market forces.   This applies to every nation from the Soviet centrally controlled prices or the indexing in the 1970s in the USA or any country that expands its money supply. Non price rationing can not exist in the long term in a capitalistic economy.

Something has to happen to allow the relative value of these toxic assets fall in relation to other assets.  If prices of these assets do not fall, the prices of stable assets will rise.  This is economics 101, Austrian economics.

The relative mechanism of price adjustment will eventually kick in even if there is a lag, not with the downward adjustments of toxic financial assets, but with an increase in producer prices, wages and consumer prices.  This will be feed by inflationary expectations. Expectational inflation gets out of control. Inflation will create instability and eventually lead to stagflation.

With the massive increase in the M1 and M2, there is no way there will not be massive inflation in the United States, maybe not true hyper inflation but double digit inflation worse than the 1970s.