In my last post I talked about the problems with economic forecasting, with economists in general, and with the seeming inability of anyone to explain what in the heck is going on. Well, I believe I know what’s going on. We are experiencing, and will continue to experience, a deep and prolonged deflation. But this doesn’t mean what you think it does. Now we have to agree on some definitions. Deflation is defined several different ways, but I am going to show you that when it comes to real money they all mean the same thing.
Deflation is defined as: a falling money supply and falling prices; sometimes it is defined by its main symptom, the increased buying power of money. When money becomes scarce, it becomes more valuable and people are willing to trade more goods and services for it. You “get more for your money,” and this looks like falling prices. See? Inflation is the opposite.
But what’s money? In my last post I argued that the Fed, by printing up an extra $1.5 Trillion (from a starting point of only $800 Billion) has inadvertently convinced us that the paper tickets we carry around in our wallets aren’t really money anymore.
So what is money? Gold. Why do I say that? Because it is exhibiting the characteristics one would expect of money in a deflation:
– The available supply of gold is falling
– The buying power of gold is rising with respect to nearly everything else; put another way, prices of goods and services paid for with gold are falling
– The buying power of gold is rising with respect to the paper tickets we carry around in our wallets; put another way, as time goes by people are willing to trade more paper tickets for an ounce of gold
As for the paper tickets:
– The available supply of paper tickets is increasing rapidly
– The buying power of the paper tickets is rising in some areas (housing, flat screen TVs) and falling in other areas (food, medical care)
– The buying power of the paper tickets is falling with respect to gold; put another way, as time goes by an ounce of gold will buy more paper tickets
Conclusion: there is no stagdeflation, stagflation, disinflation, inflation, or yourmomflation. There is deflation in all things with respect to gold. We are in a deflation. Gold is money, and paper tickets are not.
That is how it was meant to be. That is why Constitutional Money is gold (and his little cousin, silver). The Framers knew this.
“Paper is poverty,… it is only the ghost of money, and not money itself.” –Thomas Jefferson to Edward Carrington, 1788. ME 7:36
“That paper money has some advantages is admitted. But that its abuses also are inevitable and, by breaking up the measure of value, makes a lottery of all private property, cannot be denied. –Thomas Jefferson to Josephus B. Stuart, 1817. ME 15:113
“The evils of this deluge of paper money are not to be removed until our citizens are generally and radically instructed in their cause and consequences, and silence by their authority the interested clamors and sophistry of speculating, shaving, and banking institutions.” –Thomas Jefferson to John Adams, 1819. ME 15:185