Since I have not done a post on the Obama economy for awhile, I thought reblogging this Conservatives on Fire post would help fill in the gap. Hopefully you will agree.
Note that inflation is essentially a math problem that we can solve using the Law of Supply and Demand.
- If the amount of money in circulation decreases relative to the amount of goods and services, prices go down. When money becomes scarce relative to the things we can buy with it, we get more for our dollars.
- If the amount of money in circulation increases relative to the amount of goods and services, prices go up. When money becomes more plentiful relative to the things we can buy with it, we get less for our dollars.
Sounds simple. So why do we have so much trouble predicting inflation? Well, there are lots of variables.
- The total quantity of goods and services is not static. For example, increases in productivity or relaxed government regulations can quickly alter the supply of various goods and services.
- Just because the government runs a deficit or the Fed prints more money does not mean the amount of money in circulation will increase instantly. For various reasons we sometimes choose to sit on our money. Then that money is not circulating.
The fact many people are just sitting large quantities of money is currently the biggest restraint on inflation. How does that restrain inflation? Here is a simple example. Suppose you collect coins. So you have the mint send you brand new coins protected in a plastic case. Like as not that money will never ever be circulated. Nobody but you and a few friends will see it, and no goods or services will be purchased with it. Because those collectable coins are not in circulation, for all practical purposes, they are not part of the money supply — but, if you lost your job and had to spend them, they could be.
Because businessmen and consumers are so uncertain about the economy, many people are behaving like coin collectors. Instead of investing or buying goods and services, many people are sitting on their money like coin collectors. That, however, could change. Then, if the amount of money in circulation rapidly increases, inflation will also increase rapidly.
Mr. Bernanke, Chairman of the Federal Reserve, has told us many times that inflation is under control. Yet, we on Main Street don’t see it that way, do we? The Fed’s target for inflation is 2% and even their manipulated calculations put inflation at 3%. I guess missing their target by 50% is Fed speak for under control.
Paul Krugman, the Nobel Laureate Keynesian economist and columnist for the New York Times likes to make fun of Austrian economist. You see, Austrian economist believe that government stimulus will invariably lead to inflation. Krugman points to all the stimulus we have had and asks the Austrian economist to show him the inflation.
Earlier this month I made a post in which I claimed that the EU was bankrupt and so was the US. Also, in this post I made a wish. I wished an expert economist would come by and answer a…
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