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Politics : Ask Michael Burke

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To: Nadine Carroll who wrote (70678)	11/18/1999 12:16:00 PM
From: Mike M2	Read Replies (1) of 132070

Nadine, there was a time when the term inflation meant a decline in the value of money. todays political economists tell us that inflation is a rise in the general price level as measure by the cpi and ppi. The Austrian school of economics defines inflation as an increase in money and credit beyond the needs of economic growth and the supply of available savings. This is what the Nobel prize wiinning Austrian economist had to say about inflation: " The influx of the additional money into the system always takes place at some particular point. Who these people are will depend on the particular manner in which the increase of the money stream is being brought about. It may be spent in the first instance by government on public works, or it may be spent by investors mobilzing cash balances or borrowing for the purpose; it may be spent in the first instance on securities, on investment goods, on wages or on consumer goods. It will then be spent on something else by the first recipients of the additional expenditure, and so on. The inflation process will take very different forms according to the initial source or sources of the additional money stream" F.A. Hayek Can We Still Avoid Inflation quoted in the May 99 issue of the Richebacher Letter 1217 st. Paul St. Baltimore, MD 21202 We have not seen product price inflation because the inflation has been directed at financial assets. Companies have decided to go on a buying binge purchasing their own shares rather than expand their business or invest in productive capacity. In addition, as noted by Earlie the US trade deficit has enabled us to import real goods and deflation to offset the inflationary pressures of the US consumption binge fueled by debt and the wealth effect of the stock market. Another major factor in this unprecedented credit bubble has been deregulation in the banking sector and financial world. For details read Peter Warburton's Debt and Delusion and Edward Chancellors The Devil Take the Hindmost . A very short summary is after the banking sector was decimated by the real estate bust the capital markets took up the slack. Nonbank sources of credit are not captured in the monetary aggregates and are beyond the control of the Federal Reserve. There is an inverse relationship between the quantity of credit created and the quality - a very obvious point that credit originators periodically forget in a big way but that is the moral hazard created by gov't guarantees. I once was foolish enough to believe that at some point the people in power would attempt to check the speculation but the most important lesson to be learned is that greed takes control. Alan Greenspan is well aware of the austrian perspective and knows very well the bust of the credit boom is inevitable. I expected too much from a politician. mike

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