In the land of financial and monetary policy, money creation always comes back to haunt the creators. Internal U.S. prices are already climbing at annual rates of 3.3% as a spill-over of the inflation of the U.S. quantities of money. That could come right around and hit the U.S. economy in the back of the neck as additional quantities of new money hit consumer goods.
Greenspan's real problem here is that today, the general public mistakenly thinks of inflation as nothing but climbing prices of consumer goods. Further, both corporate and Treasury bond markets hate the rising price effects of monetary inflation. Why do they hate it? Take a bond with a maturity of five years, the principal being returned to the lender at the end of those five years. With rising prices, the purchasing power of that principal will have been grossly eroded.
Look at what happens to a five-year bond with an issue value (principal) of $US 1 million. Now, build in consumer prices which are climbing by 10% each year for the five years. After the first year, the $1 million face value of the bond will only buy $909,090 worth of goods. After the second year, that same $1 million will only buy $826,446, after the third year, it will only buy $751,315, after the fourth year $683,014 - and after the fifth year when the bond matures - it will buy $620,922.
This happens because after one year of prices climbing by 10%, it takes $1.1 million to buy what the $1 million used to buy. After two years, it takes $1.21 million, after three it takes $1,331 million, after four it takes $1.464 million, and after the fifth, it takes $1.612 million.
One could calculate this as $1 million divided by $1.612 million. The result would still arrive as demonstrated that the original $1 million now only buys $620,100. Looking at it in either direction, the purchasing power of the $1 million has been depreciated by the five year price inflation.
The only way that bond holders can defend themselves against this, and the way that they always do it, is to sell the old bonds and demand a higher interest rate on any new bonds that they buy.
There is one final effect in the classical inflation sequence - CURRENCY RISK.
The Inflation Risk to the U.S. Dollar is coming.
Got Gold?
Got Guns?
Got Guts? |
