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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: nextrade! who wrote (26477)1/8/2005 4:54:16 PM
From: Elroy JetsonRead Replies (1) of 306849
 
That's a great quote regarding the built-in monetary inflation in a Monetarist system. Let me answer in two parts.

Let's start with a Capitalist system, which we don't live in. Let's say the wealth of the economy has grown by 10%. We should expect all of the "primary factors of production, land, labor, and capital" to have collectively increased in value by 10%.

Note that with a fixed money supply, money appreciates in value, regardless of whether the money is made of gold or paper. Since money appreciates in value, wages and land when priced in money remain relatively constant while the price of most other items become less expensive.

How does our Monetarist system differ from Capitalism? If the wealth of the economy grows by 10% the central bank (the Fed) takes it upon themselves to increase the money supply by 10% of the GDP as well. This allows them to collect a 10% tax on the economy, since the money has to be spent into existence, which is even greater than the income tax which typically collects only 7.5% of the GDP! This tax falls most heavily on savers - have you ever wondered why the savings rate in the U.S. is zero? This huge tax provides a large subsidy for the banking system and money borrowers.

The Fed calls this 10% tax a "price stabilization measure". What they mean by this is when the wealth of the economy rises by 10% if labor doesn't earn 10% more they are getting a wage cut and if land and capital don't appreciate in value by 10% their value has fallen. Most other items remain constant in price rather than decline in value.

This enormous Monetarist Tax would be bad enough by itself, but it doesn't stop there. The the money supply is inflated even further by the subsidized over-lending system which grows the debt level far faster than the growth of wealth in the economy. This over-lending occurs in surges when irresponsible politicians implement new policies which either create debt and or encourage debt creation.

home.pacbell.net

We can see that Reagan and both Bush Presidents created the irresponsible sort of policies which grew debt far faster than the economy grew.

As we might imply from this chart, the debt level (ie the money supply) periodically reaches a level which can no longer be sustained by available income. When this point is reached, the usual result is a massive de-leveraging commonly called an "economic depression" or a "panic". In Japan this process is being artificially slowed down by the government into a process which could be better described as a "economic coma".
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