Thanks, Steve, for the compliment and the interesting, morphing definitions of inflation.
which is really at the heart of the debate between those who believe we are heading towards high inflation and those arguing we will soon see real deflation.
It seems to me that an either-or debate is unwarranted by the facts. The facts are that we have both occurring simulataneously, and I think this is unprecedented. Real estate values and stock portfolios are/have been deflating at the same time that prices of necessary consumer goods and services, such as food, gas, medical care and utilities, have been rapidly inflating.
In our last inflation spiral, the 70s, we had wages also rising. So you had the classic inflation spiral of 'too much money chasing too few goods'. The country was young and the baby-boomers were in their household formation years, i.e. buying homes, furniture, kids stuff, etc.
We don't have that now so I don't see that the Fed has the necessary tools to fight inflation. We have 78 million people entering retirement and downsizing their homes and consumer purchases naturally as older people do. On top of that, their budgets are being squeezed by the higher prices at hand.
This is the mix of demographics and economic variables that is unique and unprecedented in the history of the country, I think. I have no idea what the solution is......it will be a mix of things.....but I feel pretty certain that shrinking the money supply arbitrarily would likely accomplish little.
Also, with regard to inflation, it really is too simplistic to just attribute it to the 'printing of money'. Sometimes prices go up just because an industry can pull it off in a somewhat unfettered fashion. Healthcare costs are an important example. I don't see that Greenspan's low interest rates and subsequent expansion of the money supply had anything to do with this, do you? Healthcare costs have risen at twice the rate of inflation and we now pay 30% more than do our westernized counterparts in Europe. Why is this? I think it's nothing more than the fact that there are or have been no countervailing forces to keep a lid on these prices. Prices could rise with impunity. Self-rationing is difficult. If you need an antibiotic, you pay for it.
Sometimes prices rise, in part, due to speculative and manipulative forces in the financial markets. I'm in the camp of those who believe traders have/are distorting the intrinsic values of oil and basic farm commodities. Only 5% of oil futures contracts bought are from parties who will actually take delivery, i.e. the traditional hedgers. The rest are from traders, ETFs, and institutional hedge funds. This is unprecedented.
We are living in interesting and unprecedented economic times. And look at how arbitrary our rising prices are. Historically, an inflationary spiral saw everything going up....wages, all goods, and all services. I don't see prices going up much, if any, on discretionary items such as clothing and household furnishings.....on things where self-rationing is an option. Instead, prices are rising on necessities....food and energy being the main drivers with healthcare still rising moderately. |
