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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Tommaso who wrote (51289)	1/25/2006 10:03:40 AM
From: Wyätt Gwyön	Read Replies (1) \| Respond to of 110194

as can happen in a big war hasn't it been pretty common for govts to go off the gold standard during times of war? iirc, Lincoln suspended the gold standard during the Civil War.

To: Tommaso who wrote (51289)	1/25/2006 10:19:38 AM
From: GST	Read Replies (1) \| Respond to of 110194

Money and what things are available to buy with money (i.e. supply and demand) sets prices. When the supply of things available to buy expands, you can increase money supply without changing prices. If money supply is changed (lets say it is increased), without an increase in things to buy, then prices move up. That is inflation. Mish looks at money supply, assumes prices are too much of a headache to grasp, and assumes that an increase in money supply is inflationary, "period" (as he puts it). We could spend quite some time discussing this -- but bottom line, inflation is about prices, and to speak of what sets prices without speaking to the issue of the supply of goods (only the supply of money) is a farce. The supply of money is one part of the equation -- and nothing more than one part of it. Mish goes so far as to say that productivity increases "mask" inflation -- a very funny idea indeed. There are many things that are known as "positional goods" -- for example a Harvard education. The value of a Harvard education is social position -- if every kid in the country could get it, then it would have no positional value. Real estate is also positional -- the value of owning it is that you can't have it if I do. Some parts of town are worth far more than others for positional reasons. Stocks and gold can easily take on the character of "positional goods". When the price of positional goods starts to move up, it can be taken as a sign of too much liquidity. So if stocks, real estate and gold move up (along with a Harvard education), it is likely that something is going on. It could be that rich people suddenly have more money and bid up the price of positional goods. Lets say you have a huge tax cut tilted towards people with high income. The price of positional goods is likely to rise as a result, although it need not represent an increase in overall money supply -- it could just be rich people doing what rich people do when they get a larger lice of the pie - they bid up the price of positional goods. Of course it can also be because money supply is growing too fast as well -- or most likely a combination of the two. Bottom line -- inflation is about prices and money supply is never more than part of the equation.