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Where Is the Inflation?

Critics of the Austrian School of economics have been throwing barbs at Austrians like Robert Murphy because there is very little inflation in the economy. Of course, these critics are speaking about the mainstream concept of the price level as measured by the Consumer Price Index (i.e., CPI).

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If you read the comments section of the article I recommend looking at the comment made by James Buchanan and the responses to his comment (particularly by "Free Radical").

It's because of high Money Demand ...

... and the article does not really hit the nail on the head, and did not explain it well.

Like anything else, the value of money is determined by supply and demand. I'll repeat: supply AND DEMAND.

We can see the Fed printing money and we can measure Money Supply. But we cannot measure Money Demand because demand is determined by millions of people and it appears somewhat hidden. Because it is impossible to accurately calculate, Money Demand is usually ignored in these discussions. But it is the KEY to understanding what is really going on, so it should not be ignored.

There is a high Money Demand when people prefer to hold money (currency, gold, or other forms of money -- money simply being anything used as an exchange of value), and there is a low Money Demand when people would rather have something else rather than money.

So, in a normal economy, some people save (high Money Demand people) and some people spend (low Money Demand people). Now, when Money Supply ramps up, then *IF ALL THINGS REMAIN EQUAL* (which they never do), you will have a rise in Money Supply without a corresponding rise in Money Demand. This will lead to a lower value of money in general, which results in higher prices for things we buy.

However, if people are fearful of the future, then they tend to have a higher Money Demand than they otherwise would have. So, as the Money Supply increases -- BECAUSE THE ECONOMY SUCKS -- people will absorb that higher Money Supply by increasing their demand for money. That is what has been happening.

In short: that excess Money Supply has been absorbed by an dramatic increase in Money Demand -- the money is in the banks. People are spending less because they are fearful of the future. They have a high Money Demand because they would rather have the money than the things they could exchange the money for. Companies are "hoarding" cash (money) rather than spending on capital expenditures or labor (hiring more people), because they now have a higher demand for money than they did before.

Most importantly, banks are holding money and not lending as much because they need to strengthen their balance sheets. The money is sitting in bank accounts rather than being spent in the economy due to a higher overall demand for money by the populace. In addition, the banks are not "releasing" that money into the system because they, too, are fearful. So, it is not being lent out like it was.

Meanwhile, the Fed is monetizing the debt by being the #1 purchaser of US Treasuries, which is keeping interest rates down. Because savers are not rewarded by high interest rates, many are taking more risk by investing in the stock market, so some of that money demand is showing up by being "exchanged" for stock rather than Federal Reserve Notes. More risk, yes, but even though people have a high demand for money, they also have a relatively (and a bit nutty) high tolerance for risk. Because they are not being rewarded for saving in bank accounts, they are instead "saving" in the stock market (a lot of people are looking at it like that, even if they are misguided to do so).

Now, it is actually possible that this could all work out OK. Not too likely, but not impossible, either. The more likely scenario is something crazy happens, like we see in Cyprus but on a bigger scale, and then Money Demand would start to drop like a rock. When you have excess money in the system due to years and years of excess Money Supply AND Money Demand starts to fall, THEN you will have soaring prices because that is when the value of money plummets.

So, for now ... demand for money is soaking up the excess supply of money. But will it last?

The Chinese are importing

Something that's becoming

Something that's becoming obvious is that the containers are getting smaller but the price is the same.

Something mises predicted was called

"the crack-up boom" I am sensing its approach.

Yup - Crack-up boom...

That's what's coming.

I heard some idiot on the radio the other day say that gold was going to $700.00 and silver was headed to $15.00.

"We have allowed our nation to be over-taxed, over-regulated, and overrun by bureaucrats. The founders would be ashamed of us for what we are putting up with."
-Ron Paul

In A Deflation

Prices could go much lower than that.

Since 1913, the "Elastic Dollar" has odd value.

"Credit is a system whereby a person who can’t pay gets another person who can’t pay to guarantee that he can pay." – Charles Dickens, English novelist

Who can imagine your faith & confidence of "elastic" currency from one moment to the next?

Disclaimer: Mark Twain (1835-1910-To be continued) is unlicensed. His river pilot's license went delinquent in 1862. Caution advised. Daily Paul

Inflationary forces VS Deflationary forces

Inflation has been suppressed for a never before encountered reason.

Computers, the internet and our accelerating technology are deflationary forces that have become more powerful than the current level of Ben's inflationary money printing.

My $700 Chinese computer is replacing $1100 Klipsch speakers and $500 per year of LP records and $500 per year in books and $300 of magazines and $4000 in miscellaneous entertainment and $3000 in avoided trips to the store and the repair shop and travel agency etc.

My small business has cut half the employees I previously needed to do bookkeeping, taxes, mailings through software, email and offshored customer service. Our road salesman and print advertising was replaced by Google.

I'm a died in the wool Ron Paul "End the Fed" guy, but I think EVERYBODY is obsessing about the Fed's inflationary printing press and ignoring the bigger more powerful deflationary effects of an increasingly efficient world. This completely, and correctly explains why inflation as it is commonly calculated, has not been experienced in a big way, and why Bernanke has been getting away with money murder.

~3 Major deflationary forces on the way~

1. A Chinese made compressed natural gas compressor mounted in your garage to fuel the family car totally kills 116,855 USA gas stations and hands pink slips to it's 910,000 employees. The $200 per month it will save your family allows Bernanke to print and distribute another 200 paper dollars without creating visible inflation.

2. Chinese made Home 3D printing and CNC machines. Toys. Tools. Replacement parts. Make whatever you want from a lump of whatever you have. If your little 3d printer makes the toy, you don’t have to drive a car to go buy it, it didn’t have to be trucked by a truck driver to a store for you to see it, it didn’t have to be packaged in a factory or sold by a retail worker regarding it.

3. Cheap Chinese made solar power systems will kill US power plants, power distribution companies and lay off 560,000 well compensated workers. Highly efficient Chinese LED lights lasting 25 years lay off light bulb changers and manufacturers and reduce the needed size and initial cost of the coming solar systems. The coming high efficiency multistage heat pumps will also reduce the needed size of the coming solar systems. American job killing Solar will be ubiquitous in ten years or less.

There are thousands of improved efficiencies I don't know about coming faster than any living person has experienced as a result of the exponentially expanding information available on the internet.

The workforce and government is not able to keep up, and it will just get worse.

"Timid men prefer the calm of despotism to the tempestuous sea of liberty" TJ

Banks will lend you money if you can prove you don’t need it.

"Banks will lend you money if you can prove you don’t need it." - Mark Twain, American author
Coffee. Coffee mug sold separately. Where the Hell is my coffee mug?

Note all the sharp upward spikes. US Dollar Federal Reserve Notes are nothing but a confidence racket. I endorse Dr Ron Paul & his efforts toward sound money.

Disclaimer: Mark Twain (1835-1910-To be continued) is unlicensed. His river pilot's license went delinquent in 1862. Caution advised. Daily Paul

The article in the OP answers

The article in the OP answers his own question. Good read, but nothing I didn't know already.

"...nothing I didn't know already."

Same here, but I figured it was a good article to share with those who aren't as knowledgeable. =)


We are hitting our 2% inflation rate. Trust me, Ben Bernanke told me so.

Inflation batteries

I have a theory of part of inflation that I have used for my own understanding:
Inflation--the increase in the money supply--is not necessarily manifested in increased prices. When it is, it often shows up in the form of "batteries." Examples of batteries are housing bubbles, education cost bubbles, medical cost bubbles and the stock market.
These batteries, large and small, accumulates money and shield the rest of the economy from manifesting the inflation through price increases.
With these various inflation batteries, the rest of the economy may even show price decreases in spite of an increase in the money supply.

I believe that more often than not, an increase in the money supply will mostly go into a myriad of these inflation batteries, and therefore delay the effect on general price increases.

When these inflation batteries are discharged, the traditional 'inflation=price increase' manifests itself through a general increase in prices.

Food and gas

In 1987 $10 filled up my gas tank, filled up a grocery bag and bought a carton of cigerettes.

Today $10 might buy 3 gallons of gas, 2 gallons of milk and a pack of cigerettes,

There's the inflation.

If $10 might buy you 3

If $10 might buy you 3 gallons of gas, 2 gallons of milk and a pack of cigarettes, then you need to tell me where you shop.

I shop locally

Mendocino Coast

You worded it wrongly. Use or

You worded it wrongly.

Use or instead of and.


Thank you... LOL duh! My bad.. silly me.. good thing everyone got my point despite my wording.

Its because the west is still considered a safe haven

Its only because the poorer nations around the world so far accepts western countries to still be safe havens. When they start to demand more euro/dollars for their products the real inflation will hit hard, their inflation numbers are extreme in many cases. I predict that this paradigm shift will happen when our financial system breaks down. The trust will dissapear in an instant and it will start in the eurozone when the first countries/banks are let to go bust. This timeline can be pushed up for a short period of time by further bailouts but eventually it will come to and end. Why in the eurozone you may ask? Because so many different cooks will be harder to control than in for example the US.

The Stock Market is inflated.....

lots of gov't money going there.

The individual has always had to struggle to keep from being overwhelmed by the tribe. If you try it, you will be lonely often, and sometimes frightened. But no price is too high to pay for the privilege of owning yourself.
Friedrich Nietzsche

Oh the misconception...

The CPI is grossly inaccurate because it doesn't measure things we NEED to by. That said, something Dr. Paul was most likely inaccurate on is that the US overall will see deflation when the SHTF(which is a good thing).

The Austrians have a narrow definition of money, but currently, leverage counts as money in the economy, as the leverage contract like a vicious rubber band, the economy will realize dramatic deflation.

The inflation we have been expecting is occurring now...Stocks, Bond prices, Metals, Food, Energy...but when the Leverage contracts and there is no real "non-credit" money anywhere, prices will be forced downward.

Let's take a small scale example...

Moved below...

Can you explain why it would be deflation

Instead of hyperinflation? For a curious student :)

Small Scale example, Take 2


Bank of "We have no paddle" has $1 billion dollars. Thinking its a good idea to be levered 20:1 (this is a conservative estimate in regards to what was happening in 2007, See Bear Stearns), they use that $1B as collateral to invest the equivalent of $20 Billion (Derivatives, Shorts, Currency Exchanges, Futures, housing, etc...). Thus, there is now $20 Billion in this economy instead of only $1B.

In a simplified version, depositors come for their $1B dollars and the banks need to pull back more capital, OUT of the economy. When this happened in 2007, Banks immediately needed cash flow and needed to de-lever. This removes money from the economy at a rapid pace (Thus Bernanke's faulty assumption he needed to create capital).

Well nothing has been fixed since then; banks are still over-levered, and when they can't invest or lend, Monetary supply will drain from the economy faster than Bernanke can run the printing presses and click the "Transfer" button.

You see, the lack of available credit that will hit the system (like 2007)is the same as saying there is not enough money. This will force prices to decrease as demand will plummet (trickling from the large to the small, i.e. banks and corporations to the little guy)

Margin compression occurrs when companies have to continuously reduce profit in order to maintain demand, and soon there is no more profit to reduce.

Lots of stuff there, maybe all over the place since I'm posting quickly from work, but Long Story, Short:

More of our money supply is credit based than actual $ based. Avalable credit will decrease faster than $s can be printed once banks need to De-Lever. Google leverage for a more in depth understanding, its a fun, scary concept.


those in charge of creating of money aren't required to continue printing fake money. They can shut the presses down instead, resulting in deflation.

It is a misconception and just plain in error to say that Austrian's say that fiat money printing will always end in hyperinflation. Rothbard said perhaps the worse danger was for the inflation to be smaller and slower over long periods of time where all savings in general were eroded to nothing allowing those in control of the money printing to slowly gain control of real assets.

~wobbles but doesn't fall down~

Damn Good Question!

I am curious also.

Also, there is still a strong

Also, there is still a strong demand for dollars world wide. That keeps all the money printing from effecting us too much here at home. As soon as China, Iran, Russia et al give the finger to the dollar we will see WW3 or a lot of suffering in US if not both.

When the government takes food and energy out of the index...

...it skews the inflation numbers.

Food and energy are the grand essentials of life which must be purchased.

My guess is that if those were in there today, inflation would be near 10%.

"We have allowed our nation to be over-taxed, over-regulated, and overrun by bureaucrats. The founders would be ashamed of us for what we are putting up with."
-Ron Paul


Wouldn't it be higher than that? 3 years ago a jar of peanut butter was 2 bucks, now it's 3!