A View on Inflation & Keynesian Talking Points


03/29/2012 - 23:38

The ponzi will fail, and the economy will reset - the only question is when.

CrownThomas's picture



ĎAs the world spins helplessly into insolvency, central banks are becoming more and more active in helping to "solve" the crisis (although some would argue it's odd to have those who helped create it be counted on to help solve it). As this is taking place, the Keynesians (MMT'ers) and Austrians are renewing their rivalry, and are once again going after each other for their thoughts on the situation (note: it really doesn't matter what the Austrians believe, as the Keynesians are currently in charge of the decision making).

Volumes can and have been written on these two schools of economic thought - what I'd like to focus on is inflation.

Austrians are always sounding the alarm on inflation, and the Keynesians always laugh and point to the monthly CPI figures the BLS publishes. They say that it's in the 2%-3% range, everything is fine. And besides, the velocity of money is down significantly, so the Austrians need to be quiet and take their "crazy" somewhere else.

That's one way to look at it. I would argue that inflation is all around us, we just choose not to look.

Some context: Say you were buying apples at your local store. What if you thought that there were only a dozen apples in the store you were in, with no chance of more apples being delivered. You'd place a higher value on each apple right? Now what if you knew there was a truck load of apples being delivered shortly - you'd place a little less value on each apple, knowing that the supply of apples will be increasing shortly.

This is the same way Austrians view the value of money. They believe that individuals value money based on both quantity, and QUALITY. If the Federal Reserve can just print money and increase the money supply, creating more dollars to chase a similar amount of goods, why would you value each dollar the same as you would before the money supply was increased? And in regards to velocity of money, the velocity of money does not create inflation, it is a symptom of inflation. Think about it, if you knew there were more and more dollars chasing the same amount of goods around, you'd begin to draw on your account & borrow to purchase goods now instead of in the future, thus increasing the velocity of money. But the inflation was already there when the money supply increased arbitrarily.

Inflation is all around us. I don't need to get into things like WTI or Brent, you feel the effects of those each time you get gas. What I'd like to point out are things like healthcare, energy as a whole, housing prices, and student loans. Do you not see the inflation in those areas? -- As an aside, I recommend reading this piece ZH published on student loans.

Here's the case I lay out for those reading to make up their own minds. The Federal Reserve prints money, "buying" treasuries & increasing the money supply, thus devaluing the dollar. The Government then subsidizes all of the aforementioned areas, which means more dollars are available to purchase those goods & services. And this is how the game is played (also, banks net income swells as a result).

A. M2 (Money Supply) skyrockets (Fed printing)


B. An Example of Government Subsidies in Student Loans


C. Here's Your Inflation (that nobody can seem to find)


D. All with a declining velocity of money


E. The USD is losing value at a rapid pace (but who wants the paper tied to something of value, that's crazy) -- Also, you can look at DXY, but you'd only be looking at how the U.S. is doing devaluing their currency vs. the rest of the currencies in the race to the bottom.  



And may I present to you the only reason money is printed - so everyone can consume all those iPads and sweet big screen tv's:


Eventually the game will be up folks, and I strongly recommend you learn to live below your means before you're forced to. The ponzi will fail, and the economy will reset - the only question is when.

In the spirit of the Zero Hedge Mob