I read a column on safehaven.com discussing deflation, the current economic bugbear and it stirred thoughts in my ever active mind. I have never heard of Adam Hamilton, the author of the piece but his comments were worth passing on I thought. He notes that a lot of mainstream economists and commentators are worrying about deflation, a state of affairs where the money supply shrinks and prices rise (the same number of goods being chased by fewer dollars leads to a rise in prices). However Hamilton makes the point, forcefully, that in the current crisis there is no reason to expect deflation.
.Sure, prices are dropping but that's because people and institutions are too scared to spend the money they have. There is no decrease in the supply of money. Conversely Hamilton argues the proper definition of inflation is the measure of the supply of money; when the supply increases one has inflation. Hamilton says the commonly accepted method to measure inflation or deflation by measuring price increases or decreases is not valid.
.The difference seems academic on the face of it, and I had never given the matter much thought. I have long felt that the CPI, Consumer Price Index, has not been an accurate measure of the change in consumer prices, but I never debated the commonly held notion that the CPI measures inflation . Instead I should have been looking at the increase in the money supply as the true measure of inflation. Hamilton does that and he has found massive increases in the money supply over the past few months which he believes heralds, inevitably, massive inflation.
.It's an interesting and provocative essay found on the Implode-o-meter website, and it is persuasively argued for anyone wonky enough to care. These days voices debating conventional wisdom are two-a-penny, but Hamilton (who is selling an investment newsletter) has made a point that will stick with me for a while.
5 comments:
I've never trusted CPI as an indicator of real inflation since here at least it excludes house prices.
Money supply was a widely-used indicator measure of inflation in the '80s. Thatcher used it to put paid to the 30+% inflation she inherited from the Labour government.
Now the wheel has turned full circle and we have another Labour government likely to deliver 30+% inflation.
I read that, given the similarities between the US and UK economies, where we go you are likely to follow. Unless, of course, you get there first in which case we won't be far behind.
It would cost the equivalent of 60 cents per gallon to charge and drive an electric car. The electricity to charge the car could come from solar or wind generated electricity. If all gasoline cars, trucks, and SUV's instead had plug-in electric drive trains, the amount of electricity needed to replace gasoline is about equal to the estimated wind energy potential of the state of North Dakota. Oil is finite. We are using it globally at the rate of 2 X faster than new oil is being discovered. India and China are expected to put 3 million more vehicles on their highways within the next 20 years. We have so much available to us , wind, solar, hybrid technology and bio fuels. We need to invest in America. We need to get on with becoming an energy independent nation. www.themanhattanprojectof2009.com
YOU SPOKE,
"...economists and commentators are worrying about deflation, a state of affairs where the money supply shrinks and prices rise..."
DEFLATION:
A decline in general price levels, often caused by a reduction in the supply of money or credit. Deflation can also be brought about by direct contractions in spending, either in the form of a reduction in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy. opposite of inflation.
This content can be found on the following page:
http://www.investorwords.com/1376/deflation.html
It's complicated. Nobody knows what's going to happen. Go fishing, ride motorcycles, and don't buy newsletters.
All comments are true in their way no doubt, but the question remains, if the money supply has doubled are we in a deflationary spiral because prices are dropping, or are we about to get our underwear gobbled up by an inflationary spiral of unprecedented proportions? I have no crystal ball and will continue to watch the train wreck splatter with unalloyed, horrified fascination.
ps I buy no newsletters I buy no books and I request no money online. I just enjoy reading and happily have lots of time to do it. I am much more fascinated by politics and economics than I am by starlets and their paramours.
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