Is Inflation Or Deflation Coming?

inflation deflation header

By the M0 measure of the money supply, there was a 52% increase between February 2020 and January of this year. This is a graph of M0 going back to 2000.

M0 2000 to 2020

There. Proof of the coming hyperinflation. It took centuries to get to $3.4 trillion monetary base, and less than a year to increase it by over half. QED. This is all you need to know!

At least, so say those who are certain that prices are set to skyrocket. And who, of course, also say you should buy gold as it will skyrocket too.

On the other side, the hacks and apologists for the central bank and deficit spending argue there’s nothing wrong with the current monetary and fiscal policies. Paul Krugman, in this debate, asserts (in between many weasel words) that the Biden $1.9 trillion spending package won’t cause much inflation.

A Bank of America survey seems to confirm this, finding that 64% of people planned to pay off debt, save, or invest their $1,400 checks. The rich are not going to receive anything, so this response is showing the middle class is not planning on living large with this largesse.

One ugly fact is that the price of oil has shot up to $65. And the twin to inflation is rising interest rates. The 10-year Treasury yield has spiked up to 1.6%. Do these data points not argue for accelerating inflation?

At the same time, most car commercials advertise 0% interest for 5- or 6-year loans. This is not only a data point for lower interest rates—what would the Treasury have to be, for consumer credit to be zero interest?—but also for soft prices. The price of the car may not be discounted that much, but zero interest is a subsidy worth an additional thousands of dollars per car.

A Glaring Fallacy

Krugman argues that giving unemployed people free money is not stimulative. By the implication of his economic theory, this means non-inflationary. His reason is that it is simply replacing the income that people would have gotten if they had been employed. And therefore, it is not giving them additional purchasing power.

The fallacy in this is so glaring, that we expect a precocious eighth-grader could see through it. When those people were working, they were producing goods and services. Now they are paid the same but producing nothing. That is, welfare checks prop up demand but lockdown cuts down supply. If supply falls but demand remains the same, we would expect higher prices.

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Disclaimer: The content in this article is provided as general information and for educational purposes only and should not be taken as investment advice. We do not guarantee the accuracy ...

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