Inflation And Commodities Market

What is inflation?

Any layman can tell you—and nearly everyone uses it this way in informal speech—that inflation is rising prices. Some will say “due to devaluation of the money.”

Economists will say, no it’s not rising prices per se. That is everywhere and always the effect. The cause, the inflation as such, is an increase in the quantity of money. Which is the same thing as saying devaluation. It is assumed that each unit of money commands a pro rata share of all the goods produced, so if there are more units then that means each unit is worth less. Value = 1 / N (where N is the number of units outstanding).

There are different ways that the quantity of money can expand. It depends on what kind of monetary system you have. For example, the miners increase the quantity of gold. In free banking, the banks increase the quantity of gold-redeemable notes. In our irredeemable monetary system, the Fed increases the quantity of dollars.

Do these increases have the same cause and the same effect? Hell, no! The gold miners go to work if the cost of mining an ounce of gold is less than one ounce worth of labor, energy, and tooling. The banks issue more notes if the yield on short term bills goes up. The Fed creates more dollars if either their model tells them to do administer another dose, or politicians twist their arm (as may be about to occur now with President Trump pressuring Fed Chairman Jerome Powell).

Our friend Steve Saville writes about this. We agree with him on many topics, most recently we both wrote to debunk the gold-backed yuan fantasy.

However, when he talks of gold inflation, we take exception. Gold mining is an honest business. Whether or not one believes that it causes prices to rise (we don’t), can we all agree that the word for gold mining should not be the same as the word for the pernicious counterfeiting of dollars? Or the word for monetary central planning by the Fed?

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Disclaimer: This content is provided as general information and for educational purposes only and should not be taken as investment advice. We do not guarantee the accuracy and/or completeness of the ...

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