Thursday, June 09, 2011
Brain surgery is not rocket science to a brain surgeon.©
Some Inconvenient Truths can be Backed Up by Real Math and Science
The Reality about Speculators, Commodity Prices, Fiscal Policy and Inflation
Part 1: Why We Really Have Inflation
Inflation describes a condition of the things we buy every day getting more expensive. That’s simple. Contrary to what the “experts” want you to believe the causes are pretty simple, too.
Supply and Demand:
If supply decreases and demand remains the same prices will inflate. If supply remains the same and demand increases prices will inflate. If supply decreases and demand increases prices will inflate and all vice versa. Tensions in the Middle-East, a refusal to open valuable crude-producing areas in the U.S., a moratorium on off-shore drilling and entrée to the summer driving season with the increased EPA formulation requirements is MORE than enough to inflate fuel prices. As we will see, as fuel and food prices go, so goes the price of EVERYTHING. That is the supply and demand explanation.
Value of Money:
Currency is subject to the same laws of supply and demand as any other commodity. If supply increases and demand remains the same then the price (value) of the dollar will fall. By default, then, it will take more dollars to buy the same item because each dollar bill is worth less. This will, necessarily, lead to inflated prices.
Food and Fuel:
It is a predictable fact that once food and fuel costs start to rise the cost of everything will start to rise. Why? It’s a simple circle of economics. Food is required to grow other food, i.e. growing feed for livestock. Fuel is required to produce as well as transport products from A to B to C. That includes food. So, if it is more expensive to produce and transport food and it is more costly to produce and transport everything from raw materials to finished products prices will rise. It really is that simple.
Counterfeiting money is a very serious crime, unless the Fed does it…
Thanks to our astute policy authors and their “expert” advisors we have supply, demand, and fiscal policy more hospitable to inflation than a Petri dish is to bacteria! As pointed out in our blog post on the April jobs report we said the money supply has been increased but demand has not. The problem is that many new bills out there were printed out of thin air. In order to add dollar bills to the money supply without devaluing the currency it needs to be in response to increasing demand. What causes an increase in demand for dollar bills? Simple. GDP. If the total value of our Gross Domestic Product rises that means more wealth is being created. Since dollar bills are just paper representations of wealth, more wealth demands more representative bills. The trouble here is that we have, in essence, been photocopying money (increasing supply) without creating new wealth (increasing demand). Worse yet, the copied money is being used to purchase debt. In other words we are paying on loans to ourselves with photocopied money…that we are loaning to ourselves. Counterfeiting money is a very serious crime, unless the Fed does it, apparently. Why is it a crime? Because it is fake money entering circulation with no basis for value. Baseless money dilutes the value of productivity money and that can cause inflation. These are the effects of the Quantitative Easing and QE2 we’ve heard tell of. Any thought of a good outcome for those policies is pure fantasy. Need I explain the insanity of paying off short-term interest in favor of long term interest with money that has no basis of value?
That just about nutshells the real reason for our current state of rising prices. Ya, see? Some inconvenient truths can be backed up by real math and science.
Now let’s cover that which is specifically NOT a cause of inflation in spite of the assertions of our esteemed leaders, pundits, experts, yada, yada, yada… On to Part 2
© Thursday, June 09, 2011Blue World Asset Managers