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Thoughts on Monetary Inflation

Steve Saville
Jan 12, 2010

Below is an excerpt from a commentary originally posted at www.speculative-investor.com on 10th January, 2010.

Inflation: A deliberate policy, not the natural way


The Fed's main achievement during its existence has been massive inflation of the US dollar supply, the bulk of which occurred after the loosening of the 'gold shackles' in 1934. And one of the most obvious effects of this monetary inflation has been a 95% decline in the dollar's purchasing power (one dollar today buys roughly what 5c bought in 1913). Furthermore, the loss of purchasing power has transpired in such a relentless fashion that almost everyone now perceives rising prices to be the natural way of things. Few people realise that during the 100-year period prior to the Fed's creation -- a period during which the US economy made exceptional progress -- the dollar lost none of its purchasing power.

The reality is that a long-term DOWNWARD trend in prices is the natural way of things in a FREE economy. In the absence of government manipulation of the money supply, prices will naturally fall over the long-term due to increasing productivity. This means that in the absence of government manipulation of the money supply there would be no need for a person to speculate in order to secure his/her financial future. A person could simply save cash, safe in the knowledge that the cash will buy at least as much in the future as it does in the present. In other words, monetary inflation forces everyone to become a speculator, an endeavour at which some will succeed and most will fail.

A few smart people are presently anticipating deflation. We certainly see the appeal of the deflation view given the present economy-wide debt burden, but, unfortunately, such a view flies in the face of both logic and history (the history of the past 75 years and the history of the past 15 months). We say "unfortunately" because a period of deflation is needed to establish the foundation for a sustainable economic expansion, whereas more inflation will only make a terrible situation even worse.

Rather than deflation, chances are that the US government, via its tool known as "the Fed", will continue to borrow and spend enough new money into existence to more than offset the private sector's desperate attempts to repair its collective balance sheet. In the process they will probably end up eradicating much of the remaining 5% of the dollar's purchasing power.

Money Supply Variations





Steve Saville
email: sas888_hk@yahoo.com
Hong Kong



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