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The most important economic phenomenon lying ahead of us, which we must understand as traders and/or investors, is the inflation-versus-deflation battle.
Below I discuss this most important of all financial phenomena, one poorly understood by the public at large, as we lead into specific ways to position ourselves in the marketplace.
Inflation-or-deflation is a phenomenon not just of money supply, but of money in circulation.
When Federal Reserve Chairman Ben Bernanke was interviewed recently by Congressman Ron Paul (R-TX), one of the smartest guys in Congress, he didn’t give the full answer.
Here’s an excerpt from that interview (with some additional comments Rep. Paul then gave to correspondent Neil Cavuto):
Ron Paul: So it seems to me that you’re in the midst of massive inflation, but I guess you have a different definition. When you double the money supply, that’s not inflation itself? Or are you looking at only prices?
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Ben Bernanke: "Inflation" is the change in the price of the consumer price level, which is very stable right now, and the various measure of money, as you know, in the broad measures of money, the measures that cut the measures of money in circulation like M1 and M2 are not growing quickly.
Neil Cavuto: So, Congressman, he more or less said your inflation concern was misplaced. What do you make of that?
Ron Paul: Yeah, that’s what he said. But when it comes, people will realize they should have been more concerned. Just like he was totally unconcerned about the crisis building. Remember the many years and months before the crisis hit he reassured everybody that there were no problems. So I don’t know why we should be reassured by him now saying, "Don’t worry about inflation."
But I was trying to make the point that the definitions are different. If you increase the supply of money, that is inflation. It causes harm, even if you don’t have your rise in prices yet. But we do have rising prices in medical care and there is a lot of inflation out there.
Neil Cavuto: And you’ve been arguing that a lot of this federal printing of money led by the Fed and all these rescues and bailouts where we are pulling money out of our you know what, I mean, that’s going to be eventually inflationary. Now, to be fair to you, you’ve been saying this long before even our economists started picking up on this. What is your worry now? How pronounced is this threat? How soon is this threat?
Ron Paul: Well, I don’t think you can predict, that’s one thing, Austrian economics teaches you that you can predict trends, but not timing and yet, it will come because the money supply has been increased. …
August 4, 2009
