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Oct 17, 2015

Is Inflation No Longer a Problem?


Short term inflation is irrelevant.  The long term pattern is easy to see for a Vietnam Era vet like me.  When I was a kid, candy bars cost a nickel, silver was $1.25 an ounce and gold was $35 an ounce.  I grew up in Missoula, Montana, where I got my allowance as a single Morgan silver dollar coin every week.

I haven't bought a candy bar lately, but the last time I did it was $1.25.  Silver is $15.96 an ounce today and gold is $1,323.  A 1921 Morgan silver dollar coin is worth about $27.

The traditional solution for bankrupt governments is to debase the money.  Henry VIII had trouble paying for his 6 wives, so he minted primitive sandwich coins with copper centers and silver overlay.  Because of where the silver wore off on the coin, he was known as "Old Coppernose."  

In modern US terms, we electronically print more money. Calling it quantitative easing doesn't change what's going on. The ultimate result is convenient only in the very short term. Longer term, it wrecks the economy and creates political instability. Hitler would have been trapped in beer halls if it hadn't been for the instability of runaway inflation.

Inflation makes it hard to estimate economic risk because the way it changes values is not uniform across asset classes. To paraphrase Orwell, some assets are more equal than others. When you add the different tax treatment for different assets, it gets worse. In general, inflation diminishes the information value of prices, which in turn reduces efficiency in the economy as a whole. Inflation is not something you wish for. It's something you live through. If the government takes the inflation to extremes, the economy breaks down, which leads to the government and society breaking down. Glib talk from liberal pundits is just whistling past the graveyard.

The US has been inflating the dollar for years.  After the Obama spending binge, I think we can expect more of the same.  The only question is the timing.



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