Inflation or Deflation

Inflation, or Deflation

      Deflation is normally associated with either a business depression or a
business recession.

In the United States, since the end of World War II, we have really not
experienced either a recession or a depression.

What we have experienced is wage inflation, and federal deficits,
leading to inflation.

Besides the renegotiation of union labor contracts leading to increased
wages, a shortage of labor also leads to increased wages.

In the 1940’s, we had nickel candy bars, nickel sodas, nickel telephone
calls, and 3 cent first class postage.

In nearly all cases, these items have increased 1400%.

The price of everything rises over time, thanks to inflation. Each year,
the government prints more money, which is the main reason that the price
of groceries, cars, clothes and, yes, stocks keeps on going up. Incomes do
too.

The classical definition of inflation is too much money chasing too few
goods.

Why this money is not used to purchase discretionary items, or saved, or
invested is not explained.

Steve Forbes, in a letter to the Times May 17, 2008, continues this
explanation.

“The cause of the commodity bubble then (1970-80), and now, was
excess money creation by the Federal Reserve” (No mention of the effect of
federal budget deficits)

“ When the dollar is debased, commodity prices go up. In the current
case, the bubble began in 2004, when the Fed continued to provide excess
liquidity”. (i.e. printed paper dollars out of the air)

“Last August (2007) when the credit crisis hit, the Fed chairman, Ben
Bernanke, began flooding the banking system with liquidity”  (printed paper
dollars), “like throwing money out of a helicopter”.

No consideration has been given to the effect of an explosion of
deficits—government and private, our trade deficit, and the deficit in our
balance of international payments— and its de facto pump-priming of our
economy in boosting our gross national product.

Increased paper money supply had two dramatic examples in the 1920’s,
namely in Germany and China, where bushels of thousands of marks or
yuans were needed to buy a loaf of bread.

The Encyclopedia Britannica 1970

As people have more discretionary income, suppliers of goods and
services are able to raise their prices.  A dictum of setting prices is to
charge what the traffic will bear.

To measure inflation, there is a need for an acceptable index of the
prices that are being used to determine a general price rise or a price fall.

In the United States, the Consumer Price Index is comprised of what
government experts designate as reflecting the purchasing habits of the
population.  In no way does it include all but a fraction of consumer prices.

Since the Great Depression of the 1930’s, government policy has been
to undergird prices and wages.

The New York Times, 7/18/07

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