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Inflation !: folly, myths and nonsense

August 9, 2020

If an American complains about their 2% or 3% a year inflation just as much as a Venezuelan complains about three or more digits, ask yourself. What the hell is wrong with them? When I was a university student in the United States 20 years ago, I had a modest monthly budget that I can still remember. Two decades have passed. And the funny thing is that a student today can live on the same budget. Personally, it seems admirable.

In Venezuela today you can’t live with last month’s budget. Prices rise within a few hours. Sometimes you buy something in the morning and the price is different in the afternoon. In Venezuela, economic growth is negative and inflation is going through the roof. There is a crisis in the United States and the offers are everywhere. Many possibilities open up because everything is at a discount. And the libertarians who talk about inflation and hyperinflation? What world do you live in? They look like a spoiled child’s tantrums.

You understand that politics is politics and sometimes you attack yourself in order to attack. But here you also have to have a bit of sense. The period known as Great Moderation, which began in the mid-1980s and continues to be felt today, was one of controlling inflation. In other words, the developed world has kept inflation under control for decades. Even the libertarian wing of the Republican Party has practically disappeared. And it was reduced to a few people. Because when it comes to the current role of the Federal Reserve in the economy, there is a bipartisan agreement.

Inflation !: folly, myths and nonsenseInflation !: folly, myths and nonsense

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This great moderation was achieved thanks to the independence and modernization of the central banks. It did not happen in Latin America or any other region, but it did in most of the developed world. Today the problems are different. Today’s world is different from the world of the 70s and early 80s. We have all kinds of problems. The level of public and private debt is alarming. Budget deficits, inequality and trade imbalance are going through the roof, but inflation is under control.

The trick to controlling inflation and achieving stability is to increase the money supply in the same way as production does. However, What is inflation It is the general rise in the prices of goods and services. The issuance of currencies is not inflation. The stimuli are not inflation. Inflation is measured by measuring the price of goods and services.

If the money supply is increased irresponsibly, we will have inflation. When the demand for goods and services increases, we have inflation. And when the supply of goods and services decreases, we have inflation. Too much inflation hits purchasing power and weakens the currency. However, moderate inflation of 2% or 3% per year stimulates economic growth and creates jobs.

On the other hand, deflation occurs, which is the general decline in prices due to a lack of liquidity, overproduction or a fall in demand. Deflation leads to economic growth, currency appreciation and unemployment. That is, a crisis. Crises were very common when the gold standard was applied as there was no way to increase liquidity in the economy. Crises lasted for several years and governments usually had to temporarily deviate from the gold standard to overcome them.

In Latin America, crises are generally not deflationary. Latin American crises are usually stagflation crises. In short, economic decline with inflation. And of course that happens when the country’s manufacturing apparatus doesn’t produce enough and the government doesn’t stop spending.

In the case of the United States, the issuance of currencies is enormous and the public spending is enormous. However, they have one great advantage. Globalization. This means, The world continues to buy dollars. The hegemony of the dollar as the world’s reserve currency is the goose that lays the golden eggs of the United States. They print tickets and the world picks them up. The world ships products and they ship paper. It’s a good deal.

With the decline in demand due to containment by the coronavirus, a terrible deflationary picture was created. When demand falls, income falls. And when income falls, there are layoffs. Consumption falls when unemployed. And so we have a crisis.

What to do in a deflationary crisis Economists and politicians have already learned the lessons of the past and know exactly what to do. Deflation is fought with “reflation”. What is reflation? It looks like inflation, but it isn’t. Reflation is the issue of inorganic money (monetary stimuli) to stop deflation and return to stability. And by stability we mean healthy inflation of 2% or 3% a year. The stimuli are the size of the crisis. Giant crisis, giant stimuli.

During the worst of the crisis, the dollar got too strong. Therefore, the stimuli are specially designed to weaken them. And it actually works. The mistake is to assume that this temporary price increase will continue indefinitely. In other words, if we take the July data and start multiplying for each month for the next two years, we would hypothetically have an inflation table. But that’s absurd. Since the stimuli are designed to counter the imbalance in Q2 2020 and once that is achieved they are no longer needed. We saw it in 2008.

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In a recent statement by well-known Bitcoiner Anthony Pompiliano, he performs this absurd calculation using deflation data, which suggests that prices will continue to rise indefinitely. I invite you to read his statements. The link is up here. And you will notice a mistake. At the same time, I invite you to read the statements made by the gold beetle Peter Schiff during the last crises. It’s the same libertarian speech from the 70s. Of all the problems we have now, they have selected one problem that does not exist. You decided to talk about inflation during the worst deflationary crisis since the Great Depression of the last century. To be honest, that’s crazy.

In my search for a rational explanation for so much madness, the only explanation that makes sense is that political dogmas play a very important role here. In other words, libertarians see government influence on the economy as excessive and advocate free market fundamentalism. They want a return to the gold standard or the implementation of the bitcoin standard, and deflation must be accepted as a “temporary pain” necessary to liquidate the bad actors. With the typical harshness of Protestant ethics. Here is a debate that is worthwhile. But don’t tell me we have inflation when there isn’t. The defenders of gold always sow fear and pessimism, but everything ends in nonsense. How many gold beetles are on the Forbes list? How Many Billionaires Does Wall Street Have? Optimism always wins.

The economic disaster does not lie in the Federal Reserve. If there is a disaster, it is in the government. Debt and deficit. Furthermore, the problem is not inflation, but inequality. Salaries have not increased and nobody has any savings. Primarily, stimuli enrich asset owners. The financial markets are the first beneficiaries, not the common people. The money is on Wall Street. And yes, it’s in bitcoin. Impulses increase the prices in the financial markets and Bitcoiners eat this cake.

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Libertarians complain a lot because they are a reactionary minority with no political representation. Like this or clearer? They are the grumpy people in the financial world who always talk about the next disaster. Accumulate gold because the world will end. But the world ends centuries and never ends. In fact, Wall Street has been a better investment than gold for more than a century. Although at this point I’d like to cry with the libertarians about the rise of bitcoin, I’m afraid I can’t. I am not bitter with a sweet one.

Inflation is under control. The data is visible to everyone. What is worrying is not the charms, what is worrying is the trade war between the United States and China, which is hindering world trade. We have a problem there. Because economic nationalism increases prices. When prices rise, the Federal Reserve has no choice but to raise interest rates and remove liquidity from the economy. That would be a major blow to the financial markets (including Bitcoin). We have real problems and real concerns. Why create imaginary problems through the politics of the 70s? We no longer need follies, myths and nonsense.

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