The Fed Redefines Inflation… Again
The comments below are an edited and abridged synopsis of an article by Tom Luongo
The original definition of inflation was an expansion of the supply of money. If you create more money while keeping everything the same, then prices should rise accordingly.
This is a simplistic understanding of the role of the money supply, because it leaves out the manner in which the new money makes its way into the economy.
If we digitally airdrop 10% more money into everyone’s bank accounts, as the latest proposals from economists attached to the Fed suggest, then the general price level will, in fact, rise 10% if that money is spent on necessities. This is the scenario we are in now.
That definition of inflation, while simplistic, is still instructive under certain market conditions. It ignores the Cantillion effect of who gets the new money and how it travels. That was the old monetary policy mechanism, through credit expansion via the banks.
Fed Chair Jay Powell’s recent speech all but told us that the mechanism is broken, and that we’ll be embarking on a new monetary experiment in the future.
At a minimum, the simplistic view of inflation defines that moment when all the other considerations about the value of money have been stripped away—the debt issued in that currency, the confidence in it, etc.—and just focuses on what happens when you pump money in: Bids for goods rise. Not all goods, equally, but goods.
Up for discussion: all about prices; the Davos crowd; the Austrian call; actions before consequences; and you were expecting confidence?
Luongo closes the article with, “Sound circular? It is. Of the firing squad variety. Because this sets the next stage in motion for the real collapse in confidence, central banks and the currencies they manage. Got gold?”