Inflation: Why Some of Us Can't See It
Inflation hides itself from some people. I think it's hiding right now. What does "hiding" mean?
When most of us talk about inflation, we mean the price of goods and services we purchase. I've done this myself (and, frankly, need to be more disciplined and clear when I talk about inflation). But when prices of goods and services go up, that's only a symptom of inflation. So what is inflation itself?
Inflation is an increase in the money supply. That means just what it says. When the government - usually through the activities of the Fed and the banks together - increases the actual number of dollars in the world, we have inflation. And inflation - an increase in the supply of money, i.e., the total number of dollars in the world - can cause the the prices of goods and services we purchase to go up.
So why did I say inflation was hiding now? It's because while some items - like gas and some groceries - are more expensive lately, other items - like clothes and cars - haven't really increased much, if at all. Yet the total number of dollars has gone up, which means there is inflation.
Why don't all items go up in price? Because, while the government's policies can cause inflation to occur - that is an increase in the supply of money - that new money is never distributed evenly throughout the economy. How can you tell? Well, we know the government has created more money. So did you get yours?
What I mean by that is, if you're like me, you didn't see any of that new money, did you? Did the government send you a check recently? See what I mean?
So the government creates money, but it doesn't spread itself out most of the time. It usually goes into one area or another and settles in there. Lately, it looks like it's settled in gas prices, but even more so in the stock market.
I'm sure you've noticed that the stock market has been climbing ever since March 2009. Even with some small corrections along the way, it keeps chugging up. And the reason I think that it's the result of the government having increased the money supply is that it's chugging up even though stocks - by any valid, traditional measure of value - have been really expensive to begin with.
On top of all this, the government produces the CPI which, even though it's spiked up a bit lately, has been less than 3% for a really long time. Now, most of us don't believe anymore that the CPI really reflects the increases we see in prices in our daily lives. And, in fact, it doesn't. But still, with a low CPI, people don't feel inflation as much as they would if the CPI were higher. I'm not saying that people don't think that prices have been going up. I just mean that with the CPI low, people don't feel as bad as they would as if the CPI were higher. Maybe I'm wrong about this, but that's what I think.
So I'm going to be more careful when I use the term "inflation" from now on. I'm going to be careful to distinguish when I'm talking about prices going higher, and actual inflation - an increase in the supply of money.
We'll have to talk more about this in the future, because I believe money is the most important thing we need to keep our eyes on this year, maybe in many coming years. Why is this more important now than, let's say, last year? (I always keep my eye on money, and I always think that understanding money and how it really works is the most important thing you need to know before you can understand the economy and investments.) Because I'm thinking that the U.S. dollar has entered a phase where instead of steadily losing value - as it has for decades - it may really "crash" at some point in the not so distant future. Of course, I could be wrong. But we'll talk more about this anyway.
When most of us talk about inflation, we mean the price of goods and services we purchase. I've done this myself (and, frankly, need to be more disciplined and clear when I talk about inflation). But when prices of goods and services go up, that's only a symptom of inflation. So what is inflation itself?
Inflation is an increase in the money supply. That means just what it says. When the government - usually through the activities of the Fed and the banks together - increases the actual number of dollars in the world, we have inflation. And inflation - an increase in the supply of money, i.e., the total number of dollars in the world - can cause the the prices of goods and services we purchase to go up.
So why did I say inflation was hiding now? It's because while some items - like gas and some groceries - are more expensive lately, other items - like clothes and cars - haven't really increased much, if at all. Yet the total number of dollars has gone up, which means there is inflation.
Why don't all items go up in price? Because, while the government's policies can cause inflation to occur - that is an increase in the supply of money - that new money is never distributed evenly throughout the economy. How can you tell? Well, we know the government has created more money. So did you get yours?
What I mean by that is, if you're like me, you didn't see any of that new money, did you? Did the government send you a check recently? See what I mean?
So the government creates money, but it doesn't spread itself out most of the time. It usually goes into one area or another and settles in there. Lately, it looks like it's settled in gas prices, but even more so in the stock market.
I'm sure you've noticed that the stock market has been climbing ever since March 2009. Even with some small corrections along the way, it keeps chugging up. And the reason I think that it's the result of the government having increased the money supply is that it's chugging up even though stocks - by any valid, traditional measure of value - have been really expensive to begin with.
On top of all this, the government produces the CPI which, even though it's spiked up a bit lately, has been less than 3% for a really long time. Now, most of us don't believe anymore that the CPI really reflects the increases we see in prices in our daily lives. And, in fact, it doesn't. But still, with a low CPI, people don't feel inflation as much as they would if the CPI were higher. I'm not saying that people don't think that prices have been going up. I just mean that with the CPI low, people don't feel as bad as they would as if the CPI were higher. Maybe I'm wrong about this, but that's what I think.
So I'm going to be more careful when I use the term "inflation" from now on. I'm going to be careful to distinguish when I'm talking about prices going higher, and actual inflation - an increase in the supply of money.
We'll have to talk more about this in the future, because I believe money is the most important thing we need to keep our eyes on this year, maybe in many coming years. Why is this more important now than, let's say, last year? (I always keep my eye on money, and I always think that understanding money and how it really works is the most important thing you need to know before you can understand the economy and investments.) Because I'm thinking that the U.S. dollar has entered a phase where instead of steadily losing value - as it has for decades - it may really "crash" at some point in the not so distant future. Of course, I could be wrong. But we'll talk more about this anyway.
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