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Prices are the Cart, Money Supply is the HorsePeter Schiff The sad truth is that despite
the best efforts of monetary economists everywhere, fundamental
misconceptions about inflation remain entrenched in government,
business, and the media. Inflation has only one cause and that is the Federal Reserve itself. In the United States, the supply of money and credit is regulated by the Fed. Since inflation is by definition an increase in the supply of money and credit, only the Fed can create it. If the money supply were held constant, increases in some prices would be offset by decreases in others. The result would be no overall inflation. In fact, without government created expansions of the money supply, the natural tendency of prices would be to decline as technology allowed for more efficient production of goods and services. So while most regard the Fed as the primary inflation fighter, in reality it is the sole inflation creator. The main problem for consumers
is that most inflation is not detected by the Fed's preferred
measuring tools. As a result, inflation has been allowed to grow
unchallenged. As the U.S. dollar weakens, a few analysts are beginning to wonder whether we will now be "importing" inflation as the cost of imported goods rises to reflect the lower value of the dollar. Once again, Wall Street still doesn't get it. Our inflation problem is home grown. The reason the dollar is losing value in the first place is that we are creating too many of them. Since our biggest export is U.S. dollars, which foreign central banks have been foolishly monetizing, if anything it is our nation that exports its inflation to the rest of the world. My guess is that right now inflation is already as bad as anything we experienced back in the 1970's. Some may argue that rising prices for food and energy are being offset by falling prices for such things as cell phones, iPods, digital cameras, plasma TV, etc. However, back in the 1970's, prices for similar items, such as television sets, clock radios, digital watches, calculators, etc. were also falling in price. However, despite such price declines, the more honest CPI yardsticks we used at that time still recorded double digit annual gains. Still, the intoxicating effects that inflation has on nominal asset prices and GDP figures will eventually fade. When this happens Wall Street will sober up to the reality that the U.S. economy has actually been mired in recession for years, and that U.S. stocks have been in a stealth bear market all along. Priced in gold, euros, or Canadian dollars, (which are more accurate ways to adjust for inflation than phony government numbers) both the U.S. stock market and U.S. GDP have declined by approximately 58 %, 17 % and 21% respectively since January 2000. No wonder the government and Wall Street hang their hats on official inflation measures. Like a student allowed to grade his own report card, he can ditch his classes, not do his homework, flunk his exams, yet still bring home straight A's. As long as Wall Street and the media continue to represent government inflation numbers as if they had any validity whatsoever, inflation is only going to get worse. For a more in depth analysis
of the tenuous position of the Americana economy and U.S. dollar
denominated investments, read my book "Crash More importantly, make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com, download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com, and subscribe to my free, on-line investment newsletter. Peter Schiff
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