Monday, April 11, 2011
Clarifying the Obvious, Adam Smith and The Wealth of Nations Revisited
Total Goods and Services Produced = Total Money and Credit in Circulation multiplied by the Velocity of the Money and Credit circulating between the people chasing those goods. Assuming the goods and services remain constant and a government inflates the currency and credit in circulation then logically the the price of the goods and services will go up. It is not that the goods and services become more valuable it's that the currency those goods and services are denominated in become worth less. Many textbooks define inflation as a a monetary phenomenon of rising prices. In our scientific world I don't know why more people don't question this definition. It's not that the cart is put before the horse in this definition, it's like the cart is just magically wanded into existence. In reality a countries central bank turns on the credit currency faucet which leads to the inflation or increase in price of the goods and services produced. A perfect example of this is the price of oil today. Oil is priced in US dollars so as the Federal Reserve papers over the bankers bad debts by buying toxic assets which is referred to as "quantitative easing" through indirect debt monetization. When the Federal Reserve has the faucet open you'll see rising prices in stocks, bonds, commodities, wages, home values, ect. I ask you is anyone recieving more credit cards in the mail? Yes a government can determine what is legal tender but if the government plans to devalue a currency via fiscal deficits without balanced budgets then it should be no surprise that gold and silver will rise in price as a store of purchasing power.