Inflation: Too much money chasing too few goods? – Hardly!

That more money is available than goods is a nearly axiomatic definition of inflation in economic texts, media, and politics. But empirical data from direct observation indicates it is not true in the current economic environment.

One can find many retail businesses offering discounts, and failing businesses; while advertising is a multi-billion dollar enterprise. One can easily find retail stores full of merchandise for sale. This is direct evidence that there is not enough money to liquidate what is available for sale. Yet, prices keep going up. Therefore, it cannot be too much money for consumption causing price increases.

Consumer debt is about $2.5 trillions for consumer goods that have been “sold” but have not yet been paid for; and, still, retail stores are full of merchandise. Advertising of sales discounts is constant along with easy credit.

Inflation is often expressed as rising prices, but many things such as scarcity, seasons, fads, war, and weather affect prices along with the phenomenon of inflation.

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6 Responses to Inflation: Too much money chasing too few goods? – Hardly!

  1. Hi, I thought I would say you have a great looking site and this was a very informative article. I bookmarked your site and have it in my reader now…looking forward to more content in the future.

  2. Glenn says:

    In response to Peter Koenig:

    – “Acceptance of death and decay as natural – applied across the board to nature, all organisms, species and organizations at all levels. You can either accept this or fight it. How you accept/fight this will affect the quality of liveliness and life in the present .. and so also – ironically – longevity. Generally, deep acceptance leads to life and liveliness, a peaceful flowering and evolution of the things one holds dear, fighting leads to the perpetuation of things one doesn’t!”

    I find your equanimity in the acceptance of the death and decay of this economy, as one of many systems subject to such a fate, very Hooveresque.

    Masters live longer than slaves; they live better than slaves and are healthier than slaves. I abhor your characterization of these facts in your response as being emotionally biased.

    – “Debt is not in or of itself good or bad, simply a fact of life in our present money system. Anyone using conventional currencies – and I’ve yet to meet someone who doesn’t – better accept the fact or again choose to live a frustrated, frustrating life.”

    With fatalism such as yours the United States would have remained a colony of England. I should think you would be hiding your face in shame rather than parading the effete nature of your character for all to see.

    – “The belief that there are exceptional powers-that-be or particular ruling and controlling sectors of society to which one is submitted is an act of self-disempowerment which inevitably leads to the creation of ruler-slave relations in the system.”

    You either deny the existence of the Federal Reserve or do not acknowledge the undemocratic unaccountable nature of its functioning.

    – “It’s self-fulfilling, producing evidence which gives the impression of absolute reality/apparent confirmation of the truth of the belief. However this absoluteness is illusory. In reality my research (with individuals at both ends of the spectrum) reveals that both ruler and slave are equally (slaves and) disempowered by this relationship, of equal responsibility in creating and maintaining it in a kind of “racket”.”

    That you hold the Federal Reserve and its function in this economy as illusionary leaves me to consider you delusionary.

    Lincoln observed that of the many who favored slavery, none he knew were in favor of themselves being a slave. For those who find the debtor and the issuer of debt to both be bound into a slavery of sorts, I recommend that both exchange places to break the monotony and since both are equally burdened and the debtor may actually find respite in receiving interest rather than paying it.

    You are overlooking the fact that the inflation of the housing debt bubble was accomplished through predatory issuance of debt where the collateral values for the loans issued were inflated by criminal means purely for the profit deriving from interest coming from a larger debt issued.

    The larger crime is that banks have the ability to issue money into circulation based, not upon social need, but purely upon their own immediate need without concern for the implications of dollar devaluation inflation on the general economy. The consequences of these immoral acts are felt far beyond the perpetrators and victims in the original crime. They make a further impact on society by necessitating money being diverted from infrastructure needs into bailouts for the finance capital industry.

    These bailouts proved that the banks are incapable of finding limits to their greedy behavior from market signals, but that they and society require costly regulation to remain sound and protected from their own selves and their own bad instincts.

    Rather than reinstitution of regulations, the issuance of money must be limited to the Treasury under the reforms proposed by the AMI.

  3. Glenn says:

    The act of increasing interest rates is a second contributor to inflation that is much larger than accounted for, but less noticed, both as a consequence of being conflated with scarcity inflation, and in the calling of attention to it being adverse to the interests of the issuers of debt created money.

    Both profits and wages are reduced due to parasitic interest costs intrinsic to debt created money.

    A business that cannot self-finance becomes more dependent on debt created money; and when it cannot pay adequate wages to its employees, its employees cannot purchase without acquiring more debt created money.

    When finance interest rates are increased, supplier’s cost is increased while supplier’s profit is decreased. Wages are reduced to facilitate capital preservation. Individual capitals are not advanced for production but investment is reduced in order to preserve capital.

    The worker/consumer earns wages too low to purchase necessities from his earnings and has less money to spend after paying interest on previous borrowing for purchases; the worker/consumer is less able to incur new debt after interest rates are increased, thereby further decreasing demand.

    The supplier’s prices must then be lowered after interest rates are increased for the purpose of reducing inflation and supplier’s profit will be decreased when prices are lowered to clear markets due to decreased consumer demand. Consumer demand is reduced due to wage concessions and increased interest rates.

    Declining supplier profits and worker/consumer wages necessitate further borrowing, creating a positive feedback cycle, further concentrating capital into the hands of a smaller percentage of the population: the non-productive issuers of debt created money.

    As individuals and businesses default on loans, the assets of lenders lose value as the revenue stream from debt repayment declines.

    Lenders in their panic will resort to any way imaginable to delay the inevitable. Just as banks create money from nothing, many failing banks will create borrowers’ collateral from nothing. They delay the collapse of their debt pyramid scheme for one more day by overvaluing consumer assets in order to justify the issuance of more consumer loans. The overvaluation of real assets inflates an asset bubble in which debt created money is further removed from its relationship to real wealth.

    Money devaluation inflation is not commonly acknowledged nor is it addressed by issuers of debt created money. The devastation of money devaluation inflation requires the reform of money itself.

    Monetary Reform is both necessary and adverse to the immediate interests of the issuers of debt created money. The recent governmental bailouts of financial institutions have sheltered the issuers of debt created money from the consequences of the financial collapse which they have created. The restoration of the relationship between money and wealth must be restored in order both to relieve public pain and end the unjustified rewards that still accrue to the stewards of the obsolete and failing system of debt created money.

  4. Zachary Wermer says:

    Thanks for the essay Mr. Poteat. I would like to point out that Margrit Kennedy presented very similar misconceptions about money in her book “Interest & Inflation Free Money.” She may have a different solution to the problem, but the first chapter of her book would back up the criticism that the current banking mechanisms cause inflation.
    I would agree with the above reply to the extent that an increased supply of money causes inflationary results when that money is actually in circulation. When people hold or hoard money, that money is not chasing goods or services. A cause of great concern is who is holding that money, and why are they reserving it? Once that dead capital starts moving again, via speculation or whatnot, it is going to affect the price level or price stability – across numerous sectors. If we can circulate the money constitutionally, then we can tame real inflation. I would call it “real” inflation, because “nominal” [price] inflation is less important, because an increase in the quantity of money with a simultaneous increase in the quantity of goods and services (once money circulates properly) can be distributed in such a way as to neutralize a price level change. Of course this ideal has other requisites, but I’m glad that Mr. Poteat pointed out a common misconception of money – especially one that the Fed perpetuates and upon which it relies.

  5. Richard A Date says:

    I certainly agree about the effect of debt/credit monetary policies. The one thing the author glossed over is phenomenal advancements in technology over the last 30 years, which have had both a positive effect on std of living as well as lowering costs of almost everything, and making possible entirely new channels of information/ communication.

    Real progress helps ameliorate the damage caused by monetary debasement, but it is much easier for the debasement to occur than to achieve the progress. It is an uphill struggle.

    So, I come to the same conclusion as the author: STOP BANK DEBT-MONEY CREATION.

  6. Dave Cassel says:

    I didn’t get to study money nearly as much as I wanted to in graduate school in economics, but I am fairly confident of one principle and that is that the supply of money affects prices. Increasing the supply of money (or also the velocity of money) increases prices. This can be seen historically when Spain used silver for money and found a bunch of it in South America. In accord with the mercantile principles of economics then in vogue, they thought bringing the silver to Spain would make the country wealthy, but instead it gave them tremendous domestic price inflation. I see the principle as inescapable. I would not like to over-simplify the issue, however. Many factors contribute to changes in the general price level. To say that the supply of money is not one of them, however, is just plain wrong. Not only wrong, but dangerous, and here’s why: If one were to argue flatly that increasing the money supply would not cause inflation, one would conclude that it would be OK for the government to issue unlimited amounts of fiat money without fear of inflation. Not that I’m opposed to fiat money that is not created as debt: that is what I advocate. I have stated many times that fiat money created as debt is inflationary, but fiat money created by the government and paid into circulation without debt attached is the ideal money system. Stated a bit differently, fiat money issued as debt certainly causes inflation, but fiat money issued without debt has the potential of a stable money system. I say potential, because, in such an ideal money system, the amount of money in circulation would have to be carefully controlled to avoid either inflation or deflation. Ignoring the inflationary potential of such a system could prove disastrous.

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