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Tuesday, June 21, 2016

Why Were Libertarians All Wrong About Inflation?

My libertarian friends,

We were all so sure we were right. Like we were smug as could be about how sure we were right about hyper inflation.

Our kindred of mind had called it right so many times before on both monetary and military policy, against the overwhelming disagreement of the uncritical, less curious masses.

Hayek had the boom and bust cycle figured out.

Ron Paul nailed it so many times, we were sure he has to be some kind of prophet or something.

So where's all the hyperinflation we've been talking about since the last major war in 2003 and all the monetary expansion starting in 2008? Anyone else notice it didn't happen?

Here's my Facebook feed today:

^^Haha, look how smug I was. #winflation

I know a lot of you shared that level of certainty with me, so the lack of hyperinflation going on right now is glaring in light of this reminder of where a lot of us were at four years ago.

Here's where Gold was when I went to buy a bunch of it in June 2012, hovering around $1600 USD per ounce:

Now watch what happened:

(Thanks, Kitco for the graphs.)

Four years later, we're below $1300 per ounce.

Despite the $2 trillion war in Iraq. (The Congressional Budget Office says it cost you personally $6300.)

Even more hard to comprehend is this is what's going on despite the Adjusted Monetary Base (how much money der is out der) increasing by a factor of 5(!!!) since 2008.

(Thank you, Federal Reserve Bank of St. Louis for the graph. And also #*@! you.)

Now I don't know about you, but I haven't heard about any record-shattering gold discoveries of some mother lode of gold out there somewhere, have you?

Has the supply of gold doubled since 2012 like the monetary base has?

So the question of the day year, that libertarians absolutely have to answer for themselves, is what the H- E- double hockey sticks is going on out there that we didn't see coming?

All that powerful upward pressure on US dollar prices is not showing up at the check out counter, at the gas station, in the gold markets. Was Hayek wrong?

You and I both know how sound his understanding of markets was, and the impressive predictive power of his theory.

So what is exerting an even more powerful downward pressure on prices than the upward pressure of maddeningly massive, exponential-level monetary expansion?

There's something happening.


  1. I suggest you read this explanation. Lacy Hunt explains why the majority have been wrong about inflation.

    1. Yeah, but why are prices (of gold for instance) not off the charts after all that monetary expansion?

    2. Because that money is earmarked to paying off dollar-denominated debt - both in the US and overseas. Dollars are the only thing that can pay off such debt - not gold. We are in a classic deflation - which has nothing to do with prices and everything to do with meeting debt burdens. If and only if we (or someone) repudiates their debt does it lead to hyperinflation.

  2. Off the top of my head without even doing a cursory Google search, could the continued strength of the dollar be related to the relative growing weakness of the Euro?

  3. This is something I've wondered about a lot. I think it might have something to do with the way the Fed works. A lot of people say the Fed "prints money." But that is strictly speaking not what's happening. The fed can lower interest rates to encourage borrowing and hopefully spending. It can also lend money out of thin air. But there is still a debt obligation. A lot of the companies borrowing this money are not investing it into the economy, they're just hoarding it or putting it into other debt. So there's a lot of debt out there, but since the money's not moving around (velocity) we don't have inflation. Not yet anyway. I'm really interested in becoming more informed about how this all exactly works and am planning to attend Mises University next summer.

  4. The expansion of the money supply in the absence of velocity does not create inflation. In other words, if a helicopter dropped millions of dollars which floated to the ground and was immediately scooped up by the people and hidden in their basements, prices would not rise until they started bringing it out and spending it in sufficient quantity to dilute the value. That is how it is explained in many econ courses.

  5. The explanation that I've heard is that the expansion money mostly went to banks, who then put it in the stock markets because interest rates are so low. So the majority of the money isn't in circulation (yet).

    Like I said, just what I've heard, don't quote me.

  6. Wes,

    I have most of my money in stocks and keep about 5% in silver gold. The way I look at metals go up when the market bad and metals go down when the markey is flying high. Rule of thumb is buy metals when stocks are high, buy stocks when the market is on sale. Inflation isn't a worry it you beat it with your investments and ut is actually a positive for anyone with a mortgage.

  7. Inflation is a monetary phenomenon. When the Soviet Union collapsed, consumer goods like HiDef TVs were the asset of choice. Gold has a long term history of ultimately being a preferred asset, but the variances by decade can be dramatic and counter-intuitive. Your time frame is all-important, and it is too son to be called wrong. We are merely "early", and maybe only be a few years.

  8. Placercolp@gmailJune 22, 2016 at 7:57 PM

    Dear Wesley, thanks man,great post, you're the best!
    What a great topic,your observations,mine as well, so true.
    asking my LP friend, Prof. of Economics, Michael Mace .:-)

  9. Dave said "The explanation that I've heard is that the expansion money mostly went to banks, who then put it in the stock markets because interest rates are so low."

    I think he's right. The Fed's monetary base expanded fivefold but the same can not be said of the overall money supply (M2). I still think there will be very high inflation at some point, but we're now dealing with the slow deflationary economic environment. All the Fed did with its actions is buy time (for the politicians), but they have not solved the fundamental problem. All of this is related to our $20T national debt which requires very low interest rates so as to not blow up the federal budget deficit permanently and wreck the US dollar.

  10. Thanks,.Well said!
    Are we paying off the deficit to the Federal Reserve Corporation with FRN,s or US dollars? The former Fiat,the ladder,Silver.;)

  11. The post is really informative & will help a lot to understand current financial scenario.