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Inflation

 
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PostPosted: Tue Aug 18, 2009 10:35 pm    Post subject: Inflation Reply with quote

Some believe inflation will remain contained, because the U.S. money supply hasn't grown as fast as before (see chart):

http://2.bp.blogspot.com/_otfwl2zc6Qc/SocMZNLU_-I/AAAAAAAAK7A/yoJy1shAHbA/s1600-h/m2.jpg

My comment:

"Inflation is always and everywhere a monetary phenomenon" is true only in the long-run, because of shifts in the foreign exchange market or changes in the velocity of money in the short-run. It should be noted, monetary policy prevented a deep depression in the 1970s, similar to the 1870s and 1930s (there were several recessions from 1970-82, including two severe recessions).

Also, many shocks take place, e.g. Y2K (when the money supply spiked higher and then lower around 2000, i.e. the monetary base or high powered money), 9-11, an oil shock (or commodities in general), minor technology shocks in the '80s and '90s, and the quick and massive "Creative-Destruction" process in the early '00s.

Economies are often too dynamic to accurately predict. I expected China's economy to collapse, along with other major net export countries. China was showing production strains, including cutting corners exporting unsafe products, received increasingly smaller gains of trade, and had enormous social costs. However, the U.S. economy, along with the Republican party, imploded instead.

U.S. households didn't get much of a bailout. Instead, they were burdened with even more debt from massive government spending. It's uncertain how that will play out, e.g. Americans working harder and longer to pay-down debt, adding to future economic growth, or consume less to strengthen their balance sheets, leading to slower economic growth.
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