Evidence of inflation?

A debt or credit system cannot inflate unless there is trust—credit derives from the Latin word for trust. Nobody lends unless they expect to be paid back, but while we normally think of trust in terms of moral character, it also applies to simple math. One can fully trust a person or institution, but not believe that they have the capacity to repay a debt.

This is the lynchpin of the deflationist argument. There can be no inflation unless consumers and financial institutions believe that taking on more debt will lead to better economic outcomes. Without this, new debt will not enter the system except via U.S. government borrowing.

A way to restart the system is via inflation. Inflation eats away the value of the debt, increasing the likelihood of repayment. Once the threshold for system-wide "trust in repayment" is breached, inflation will commence with a new debt binge.

There's a catch-22 though. If people don't borrow, there won't be inflation in a credit based economy. The government must use another method to generate inflation: print money.

Fiat currency is faith based. It is worth what we believe it is worth. Right now, trust in currency is high and trust in debt is low. The government can transfer trust in currency to trust in debt by destroying the currency via printing.

What is the Federal Reserve doing? They are printing at the fastest level since the Y2K scare:

Table 3

Number of Notes Printed
(millions per calendar year)


2008 Estimated

2009 Budget

Percent change 2009B/2008E

There's a definite shift towards bills with greater face value, but the Fed will have to print a lot more to generate inflation.

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