Post
Topic
Board Economics
Re: Sniff ... do you smell smoke?
by
MoonShadow
on 30/04/2012, 23:58:22 UTC
What this data shows is that from pre-recession inflationary peak to the present day, U.S. currency has devalued in total 5% over the course of about four years.  That's about 1.25% inflation per year, average.  If you kept your dollars in an online savings account over this period of time, your interest rate would've averaged about 2%.  Kept them in the market and reinvested dividends?  Anywhere from 5% to 40% gain per year, depending on your timing competence.

While this is all true, the problem is this kind of analysis is (at best) concurrent or (more likely) delayed.  Said another way, these metrics look at recent history (and perhaps the trends) in order to make a future prediction.  That is, after all, the point of all this; to make an educated guess as to what comes next.  The problem with that is there are other metrics that should more indicitive of the future than (in particular) the consumer price index over the past several years.  The metrics of the monetary base, for example (M1, M2 & M-prime) have more than doubled over that same time frame.  Has the demand for liquidity and/or the practical size of the US economy doubled during that time?  No and No.  So the simple logic of the law of supply and demand (as applied to monetary demand) says that, eventually, we are going to see some rather severe inflation, assuming that the federal reserve does not (or cannot) withdraw that liquidity from the banking system at the next inflection point.  There is no historical evidence that the academics who work at the federal reserve even have a reliable theory that could inform them of such an inflection point.  And that should worry you more than the small, and dropping, risks of a deflationary event.