Puplava on Inflation

Jim Puplava writes an excellent article on various topics including inflation, econometrics, and market bubbles, which echoes a lot of my views on the broader market. The whole thing is worth reading, but here are some choice excerpts [via Mises Blog]:

However, there is irrefutable evidence that government is the source of all inflation. An undue increase in the quantity of money is what stands behind a rise in prices. The source of all money or credit is government. Thinking of inflation only in terms of rising prices is similar to looking at the symptoms of a disease rather than the disease itself. A more exact definition of inflation would be an increase in the quantity of money and credit relative to available goods resulting in a substantial and continuing rise in the general price level, an increase in the quantity of money caused by government.

You will notice that this definition doesn?t say anything about cost-push, profit-push, or crisis-push inflation. It simply states that the supply of money expands leading to higher prices. It is the expansion of money and not rising prices that leads to inflation. This also points to the real cause behind inflation as government intervention in the economy and financial system by expanding the supply of money and credit in the system. [...]

Given this new aspect of America?s economic life and the fact that the Fed and the government have no inclination to live within their means or curtail rampant money creation, new asset bubbles are going to be inevitable. While one asset bubble may deflate as was the case in the NASDAQ and tech stocks from 2000-2002, other asset bubbles in bonds, mortgages, and real estate took its place. The only thing that can force a government to balance its budget or prevent a central bank from issuing endless money is to limit the power to create money. That is possible only when the money unit of a country is backed by gold and silver. With gold and silver backing the monetary unit, the government is totally dependent on the taxpayer for every dime it spends. Tax rates would be far higher in order to support the government?s voracious appetite for spending. It citizens might not be as willing to accept tax rates that border on slavery. [...]

Inflation is nothing more than an extension of tax rates through other means. Inflation then is a hidden tax. Deficits and taxes are really the twin pillars of the welfare state. It gives the appearance that government benefits are free, making government out to be a benevolent Santa Claus. [...]

What I believe that we will see later this year is that the price of gold and silver will begin to appreciate against most major currencies and not just the U.S. dollar. Therefore if one views the current rate of monetary debasement, I believe the next asset bubbles will take place in the natural resource sector. Commodities and especially the precious metals are only in the beginning stages of a new bull market. [...]


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However, there is

However, there is irrefutable evidence that government is the source of all inflation.

I'm not so sure about this. Isn't it true that wage increases above the level of productivity increases can cause inflation, as is the case in many European countries, where the unions and the corporate sector are in bed with each other?

What I believe that we will see later this year is that the price of gold and silver will begin to appreciate against most major currencies and not just the U.S. dollar.

I've always been skeptical of these kinds of claims. Investing in gold and silver has historically been a poor decision relative to other investment opportunities. Perhaps not as bad as simply holding cash, but not much better.

On the first point, the key

On the first point, the key word is "irrefutable" as opposed to non-falsifiable, or just plain wrong. This has to do with the definition of inflation, which Austrians define differently, as we've argued about in the past on the blog before, and is probably not worth going into right now.

On gold, yes, gold has not a successful investment over the long, long term. It has instead historically been a store of value. A fine suit of men's clothing 500 years ago cost an ounce of gold. A fine suit of men's clothing today costs an ounce of gold. I don't think any other commodity has been as successful a store of value over 500 years.

But periodically, gold does become a good investment, and I believe that time is now. When the govt is destroying fiat currency hand over fist, the relative values of commodities rise, and I think we are in the beginnings of a secular bull market in commodities. As the sequential bubbles expand and pop due to reckless monetary policies, the final bubble will be in true money - commodities, of which gold has historically been the most marketable resulting in its use as money.

Of course, I could be totally wrong, and anyone listening to me for investment advice is sure to lose all their money.

Austrians do not believe

Austrians do not believe that wage increases above the level of productivity increases can cause inflation? I didn't know that.

I would say real estate is a better investment than gold in almost any conceivable situation. The only advantage gold may have is that it is portable, so there might be less worry about political upheavals if you need to flee the country on short notice.