by Mortimer Duke (June 2011)

 

Most people are surprised to hear that the word promiscuous has no sexual connotation on its own.  The word means “indiscriminate”, but through the repeated use of the term “sexually promiscuous”, the word promiscuous itself seemed to morph into the previous paired term and became synonymous with sexual indiscretion.  Why is this relevant to a blog focused on the financial markets and economics?  Because the same hijacking of perfectly good word and deliberately changing the meaning is taking place with much more serious consequences than an STD.

 

The word I’d like to discuss is “inflation”.  Current market participants have come to understand this word as simply rising prices.  This is a perversion of the word in order to obfuscate the real definition and misdirect attention from the real inflation problem.  Inflation is correctly defined as an increase in the supply of money and credit.  The symptom of inflation is in increase in prices.  You can’t have “food inflation” or “housing inflation” or any other kind of inflation…..you simply have inflation or you do not.   The reason people need to understand this is that if you don’t properly define the problem, you will ultimately fail to treat it properly.  If you define the problem of inflation as “rising prices”, then to implement price controls at some point makes sense. The flawed thinking would be if we stop “rising prices” then we will no longer have inflation, according to the skewed definition.  This type of thinking will be coming to a developed country near you as the pressure on governments to ‘do something’ will mount when prices start to rise.

 

In reality, the problem is properly diagnosed as the deliberate increase in the supply of money and credit, then the cure takes on a very different course of action.  The Fed would shrink the balance sheet, stop the overly accommodative stance and allow the system to adjust to a lower level of economic activity.  When only the symptoms of inflation are treated, then the inflation doesn’t actually abate, only the symptoms are masked.  When price controls come into the system, continually rising prices will create massive shortages, bare shelves and massive lines for the most basic essentials.  Don’t fall for this trap, recognize the problem for what it really is and take the steps to protect yourself.