What drives inflation?

[Joe Ross]

If there is one factor that drives the inflation-deflation cycle, it is the effect and trend of interest rates. The bond/note market is the foundation of the stock market, and makes its existence possible. Interest rates compete with all other forms of investment for capital. When rates are rising, the stock market is less attractive because government bond and note yields are guaranteed, while stock market dividends and profits are not. Falling interest rates, which may stimulate inflation, precipitated the largest stock market increase in history. Real interest rate yield equals the inflation rate subtracted from interest rate yields. A 5% bond yield and 7% inflation rate erodes the purchasing power of money annually by two times.

Notes and bonds are not really controllable by the FED. The market pretty much decides what those will be. There is a great fallacy perpetrated by the FED which makes people think the FED controls interest rates. The truth is they don't. All the FED ever does is to react to what is happening in the market. When the yield curve gets too far out of alignment, the Fed raises or lowers interest rates.

However, there's more. The FED does control the money supply. The FED prints money with no accountability. They create money out of thin air. With the removal of the M3 statistic, the lack of control is even more prominently displayed. The FED is almost entirely responsible for long-term inflation. If you or I were to print money with no accountability, we would be put in prison for counterfeiting. Yet the FED continues to print counterfeit money to the extent that people on fixed incomes suffer tremendously from the falling dollar.

 

[Martinghoul]

Will somebody please shut this clown up? I can understand when he spouts inane generalities, but he's talking utter rubbish here.

 

[alexander]

He sounds like a con-FED-erate

 

[Splitlink]

Inflation is driven by union demands for higher wager, demand over supply and the new expression "quantitative easing". Forget interest rates, that is the effect, not the cause, because governments are trying to curb inflation and interest rate manipulation is the only weapon the central bank has.

 

[spreader_legger]

I spoke to jeff, a good Texan friend of mine, & he reckons that Texas should seperate from the Union. That way, we would have a new Texas dollar. Something tells me that as a petrodollar currency, it would behave very much like the USDCAD ..... perahps even the CADJPY ...... any thoughts?

He sounds like a con-FED-erate

 

[Splitlink]

It would not make any difference. The same conditions that cause inflation would apply. The Canadian $ is subject to inflation, the same as everything else. But a new currency is likely to be worse, because of the consumer, "man-the-street factor, who is conned into believing that one $ is equal to another.

For instance, the Euro came in at about 166 pesetas to the Euro.(i think--it's ten years ago and my memory is rusty, but the example is the point) We had a 100 peseta coin , which was worth around 60 cents and, roughly, the same size. People, immediately, started to use the Euro coin with a 100 peseta mentality- During the change over period people were passing over Euro coins in the shops for the 100 Peseta coins and prices were rounded up for no other purpose than for the benefit of the shopkeepers.Inflation was built into the economy right from the beginning and, because there was a boom in Spain, everyone asked, and got, more wages and prices spiraled.

As always, those with cash savings in the bank suffered terribly.