Inflation Fears: Real or Hysteria?

Published on Global, by Ellen Brown, May 10, 2011.

Debate continues to rage between the inflationists who say the money supply is increasing, dangerously devaluing the currency, and the deflationists who say we need more money in the economy to stimulate productivity.  The debate is not just an academic one, since the Fed’s monetary policy turns on it and so does Congressional budget policy.

Inflation fears have been fueled ever 2009, when the Fed began its policy of “quantitative easing” (effectively “money printing”).  The inflationists point to commodity prices that have shot up.  The deflationists, in turn, point to the housing market, which has collapsed and taken prices down with it.  Prices of consumer products other than food and fuel are also down.  

Wages have remained stagnant, so higher food and gas prices mean people have less money to spend on consumer goods.  The bubble in commodities, say the deflationists, has been triggered by the fear of inflation.  Commodities are considered a safe haven, attracting a flood of “hot money” — investment money racing from one hot investment to another.

To resolve this debate, we need the actual money supply figures.  Unfortunately, the Fed quit reporting M3, the largest measure of the money supply, in 2006.

Fortunately, figures are still available for the individual components of M3.  Here is a graph that is worth a thousand words.  It comes from (Shadow Government Statistics or SGS) and is reconstructed from the available data on those components.  The red line is the M3 money supply reported by the Fed until 2006.  The blue line is M3 after 2006.

See Graphic: Annual US Money Supply Growth – SGS Continuation … //

… As explained in an earlier article, the public debt is the people’s money.  The government pays for goods and services by writing a check on the national bank account.  Whether this payment is called a “bond” or a “dollar,” it is simply a debit against the credit of the nation.  As Thomas Edison said in the 1920s:

If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good, makes the bill good, also. The difference between the bond and the bill is the bond lets money brokers collect twice the amount of the bond and an additional 20%, whereas the currency pays nobody but those who contribute directly in some useful way. . . . It is absurd to say our country can issue $30 million in bonds and not $30 million in currency. Both are promises to pay, but one promise fattens the usurers and the other helps the people.

That is true, but Congress no longer seems to have the option of issuing dollars, a privilege it has delegated to the Federal Reserve.  Congress can, however, issue debt, which as Edison says amounts to the same thing.  A bond can be cashed in quickly at face value.  A bond is money, just as a dollar is.

An accumulating public debt owed to the IMF or to foreign banks is to be avoided, but compounding interest charges can be eliminated by financing state and federal deficits through state- and federally-owned banks.  Since the government would own the bank, the debt would effectively be interest-free.  More important, it would be free of the demands of private creditors, including austerity measures and privatization of public assets.

Far from inflation being the problem, the money supply has shrunk and we are in a deflationary bind.  The money supply needs to be pumped back up to generate jobs and productivity; and in the system we have today, that is done by issuing bonds, or debt. (full text).

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