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alstry (< 20)

Monetary Inflation does NOT equal Price Inflation



March 18, 2009 – Comments (27)

There is a lot of confusion among CAPs players and the general public about the use of the term "Inflation."

In the classical sense, inflation is the increase of the money supply.  How money supply is calculated varies....many economists use M1, M2, M3 and similar definitions.  Alstrynomics uses M3 plus ALL OUTSTANDING CREDIT.

However, the common usage for inflation is rising prices...some limit it to commodities, and some even narrow it to specific commodities, while others apply it to rising prices in general.

Historically, increasing money supply led to rising prices.  The reason was because increasing money inevitably led to the creation of increasing credit which led to higher demand forcing prices higher.

Up until recently, we NEVER had increasing money supply without increasing credit.  BUT THIS TIME IS DIFFERENT.  We are printing hundreds of billions of dollars and giving it to the banks, and they are hoarding it in their vaults.  As a result, not only is credit not growing, it is actually contracting due to rising defaults of outstanding debt. 

To give you a slightly different perspective...let's say the government printed up $36 trillion dollars of bills at KINKOs and handed over to effect, that would triple M2 money supply.  Immediately, all the gold bugs would be screaming that gold prices are going to fly through the roof and toilet paper will cost you more than a $1 per wipe.  If I went out and spent the $36 trillion into the stream of commerce........they would be dead on and America would be booming like never before.............................HOWEVER.....if I took all those bills, and stuck them in my buddies would have absolutely NO impact on the price of toilet paper or anything else for that matter because supply and demand would remain unaffected by the printing.

In the latter case, we would have massive printing of money, literally, but no impact on prices.  How many would call it inflationary even though in the classical sense it was massively inflationary?

As a result...many are screaming that today's move by the Fed was price inflationary and is going to stimulate the economy.....not a chance my friends.  Watch over the next few weeks....the dollar will likely regain strength against foreign currencies and interest rates will start climbing to even higher levels then they were before they crashed today as holders of our debt demand higher interest rates for the dilution of the currency.

Today's move will only accellerate the contraction of the American economy by putting an additional interest burden on the American Government and American taxpayers to the banks and likely cause the DOW to drop below 4000 before the end of the summer.....maybe 3000.  Does anyone know for sure.....not a chance. 

But based on my survey of contacts today....Alstrynomic's FU Virus is spreading....and spreading fast.....anyone with documented cases please comment below.  I just had a friend inform me that Dell is initiating material layoffs in Austin. 

Anyone??  Anyone??  Bueller???


27 Comments – Post Your Own

#1) On March 18, 2009 at 11:15 PM, Imperial1964 (95.69) wrote:

"Up until recently, we NEVER had increasing money supply without increasing credit."

We actually had increasing money supply without increasing credit in the depression.  We also had price deflation because the velocity of money was decreasing even faster.  That is what you are getting at with your "money in a warehouse" example.  Only the amount of money circulating around matters when it comes to price inflation. 

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#2) On March 18, 2009 at 11:21 PM, alstry (< 20) wrote:

Point taken...I should have clarified in our lifetimes.

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#3) On March 18, 2009 at 11:34 PM, RVAspeculator (28.16) wrote:

I am locking my mortgage at 4.4% on Thursday which is going to put another few hundred a month in my pocket.

Millions of others are going to do the same thing.   Its almost like they are handing out the trillion to the people.


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#4) On March 18, 2009 at 11:41 PM, shffl (< 20) wrote:

great post alstry, i never thought of it like that and it makes lots of sense to me. just to clarify, imperial, what does is "velocity of money?"

from what i know, abou 300 billion is going into treasuries and 700 billion to the mortgage back securities. alstry, is it for certain that those money are going to stay in the banks vault rather than circulating the market?  

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#5) On March 18, 2009 at 11:45 PM, alstry (< 20) wrote:


That is a good point and I heard CalculatedRisk made a similar argument.

However, many will not qualify to refinance.  There are millions of homeowners whose value of their home is much less than their mortgage.  Some would have to come up with hundreds of thousands of dollars to qualify for refinancing......millions more have lost their jobs and also don't qualify for financing.

My back of the napkin estimate is about $2 trillion dollars worth of mortgages might qualify for advantageous refinancing likely saving on average about 1 1/2%.

Now we are talking about a savings of about $30 billion per year and after backing out tax benefits closer to $20 billion net.....not a very big number in the grand scheme of things.......

and if my analysis is close...refinancing at this rate might not last much longer than tommorrow.

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#6) On March 18, 2009 at 11:57 PM, tonylogan1 (27.59) wrote:

Alstry - As nice as the analogy sounds, no one... even Alstry.... would keep the money in the warehouse forever… Even the banks.

They obviously have not immediately started increasing credit, but eventually if you give someone a bazooka, they are going to use it... even if they say in front of congress that they will not.

This temporary phase where money supply increases without credit increasing only makes it appear that inflation will not be a problem, but in fact, the banks are just "on hold".

Eventually, all this debt will need to be serviced at higher interest rates (notice I did not say eventually the debt needs to be paid off, since we all know it will not be paid off in our lifetimes)

The Fed action today clearly shows other countries have effectively told us they will not give us money at low enough interest rates so we are now down to our last option ... insert shameless plug here...

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#7) On March 19, 2009 at 12:01 AM, Harold71 (< 20) wrote:

"likely cause the DOW to drop below 4000 before the end of the summer.....maybe 3000."

Hey I agree.  But gold will probably be $1500 by then too.  Eventually, they will meet, like old friends...what's it been, over 25 years?

Money supply, credit, M3, data point here and there...  What really matters is CONFIDENCE.  If people lose confidence in the value of something (i.e., a Federal Reserve Note), the value can drop rapidly, as they sell it "before it goes any lower."  Since the things we buy are priced in these Federal Reserve Notes, the effect is "inflationary." 

If no one wants a FRN, the value goes to zero.  If no one wants gold, the value goes to zero.  I think one of these will eventually be true.

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#8) On March 19, 2009 at 12:04 AM, alstry (< 20) wrote:


I understand your point but could you clarify one thing for me...

Who exactly are the banks going to lend to????

Approaching 80% of the American population lives paycheck to paycheck or less and are pretty much maxed out.....and the other 20% really doesn't need to borrow.

Are you going to force banks to lend money to people they know will not be able to pay them back???

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#9) On March 19, 2009 at 12:19 AM, tonylogan1 (27.59) wrote:

Oh boy... glad you asked...

They will not be lending to Joe Six Pack. Average American that is paycheck to paycheck is going to suffer, as always happens during socialism regime changes.

I'll give at least one example of who they will lend to... That is anyone who has a government backed guarantee for repayment or anyone that the government sponsors loan securitizations.

The new SBA loan program is one (of many to come) example of this.

Banks have been hesitant to lend to small businesses because they know they are going to have higher than usual default rates, but now the government is coming in and allowing the packaging (securitizing) of those loans so the banks can feel free to lower their lending standards and make more loans (This should sound familiar to the subprime bubble).

The government is proving they are short-sighted and only want to get re-elected, so they are going to do all they can to re-inflate the bubble, no matter how much inflation it takes.

You are right; there is no real inflation yet. But I would not give fools the advice that inflation is not going to come.


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#10) On March 19, 2009 at 12:23 AM, BradAllenton (31.63) wrote:

I for one am not confused. I look at my cost of living as a metric. Has my life gotten cheaper or more expensive?

Health care costs -UP  (way UP)

Food costs- UP

Electricity- UP

Taxes- UP

Cable Bill- UP

Water Bill- UP

Heating costs- UP

Tolls on the roads I drive -UP

Inflation is out of control and going to get much worse. The government lies about the numbers plain and simple. Look at what you do day to day and ask yourself is it cheaper to be you now or cheaper to be you two years ago?

(please don't say real estate is cheaper because we don't buy and sell homes daily)

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#11) On March 19, 2009 at 12:35 AM, tonylogan1 (27.59) wrote:

ha... nice disclaimer on real estate...

as a renter, I just got my rent lowered 20% yesterday because the rental market (Los Angeles) is falling apart.

Gas is barely over $2.00 a gallon, natural gas is almost free (lol)...

Food prices hae stabilzed considerably and perhaps even declined slightly over the last 6 months.

 Everything elseyou mentioned is up (i agree), but we have not seen anything close to what real inflation is going to look like. 

I am not talking about hyper-inflation, but everything you buy will cost twice as much 5 years from now, and then it will be twice that again within 7 more years.

We'll be wishing for $2.00 gas. Oh well..

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#12) On March 19, 2009 at 12:45 AM, BradAllenton (31.63) wrote:

Hey Tony, I think you are using more recent numbers to make the contrast. Think back a few years and compare costs. We are coming off crazy energy costs (creeping back up by the way) so 4$ gas is out but consider that a few years ago it was 1.25 a gallon. We had it so bad that getting hosed feels better now than ever. Apples to Apples though we are getting crushed by inflation. Check out this chart of historical inflation. These are the governments bologna numbers, so add a few points to get the real picture. The truth is even after all this mess and wealth destruction we have yet to see deflation.

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#13) On March 19, 2009 at 12:56 AM, tonylogan1 (27.59) wrote:

well I think $1.25 gas lasted too long... but I digress.

You are right, if you go back even further we could have bought a hamburger for a nickle.

"Inflation is the tax they use when they are already taxing you as much as they think they can tax you, but they still havent taxed you enough" - tonylogan 2009

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#14) On March 19, 2009 at 1:09 AM, kaskoosek (29.97) wrote:

Nonsense, we are nearning a currency collapse.


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#15) On March 19, 2009 at 2:01 AM, shffl (< 20) wrote:

food prices have actually been getting cheaper for me. milk was 2 gallons for ~5 dollars during summer and now its 2 for 3.80 ish. and over the past few days, gas prices have dropped a little again i believe. if inflation were to be the case, it hasnt happened yet. i guess it takes a while for it to settle in.

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#16) On March 19, 2009 at 2:28 AM, QualityPicks (25.50) wrote:

Overall we might keep having deflation. But the banks will look for anything that is working (nothing right now?) to channel the money to. That could cause a new bubble to inflate somewhere else. But that is the tough part for the Fed this time around, the banks are having a real hard time channeling money to any activity, since the whole economy seems to have imploded ALL at once. So, there is not much the money can go to. If you give it to small businesses, that sell to consumers, then you are risking it. If you give it to consumers you are risking it. Etc. So, inflating is a really hard thing to do right now. It hasn't worked so far. I don't know if it will.

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#17) On March 19, 2009 at 3:51 AM, chevionUSA (< 20) wrote:

hahahahaha  dow at 3000-7000 . that was my predication 2 years ago and everybody laughed.  But anyways...

You are absolutly wrong in your deductions and reasonings. I would argue that inflation is already here...look at grocery prices, McDonalds cheesburger prices ( and they 've gotten smaller too), and Gold prices.

The prblem is that government wants us to go back to consumerism and after the last gasoline price hike people are scared to death about spending. Gas prices at $4.50/gallon is still fresh in our memory and plus going back to "consumer-driven economy" is stupid anyways. Now government is giving tax credit to people who spend more and taxing people who save. I don't understand the reasoning...why should we be punished by forgoing current consumption for future benefits?

Back to your point: printing all this money can't be good...look at Hitler Germany..the other day I boight a gallon of Corn Oil from Costco for 9 dollars and some change....last time I checked we were the corn capital of the world and corn oil is 4 times more expensive than gasoline.

So this brings me to my bigger point: gas prices are artificially low, they will go up, once gasoline prices go up and governmnet can't do nothing about it inflation sets in.

when people have to pay more for food and transportation hous prices will come down (hopefully) and we will have normalized economic activity. 

What makes me mad? Oracle CEO owning 240 homes and 14 commercial buildings in Malibu, Ca.

1 person owning 200 homes...not just in any Malibu where monthly rent for a house is $150,000/month, a house goes for 50-100 million in Malibu Colony.  and 1 guy owning 200 of them...that pisses me off.

Did he buy those with his salery?? i don't think so..that's my and your stock prices at work!!!!

A lot of CEO's use our money to buy themselves stuff instead of putting our money to work and back into business.

These CEOs belong in jail. I don't mind if they get a 6 digit Salery for a job a 5th grader can do...but stop using the business capital for junk and mansions.

Orcle CEO i hope you get fired!! 

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#18) On March 19, 2009 at 4:06 AM, chevionUSA (< 20) wrote:

The Feds as our Hero:


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#19) On March 19, 2009 at 4:30 AM, chevionUSA (< 20) wrote:

By the way the best blogger is not Dwot...that guy Goldminersomething...he is not only a good bloger he is also a stalker. He knew my cancelled screen name kevinatucla and sent me a link to a post I did like 1-2 year ago about respect to goldminder...he is crazy like that

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#20) On March 19, 2009 at 5:06 AM, sandiegostew (< 20) wrote:

alstry's wrong, just so wrong: the money won't be sitting in limbo forever.  What happens when that huge stockpile of money starts flowing again, backed by the taxpayer, no less.

tonylogan1 is correct here: the morons in Washington only care about the short term to the next election cycle; 'throwing the kitchen sink in' to make sure the economy gets a little stability on their watch: damn the future.  This is only going to get worse over the next year or two guys.


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#21) On March 19, 2009 at 5:39 AM, 4Magoo (< 20) wrote:

I am a teacher and have seen this over and over again in my classroom. For years I created a classroom country and a classroom economy. I controlled the purse strings and had an unlimited supply of money via a printing press. Students could earn money in a variety of ways and spend it as well. I pulled money out of the economy each Friday with an auction. Over the school year the money supply in the hands of the students grew and you could just watch the as the inflation showed up in the Friday auction. At the start of the school year you would be able to buy a candy bar for $1.00. (That was our smallest denomination.) By the end of the year, you might pay $50 for the same candy bar. My printing of money (the money supply) made no difference to the inflationary spiral if it never made it into the hands of the consumer. If the banks never let the money out of their vaults, it will only be inflationary to the extent that the government will be paying more money out in interest to people who have bought Treasury Bills. BUT the reality has to be that eventually the banks will decide that they can make more money by getting the money out of the vault and into the hands of the consumer so they get additional interest on that money. It is then that we will have increased inflation and I believe that will happen as surely as the sun will rise tomorrow morning.

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#22) On March 19, 2009 at 11:10 AM, tonylogan1 (27.59) wrote:

sandiegostew - thanks. It always feels nice to read two sentences that include "alstry is wrong, tonylogan is right"...

That said, I anxiously await an Alstry reply to my SBA loan comment response...

Alstry is and has been right on a lot of things, but I think he has missed the mark on the inflation assessment.

Example: His yahoo board posts brought me to CAPS and got me to short BZH, SPF, and other junky homebuilders back in the day...


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#23) On March 19, 2009 at 11:58 AM, alstry (< 20) wrote:


You comment made me think more than just about any comment on CAPs thus far.....

That said, right now, based on what I see...we are only dispensing trickles of medicine for a epidemic that is spreading rapidly.

I will give your comment more thought...but right now...guaranteeing a few hundred million of debt against TRILLIONS defaulting really is not material to the significance of the problem.

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#24) On March 19, 2009 at 12:38 PM, tonylogan1 (27.59) wrote:

al -

appreciate the reply. 

Last thought on the subject for now is... The actual amount of the purchase yesterday is not relevant. It could have been $300 Billion or $100 Billion, but the botom line is tha:

1. we could not find enough buyers for treasuriesat the rates we wanted

2. we are committed to keeping rates low, regardless of potential inflationary effect.

They could not have announced a plan to buy $20 Trillion worth of treasuries, because the world would have imploded, but we fools have learned to read between the lines.

TARP I leads to TARP II.

$300 Billion long treasury leads to ...


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#25) On March 19, 2009 at 1:03 PM, alstry (< 20) wrote:


Thanks for the reply.

Hyperinflation does NOTHING to solve the FU actually makes it worse because prices rise much faster than income and more and more default faster.

The ultimate issue is one telling another FU....hyperinflation kills everyone...deflation only kills the leveraged...which may in the end ultimately be us all.

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#26) On March 19, 2009 at 8:49 PM, bio7 (< 20) wrote:


Do you know Ellison had requested and received a $3 million tax break on his property taxes.  Per SFGate, this is after arguing that his flamboyant Japanese-style estate in Woodside is functionally obsolete.

 Did you know he is so arrogant that he skirted the law about landing his plane during early morning hours.  He could give a damn about all the people it bothers.  I'm not sure but I think they changed the law/rules and are now letting him land whenever he wants.

 Here is the link to the SFGate article.


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#27) On March 19, 2009 at 11:44 PM, nihilkillsmemore (20.69) wrote:

I would not be suprised if other countries got into currency wars to support their exports i.e go on a devalueing spree

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