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Inflation defined as TM = FM + [MV*CM] under the current policies of Bernanke and the Federal Reserve is alive and well.

MV*CM refers to the market value of credit money which with the collapse in late 2008 of asset prices, crushed the asset price inflation contained within residential real estate, commercial real estate, stockmarkets and commodity markets worldwide.

The massive money creation, measured by M2, has stabilised all those markets save residential real estate, although commercial real estate is looking decidedly wobbly currently.

What should have happened is that the massive inflation should have collapsed into a truly epic deflation. The massive overcapacity built on inflationary money, would have proven unsustainable with a natural rate of interest being charged for capital.

Thus the current inflation is invisible. It is visible only in what is not happening: viz. the absence of a true deflation being allowed to run it’s natural course.

The primary victims of such a deflation would have been the Banking system, both visible [traditional] and the so called shadow banking system. Currently, what we have are the banks most guilty of egregious lending practices being supported, while prudent banks are being squeezed through not being allowed to pick-up market share via inability to access the cheap capital available to the cretins at Citi et al.

Figure2

At first glance, there isn’t much of a correlation between the series under review. However, if a closer look is taken at series’ underlying trends, which strip out short-term fluctuations and “noise,” two findings stand out.

First, trend money growth of M2 and trend changes in consumer prices are pretty much on the same wavelength, and they are positively and highly correlated. Second, trend changes in the money stock seem to affect trend changes in prices with a time lag, and trend money growth seems to lead trend changes in prices.

The (admittedly arbitrary) trend lines suggest that consumer prices will go up and that the latest drop in rising consumer prices should be interpreted as a temporary downward blip (driven by lower commodity prices).

Why might inflation continue to increase, so much so that it again becomes visible to the mainstream via rising prices? Simply, government, when it cannot raise money legitimately through either debt and or taxation, must, essentially expropriate the property through theft.

The previous post details the levels of deficit spending that are being projected and the level of debt required to pay for this. The numbers are simply not tenable – thus, inflation is the only answer that government will seriously consider in their grab for ever increasing power.

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