Saturday, October 22, 2005

It's the money supply, stupid.

A writer over at Techcentralstation says that energy prices are rising, sure, but don't be fooled. The central banks are to blame for inflation.
As important as they might be, rising oil or other energy prices cannot be the primary cause of higher consumer prices. For this to be true, the quantity of money would have to be passive and adjust itself to accommodate increases in input costs.

However, the reverse is true in that overall costs can only rise when there is an excessive expansion in credit or the money supply. Unless there are offsetting increases in money supply or credit, higher oil prices would force down all or some other prices.

Costs and prices can only rise in all or most sectors if the central bank engages in monetary pumping by loosening credit policies by lowering benchmark interest rates.

A wise man once wrote, "Inflation is always and everywhere a monetary phenomenon."


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