Next Stop: Stage Two
July 31st 2008 23:51
The Early Warning Report ( by subscription only) written by Richard Maybury has an excellent article about inflation and how to tell what stage of inflation we are in. He quotes Ludwig Von Mises, the Austrian economist:
This ignorance of the public (toward the political cause of inflation is the indispensable basis of the inflationary policy. Inflation works as long as the housewife thinks: "I need a new frying pan badly. But, prices are too high today; I shall wait until they drop again."
In stage two wrote Mises:
...people discover that the inflation (of the money supply) will continue, that it causes the rise in prices, and that therefore prices will skyrocket infinitely. The critical stage begins when the housewife thinks: " I don't need a new frying pan today: I may needone in a year or two. But I'll buy it today because it will be much more expensive later."
In stage two, people accelerate their spending and prices rise faster than the money supply.
In stage three:
...the catastrophic end of the inflation is close. its last stage the housewife thinks: "I don't need another table; I shall never need one. But it's wiser to buy a table than keep these scraps of paper that the government calls money, one minute longer.
Maybury thinks we are in the later part of stage one. I don't disagree, but on some things we are in stage two. I am going to Mexico in the spring. I have been told I should make my reservations now, because the fares are going up soon.
Maybury thinks that foreigners are already well along in stage two.
When foreign holders of dollars find other foreigners won't accept greenbacks except at very high prices-to protect against further price drops in the currency-the dollars are sent back to the US to buy real things from Americans. First little things go then our crown jewels; the latest is the Belgian brewer buying Anheuser-Busch.
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