10A115 A Crystal Ball by Jim Davies, 12/30/2010    

We're on the cusp of a new year. Wouldn't it be nice to know the future? - maybe not. Being prepared for a range of possible futures is part of the fun of living, and in any case there is a severe logical problem: if the future were known, everyone would take decisions now to make the best preparation for it, and those decisions would be different from what we'd take if it remains unknown, and would therefore change the future. One more reason why it can't be known. Darn!

There are, even so, some sound guideposts to the future. Those who know and study them are likely to do better than others. I'm thinking here of the economic future, and the mess governments make of it. The business cycle theory of the "Austrian" economics school seems to me the soundest guide, the best understanding of how things work, and the relation between money supply and prices, explored both by that and the "Chicago School" is another.

In a zero government society both the nature and the supply of money would be determined only by the market itself, nobody else - no Fed, no central bank. Several thousand years of precedent suggest, however, that gold and silver will probably be the main choices made, primarily because nobody can fiddle with the quantity in circulation. Relative to the volume of goods and services being produced, it is that quantity which determines prices, and therefore wellbeing.

I don't know what that volume has been or will be, but I'm guessing it is a bit lower now than it was before the 2008 crash - because unemployment has doubled, from about 5% to about 10%, so fewer people are producing. No doubt efficiency has risen as producers have tried to make better use of resources, as usual, but I'm thinking the net dropped by a few points, perhaps 3%. At the same time, the supply of money has not increased, despite the massive printing programs of the last 30 months; that's a bit puzzling, but as the chart shows (click here for enlargement etc) M3 (green line) is now just where it was in mid-2008. One must watch what government people do, not what they say.

Hence, a slight fall in goods, with an unchanged money supply: that means a very small inflation has taken place, and that's exactly what I've sensed, when out shopping. (Sure, prices of some items like gasoline and fresh foods have risen a lot, but others like housing have fallen a lot.) Haven't you?

There's a time lag; a money supply change affects prices after about 18 months. So from the chart, we should see very little inflation before mid-2012. This conflicts, I know, with predictions that the "Dollar will crash"; perhaps it will, but in relation to what? - to commodities like gold, silver and food, yes, quite probably. Relative to other, foreign paper currencies like the Euro, the Pound and the Yen, I doubt it. The Renminbi, perhaps; Chinese are, after all, a bit inscrutable.

It will be exciting to find out, in 2011.

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