Inflation vs. Prices

KCB wrote: "My question is: since the U.S. dollar is now a fiat currency, how can the supply remain low in the face of strong demand? If there's strong demand for a currency, doesn't that imply willingness on the part of those who demand the currency to borrow it? Wouldn't that set up an inflationary scenario?"

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It's amazing how many people are convinced that our currency is issued by U.S. government fiat. It's not.

The US$ is issued ONLY by private individuals who hold private equity shares in the private Federal Reserve Bank, and the private banks that lend with leverage on top of their reserves. Think of the Fed as a hedge fund for the world's wealthiest villains. They need the hedge to protect themselves against the greed of one another--much like the mob doesn't keep guns to hedge against police action (they can buy the law), rather,to protect themselves from one another.

To answer your question, it isn't that dollar "demand" is strong relative to the boom years of 1998/1999 or 2005/6, it's not. It is that there are few dollars to be found, so surviving dollars gain buying power.

The Fed is not our banking system. The Fed is a predator in our banking system. They have purchased a government blessing to flood our banking system with reserves whenever they wish to do so, AND when our private banking system is willing and able to arbitrage a low Fed wholesale price of funny-money into additional retail loans with leverage. When that happens, the Fed has a massive inflationary influence, if and when, our banks can reasonably mark up that cash. Obviously, with a 0.04% retail rate for same-term cash, banks are cut off from wholesale Fed counterfeiting--oops, I mean--from profitable Fed "lending."

Right now, the Fed is draining cash harder than they ever have before, by keeping the Fed short term cash price sky high at 0.25%--today it's about 700% higher than the market rate of 0.04%. This is an unmistakable sign that the Fed is trying to seize banks for profit. Suffocating banks under crushing reserve interest rates is not inflationary.

Another perceptual problem arises because some people think inflation means prices. Current price levels have nothing to do with inflation, but for a macro, market-based, cause-effect relationship. "Price" is the toll a trade exacts on the buyer, not a number on a board. Physically trading things, things displayed on stock exchange (the word "exchange" is used for a reason) tickers scrolling at the speed of light, actually takes a pretty long time. Only after the dust has time to settle, and people reconsider how much of something they are willing to give up for something else, is the price, or the toll in goods and services surrendered, truly adjusted at the market or macro level. That's what price means.

Inflation refers to a rise in the dollar supply, not the price level of goods/services when banks print dollars (notice I did not say "the government prints") to arbitrage the difference between their reserve cost and the short term market price of cash. When I use the term inflation or deflation, I'm not talking about prices, because prices in a vacuum have nothing to do with inflation or deflation. Today is a perfect example. Lets take the Dow:

The Dow is down about 40% from highs, -20% from Y2K, and -80% from Y2K when adjusted for buying power (as priced in commodities). This is the macro result of deflation. The best measure is that of long term buying power. The price of the Dow, or the toll exacted in goods and services surrendered, is down 80%. That is the profit one would have made, had they converted Dow shares into other things in 2000 (then bought them back today--which would be a dumb move at the present time).

But, the Dow was up yesterday, so people tend to think there was inflation yesterday. There wasn't, because prices can be set by any number of individuals operating within a greater market. If two people trade a share of the Dow for 50,000, that is the price for that day, but 50K is not a true market price, because two people do not = the market. Institutional sellers cannot fetch that price for their shares, because the one guy dumb enough to pay too much cannot absorb their volume of transactions. Much like the current 10.5K is not the true market price of the Dow, because of the anemic number of transactions we see trading today at that price--not enough dummies.

With near-zero trades, it is possible that the Dow could go to 100K tomorrow. And with absolute certainty, it will return to market value when high volume trading returns. High volume exited stage-left at 6.5K.

Of course, that was a different Dow 30 than we have today--but I think that having to change the Dow 30 is worse than being able to leave it alone, so the true market price is even lower.