Recommended Reading:

“What Has Government Done to Our Money” By the great Austrian Economist Murray N Rothbard. You can get it from the Mises Institute for $6.

http://mises.org/store/product.aspx?ProductId=262

Re: Inflation vs Deflation expectations

Currency inflation is a monetary phenomenon. More money = inflation; less money = deflation; therefore, to have deflation the Federal Reserve would have to decrease the money supply, and to have inflation they are increasing the money supply. Sorry to state the obvious, but sometimes you just have to go back to basics, to make sure people are on the same page. There are also price moves not related to inflation/deflation of a currency, but this is not the question. The reduction of the money supply has never happened for any long period of time. Expect Inflation. The Keynesians at the Federal Reserve believe that they have to create inflation to keep the economy going, and so they will. Other reasons are given for the continual inflation, but the delusional nature of Keynesianism must suffice in a short post. Also there wasn’t really deflation in Japan (http://research.stlouisfed.org/publications/iet/japan/page4.pdf). What will make it hyperinflation? There is no consensus on what constitutes hyperinflation. Some say 20%, some 50%, and some 100% per annum if you search for a hard numbers definition. All of these would be bad, but the bigger the number the harder the economy falls.

As a side note, I am pleased that the title of this show uses the word default and not collapse. The government has definitely defaulted, or failed to keep it contractual/understood obligations with the people. On the other hand we have not had a currency collapse in the US, in which the dollar has failed or all but failed to serve as money. Despite the continual defaults, people have continued to use the greenback as money. Fools and the purchasing power of their money are soon parted.

Historically inflation/deflation was about money supply. Because the Fed ‘researches’ and publishes statistics based on price movements people commonly seen inflation in terms of prices. But prices of any item can rise or fall with supply and demand of that particular item. Because of the confusion now in the inflation discussion, people in the Austrian school of economics have started taking about monetary inflation(increased money supply), and price inflation(increase of average prices). Now take for instance the simplistic scenario in which there is no fractional reserve banking in an economy that is isolated from any other potential economy. In this scenario, then the same people cannot spend more and more money year after year unless there is new money; also to spend more one item x they would have to spend less on items y or z. When the Fed publishes ‘inflation’ statistics they are ‘estimating’ the general price movement, not the price movement of any particular item(I use the quotes because what the fed is really doing is deception). “So if the demand drops?”: You must ask yourself, “the demand for what in particular has dropped?” What if the demand dropped on cell phones? Maybe if a EMP takes out electronics, the demand for cell phones will die, but you still would have money to spend on food, so people would now be able to spend more on things like food and in the end spending the same total if the money supply were held steady. Demand for everything would have to drop for all prices to fall. Only if people are all dead in some Alex Jones apocalypse would all demand for all of various products completely disappear since we all at least need to eat. There is an interplay between the supply/demand for money and supply/demand of various products in society, but if the amount of products remain stable and the money supply increases then you will have both monetary and price inflation.
The Fed seems to be worried about price deflation since this is what they spend the most intellectual effort on. This is because Keynesianism teaches that price deflation, where there is a stable money supply and more goods, will lead to decreased spending (since items cost less), then decreased wages for workers and/or job losses; This will in turn lead to people less able to buy product (more demand drop) since they have less money; this vicious circle will continue until all we can do is sit around and twiddle our thumbs until we starve. This is false, if the money supply remains stable and the workers more productive, people can now buy more of product x at a lower price, thereby spending the same amount or buy more of other products, again spending the same total amount. In the free market scenario increased productivity frees people to do other things and increase the number and types of product people can consume. Workers keep their wages by producing more products that are cheaper, but by selling more of them, or creating new products that can now be purchased.
The Fed manipulations of interest rates are not a change in money supply, but do affect the economy. Lowering interest rates will favor the increased buying of items that need to be financed like houses. Would you rather have your mortgage rate 10% or 4%. On a large item like this over 30 years a change in interest rate can change the total cost very significantly. Hence during this last decade when the Fed kept interest rates low, we saw a surge of house buying.

I’m behind a bit, just finished listening to this one yesterday, and I have to say this is one of my all time favorite episodes. It is a great resource to point to when trying to explain to people what BS the mainstream media and our government spew about defaults & budgets & our monetary system. Thanks!