#1 The business cycle is the credit cycle.

#2 Inflation is a net increase in money and credit, not just prices (mainstream opinion) and not just money (common misconception among contrarians).

#3 Deflation is a net decrease in money and credit.

#4 There cannot be both inflation and deflation at once.

#5 The central bank and the government bring about inflation by absolving banks of the responsibility for their actions. 9:1 fractional reserve lending would not be rewarded in a free market devoid of FDIC insurance and a central bank to print the money to pay for it and other bailouts for bankers.

#6 Price increases themselves are not inflation. If you have a fixed expense budget and your grocery and energy bill goes from $500 to $700, you must cut back $200 somewhere else (for instance, many are deciding to forgo eating out).

#7 Aggregate prices tend to increase as a result of inflation, but they are just an effect, and a lagging one at that. Note how CPI is still highly positive while defaults are soaring and lending is contracting.

#8 We are not experiencing stagflation. In stagflation, wages and total expenditures increase. We are in deflation with high energy and food prices. CPI ignores the 20% decline in housing and the actual prices being paid for goods like cars and clothing, which are selling at big discounts. With wages flat,  unemployment rising, and credit being withdrawn, less money is being spent overall.

#9 Wages must fall to sustain employment in deflation. People can’t afford the high prices we have experienced for the past few years. Actually they never could, but just borrowed to pay them. With credit withdrawn, companies that relied on these prices are being squeezed. Many will go under, and those that survive will have learned to economize on labor and other inputs (think Dunkin’ Donuts Vs. Starbucks).

#10 Prices can increase as a result of shortages and increased demand as well as inflation. If oil goes to $200 this fall because we bomb Iran or in 2011 because crude production has dropped by 10 million barrels per day, that will not be inflation or inflationary. But if the world’s central banks socialize all of the current credit losses and recapitalize or nationalize the banks, and carbon credits then go to $10,000 per ton because of easy margin loans, that will be inflation.

#11 Inflation is coming, and it will be extreme. Not this year, not next year, probably not until after 2010, but after all of the bad debt is wiped out and the governments and central banks have had time to spend and print their brains out, we will see the final failure of this paper money regime. Don’t look forward to it, because these events are not pretty. Such an event lead to la Terreur, the worst phase of the French Revolution, as the corrupt and populist oligarchy tried to force the bourgeoisie to accept its worthless script, the assignats (photo at top of page).

But not all gold bugs are libertarians. Guess who restored the gold standard in France?











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