I agree with those who said inflation is a side-effect of the increased money supply.
Let’s say you made $2000/month, but then I gave everyone $2000 to buy that item that costs $2000. The price of that item will jump to reflect the demand. If I took $2000 away from everyone and burned it, then the demand will drop and the price of that item would drop.
Inflation has occurred in the last 10 years, disguised by rising stock wealth and home equity, due to an increase in the credit offered. People were priced out of houses, but it wasn’t considered inflation back then.
Now, house prices are dropping fast, and some traders have speculated in hard commodities, such as oil and food. Now, all of a sudden, inflation is exploding? I think not. I think the play money moved from the stock market to the real estate market to the commodities market.
As credit continues to contract, cash will be needed by banks to repair their balance sheets, leading to more margin calls. Leveraged traders will have to continue selling their equities and commodities to meet those calls, leading to a downturn in the markets.
Think of it this way…so you’re spending $300/month more in food and gasoline. Meanwhile, your home dropped in value by $2000 that same month, and your income stayed the same. Are you going to add to the demand of luxuries or reduce your demand for them? Look at Subway and Starbucks…they are offering CHEAPER food to entice you back to their stores.
Our money supply is contracting, and even more so with the trade deficit which is an outflow of our dollars from this country. We have less cash and credit than a year ago.
