Posted December 14, 2008
Q. Inflation
is the result of a larger than proportionate growth in money supply.
What
we see now is that M3 (total money supply) is coming down as banks keep
sitting on cash because they are reluctant to grant credit. As Money
supply is coming down, hasn’t the danger for inflation not become a danger
for deflation? |
A.
Only the RATE of
Growth in Money supply is coming down; M3
keeps on GROWING at a slower pace (10% instead of 18%) and therefore we
keep on having monetary inflation and not deflation. M1 is growing at a
faster rate (more people are keeping their savings under their mattress)
and the rate of growth of M2 has also increased to almost 8%.
At
this time we also see the velocity of Money coming down.
This is a normal and expected faze of the
inflation/hyperinflation cycle we are living: people are spending less
because they erroneously think prices will come down. The day they
understand Inflation is here to stay, people will start to buy whatever
they can to get rid of paper money. Velocity will pick up again and we
will at that point have entered Hyperinflation.
GDP (gross
domestic product) is decreasing by almost 4%!
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