Tuesday, October 5, 2010

Shorter Milton Friedman: "Never Mind the Man Behind the Curtain"

Milton Friedman often said: "inflation is always and everywhere a monetary phenomenon."

Except when it isn't, which is never.

Speculation in commodities can and does cause inflation without an increase in money supply (i.e., a monetary phenomenon).  It did so in the 1870s, the 1900s, the 1920s, the 1970s, and it does so now.

If you compare the change in commodity prices year to date versus the change in the dollar's value compared to the Euro, you'll find something remarkable.  Using copper as an example, both the value of copper (in dollar terms) and the value of the dollar (in Euro terms) are up since the beginning of the year, but the value of copper is up by A LOT more.  According to Uncle Miltie, this isn't supposed to happen.  Commodity prices and the value of money are supposed to move inversely to one another, not together, and not in a manner that commodity prices move in the same direction as the value of a dollar but as a multiple of it.

I've seen some data from Karl Denninger that suggests the same thing is true in agricultural commodities, and if it isn't it soon will be.  The FIRE sector is a parasite on the productive sector, and their rent-seeking in consumer staples is going to cause a lot of pain and probably a few deaths.

'Nuff said.