The Liberty Lamp: Libertarian News & Editorials

Inflation. Everyone knows it sucks, but what does it mean in terms of international trade and global finance? Did you know that governments actually create not just one but two kinds of inflation? Author and financial scholar Gary North explains...

"Monetary inflation is the basis of price inflation, except in rare occurrences, such as a war or an earthquake, where unexpected falling supplies are the cause: "The same number of currency units chasing too few goods."

In the United States and around the world, monetary inflation is the norm. But, very occasionally, central bankers decide almost simultaneously to put on the brakes. They stabilize money. Then we see the clash of the two inflations.

The St. Louis Federal Reserve Bank publishes a chart of the four major currencies: U.S. dollar, Canadian dollar, Japanese yen, and British pound. This chart tracks the reserve money data, which reveal central bank monetary policy. It’s worth printing out.

You can see that there was parallel policy in 1999: inflationary. The Canadian central bank was creating reserves at an astronomical rate: 25% per annum. The other countries were creating reserves in the 10% to 15% rate – high.

Then, without warning, the central bankers reversed their policies in 2000. Canadian reserves fell like a stone at minus 7%. The Bank of Japan’s rate of reserve creation fell to 0%. So did the Federal Reserve System’s. That coincided with the collapse of the Nasdaq and the general U.S. stock market.

Then, in 2001, all four banks reversed policy again: back to monetary inflation. The Bank of Japan expanded reserves at a 28% rate, or close to it.

Ever since 2005, all but the Bank of England have been reducing the rate of monetary inflation: under 4%.

Ever since the final week of January, 2005, the Federal Reserve has almost stabilized the adjusted monetary base.

This is monetary disinflation. When monetary disinflation hits price inflation head-on, there is a crash in the equities markets. The stock market boom, fueled by rising monetary reserves, threatens to become a bust.

Ludwig von Mises described this boom-bust phenomenon as early as 1912 in his book, The Theory of Money and Credit. I have written a short book on Mises’ monetary theory, for those of you – in addition to my mother – who are interested."

To fight this, North recommends focusing less on stocks/bonds but rather on money markets, bank Certificates of Deposit (CDs) and, of course, the ever-popular precious metal. Please see our Free Market Investing Guide for more information.