tag:blogger.com,1999:blog-379856994574950364.post8509839246292701182..comments2023-08-25T08:45:09.672-04:00Comments on The Supply Side: Tuesday round up.Unknownnoreply@blogger.comBlogger1125tag:blogger.com,1999:blog-379856994574950364.post-28957139481380696612011-02-02T17:05:10.311-05:002011-02-02T17:05:10.311-05:00Don Luskin is starting to get it that there is som...Don Luskin is starting to get it that there is something wrong with the Gold price signal. The explanation that he is searching for is an understanding inflation that manifests in an increase in the general price structure as measured by idex measures like the CPI or the PCE, can only operate if private credit is expanding. Where private credit is contracting there is no transmission mechanism between money supply or interest rate and price change. Demand for credit is driven by fiscal incentives not by monetary incentives. Where a credit shock has destroyed a tremendous amount of saved wealth and the reaction is to deleverage in response to that loss, then the supply side response should be to create fiscal incentives to promote capital formation and risk. That is the only driver that can produce aggregate private debt expansion net of write offs and pay offs. So, as the fed expands money supply and the fiscal context does change to create proper incentives the new money and low interst rates do not produce expanding credit formation which is what actually causes prices to rise. Instead, the new money and low interest rates merely result in increasing excess reserves right back on the Fed balance sheet...until they can be applied through carry trade in emerging markets where credit is actually expanding. The definition of inflationo should focus more on capital flow than on gold price or commodity price change. Properly understood the increasing flow of capital from financial assets into leveraged tangilbe assets is inflation. In contrast the flow of capital out of tangible assets and financial assets into money and money substitutes is deflation. Where there is no faith in money as money, where the soundness of money is questioned, the capital flow seeks money substitutes...short term sovereign bonds of the highest available rating, fungible commodities that are not perishible, gold, etc.Ed Breennoreply@blogger.com