If you truely don’t believe that inflation is purely a money supply phenomenon…..answer yourself this one simple question:

By Daniel at 1 December, 2009, 7:20 pm

What do you think will happen to consumer prices if the Fed printed $100 trillion dollars overnight, and in one fell swoop….paid off all outstanding Federal debt….covered all pending liabilities for social security and medicare….and has enough left over to buy every American family a respectable home?

Do you think it would matter if the velocity of money was zero?

It’s a monetary phenomenon, folks! Don’t let the politicians misguide you. Seriously, if everyone believed the truth, do you really think the Fed will be allowed almost unfettered ability to print money?

Ask yourself another question: are you really paying less for day-to-day living now than you did last year? Do you find that you are, indeed, richer….that every dollar that you earn now is actually buying more stuff than it did last year?

We are our own best surveys, guys. I am certainly finding that my dollar does not go far these days (even compared to two years ago), and I have been (and still am) gainfully employed in a stable job for the past 10 years.

All basic inputs to our economy has gone up in price (i.e. commodities like oil, copper, energy, etc). Factories are definitely feeling it and are responding by firing workers, without having to resort to raising consumer prices. The problem is, the surge in commodity prices is still on-going and shows no signs of abating. Factories are running out of workers to let go. Eventually, there will be two choices….maintain break-even margins by raising consumer prices? Or go bankrupt?

Think about it…. You can’t have something for nothing.

The deflation occurring in the housing industry has to do with fewer sales and less demand. Less demand is deflationary. The government is inflating but the populace is deflating. The jury is out on who will win.

As an example, milk went to 5 dollars per gallon and people quit buying. When gas goes to 4 dollars per gallon people will quit driving.

We are deleveraging. That is highly deflationary. So it is a race. I don’t think the government can easily win this race. Housing is a key factor in making inflation work and housing is dead in the water.

The battle is on between the huge, ongoing contraction of credit, which is deflationary, and Bernanke’s inflationary ‘countermeasures’. Too early to say who is winning. And there are big money bets on both outcomes…

- Mr. Big