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Markets are constantly in a state of uncertainty and flux and money is make by discounting the obvious and betting on the unexpected. - George Soros

Regarding rising prices and money supply

Aug.26, 2008 in Investment Opinions

Because of globalizaton, all the other countries raising money supply causes more demand for raw materials and goods. Right now, the only reason for the pull back in commodities is our recession and Europe’s. If it spreads to more of the developing nations, we could see more prices fall. This is good news? Not hardly. It means a return to higher unemployment here; higher hunger and poverty rates around the world; more risk of riots and wars from the people who are seeing the chance for a better life taken away.

Also, on the recent drop in money supply. The people who said the past 20 years of high money supply (or whatever the period) are correct that it can now cause problems.

If you and every American were saving 10% of your money every year for 20 years and then suddenly decided to go on a spending spree, everything would change. The 20 years of saving would have lowered demand. The change to taking money out of saving would increase demand and prices.

The Central Banks of the world have been keeping the dollars off the market with purchases of our debt. The government spending for military and other foreign aid and spending and other things was keeping hundreds of billions of dollars in circulation outside our borders and in ways that weren’t driving up prices. Now, if central banks slow the buying of debt and either directly or through growing economies buy more copper, iron, oil, grains, etc. to spend the dollars they didn’t use to spend on those things, it can have a dramatic impact on prices for us too. Anything we import or that is made with imported raw materials can go up.

Only a global recession may help keep prices down. That is not a “solution” and only a greater problem as it reduces demand for our exports. At the same time, a global recovery whether led by us or not, will cause prices to rise again if supply hasn’t been increased to meet rising demand again. The problem with a recession is that the mines, wells, and other raw material sources are often cut back too. Then when recovery comes, they take time to get on line and lag demand.

We used to be such a large part of the global supply/demand formula that just controlling our money supply was enough to change the course of inflation. Now, with something like 2 billion consumers, all over the world, that has changed. The rising wages of the developing world and rising demand for raw materials is causing rising prices in ways we have absolutely no control over regardless of how much we raise our interest rates.

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