See It, Kick It - A Simple Inflation Test

Samuel Johnson was an eminent British scholar in the 1700s. One day he was walking in the  countryside with James Boswell - his friend, stooge, and biographer. They were discussing Bishop George Berkley's theory of knowledge, that was causing some commotion in English intellectual circles. Very simplified,  Berkley's theory stated that we only know the world by our ideas, and hence don't know if anything really exists. Basically, he was simply giving a modern version of Plato's original theories of the world only existing as an imperfect idea.

Exasperated at hearing Boswell's speculation of Berkley's thesis, Johnson suddenly walked up to large stone and kicked it. "See, sir" he said.  " I  do so refute the clergyman's theory.' Basically Johnson saw the rock, kicked it, and by so doing proved it was not a figment of anyone's imagination. Philosophy profs, of which there are far too many, would call this the empirical argument.

Johnson would just call it common sense.

The same applies today to the silly inflation / deflation argument. A "Mr. Practical" at Minyanville.com never tires of belaboring his point that the world, especially the US, is going into a deflation. The common definition of deflation is a decrease in prices. His definition seems to be that if credit is decreasing faster than it is being created, then we have a deflation.

By Mr. Prac's definition, yes, we are having a deflation.

But ask an average housewife or pensioner, and they'll tell you no, we're having inflation. And a very bad and obvious inflation.

They see prices, they spend money, and at the end of the month, they're poorer. To them it's common sense. I guess academics would say they're being empirical. .

Mr. Practical is talking about theory. These people are talking about reality.

What is is occuring today in the United States, is that prices for some items are going down and for other items going up. Unfortunately, the only price decreases are either in luxury items or stuff that requires debt. Examples of  this are automobiles, eating at restaurants ,  and Brook Brothers suits. Examples of items increasing in price are essentials like food and energy. Obviously not many people out there need a new car every year or a Brook Brothers suit for their entire life. Sadly, everyone needs to eat, and many have to drive a car, however old it is, to economically function in society. For them, 90% of the population, we are having inflation. For the other 10% like Mr. Practical, it might look like we're have deflation.

It's really two different sides of the same coin.

Demand for goods and services has fallen drastically. This should lead to a fall in prices aka deflation. The main reason food and oil have gone up so much in price, is that we are having a Bernanke induced speculative inflation. It is the worse thing an economy can suffer, and it shouldn't even be happening if the Federal regulations were being enforced. But they're not. Partly because certain rules on commodity position limits have been waved for certain large financial firms like Goldman Sachs.

This inflation in commodity prices will indirectly put a floor on most fungible goods. The reason simply being that companies can only lower prices so much without then having to take a loss on each item sold. If demand falls below production, these same companies will then simply  reduce productive capacity to maintain their price level. In this process, more workers will be fired.

It's stupid. But unfortunately Bernanke is reality. My only wish is that I could kick him.

"On the road from the City of Skepticism,  I had to pass through the Valley of Ambiguity" - Adam Smith