Tuesday, 17 September 2013

Why no banana republic price inflation yet ? Its all about the store of value functions and medium of exchange functions.

 I'd like to share an exchange I've been having with Jim Willie (rumor anyway)  who's been posting as Grumps Labastard of the FOFOA blog. Jim Willie does not seem to think that the store of value (SOV) and medium of exchange (MOE) functions of money can be separated. This will also shed some light on the confusion as to why banana republics have such high price inflation with menial actual printing.

His words

A common assumption I find in the gold community is that there is a somewhat constant store of value that must be available. What this blog has done for me is that the flaws in FreeGold have allowed me to see that value cannot be trapped and isolated for a long period of time. The SoV and MoE functions cannot be separate. The concepts delineated on this blog are zero order, linear. I think the truth may lie in Fekete's Theory of Interest. It's the tension between saver, investor, and producer, the first and second order derivative relationships that make it impossible for the SoV not to be intertwined with the MoE. 

My answer

It is already happening all over the world, all the time. Do you think millionaires and billionaires in banana republics store their purchasing power in their local currency ? No they don't. That's why inflation shows up so fast in these countries. Because the producers are not saving their excess in local currency. They save elsewhere. Thus, the local central bank has no purchasing power to steal via printing (savings are not denominated in the medium that the central bank has the ability to print). The printing just floods the transactional side and you get instant price inflation.

Why hasn't the US experienced banana  republic style price inflation yet ? Simple. Too much savings to to draw from via printing to have enough effect on the transactional side. Too many fools are saving in the medium that the US central bank has the ability to print.

When the producers around the world start saving in a medium other then US dollars (gold maybe ?)
there will be a corresponding amount of price inflation in the US. So it goes back to the same thing. When the bond bubble bursts (savings exit the medium that the Fed can print) the US will join the banana republic club.