The Wisdom of our Ancestors is in the Simile

Earlier this week my mother and I were talking about the tax cut extension (now passed) and the omnibus spending bill (fortunately dead).  The conversation went a little something like this:

Me: “I just wish they would quit spending so much” 

Mom: “I just wish they would quit raising the gas prices”

Me: “Mom, I know that you know that the government doesn’t raise the gas prices.”

Mom: “I don’t know.  It sure seems like it.”

Well, in large part mom was  right.  Read how below the fold.

Then yesterday I came across this article on rapidly rising food prices.  And, like the mystery solving satisfaction that strikes a child when they discover how to think two moves deep in chess, I remembered that prices fluctuate according to the change in the supply of money compared to the change in GDP.

Well, if you are at all engaged in the world you have heard something about QE2 – no, not the cruise ship – the policy of quantitative easing being practiced currently by the fed.  Quantitative easing is just a fancy way of saying printing more money.

The graph on the left is of the M1 money supply.  The line graph is of the percent change and the shaded area is the absolute money supply.  Notice the sharp curves up in the shaded area in September 2008, when everyone thought the world was going to end, and again in November this year.  Those are periods of massive cash infusion into the economy.   And when cash grows faster than the economy we get inflation.  (for the sake of brevity I won’t get into the other variables that have been preventing inflation thus far – including the decrease in consumer debt occurring and how this decreases the M3 money supply). 

Further, oil is, for now, traded in dollars.  So when we devalue the dollar (print more money) oil prices rise, as well as other commodities like food.

As you can see, mom was right. . . er, partly right. By devaluing the currency, government is causing gas prices to go up.  Increasing demand for oil across the rapidly growing Asia-Pac region is also contributing to the rise.

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One Response to The Wisdom of our Ancestors is in the Simile

  1. Bhuvan Nijhawan says:

    if only…..the qe2 would show up in more money supply in our monthlypaychecks………

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