Sunday, January 07, 2007

Flecks of Gold

As usual, Bill Fleckenstein is predicting the end of the world, or at least what he calls "the next time down", a major decline in the stock market. Fleckenstein is one of my favorite investing writers, but before a new reader takes any one of his articles too seriously, that reader should take into account that Fleckenstein is always predicting the end of the world. Since the market does have its ups and downs, Fleckenstein will eventually have to be right, just as a clock which doesn't work at all will be right twice a day. This doesn't prove that Fleckenstein is not worth reading. As I said, I think he is. It's just an observation.

Fleckenstein also has a tagline: "In a social democracy with a fiat currency, all roads lead to inflation." This is worth a comment. As far as I can see, in any kind of society which uses any kind of money, over the long term all roads lead to inflation. Let's ignore mild short-term events, like Japan over the last decade or so. What major deflationary trends come to mind offhand? Only two come to my mind: one after the Black Death and one while the Roman Empire in the West was dissolving. See what I mean? I haven't done any serious research on the subject, but at first glance, it looks like inflation is the normal pattern of societies, with deflation being only a response to disasters on an earthshaking scale.

Assuming that this is true, why should it be so? I can guess at at least two reasons, depending on what definition of inflation you like.

If you like to define inflation as the decrease in the buying power of money, Gresham's Law will be enough to explain it in almost any society, since Gresham's Law itself seems to be based on human nature. The only condition would seem to be that there be several currencies (or other independently valued forms of money) available in the society. If you want to see the good money drive out the bad, you need to have both good and bad money available. In normal societies, traders of one kind or another will always make sure that there are several independent forms of money available. And if you try to use artificial, non-commercial means to limit the effect of Gresham's Law, you end up with triple-digit inflation South-American style.

If you like to define inflation as an increase in the amount of money available, you have another reason for inflation. Over the long run, people will always be inventing new kinds of money, whether for convenience, or to serve some legitimate commercial purpose, or to try to get around controls. In societies with some central control over money, as most modern societies have, the commercial interests will constantly be inventing new forms of money to get around the controls, which those interests feel limit their profits and convenience. The monetary authorities will, of course, respond by measuring and controlling each new form of money invented. To which the commercial interests will respond by inventing yet a newer form of money. And so on. It's like the battle between the email users and the spammers, which is - and will continue to be, in the foreseeable future - in a never-ending state of escalation, with the controllers always finding new technical means of control, and the controlled always finding new technical means to circumvent the controls.


Post a Comment

<< Home


to my broker review site