OJ,

I have a gold bug friend who insists that financial ruin is just around the corner.

He is as insistent that inflation will explode as you are it doesn't exist. I keep e-mailing him your pages.

Here is the kicker though.

Inflation IS a threat, and it IS occurring right now. The balancing factor is that deflation is rampant as well. What Greenspan is doing, and I'm convinced he's doing better than his many detractors could do, is throwing just enough money at the deflation to keep things stable.

You are correct in pointing out that we in a similar configuration to the late 1800s, the difference is that we now have a central bank and zillions of computers to track what is happening.

And remember, class. Inflation is too many dollars chasing too few goods. In a time where "goods & services" are flooding the world economy, we need dollars to sop them all up.

Been to a store lately? There seem ample goods.

It's perceptions that count, not the abundance of goods available, nor the plummeting price of gas, nor low unemployment nor the plunging of the deficit as a percentage of a growing GNP nor any of the other positive signs about the economy or anything else for that matter.

If the senate doesn't confirm Bernanke before January 31st, I hope Bush is prepared for a recess appointment. Greenspan's tenure shouldn't be extended for even a day past the end of his term.

Bruno, you either have one or the other. Inflation and deflation can't both be happening at the same time.

individual prices vary--the cost of living just keeps going down.

Bruno: Remember that inflation is a monetary problem. If the money supply is growing too fast for the growth in the economy, then the result is inflation. If prices of certain items are going up because of actual changes in the relative value of inputs, that's not inflation but the ordinary working of the price function (i.e., price goes up as a signal to switch to alternatives while the available supply is directed to the highest value use). None of us like it if the price of the things we like to buy go up in price, but that doesn't make it inflation.

Joe,

x + y = monetary situation ("+" is really too simple an operator, but suffices for purposes of illustration)

where x = turning on the printing presses
and y = a world churning out goods & services
__

I submit that you can "inflate" at the same time the world is pumping out goods & services.
Dave:

I may need to tighten up on defintions, but the situation is fluid. Inflation may be defined as a "Monetary Phenomenon" in the text books, but what is actually happening out side the text book is what is important.

To argue that the quantity of goods & services available in the world doesn't impact "inflation" seems to fail the common sense test.

Bruno: Assume you have an economy that consists entirely of 100 apples and 100 pieces of paper scrip, all of equal value. If someone then just sits down and writes another 100 pieces of scrip, then the price of apples will go up. That is inflation, because their is a general price rise due to an increase in the money supply.

Say, instead, that there are 100 apples and 100 pieces of scrip. This time, 50 of the apples are destroyed in a natural catastrophe. Again, the price of applies will rise, but that's not inflation. That is the market reacting to supply and demand.

The Fed's job is to prevent a general increase (ir decrease) in prices due to growth (or shrinkage) of the money supply. At the same time, it must not interfere with changes in price that are due to the market reacting to supply and demand because every time it does so, it decreases the efficiency of the economy.

Now, suppose the Chileans are sitting around with a bunch of extra apples and say: Hey, the gringoes will buy these....

And suppose further that news of the Chilean apples gets dispatched by flying monkey to the dungeon where Alan Greenspan spends the daylight hours, suspended upside-down like a large wizened bespectacled bat. The resulting increase in the amount of scrip on issue is not necessarily inflationary if Greenspan reads the monkey's entrails correctly.

i hate those damn flying monkeys

i hate those damn flying monkeys

I believe you have all got it right.

Now add another 2.3 billion people developing services to clean flying monkeys, provide viagra knock-offs to bats, polish the apples, genetically modify the apples, ship all of it to each other, and write software to develop and manage intricate apples to monkey arbitrage schemes.

Massive human potential unleashed into a world with too few scrips. Somebody had to turn on the printing press.

That's pretty much all I'm saying. There is no such thing as an island with 100 apples. As an illustration, it discusses money in a way that ignores nearly infinate human potential.