In Jim Cook's Archive


Years ago, I wrote about the dangers of inflating and the possibility of runaway inflation. Nothing like that has happened and I often wonder why. I’m no monetary expert, but I believe the onset of high inflation has been forestalled by a type of deflation. For example, when we see all the chain store closings and empty malls, we are witnessing a form of money destruction. Our economy has been experiencing a boom for some and a bust for others. The monetary authorities increase money and credit and the faltering part of the economy destroys it, thus moderating inflation.

A lot has been said about the dangers of inflating. In our lifetime we have seen China rise from an impoverished country to a leading economic power. How much of this success can be traced to the vast amount of dollars created by the U.S. and sent to China and other countries for goods? China and the world have prospered because of inflating. It’s true that a bust often follows an economic boom, but it seems that the world is farther ahead than it would have been under a more restrictive monetary regime.

Under the gold standard money increases by the amount of new gold mined each year. That small percentage would most certainly have cramped economic growth, but there would be little chance of recession and inflation would be low. The gold standard would be incredibly unpopular and would be blamed for every economic and social problem. However, unlike paper money and bank credit, gold cannot be created out of thin air.

The great danger is that in the face of a faltering economy, so much money will be created that it unleashes a runaway inflation. Monetary expansion is the tool the authorities use for every slowdown. Whether it proves to be ultimately ruinous will be spelled out in the future. So far the dire predictions have not been realized. Nevertheless, the possible repercussions from our aggressive money creation certainly merit positioning a percentage of ones assets into hedges that offset inflation.

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