From: pmahler@netcom.com (Paul Mahler)
Newsgroups: misc.invest
Subject: Re: Long-term direction of the dollar
Date: 28 Aug 92 01:45:36 GMT
Organization: Netcom - Online Communication Services  (408 241-9760 guest)

>>>Note that while the US dollar drops, this makes gold a more
>>>attractive (and dependable?) currency.  Gold has gone up a
>>>few dollars per ounce but if central bank intervention proves
>>>to be ineffective, watch for gold to spurt up.
>>
>>>Bob Devine
>>
>>We seem to be in a deflationary spiral. It is not clear that gold will 
>                    ^^^^^^^^^^^^^^^^^^^
>>Paul Mahler                   internet: pmahler@netcom.com

>It seems to me that, if anything, a falling/weaker dollar should be
>viewed as both inflationary in and of itself, and to lead to indirect
>inflationary pressure on the US economy...

>Am I missing something?

Yes, you seem to be using the word "inflation" incorrectly. You are 
using the word as "price inflation" where prices are increasing. 

If you look at a market basket of commodities taken 10 years ago and taken 
again today, the price of each of them relative to the dollar has increased. 
This is price inflation. The value of each of them relative to each other has 
stayed the same, for the most part.  When bread was a 10 cents, eggs were 10 
cents.  Now bread is a dollar and so are eggs. The price of bread compared
to eggs hasn't changed. The price of bread compared to dollars has gone
up. The only commodity that is worth less (relatively as well as
metaphorically) when prices are inflating are the dollars. 


Price inflation is the effect, not the cause. Prices don't go up and weaken the
dollar, the dollar goes down in value and prices (relative to dollars) go up.
Increasing prices causing a fall in value of dollars would be the tail wagging 
the dog.

Stopping inflation is trivial. The
Federal Reserve could stop inflation tomorrow by stopping the presses. This
of course, would cause all the banks to fold.  

Prices of other commodities go up as the price of the dollar decreases. Dollars
are just another commodity. We just hapen to value other commodities 
in relation to the dollar, instead of beads or trinkets, or other commodities.  

The amount of time it takes to earn wages to buy basic commodities, 
like food, has dropped over time.  It takes you less time to earn a loaf 
of bread than it did 10 years ago, and this is the case for most commodities. 
This is deflation.

In broader terms, the number of dollars is increasing at an alarming rate. The
mesasure of cash and cash equivalents is M1. M1 has been increasing for the
last quarter at about 11% per year.  This is because the government is putting
more money into circlculation by decreasing the reserve requirement and
lowering the discount rate. The broad supply of money is M3.  M3 has been
going down at about 1% annualized.  This is another sign of deflation.

Everyone seems to think that the government controls the economy or controls
inflation or deflation. More myths. The government could roll the presses as
much as they want and we could still face deflation. The government can't 
control the economy, and probably shouldn't try since the system is not
understood. Economists are the modern correspondents of court wizards. 
They are no more able to predict the future than astrologers. Actually,
astrologers may do a better job.  This comment may not be fair to Astrologers.
-- 
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Paul Mahler                   internet: pmahler@netcom.com
Consultant
1800 Market St. #257          voice: 415.327-6737
San Francisco, CA 94102       fax: 415.322.1603

"I work for myself; there's no one else to blame it on." 
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