Inflation Explained Simply

August 5, 2006 –

We at maalamalama are constantly surprised by how little people understand the manipulation of monetary flow and inflation by the world’s central banks. Especially since such policies affect everyone that is invested in the global stock markets, real estate markets, currency markets and commodity markets. In late May, 2006, for weeks, the top stories that ran on every online financial news site speculated on whether the U.S. Federal Reserve would raise interest rates for the 17^th straight time. This story ran for days on end, the speculation itself fueling volatility in the global markets.

In addition, they run erroneous reports all the time such as terrorist concerns driving the stocks of airline industries downward. Many airline companies were in trouble long before any terrorist concerns and would have continued to have been in trouble without any terrorist concerns due to many other more important outside factors.

Controversy sells news but it won’t help your investment decisions

We’re not sure if the major media really is that ignorant about monetary and fiscal policy and or if they merely utilize a bit of the “controversy sells” marketing strategy to their benefit. We feel that the answer is probably a little bit of both. In any event, such ignorance that exists in major media fuels erroneous stories all the time. Financial journalists that do not understand biology or chemistry and that have no credible educational background in either area write negative comments about biotechnology stocks in the major media and drive the price of stocks down unfairly or vice versa, praise such stocks without understanding the potential of the technology under development and cause such stocks to rise tremendously with no just cause. Furthermore, journalists with no economic educational background write speculative stories about interest rates and therefore needlessly fuel speculation regarding topics where there should be no speculation.

In very simplistic terms, central banks loosen money supply when they want to create inflation and they constrict monetary supply when they want to create higher interest rates. More than anything, it is monetary policy that causes inflation and fluctuation in interest rates, not the price of oil, not unemployment data, not job growth data, not the phase of the moon, not sun spots, not the price of gold, and not the outcome of the World Cup. Though some of these factors undoubtedly figure into inflation and interest rates, the major determinant behind inflation and interest rates has always been the global central banks’ decisions to constrict or loosen the global money supply.

So that’s it for today. Short and sweet. Until next time, follow the MoneyMites to make more money.

KAEHO’s Corner

Since you’ve taken a simple concept that people can’t seem to comprehend, I’ll do the same today. So simple explained, this is what Zen is. Zen is neither thinking or non-thinking. It is pure thought lacking any personal consciousness, thought that is in harmony with the universal energy. Even though J.S. has described Zen as enlightenment, well, he’s wrong. Zen is not enlightenment, but rather the return to the natural pure state of body and mind. If J.S. had mentioned that his enlightenment, and thus, his “zen” in investing was reached by disposing of all previously conditioned thoughts and theories about investing and returning to a pure mental state, then that would have been a much more accurate description of what the zen of investing is.