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Inflation Watch

Posted: Sunday, February 1, 2009

By: David Retz (Expired article)

Solvang, CA -

Monetary Policy efforts to "boost" the economy by lowering interest rates seem to have reached their limit, as the prime rate is now zero. The government's next-best thing - giving money away - also known as "fiscal policy" appears to be on the horizon.

The numbers bandied about ("trillion" seems to come to mind) make one wonder where the money actually comes from. There is only so much sitting in banks (run by the Federal Reserve System), and there are ways that the Federal Reserve has to increase the overall supply of money (such as selling bonds). This gets reflected in additional cash in Federal Reserve accounts, or as "real" cash as it is printed.

The term "M1" is a measure of money supply (cash and banking deposits), as published by the Federal Reserve Board on a weekly basis. It has remained about the same until about September of 2008, at which point it started to significantly increase, with a total increase of $274 billion since January of 2008 (+20%).

As more and more dollars chase the same level (or fewer) goods and services, it looks inevitable that we face the possibility of long-term inflation. The "Critical Commodities" listed above this article are the prices of Gold, the Euro, and a barrel of Crude Oil - each of which can be used as a yard-stick or "standard" for the value of the dollar. As any of these numbers rise, this can be an indicator of devaluation of the dollar (i.e., inflated dollar) and a harbinger of increased prices for other goods and services that may be related.

If it's any warning, the value of Gold has broken above the $900 level in the past week (2/1/2009). (Note: the above values are obtained every few minutes from the New York Mercantile Exchange (NYMEX) and from Yahoo Finance.)

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