I keep hearing all this crap from the media about rising food prices.  And then they talk about the price of gas.  And then they talk about the falling home prices (which aren’t really falling, but simply returning to a more reasonable level after being inflated themselves).

But they always talk about them separately, as if they had nothing to do with each other.

They are very related…and the relation is to the value of our money, which is a fiat money issue.  It is related to ramping up the printing press, and a crisis in the faith of the value of the dollar.

Remember that fiat money has no value other than the agreement that it can be exchanged for things.  The US dollar is worthless if everyone decides we don’t want to use it for payments anymore.  At that point the govt must enforce its use, prevent by law the exchange of the dollar for something of hard value….and then the govt usually collapses some time after that.

So….what does this have to do with anything?  The recent rise in prices is caused by the devaluation of the dollar (a fiat money, printing press issue), not by any smokescreen the government or media may be reporting.

Here is the thought exercise:

The government is printing more dollars (through low interest rates), making each dollar worth less.  We see this, and the international community sees this. 

It is in everyone’s best interest to convert the value of your dollars into another store of value (gold, the Euro, real estate, etc.) that is more stable.  Every day you hold dollars, they are worth less…so you convert the dollars to something of hard value.

What do you choose?  The first option for the international community is probably another currency, because it is a quick, easy way to convert value….and we see this:  Major currencies all appreciating versus the dollar. 

But what happens when other central banks also depreciate their currency, or there is a crisis of trust in the fiat money system in general?  Easy:  We choose a hard store of value…something that doesn’t represent something of value (like a bill or coin), but actually IS valuable (like food, oil, real estate, etc.)

What is the most popular hard store of value ever???  Real Estate.  You cannot turn up the printing press on land.  Unlike paper bills, they’ll never make any more:  the supply side is fixed.  In uncertain economic times, land is a certain store of value.  And that’s what we saw:  Housing (and thus real estate) prices shot through the roof.  People liquidated their dollars (which were very cheap anyway due to low interest rates) and bought a hard asset.  We did it, and the international community did it.

So the “fall” in real estate values is not a fall so much as it is a return to more reasonable levels after a real estate bubble created by the process I described above.

Now lets look at Food prices:  Do you think there are suddenly more people eating?  Or that crops are failing all over the world?  No.  We buy most of our food from abroad, the dollar is worth less, so it takes more of them to buy food.

Now let’s look at Gas prices:  Is there a supply side issue?  Is less oil being pumped?  No.  Is there a sudden rise in demand?  Not enough to justify the current rise.   Here is the price of oil in gold instead of dollars:  our currency is plainly losing value.

Part of it is our dollar is worth less, so the price is rising.  On a related note, oil is priced in dollars as an international commodity, so the price cannot rise the same as non-dollar denominated assets.  So why the sharp rise?  Is inflation THAT bad?  I’m not exactly sure about this one…but it may be oil speculation.  The movers/shakers on the international scene are looking for safe stores of value for their money.  Currencies are being devalued (can’t invest there), real estate prices have already been run up (can’t invest there)….so what’s the next hard store of value to move to…..commodities (oil, metals, etc).  So the next bubble would be in commodities.

Is there anything we, as regular people, can do about the government devaluing our dollars?  Not really unfortunately.  For those with the determination, it is possible to denominate your savings accounts in other currencies, or gold….but I think most of us are stuck with inflation.

Update 5/30:  Here is an interesting article that makes the point I’ve been getting at with historical examples (which I was too lazy to lookup):  Fiat currencies always fail.

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