Inflation and the Credit Cycle: Rising Prices Mean Declining Values

“‘Tote dat barge! Lift dat bale!’
Get a little drunk,
and you lands in jail!”
-Ol’ Man River

It is Victory in Europe day…another holiday in France.

But that doesn’t stop us. Long-time Markets and Money sufferers know that we don’t take holidays; too tiring. Besides, there are always things to be reckoned with. If we don’t reckon with them, who will?

Yes, the world just keeps rollin’ along. It is always different – and always the same.

The Dow hit a new high again yesterday. Massive amounts of phony ‘new wealth’  are being created. What’s this new wealth to do, but chase after the Dow and other assets? And what can assets do but respond…by going up in price?

Then, the poor yahoos see prices rising and come to exactly the wrong conclusion: these assets are becoming more valuable – and safer too. Something has happened that makes the world more prosperous than ever…they think…something that will make anyone rich, if he just gets with the program.

Here, we offer not so much a counter-view, but simply gratuitous insults and ridicule.

A financial asset is merely a tool for making money. Imagine it as a factory or as a hotel or as a computer program. What is it worth? Only what it can produce. It doesn’t produce more just because people pay more for it. On the contrary. The more dollars you have to pay to buy the asset, the less productive each of your investment dollars becomes!
Whereas, a dollar will produce 20 cents of revenue when the asset is priced at 5 times revenues, it will only produce 5 cents of revenue when the price of the asset rises to 20 times revenue.

The value of the asset has remained the same. What has happened is that the value of the money you used to buy it has gone down.


C’mon, do we have to explain everything? Because there is more capital now chasing the same capital assets. Inflation, in other words…inflation of the money supply…has caused prices to go up.

What makes this bout of inflation particularly agreeable is that it never makes its way down to the hoi polloi. The price of labor is being held down by the globalised market. So the proles who lift and tote, never get a raise…and never get their hands on all this money. It’s not cost-push inflation, led by increasing labor rates, in other words. It’s asset-pull inflation, a completely different kind. It’s money that the average working stiff never gets his hands on. So, he never takes it and uses it to buy cereal and milk. And he never forces his employer to raise prices.

Instead, this money stays with the people who invented it – central bankers, hedge funds, private equity funds, venture capital funds. It remains like the chips on a Las Vegas gaming table.

You see, dear reader, money creation is no longer in the hands of the central bank authorities alone. Banks no longer control the credit cycle. And gold no longer controls international money flows or relative currency prices. The whole system is out of control.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

Bill Bonner

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