Why Most Consumer Prices Aren’t Affected by Money Printing

“Commodities head for longest run since 2000,” says a Bloomberg headline.

What gives?

On Friday, stock markets sold off all over the world. But there was no follow-through on Monday. Instead, the Dow posted another 68-point gain.

Gold, meanwhile, lost $7.

There’s a lot of money in the world. Central banks are printing it! Particularly, the Fed.

So what happens when central banks print money? Well, prices move.

If you believe the “quantity theory of money” you have to believe that prices will rise. More money in circulation means that there is more money available for every unit of output.

So, things that can’t be easily reproduced…and things that are priced on the international auction market…go up. Like wheat. Like copper. Like oil. And, of course, like gold.

Markets are always discovering prices. Prices go up and down. But they usually find an equilibrium in a fairly narrow range. In a world of real money, prices don’t vary that much.

But with so much new, ersatz money in circulation, markets have a hard time keeping up. They get bubbly. They discover that yesterday’s price was too low…so they move it up again. And then they worry that it is too high, so it drops back again.

Generally, as central banks add money, prices move higher and higher…until the bubbles pop.

Why don’t local items react too? Like the cost of parking…or houses? Well, it’s a long story. But the Fed’s easy money doesn’t lift all prices evenly. Because the money isn’t distributed evenly. The Fed prints money, but it doesn’t give the money to us. It gives it to the banks. And the banks put it into hedge funds, trading departments, and speculative portfolios.

This is what is known as “hot” money. It never gets into consumers’ pockets. So, it never is used to buy the ordinary stuff of a domestic economy. Instead, it goes into hot markets – markets for global, auction-priced goods. Those items are soaring…even as the core inflation reading in the US is nearly flat.

Oil is at a 2-year high. And check this out. From the Telegraph:

Christies auction house has best year in 245-year history.

Christie’s has announced record sales for 2010 after the auction house enjoyed the best 12 months in its 245-year history.

Total sales rose more than 50pc to hit £3.3bn last year, as the company retained its position as the world’s largest auction house.

Christie’s was involved in two-thirds of global artwork sales worth more than $50m (£32m).

Works sold over the course of 2010 included Pablo Picasso’s Nude, Green Leaves and Bust, which sold for an auction world record £70.3m, as well as the £35.2m sale of Alberto Giacometti’s Grande tête mince, both of which were sold on the same day last May.

Impressionist and modern art sales [were] Christie’s most successful market, with sales [totaling] £767m, followed by post-war and contemporary art sales of £603m.

Europe and the US were responsible for the lion’s share of sales, but growth was fastest in the company’s Asian business, with sales more than doubling to £499m.

These price increases are not driven by consumer price inflation. People aren’t desperate to get rid of money before it loses value. This phenomenon is driven by greed, not fear.

And more thoughts…

Juan came to help on Sunday afternoon. Juan is a short, sturdy man with a ready smile.

All the gardeners, maids, cleaning ladies, field hands, pot and pan washers, car parkers and tree trimmers are Hispanic now. Juan is from El Salvador.

We were pruning apple trees – about 100 of them. They’ve been let go for so long the branches grow every which way, but mostly where you don’t want them – straight up.

You have to prune them twice. First, we get up in the crotch of the tree with a chainsaw. We cut out big limbs growing up through the center of the tree – often big boughs, the size of a gypsy’s thigh, bristling with little branches.

Then, we go through the tree again with pruning shears, lopping off all the smaller, unwanted limbs.

“Corte todos que suben por arriba,” we told Juan. We don’t know whether that was correct or not. Juan didn’t try to improve our Spanish. Instead, he spoke English:

“Juan, you mean, I cut the ones that grow up?”


“Why is he calling you Juan?” Edward asked later.

“I don’t know… I gave him my name. But my Spanish accent is so bad…somehow, I guess he heard ‘Juan.'”

“Well, why don’t you tell him your name isn’t Juan?”

“Why? I don’t mind being called Juan.”

“What’s his name?”


“You’ve got to be kidding.”

“Nope. Two Juans.”

Juan (the other one) was pruning a tree. The field was covered in snow. The trees were icy. We slipped and fell out of one tree. Another tree attacked us. We cut off a big limb and it fell on us. It was nice to have Juan backing us up.

When we checked on Juan, we realized that our instructions hadn’t been specific enough. He had cut off all the limbs. All that was left were nubs and stumps.

“You better give him another lesson,” Elizabeth suggested.

“Juan, no corte todas las ramas. Solamente los que crecen directement por arriba.”

“What did you tell him?”

“I think I told him to cut off only those branches that are growing straight up. But we’ll have to see what he does.”

Later, at lunchtime, Juan told us a little about his experience as an immigrant from El Salvador.

“I came here illegally. But that was a long time ago. I’ve got my papers now. I’ve been here for 20 years. I lived in Houston first. And then, I heard about a job on a horse farm here in Maryland. So I came here.

“We were 7 brothers in El Salvador. And there weren’t any jobs. And there was a lot of fighting. It wasn’t safe. My father told us all to go away. So my oldest brother came here. And then the rest of us came. Now, we’re all in the US.

“But it wasn’t easy. I had to work hard. This fellow who hired me on the horse farm, he has 40 horses. And those horses are a lot to take care of. And he didn’t have enough people to take care of them. So, when I came, I had to work every day, 7 days a week, for three years without a single day off.

“It was rough. And I didn’t earn much money. But I kept at it. Because it was a job. And he gave me a trailer to live in. Then, after three years, I got to take a Sunday off. And then it got better. My wife came to live with me. And now we have a family. And I take off every Sunday afternoon.

“But I like to work. So that’s why I’m over here helping you.”


Bill Bonner.
for 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

Latest posts by Bill Bonner (see all)

Leave a Reply

Be the First to Comment!

Notify of
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@marketsandmoney.com.au