Wednesday, May 18, 2005

Safe Haven | The Great Inflation Illusion: A Historic Perspective

The Great Inflation Illusion: A Historic Perspective
Since I was a child, the amount of money in the United States has grown significantly. According to the Federal Reserves Historical Data on the money supply (as measured by M3), when I was eighteen months old in 1959, the money supply stood at $292 billion. Of course it continued to grow so that by the time I started college in September 1975, it had reached $1,145 billion. Even though I was totally clueless as to what was causing inflation, I nevertheless, began to notice its impact on the world around me. Prices were going up everywhere. Paul Volcker would seek to curb what was the worst inflationary expansion of money and credit ever in US History by raising rates significantly. So by the early eighties the United States, and the rest of the world, was experiencing the highest interest rates in history. While interest rates had climbed to 14 percent on long-term government bonds by September 1981, this would be dwarfed by rates throughout most Latin American countries. In 1981 Chile's short-term bank loans were 47 percent and Brazil's were 49.