Run, Don't Walk From Treasuries

Everyone already knows this is true in reverse. We had tremendous asset inflation in the 1990s and falling inflation. Since everyone, except commodity producers, benefited from that disconnect, few people questioned it.

While it is true that falling asset prices reduce demand, which does have a deflationary impact, there is a lot more to the inflation story than demand. As Milton Friedman said, inflation is a function of monetary policy and money creation. The more money printed, the more inflation you're going to have.

In fact, with the combination of asset deflation and excess money creation, the logical result is even more price inflation than if assets were inflating.

The reason is that the money being created needs to go somewhere. If it isn't going into assets, it will go into goods, services and commodities, all of which feed into reported price inflation. If our currency continues its decline, that will also increase inflation, especially for anything that's imported, regardless of what's happening with assets deflating.

Even so, isn't inflation today always going to be dramatically lower than in the late 1970s and early 1980s because of global competition keeping wages down? Unfortunately, this view is based on two faulty assumptions.

The first is that a big part of the decline in reported inflation during the past 20 years has been the result of more and more creative ways that the government has simply redefined what inflation actually is. Think of this sort of the way President Clinton said "That depends on what the definition of 'is' is."