Wednesday, 28 April 2010

What? Price stability? What´s that?

Items with an underlying monetary nature have exactly the same attributes as money held with the single exception that they are not 100% liquid.

We do not have stable – as in fixed real value - money. The real value of money is generally accepted by the public at large to be stable – as in fixed - in low inflation economies, but this is not true. The belief that we have stable – as in fixed real value - money is an illusion, namely the notorious money illusion.

Central banks and monetary authorities have monetary policies that often create the impression that money is stable in real economic value. They implement monetary policies that include the tolerance of low inflation limits of up to two per cent per annum. Then they assure everybody that “price stability” is guaranteed and assured. The public at large mistakenly assume that this means stable – as in fixed – prices. We regularly read in inflation reports that low inflation targets have been met and that “price stability” is assured.

In a low inflationary economy this appears to be true. But in reality it is not true. Yes, money illusion makes us believe that our depreciating money maintains its real value, while it actually halves in real value over 35 years with constant two per cent per annum inflation – the generally accepted level of “price stability.” All currently existing bank notes and coins will eventually arrive at a point of being completely worthless in real monetary value during indefinite inflation. How quickly depends on the level of inflation.

Kindest regards

Nicolaas Smith

Copyright © 2010 Nicolaas J Smith

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