Some Comments on the Quantity Theory of Money

As I mentioned in my previous post - Inflation - Why the official numbers are wrong! - I pointed out that the general theory for which inflation is based upon implies that the "price level" is a vector but measures of inflation represent this as a scalar. Today I want to explore how that complicates the picture for the Quantity Theory of Money.

Inflation - Why the official numbers are wrong!

I'm certainly not the first to claim this and I won't be the last. But I think I'll say this differently than most who happen to say it.

For starters, when I refer to inflation, I'm preferring to price inflation.  Some (particularly Austrians), by inflation, mean monetary inflation so I think it's important to be clear on what's being discussed.

Many feel that the current inflation figures (whether we're talking CPI or CPI minus food and energy) understate the actual rate of inflation. Other methods are sometimes used which in many cases are not any better than the official numbers (and in many ways worse.)

Howerever, what I'd like to suggest is that Any method of coming up with an inflation number is flawed. To understand this we'll have to take a brief detour.

Real Estate: The Better Inflation Hedge

In my previous post, I discussed having a healthy dose of skepticism when one sees a correlation between two variables. The relationship may not hold very well out of sample (such as future performance).

But I also discussed gold as an inflation hedge and I suggested that gold was a lousy inflation hedge in spite of what most people seem to believe.

Today I want to discuss another asset class which, although may or may not be a good inflation hedge, is nonetheless a better inflation hedge than gold. Furthermore, this asset class has many other attractive features that suggest it should be pursued before gold if you're looking for a hedge against inflation.

Gold, Hedges and Correlations

Today I'm going to touch on a sort of theme I have here and that's regarding on how to assess correlated data. How much can we actually read into it? How do we determine that there's a fundamental relationship that, not only holds well in the past but will continue to do so in the future?

To do that I'll be taking a quick look at gold and why I consider the "inflation hedge myth". In short, gold is not an inflation hedge. At least not on any reasonable time scale.