Yesterday, we talked about how the money supply has not expanded unduly, given the level of economic growth. We also looked at credit growth and found that it too was running at or below the levels expected, considering the level of economic growth. There appears to be no sign of the Federal Reserve’s stimulus in these measures.

Does that mean we’re off the hook on inflation? The short answer is no, and the reason is interesting. First, though, a bit of background.

I have to apologize to Micah Crabdree, who posted a question on Halloween. Since then, I’ve either been preparing for our National Conference or attending it, and I meant to respond earlier. Sorry, Micah, but here you go . . .

The question concerned when the Fed was going to start the taper process—specifically, wouldn’t it be better to do so in a strong market environment, when the possible negative market effect would be limited, as opposed to a weaker environment, when the Fed’s action might serve to weaken it further?

Yesterday, we talked about the two fundamental requirements of money: scarcity and exchangeability. Today, we’ll focus on how those elements work in the current monetary system.

Money today is almost exclusively fiat currency, with no underlying assets behind it. Dollars, euros, pounds, and the yuan/renminbi all have value because their governments say so. “Money” that has no governmental backing, such as gold or bitcoins, is a fringe player right now.

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” — Mark Twain

What is money?

At first blush, the question either sounds pretty obvious or like a Zen koan. I think it’s worth asking, though, for the same reasons it was worth asking “What is a house worth?” in 2007. Although everyone thought they knew all about the real estate market, it turned out we didn’t. In the same vein, I think there’s a real benefit to taking a deeper look at exactly what money is, and has to be, to determine if what we think we know about it (and about current economic conditions) actually makes sense.

Hanging out in planes and in airports yesterday, I was prepared to write something fairly caustic about US Airways. But I have to say, at the end of the day, they did a pretty good job.

Looking at yesterday’s post, it is clear that there’s a disconnect between consumers and business again—but in the opposite direction from what’s been happening recently. Over the past couple of years, consumers have spent while business sat on its cash, refusing to invest or, more particularly, hire. While consumers had led the recovery thus far, it was apparent that, to take the next step, business had to start to hire and invest.

I mentioned yesterday that consumer confidence had declined since the shutdown, while business surveys had come in much more strongly, indicating that this transition might be starting. Today’s data points suggest that, while consumers are closing their wallets somewhat, businesses are beginning to open theirs.

Today’s news included a stronger-than-expected growth figure for the U.S. economy, which expanded 2.8 percent in the third quarter. Before we get too excited, though, we have to note that the increase came from inventory buildup—not exactly a sustainable growth engine. In fact, you can argue that the reason inventories increase is because sales are less than expected. If you take away the inventory effect and net foreign trade, you end up with a 1.7-percent growth rate for sales to domestic purchasers for the quarter, down from 2.1 percent in the previous quarter, which supports this argument.

Unfortunately, other data points confirm a slowdown last quarter. Personal consumption grew more slowly, at 1.5 percent (down from 1.8 percent the previous quarter), while business investment dropped from a growth rate of 4.7 percent to 1.4 percent.

This will be a very short post as I’m off to Commonwealth’s National Conference in Phoenix. It’s always a great week—with a wide range of interesting content, wonderful events, and even better people—and I’m excited for it.

I’ll try to post something else later this afternoon, but for the moment, the interesting story of the day appears to be politics. The reelection of Chris Christie in New Jersey and the defeat of the Tea Party candidates in Virginia and Alabama suggest that the center may be getting some traction. Hopefully this will translate to a more businesslike, less confrontational environment in Washington.

I have been shamelessly avoiding writing about the Affordable Care Act, better known as Obamacare, because it was both inherently too political and economically too nebulous to really get my hands around. Apart from noting that it would inevitably create additional headwinds to growth and job creation—which isn’t a value judgment, but an economic fact—I haven’t weighed in on the law itself. An opinion on the law has to be a value judgment between competing goods, a relative cost-benefit analysis that everyone has to do for himself or herself.

Now, however, we’re at a place where the law itself is not at issue, but the implementation is, and that is having (and will continue to have) economic and market implications that we should be aware of.

http://www.youtube.com/watch?v=xRIhIbwhwNg