Why Most Consumer Prices Aren't Affected by Money Printing

“Commodities head for longest run since 2000,” says a Bloomberg headline.

What gives?

On Friday, stock markets sold off all over the world. But there was no follow-through on Monday. Instead, the Dow posted another 68-point gain.

Gold, meanwhile, lost $7.

There’s a lot of money in the world. Central banks are printing it! Particularly, the Fed.

So what happens when central banks print money? Well, prices move.

If you believe the “quantity theory of money” you have to believe that prices will rise. More money in circulation means that there is more money available for every unit of output.

So, things that can’t be easily reproduced…and things that are priced on the international auction market…go up. Like wheat. Like copper. Like oil. And, of course, like gold.

Markets are always discovering prices. Prices go up and down. But they usually find an equilibrium in a fairly narrow range. In a world of real money, prices don’t vary that much.

But with so much new, ersatz money in circulation, markets have a hard time keeping up. They get bubbly. They discover that yesterday’s price was too low…so they move it up again. And then they worry that it is too high, so it drops back again.

Generally, as central banks add money, prices move higher and higher…until the bubbles pop.

Why don’t local items react too? Like the cost of parking…or houses? Well, it’s a long story. But the Fed’s easy money doesn’t lift all prices evenly. Because the money isn’t distributed evenly. The Fed prints money, but it doesn’t give the money to us. It gives it to the banks. And the banks put it into hedge funds, trading departments, and speculative portfolios.

This is what is known as “hot” money. It never gets into consumers’ pockets. So, it never is used to buy the ordinary stuff of a domestic economy. Instead, it goes into hot markets – markets for global, auction-priced goods. Those items are soaring…even as the core inflation reading in the US is nearly flat.

Oil is at a 2-year high. And check this out. From the Telegraph:

Christies auction house has best year in 245-year history.

Christie’s has announced record sales for 2010 after the auction house enjoyed the best 12 months in its 245-year history.

Total sales rose more than 50pc to hit £3.3bn last year, as the company retained its position as the world’s largest auction house.

Christie’s was involved in two-thirds of global artwork sales worth more than $50m (£32m).

Works sold over the course of 2010 included Pablo Picasso’s Nude, Green Leaves and Bust, which sold for an auction world record £70.3m, as well as the £35.2m sale of Alberto Giacometti’s Grande tête mince, both of which were sold on the same day last May.

Impressionist and modern art sales [were] Christie’s most successful market, with sales [totaling] £767m, followed by post-war and contemporary art sales of £603m.

Europe and the US were responsible for the lion’s share of sales, but growth was fastest in the company’s Asian business, with sales more than doubling to £499m.

These price increases are not driven by consumer price inflation. People aren’t desperate to get rid of money before it loses value. This phenomenon is driven by greed, not fear.

Bill Bonner
for The Daily Reckoning