Peter Schiff is Wrong __ James Turk is Wrong
Peter Schiff's Euro Pacific Capital newsletter from April of 2009 stands out as especially revealing. That newsletter clearly demonstrates just how far off the proponents of the Austrian school are on understanding inflation and hyperinflation. The newsletter featured a guest article written a month earlier by James Turk entitled "On the Cusp of Hyperinflation". [James Turk is the author of The Collapse of the Dollar and the founder of goldmoney.com.] In this March 2009 article, James Turk enumerated 6 reasons for his predicting that "hyperinflation of the US dollar is imminent" and also said "[the US dollar] is on the cusp of hyperinflation. I expect this to become increasingly clear within twelve months." Of course this hyperinflation prediction has proven to be wildly off the mark. Average consumer price inflation by any measure has registered in the low to mid single digits in the 2½ years since. Nevertheless, in September of 2010, eighteen months after his 'hyperinflation within a year' prediction, Turk unapologetically published another such prediction, in which he hyperlinked to his original prediction. Though no doubt he is sincere, James Turk is dead wrong. It will be interesting to see for how many more years James Turk and Peter Schiff, et al, will continue to reiterate these runaway inflation predictions that will completely fail to materialize.
Austrian Economics is Wrong
This, folks, is your fair warning: Peter Schiff, James Turk, John Williams, Marc Faber, Charles Goyette and others will surely continue ad nauseum with their predictions of runaway inflation in the dollar but consumer prices simply aren't going to cooperate with them. Sooner or later these pundits will have to face the reality of radically lower consumer price inflation than they predict. Eventually their predictions will lose all credibility. These guys really don't understand economics holistically—especially the factors affecting why people raise prices. Yes, I say factors (plural), as Milton Friedman's famous quote, "Inflation is always and everywhere a monetary phenomenon" is simply wrong. And I say people, as the Austrian school simply views consumer prices as inextricably linked to the money supply, as if little else matters, such as people's perceptions, and people's propensities for taking pricing action (or no action). You just can't have a viable price inflation model that completely removes human behavior from the equation. Sorry Milton.
Monetary Inflation is not the same as Price Inflation!
Indeed, the Monetarists and the Austrians believe that inflation of prices is simply an automatic manifestation of overly abundant money. Money supply and prices are supposedly inextricably linked by mathematics, such as in the equation known as the Quantity Theory of Money. To be sure, you'll see the Quantity Theory of Money in every Economics textbook, expressed as some variant of P(k)=MV. [Read this equation as: "the general price level (P) is proportional to the size of the money supply (M) times the velocity of money (V)."] In other words, according to the Quantity Theory, if you increase the money supply by say, 25%, while holding its velocity constant, then prices on average must also rise 25% in order to maintain a supposed equilibrium. As neat and orderly as this theory assumes the economic universe to be, it is simply not true. It is but a theory.
It's funny, Sigmund Freud's theory that every man has a secret desire to sleep with his mother appears in every Psychology textbook, yet few people would actually believe it. So why is it that so many believe so unquestioningly in the Quantity Theory? Its empirical supporting evidence is inconclusive at best, while more importantly, via thought experiment I can in fact prove that P(k)=MV cannot even remotely represent a full accounting of what governs prices. That is not to say that increasing the money supply cannot raise prices; rather, increasing the money supply may raise prices, but probably not by so much.