The Cox News service reports that food prices are up 37% from a year ago. The "Times" of London reported on December 3 that Gulf Oil states are reducing their ties to the dollar. Iran stopped conducting its oil business in dollars on December 7th.Why are food prices rising? Why is the worldwide demand for dollars shrinking?Changes in prices, or in the value of a currency, always reflect a change in the supply of goods and services, or in the demand for them, or in the size of the money supply, or a combination of all three.We've touched on part of the cause of rising food prices before: government subsidies for ethanol. These subsidies divert corn from food to fuel production. That makes meat more expensive, becasue corn is used to feed cows. It also sends a signal to farmers to stop growing other crops, and start growing corn. This lowers the supply of those other crops and causes their price to rise. Meanwhile . . .Ethanol requires more energy to produce than it delivers. That means ethanol is triple bad news. It raises your price at the pump, and at the grocery store, and it's bad for the environment. Thank you very much government. But . . .Is ethanol enough to cause a 37% increase in food prices? We think not, especially when those price increases are accompanied by $800-an-ounce gold, and a world-wide flight from the dollar. Why have so many people traded dollars for gold, and why is the dollar losing its value overseas?Is it because foreigners suddenly have less demand for American goods and services? This can't be the answer. The volume of American products sold abroad is roughly unchanged. Of course, not all dollars are used to buy goods and services. Many dollars are held as an investment -- as a store of value.Is the American dollar no longer a good investment? Consider, first we had a stock market crash between 2000 and 2002. The American stock market lost nearly 38% of its value. Then there was the housing bubble, followed by the housing bust.The housing bubble began in about 1996, but the balloon really started to inflate at about the same time the stock market was deflating. It certainly looks like money sloshed out of the stock market and into the housing market. It looks like people have been trying to find a safe place to invest their dollars.But if the stock market and real estate turn out to be unreliable then it stands to reason that some money would then go to things like gold or to other currencies. This would explain the retreat from the dollar, but it doesn't necessarily account for rising prices for food and other goods.There is actually one thing that explains all of these phenomena: the size of the money supply.When the Federal Reserve expands the number of dollars certain sectors get the new Fed money first. Those sectors are . . .* The government, and those who do the most business with the the government* The banking system, and those who do the most business with banksThis means that you would expect to first see the impact of an expanded money supply in the Big Business and Big Banking sectors. And what did we in fact see? We saw a stock market bubble (Big Business) followed by a housing bubble (Big Banking).Eventually the new Fed money has to work its way through the entire economy, raising prices for everything you buy. We might call this the Consumer Bubble. And what are we in fact seeing? We are seeing rising prices for consumer goods like food.Remember what we said in our last message on this subject. New money created by the Federal Reserve works exactly like money created by counterfeiters. The people who have the new money first are able to get something for nothing (purchasing goods and services before prices rise to account for the increased money supply). We might call this the Theft Phase of the Inflationary Cycle. Then . . .Businesses are tricked by the new money into thinking there is increased demand. This causes them to raise prices so as to maintain inventories and invest in new production. This is the Boom Phase. Then . . .The new money works its way through the entire economy, raising all prices, which removes the impression of increased demand, causing the previous investments in inventory and expanded production to become unneeded and unsupportable. This is the Bust Phase.This is exactly what we have seen happen. This is why the dollar is losing its value. There is no mystery.Think about the two Alan Greenspan quotes at the top of this message. Greenspan admits that no central bank -- no Fed -- was needed under the Gold Standard. Notice the other quote. Greenspan admits that neither he nor anyone else knows how to predict what the economy will do. This is very important because . . .The whole idea behind the Fed was that the money supply would be backed by all of the goods and services in the economy (instead of by gold), and that the managers of the Fed would increase the money supply in sync with the growth of the economy, thereby avoiding price inflation. But . . .Greenspan admits that it is impossible for him, or anyone else, to know enough about what is going on in the economy to keep the money supply in sync with productivity. This has resulted in repeated disasters, from the Great Depression, to the Great Stagflation of the 1970s, to today.How do we get off this roller coaster? Returning to the stability of gold would be one way. And gold would probably work even better today with our advanced ability to transfer the ownership of gold/money electronically, instead of toting it around with us. But . . .The process of returning to a gold economy seems daunting given that the Federal Reserve and the money it creates is so interwoven with our economy. We will have more to say about this in future messages, but for now, suffice it to say that Congressman Ron Paul has devised a very elegant way to get things started.The simple act of repealing the legal tender law, which confers a monopoly on Federal Reserve Notes, would empower transactions in gold, or any other currency or commodity the market found worthwhile. This would foster monetary competition, and competition would reduce the Fed's ability to inflate the money supply.This one change would be a big first step toward getting off the roller coaster.

The American dollar is being devalued against other currencies because of its ever growing foreign trade imbalance and its huge national debt. Money is pouring out of the USA for safer, more stable investment climates. To blame the Federal Reserve is misguided. You'd be far more correct blaming a poor President for his disastrous foreign policies and his total lack of business sense. However, even that statement is incorrect because I'm sure he's lining his bank account nicely as he rapes the American pubic and transfers the wealth of America to his political allies, Texas oil barrens and the Saudi Royal family.

Your smart enough to come up with this stuff, but your not smart enough to know how important the Federal Reserve Bank of the United States is. You shouldn't be blaming the Federal Reserve bank for trade deficits. Because after all, that is what you are complaining about. Many countries run large trade deficits with us. Many countries pay a price for this, as China and Japan's standard of living is substantially less than ours. Your making too many connections here that simply don't exist. The advantages of using legal tender is common knowledge. I think you should study Economics in College, because anyone who likes it this much has a future.When has inflation been that high? Inflation is about as its always been. If inflation was high the fed would have to respond by tightening the money supply.Where do you study economics at?

The depreciation of the U.S. dollar is 100% the fault of the Federal Reserve Bank.There is NO need for the Fed. As defined in any basic macroeconomics college class the definition of inflation is an increase of the money supply. The Fed admits it increases the money supply, it uses open market operations. Therefore the Fed is the sole reason why there is inflation.Although we do have a massive trade deficit, Demon is wrong because mass inflation actually creates an INCREASE in exports as we are seeing now. With continued inflation we will have a net increase in exports. Isu tigers is wrong because tcz is not blaming the Fed for the massive trade deficits. You are blaming the Fed for causing massive inflation. The Fed caused the Great Depression, as Milton Friedman explains in his book Monetary History of the United States. The Fed is the reason why we currently have a credit crisis, because we lowered the interest rates to 1% in 2003. Central banks create a misallocation of resources by not allowing the free market to determine the interest rates. It's funny because before there was a central bank prices of goods actually got cheaper. Now everything is getting more expensive because of the central bank.The only "common knowledge" about legal tender is that it is a government created monopoly on money. There are no advantages.Isu Tiger I think it is YOU who should go learn some things or two about economics. Try www.mises.org for a start.

Sorry, I won't waste words with long drawn out explanations on this, I will just give the simple and truth.You don't need the Fed Rev, They need you.Have you any Idea how much paper money they have produced and handed around the world in the form of promissory notes (dollars) And what will happen when the rest of the world stop using them.I think you see my point.