Hey everyone, figured I'd contibute a little something to the forum here with my first post... I was just wondering as to what every one else thinks about the fallacious reasons typically given for inflation and why it is that everyone buys into those concepts rather than accepting the logically sound Austrian view?
Perhaps there is more to the Austrian perspective than I am aware, but if I am correct, Austrian's believe simply that inflation is caused by an increase in the money supply. [It really is so simple!]
Why is it that we still have the idea that inflation is a natural phenomena? That with growth comes inflation, inevitably? Why do we hear that the Fed has "inflation concerns"--they cause the inflation! Not exclusively, of course, but as the "banker's bank" they have some controls over the lower levels of inflation too, those not directly in their hands.
On Saturday, I went to a Ron Paul rally in Chicago (anyone else there?). It was pretty good, and the portion that he spoke on the need for a gold standard and a halt to inflationary taxes by the Fed was fantastic. Lots of people were clapping and whooping for every third sentence he said... I was surprised, however, that when he said, straightforwardly, "Inflation is an increase in the money supply," I was the only one who yelped my praise.
I know that the MSM and the government (and all politicians therein) have plenty to gain from inflation (or at least, approving of current policies). Why is it though that the simplest definition and, indeed, the only correct one, has failed to make it into the mainstream? How can we fix it.
Thanks! Cris
In Economics 101 we were discussing inflation, and our professor asked us what we thought caused inflation. I raised my hand, and asked about the monetary policy and the blatant increasing of the money supply!
She shrugged the point off and asked others for ideas that she wrote on the board, but left mine out.
Yesterday. I brought up the interview with Greenspan on the Daily Show, and then said "and then John Stewart asked a really good question..." to which she cut me off and said "no it wasn't a good question. Greenspan was right that he should read the book again."
So our econ students are, from the beginning fed this line, and that might well be why they come out of college with NO idea why inflation happens.
Good call, Joe. I was very blessed by an open-minded monetarist for Econ 101 and 102. While he supported the Monetarist view, he introduced us to Hayek and, to a lesser degree, Mises. In subsequent conversations, he's admitted that there is 'something to' the Austrian perspective, but since he made a few hundred thousand while he worked at the Seattle Fed bank, I think he'd have to explode if he admitted that those 20 years of his life were evil... :)
This is one regard in which I am fortunate. My professor of economics is a staunch Hayekian, and constantly "injects" Austrian themes into his teachings.
Hey Inquisitor, I'll give you a pound sterling if you record a lecture for me :) What school are you at?
that's truly amazing. I don't see how you can be an economics teacher or economist and totally disregard something so obvious. It's not voodoo.
Lancaster. The professor in question is Gerry Steele. As much as I'd like to take you up on that offer, he has some lectures and articles available here as it is.
csullivan:Perhaps there is more to the Austrian perspective than I am aware, but if I am correct, Austrian's believe simply that inflation is caused by an increase in the money supply
Perhaps there is more to the Austrian perspective than I am aware, but if I am correct, Austrian's believe simply that inflation is caused by an increase in the money supply
I would say rather that inflation IS DEFINED AS an increase in the money supply. (As Ron Paul said at the rally you attended). This definition used to be the only defintion, before somehow the central bankers / Keynesians got us to buy into the clever lilttle newspeak dodge of redefining it as a general rise in prices.
Inflation can cause an general rise in the level of prices, but when you redefine it AS a rise in the level of prices, then you can go off looking for other causes of "inflation" besides the obvious one: aggressive credit expansion by the central banking system.
Cheers!
The problem in defining what causes inflation is that the two parties generally do not agree what the definition of inflation is.
Austrians, such as most of us, believe that the definition of inflation is "the increase in money supply," therefore the cause of inflation is "increasing the money supply." Non-Austrian Economists tend to believe that the definition of inflation is "the increase in prices in a market," and is caused by an increased demand for a market, or a decreased supply of that market (services or product). For them, inflation has more to do with increased demand/decreased supply than a change in the money supply.
Many of us Austrians can agree that inflation (the increase of money supply) usually causes some or many markets to move up in price as new money floods towards a fixed or previous supply of a market's product or service, but inflation doesn't necessarily cause ALL prices to go up. Over the past 2 decades, the money-supply-adjusted price of computers has tended to go down, which non-Austrians would call "deflation," but we would call "price drops." Even in an inflationary economy (i.e., the rising of the money supply), prices don't always tend to go up. It is possible that new money is hoarded outside of the banking system (mattress, vault, wallets and purses locally and foreign lands, etc). It is possible that new money is deposited into accounts that have high reserve requirements and isn't loaned out.
Whatever the basic premise is for the cause of inflation, it is important to understand that more often than not, we are looking at two different subjects: money supply inflation (which can and usually does cause some price increases), and price increases (which can and usually is caused by either money supply inflation or by new demand or reduced supply for a given market product or service).
Please correct me if I'm wrong: it seems to me that the Austrians agree that an "inflation" of money supply necessarily makes monetary prices of goods higher than they would be without the "extra" money, which doesn't mean that prices will increase or decrease as of in a causal relation.
Danilo is correct. When the government inflates the money supply it dilutes the purchasing power your dollar, causing prices to rise.
justinx0r:Danilo is correct. When the government inflates the money supply it dilutes the purchasing power your dollar, causing prices to rise.
I still disagree completely. Price increases are not always caused by inflation of the money supply. Inflation of the money supply CAN dilute your dollar, but it isn't required to, because your dollar's purchasing power is market-specific, not overall economy-specific.
What money supply inflation does do is create malinvestment potential. Picture this: new easy money is created. People want the best return on their money as possible, so they look for recent historical returns in a given market, say housing. Since the recent history of housing showed a price boom, they mal-invested their new money into housing in hopes of a better return. Because the housing market had a flood of new and old money move into it, the increase of money in that market caused prices to go up. Why didn't the price of computers and cell phones and car tires go up equally? Because they did not have the return on investment that housing seemed to show. In computers, prices went DOWN even in an inflationary (money created) economy.
You can't just say that newly created money makes prices go up -- it doesn't. If the central bank doubled the money supply overnight, but everyone socked that new money in their mattress, prices wouldn't change. You also can't say that inflation automatically makes prices go up if that money disappears outside of our economy.
I'm against central banks, and against fiat money, but I am also aware that inflation does not create generic price increases right away. It is once that new money actually cycles into the economy overall that we see price increases -- but not always, as we see with some consumer goods. New money is not as bad as easy credit, I'd say, because money can be exported easily (and out of our market) whereas credit can not be exported so simply. Imagine if immigration was legal and unlimited -- immigrants might flood into the country, send their dollars out of the country "back home" and we might see price decreases overall as money left the country and the demand for money increased due to this fleeing of cash from the local economies.
I have argued both sides before. Back when I was still a slave to keynesian economics (sophmore year of college), I made a passionate argument (that I did not even understand) that inflation was somehow caused by "demand pull" and not the amount of printed fiat dollars.
Many on this forum, including myself, disagree with this generalization. However, I think that the manner in which "inflation" is measured should also be brought under scrutiny. In my student managed fund class, I did a special project which blasted the feds for how they measure CPI, and why it is in their interest to overstate it.
CPI apologists
Claim:
An accurate if not overstated measure of inflation is attained by selecting a “basket of goods” which reflects changes in the price of goods that a sampling of consumers bought.
Assumptions:
· Economists need a clearer picture of the economy and volatile goods distort this picture
· Changing to three decimals will make the published percent changes more precise.
· The value of quality change in a good is important to know—it could have inflationary or deflationary applications
· Substitution of goods may lead to an overstatement of the CPI and thus this quantity must be measured to reflect an accurate picture
While us crazy, Austrian conspiracy theorists
It is silly to think the BLS can accurately measure inflation. Adjustments the feds makes to the “basket of goods” causes an overstatement in the CPI.
Assumptions
· Volatile products cannot be ignored for long and will eventually begin to take toll on other markets
· Economic data is already imprecise. Three decimals gives a false impression that these numbers can be made even more precise
· Government cannot accurately measure quality improvements in goods and this improvement is not a voluntary improvement
· Substituting may imply a declining standard of living and thus equating this with lower inflation is wrong
So what say you, forum lurkers? Who is right? The CPI Apologists or the Feds?
I tend to argue against the accuracy of the CPI. Among other things, the value of an item must be measured in utility, rather than in production cost, so it is next to impossible to accurately chain a CPI. Additionally, politicians gain power when inflation is high because that makes it appear as if wages are stagnating, thus creating demand for the government to interfere in the economy, thus biasing the statistic.
The usual scapegoat for inflation is oil and energy prices. Oil and energy are seen as comprising part of every good, because every good uses oil somewhere along the line. So can rising energy prices cause inflation?
No, inflation is, strictly speaking, the debasement of the monetary unit. Prices are indicators of relative scarcity. If supply falls or demand rises, prices rise because the good is now more scarce than before. My professor actually cuts marks on papers which treat inflation as a rise in prices.
Inflation arises from a discrepancy between the amount of money that can be spent and what it can buy at present prices. If the present amount of money being used to purchase goods is greater than the monetary value of goods available, then inflation will correct the imbalance. One good becoming more expensive with no underlying increase in purchasing power or decrease in availability of goods would merely shift prices around, leaving the average intact.
A.B. Dada: ...I still disagree completely. Price increases are not always caused by inflation of the money supply. Inflation of the money supply CAN dilute your dollar, but it isn't required to, because your dollar's purchasing power is market-specific, not overall economy-specific. What money supply inflation does do is create malinvestment potential. Picture this: new easy money is created. People want the best return on their money as possible, so they look for recent historical returns in a given market, say housing....
What money supply inflation does do is create malinvestment potential. Picture this: new easy money is created. People want the best return on their money as possible, so they look for recent historical returns in a given market, say housing....
Some of the confusion about inlation has its origin in the unclear definition of the term. Sometimes it is used for increasing the money supply, and sometimes it is used for pointing to an increase in prices. I don't doubt that printing or creating book money can leads to an increase in the money supply and can lead to an increase in prices for goods. I think people have already pointed this out well. There are however two other issues that concern me:
We should also keep in mind that in a healthy economy the normal trend ought to be for prices to fall. New technologies, improved efficiencies, and deepening of the division of labor all tend to cause prices to decline, as they did throughout the 19th century. There was low nominal price inflation during the 1990's, even though the PC and internet revoloutions took place in that decade. But we didn't see prices falling dramatically either and I think we would have had it not been for monetary inflation.
A.B. Dada: justinx0r: Danilo is correct. When the government inflates the money supply it dilutes the purchasing power your dollar, causing prices to rise. I still disagree completely. Price increases are not always caused by inflation of the money supply. Inflation of the money supply CAN dilute your dollar, but it isn't required to, because your dollar's purchasing power is market-specific, not overall economy-specific. What money supply inflation does do is create malinvestment potential. Picture this: new easy money is created. People want the best return on their money as possible, so they look for recent historical returns in a given market, say housing. Since the recent history of housing showed a price boom, they mal-invested their new money into housing in hopes of a better return. Because the housing market had a flood of new and old money move into it, the increase of money in that market caused prices to go up. Why didn't the price of computers and cell phones and car tires go up equally? Because they did not have the return on investment that housing seemed to show. In computers, prices went DOWN even in an inflationary (money created) economy. You can't just say that newly created money makes prices go up -- it doesn't. If the central bank doubled the money supply overnight, but everyone socked that new money in their mattress, prices wouldn't change. You also can't say that inflation automatically makes prices go up if that money disappears outside of our economy. I'm against central banks, and against fiat money, but I am also aware that inflation does not create generic price increases right away. It is once that new money actually cycles into the economy overall that we see price increases -- but not always, as we see with some consumer goods. New money is not as bad as easy credit, I'd say, because money can be exported easily (and out of our market) whereas credit can not be exported so simply. Imagine if immigration was legal and unlimited -- immigrants might flood into the country, send their dollars out of the country "back home" and we might see price decreases overall as money left the country and the demand for money increased due to this fleeing of cash from the local economies.
justinx0r: Danilo is correct. When the government inflates the money supply it dilutes the purchasing power your dollar, causing prices to rise.
Hey Adam, long time no talk. Having participated in your forums, one thing I always thought is that you didn't quite get the monetary stuff right. I suppose I'm a bit biased, as I was taught by Austrians and took it for granted a long time that inflation is, by definition, an expansion of the money supply.
The way to think about this stuff, is to think in terms of "trends" or "tendency". So, when austrians say that inflation will cause prices to rise, in your head you should automatically translate that to "will TEND to cause pricess to rise". The difference is sublte, but important.
In general, (as pointed out in the post just before this one) prices should fall due to technology and labor improvements and other factors. So, if the downward pressure on prices due to these factors exceeds the upward pressure on prices due to inflation, prices can fall in some cases. However, this doesn't mean that inflation didn't, as justinx0r put it, "dilute the purchasing" power. In this case, we can see that if there had been no inflation, the price of the good would have fallen, in nominal terms, even further. In other words, it is a fallacy to say that inflation had no impact on the price of a particular good just because the nominal price of that good dropped during an inflationary period.
If it helps, I'm going to try (formatting be damned) to put a 2x2 chart help demonstrate. Imagine a 4-square grid, where the labels across the top, from left to right, are "no inflation" and "inflation", indicating the two possibilities that over time we either don't have any inflation at all, or we do have some amount.
On the left side, the labels from the top down are "old tech" and "new tech". This indicates a change in production technology, where "new tech" means that production changes for this good should lead to lower prices for whatever reason. I'm holding constant any changes in technology that would change the nature of the good, such as a faster CPU in a computer, or additional safety features in a car. Just assume for this case that the nature/quality of the good is exactly the same. The only thing to change is the production technology to help decrease the price of the good
no inflation inflationold tech 100 150
new tech 50 75
In this case, without inflation and before any changes to technology the price of the item is 100. Then some new technology comes along that puts downward pressure on prices, and causes the price to rest at 50. But imagine that at the same time the technology is being developed/deployed, inflation is creaping in. In that case, it's possble that we don't move down then over, but that we kind of drift directly from the top left to the bottom right, such that, in nominal terms, some of the downward pressure on prices due to new tech is offset by inflation, but still resulting in a nominal price drop.
First lets agree that: 1. We have a fiat currency ( irredeemable paper ) in this country. When you're talking about inflation you're talking about easy manipulation of the money supply which is only done with fiat currency. 2. We don't have two inflations (price and money supply)
When the Federal Reserve has the printing presses fired up and their counterfeit money starts rolling off then you will lose purchasing power with the dollars you have in your pocket or bank account whatever (of course this is when the money is actually borrowed into circulation). In reality goods and services don't actually increase in value which is what is assumed when we see a price increase, actually the federal reserve notes have lost purchasing power and it now requires more of them to buy the same goods or services. Now there are different economic components which dictate the price of a good or service hence a price reduction when the money supply has actually increased. Inflation is the expansion of the money supply and deflation is the contraction of the money supply (without an equal expansion and contraction of goods and services). This is putting aside any gimmics which may artificially hide the real supply of money in circulation.
Just for the record NO economy in history has ever survived when a fiat currency was allowed to circulate conversely NO economy in history has ever failed when real money (gold or silver) was used as a medium of exchange.
Monetary economics - along with monopoly and competitive economics - is one of my favorite topics for discussion actually.In terms of the Austrian view of inflation its a little confusing for anyone and different areas need to be understood.Austrians generally perpetuate many theories including Cantillon effect, which is what they contribute to government banks and privileged shareholders/corporations taking money from the poor.
To give a graph, this is the best way I can explain the natural increase in the supply of money - what Mises termed as inflation,
Though I do like the Austrian theory of the value of money and find great value in it, I must admit... When speaking of the specific term of the value of money from origin, I'm much more an Andersonian. To demonstrate that I'll refer you to Anderson's list in his The Value of money starting on page 388 and ending on 394
The Origins of Capitalism
And for more periodic bloggings by moi,
Leftlibertarian.org
Niccolò:Monetary economics - along with monopoly and competitive economics - is one of my favorite topics for discussion actually.In terms of the Austrian view of inflation its a little confusing for anyone and different areas need to be understood.Austrians generally perpetuate many theories including Cantillon effect, which is what they contribute to government banks and privileged shareholders/corporations taking money from the poor. To give a graph, this is the best way I can explain the natural increase in the supply of money - what Mises termed as inflation, Though I do like the Austrian theory of the value of money and find great value in it, I must admit... When speaking of the specific term of the value of money from origin, I'm much more an Andersonian. To demonstrate that I'll refer you to Anderson's list in his The Value of money starting on page 388 and ending on 394
foster: The usual scapegoat for inflation is oil and energy prices. Oil and energy are seen as comprising part of every good, because every good uses oil somewhere along the line. So can rising energy prices cause inflation?
The term is misused. The Fed deliberately uses inflation to mean price increases, but the term really only means money supply increases; which causes price increases.
Peace
MrJekyll: If someone pointed a gun to your head and stole your wallet, would you need a chart with circles and arrows and a description on the back of each one to know your being robbed?
MrJekyll:If someone pointed a gun to your head and stole your wallet, would you need a chart with circles and arrows and a description on the back of each one to know your being robbed?
Lol, I'm not sure what this means exactly, but I'll tip my hat to an arlo guthrie reference any day. Well done.
Thanks Mr Jekyll, your comment reminded me that Fractional Reserve Banking is, beside the Federal Reserve's nefarious actions such as buying U.S. Treasury bonds with money created out of thin air, an important contributer to money inflation. See this eye-opening video for an explanation.
Switch to the libertydollar, yes! From one fractional reserve bank to another!
gethky:Thanks Mr Jekyll, your comment reminded me that Fractional Reserve Banking is, beside the Federal Reserve's nefarious actions such as buying U.S. Treasury bonds with money created out of thin air, an important contributer to money inflation. See this eye-opening video for an explanation.
I always point out to people that this video was created by Socialists, and that there is a lot of misinformation in there. (see who posted it and their link.)
They do a halfway decent job of showing how money evolved and how fractional reserve came about, but it goes wrong from there. The Mises Institute has a video you can view here that is much better. I remember the socialist video had leanings toward control over production by government, and represented consumption as the result of capitalist greed.
The aspiration toward freedom is the most essentially human of all human manifestations. -Eric Hoffer
I see no blatant contradiction between the two videos, one is a bit more cartoonish but I guess that is what some people need in order to absorb something that is really too scary to think about. So again this leads me to the use of a private currency this is the only way to get government and the federal reserve under control or better yet out of control. Check out www.libertydollar.org
Except they aren't.Twenty LD = Twenty USD
However, twenty LD also = One ounce of silver.
But one ounce of silver only = $14.00
Thats not even the worst one though! $1,000 for one ounce of gold? Are you kidding me?!? Gold only trades for about $765! Thats an overhead of what? $235?Listen. I hate the fed just as much as the next guy, maybe more, but I'm not so delusional that I'm willing to get ripped off for something so few people accept anyways.
I don't know, you do the math.
ggkrol:. So YOU do the math. NO WHERE will you be able to buy 1 oz. of silver or gold for the spot price. THE LIBERTY DOLLAR IS NOT AN INVESTMENT BULLION IT IS A CURRENCY and as such many consideration had to be taken into account in order to make it viable. The Fed. is able to print a 100 dollar bill at a cost of about 2 cents but then loans it at face value. Good grief where's your outrage at that.
. So YOU do the math. NO WHERE will you be able to buy 1 oz. of silver or gold for the spot price. THE LIBERTY DOLLAR IS NOT AN INVESTMENT BULLION IT IS A CURRENCY and as such many consideration had to be taken into account in order to make it viable. The Fed. is able to print a 100 dollar bill at a cost of about 2 cents but then loans it at face value. Good grief where's your outrage at that.
Really? Because I was. Though to be fair it was five ounces of brick gold in Italia.
Be that as it may though, its still a deceitful scam.
EotS,
An important point made in the socialist video that I didn't see in the MI video was a detailed explanation of the fact that, in an economy where all the money is created by loaning it into circulation, the debtors have no choice but to use the money created by other borrowers in order to pay the interest on their loans.
Before accepting the Austrian view that price inflation results from more money chasing the same amount of goods, you should read about the real bills doctrine (www.csun.edu/~hceco008/realbills.htm). The real bills view is that the dollar is backed by the Fed's assets (gold + bonds), and that if the fed issues 1 more dollar, while simultaneously getting another dollar's worth of assets, then the money will be worth the same as before. Inflation results when the fed loses backing, for example, when the fed issues $100 and gets a bond worth only $99 in return.