In The Conservative Case for QE2, David Beckworth provides a quasi-monetarist defense for the second round of quantitative easing.
He states that the purpose of QE2 is "about fixing a spike in the demand for money that has significantly hampered spending." He elaborates, "Because the monetary base has been increasing so rapidly and there has been very little inflation, it must be the case that demand for the money must be increasing even more. In fact, money demand has been so pronounced that even the previous $1.2 trillion increase in the monetary base was not enough to prevent outright deflation in 2009 or a sustained decline in core inflation (which shows the trend path of inflation) over the past two years. Thus, a significant portion of the money supply is being hoarded and not spent. This is the excess-money-demand problem."
In essence, the Federal Reserve has failed in the same regard that Milton Friedman blamed it for the Great Depression: "The fact that total current-dollar spending has remained depressed for so long means that the Federal Reserve has failed to do its job and effectively has kept monetary policy too tight." The solution is produced by the new monetary policy: "QE2, then, is a long-overdue attempt by the Federal Reserve to address the excess-money-demand problem. It will do so in two complementary ways. First, QE2 will increase inflation expectations, which should reduce the demand for money. Knowing that prices will be higher in the future will motivate creditor households, firms, and banks to start spending their money today while prices are lower. Second, QE2 will increase the monetary base, and this should begin to satiate excess money demand. Together, these developments should provide the catalyst needed to get the virtuous spending cycle started."
And, of course, lowered-interest rates are not necessarily problematic: "Note that lower long-term interest rates are not the key to QE2 working. Yes, long-term interest rates may initially drop as the Federal Reserve buys up long-term Treasury securities to increase the monetary base. But this effect will be fleeting if QE2 is successful. Once the economy starts recovering, interest rates will start increasing. Similarly, QE2 may initially cause the dollar to lose value, but by spurring a recovery QE2 will ultimately put upward pressure on the dollar."
Bob Murphy responds to Beckworth's quasi-monetarism with several Austrian challenges.
In turn, Bill Woolsey responds, once again pleading the quasi-monetarist case. David Beckworth, too, responds to Bob Murphy. He summarizes his key points skillfully: "During 2008 there emerged a surge in money demand as the housing fiasco began to unfold. This spike in money demand got even more pronounced in late 2008 with the uncertainty created by the financial crisis. Given that we have a central bank — and this is not an endorsement of the Fed — its job should be to offset and stabilize such money demand shocks. The Fed failed on this count and, as a result, what should have been an ordinary recession got turned into the 'Great Recession' of 2007-2009. Yes, this Fed failure — like its failure to raise the federal funds to its natural rate level sooner in the 2002-2004 period — is another indication the Fed is flawed. Nonetheless, we are stuck with this monopoly producer of money and have to work with it. This means the Fed should have done more to prevent the surge in money demand. Because it did not, the Fed effectively tightened monetary policy in 2008. Moreover, despite the large increases in the monetary base to date, money demand remains elevated. From this perspective, then, monetary policy is still relatively tight. QE2 is an attempt — a flawed one as I will discuss later — to address it."
He adds, "Appreciating the importance of money demand shocks also helps explain why conservative economists like Scott Sumner, Bill Woosley, Josh Hendrickson, and I are sympathetic in spirit (if not in form) to QE2. It would do all hard-money advocates some good to wrestle with the monetary disequilibrium literature and its implication for a commodity standard. It is worth noting that there are prominent Austrians like George Selgin and Steve Horwitz who take the monetary disequilibrium seriously."
I think the money demand shock, given our monopolized currency, can only be treated through the machinery of the Federal Reserve; given the excess money demand, greater supply is required.
P.S. I fully endorse free banking.
"I'm not a fan of Murray Rothbard." -- David D. Friedman
In short: the problem with inflation are the Cantillon-effects that happen when prices change, not the pure fact that prices change.
The state is not the enemy. The idea of the state is.
Michael J Green:A timely contribution from Horwitz.
Great! Thanks!
Michael J Green:Yes, if the demand/supply for a good jumps/plummets, the price for that good will change to accomodate the new circumstances. Certainly, though, you can see the problems when the good is money itself, right? Then, instead of one good changing in price, all goods bought with money must change in price to reflect the new circumstances. That takes time to work itself out and, since money coordinates economic activity, can cause a bunch of discoordination and general economic harm. There can be discoordination due to the sudden surge in demand for a particular good - entrepreneurs' otherwise sound plans could be ruined because of the unanticipated rise in demand towards this good and thus away from the entrepreneurs' goods - but it is nothing compared to the problems borne from a radical change in the supply/demand for money itself.
I guess the question to ask is what would cause a significant or radical change in people's demand for money.
Otherwise, as you yourself imply, discoordination happens all the time in a market economy. It's basically a fact of life. The thing is, the discoordinations don't happen all at the same time and aren't systemic in nature.
Michael J Green:"Excess demand" may not be an appropriate term, just as "market failure" has problems, but we can agree on the point being made, right? In the wake of a hurricane, there can be an "excess demand" for bottled water, can't there? Demand skyrockets and though suppliers may raise their prices, there may still exist a shortage. Even if there is no literal shortage (each water bottle vendor still has product to sell), we can agree that there is something abnormal, something special, about the demand for bottled water in this situation, right? Similarly, in the wake of bank failures and a financial panic, the demand for holding money can skyrocket and, since you're dealing with money, it's not as simple as a small number of vendors adjusting their price for a certain good - everyone must adjust their price.
Even if everyone must adjust their price, so what? You're also assuming that everyone's demand for money has changed by the same proportion -- how can that happen in a free market with commodity money?
Michael J Green:One can accept all this while still believing the government would only do more harm than good through 'quantitative easing' or anything else through a central bank. One can believe this is a very serious problem while believing that the best/least worst solution is indeed to let prices adjust without issuing a single additional unit of money
At the very least, I can go along with this.
The keyboard is mightier than the gun.
Non parit potestas ipsius auctoritatem.
Voluntaryism Forum
Esuric:When someone engages in printing money. prices will certainly adjust. The problem is, we know which way they will adjust. Up This is not the problem at all. In fact, general price inflation is essentially irrelevant except for the fact that it may, and eventually will, yield high long-term interest rates. Simply put, if prices were perfect, i.e., if they instantaneously and simultaneously adjusted to alterations in the supply of money, then inflation and deflation wouldn't really be a problem at all (if we ignore the effects of inflationary and deflationary expectations).
When someone engages in printing money. prices will certainly adjust. The problem is, we know which way they will adjust. Up
This is not the problem at all. In fact, general price inflation is essentially irrelevant except for the fact that it may, and eventually will, yield high long-term interest rates. Simply put, if prices were perfect, i.e., if they instantaneously and simultaneously adjusted to alterations in the supply of money, then inflation and deflation wouldn't really be a problem at all (if we ignore the effects of inflationary and deflationary expectations).
You are correct here. Inflation and deflation cause economic distortions because prices aren't what you call "perfect". In particular, inflation is an indirect tax levied by those who receive the new money on those who don't (until after they've already felt the effects).
On another note, an important distinction should be made between the supply of money and the supply of loanable funds.
Michael J Green:"Excess demand" may not be an appropriate term, just as "market failure" has problems, but we can agree on the point being made, right? In the wake of a hurricane, there can be an "excess demand" for bottled water, can't there? Demand skyrockets and though suppliers may raise their prices, there may still exist a shortage..
There is no longer any shortage. All who are ready to pay for water can buy it at the new updated price. "Still exist a shortage" is not economics. It's a fantasy to get rid of scarcity.
Now, you may be implying that an increase in production for water bottles should follow. This may or may not be true depending on the circumstances, i.e., is the increase in demand temporary or permanent? However, money is different from water bottles in one very important way: More of it does not confer any social benefit , therefore, once the price of money adjusts to meet its new demand, no increase in production needs to follow.
Michael J Green:"everyone must adjust their price..
non-sequitur if you are implying that this justifies an increase production of fiat money or fiduciary media. " Everyone must adjust their price" is practically the natural state of the market.
Autolykos:You are correct here. Inflation and deflation cause economic distortions because prices aren't what you call "perfect"
It has nothing to do with the "imperfection" of prices (whatever that can possibly even mean). it has to do with the fact that money is not neutral. Every change in the money supply in circulation constitutes a transfer of wealth which permanently affects the entire structure of prices, leading to a permanent change in the capital structure of the economy. Things will never return to the way they were or would have been absent the change in the money supply.
DD5:It has nothing to do with the "imperfection" of prices (whatever that can possibly even mean).
Did you not understand Esuric's definition of "perfect price"?
DD5:it has to do with the fact that money is not neutral. Every change in the money supply in circulation constitutes a transfer of wealth which permanently affects the entire structure of prices, leading to a permanent change in the capital structure of the economy. Things will never return to the way they were or would have been absent the change in the money supply.
How does a change in the amount of money currently in circulation constitute a transfer of wealth?
Esuric: None of those quotes support your argument and none of them invalidate my position All of them do both. Read them. Do you think mere assertion makes you right, or convincing? Tell you what, I'll lay it all out for you: Here is the second quote in full, with more context. Anything in brackets is my addition, either to clarify a minor obscurity, or to point out the parts you must have skipped. The second mischief [of using "inflation" to mean "price inflation"] is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation-the rise in prices- [He just said it, black on white. Inflation makes prices go up. Got that?] are disguising their endeavors as a fight against inflation. While merely fight- ing symptoms, they pretend to fight the root causes of the evil. [here is point the second. The rise in prices is an "evil". No mention of trade cycles, of interest rates, of Hayek, nothing. The rise is prices is an "evil". Yep, he said it.] Because they do not comprehend the causal relation betw-een the increase in the quantity of money on the one hand and the rise in prices on the other, they practicalIy make things worse. [The politicians' error is NOT some misunderstanding of Hayek, or of interest rates, or trade cycles, or anything else. Their misunderstanding is yours. They think money printing does not make prices go up.] The best example was provided by the sub- sidies granted on the part of the governments of the United States, Canada, and Great Britain to farmers. Price ceilings reduce the supply of the com- modities concerned because production involves a loss for the marginal producers. To prevent this outcome the governments granted subsidies to the farmers producing at the highest costs. These subsidies were financed out of additional increases in the quantity of money. If the consumers had lndirect Exchange 42 1 had to pay higher prices for the products concerned, no further inflation- ary effects would have emerged. The consumers would have had to use for such surplus expenditure only money which had already been issued pre- viously. Thus the confusion of inflation and its consequences in fact can directly bring about more inflation. It is obvious that this new-fangled connotation of the terms inflation and deflation is utterly confusing and misleading and must be unconditionally rejected. (I'm not sure that you understand what I'm saying). Your first post said something different than this one seems to do. In any case, you misunderstand all you have read of AE, and I will enlighten you later on in this post. Also, since we're appealing to authority, Quoting Mises between two Austrians is not the logical fallacy of an appeal to authority. It shows that the accepted position of the AE community is what I said [assuming for the moment that the quote supports me, which it does], and places the burden of proof on you, a neophyte, to show why Mises is wrong. The accepted manner in which this is done is to summarize the accepted position [which among other things shows you have understood it in the first place], and then present your evidence. Mere assertion that the accepted position of the community is appeal to authority doesn't cut it. Also, pointing to you exactly where he makes his logical argument is not an appeal to authority. It is pointing to where you should read to see and understand my argument [= identical to his]. here's Hayek: Hayek: General price changes are no essential feature of a monetary theory of the trade cycle; they are not only unessential, but they would be completely irrelevant if only they were completely “general” –that is, if they affected all prices at the same time and in the same proportion (pp. 64, Monetary Theory and The Trade Cycle). I hope you agree by now, given the above, that inflation makes prices go up, and hopefully agree that our man Mises was saying exactly that. You also must agree by now [given the above] that Mises in the second quote was saying that rising prices is an evil. Actually you don't have to be a Mises or an Albert Einstein to get this. Anyone who stops living rent free in Mama's basement and goes out into the real world for awhile, where they have to work for a living and pay their own bills, gets it. As a thought experiment, imagine paying double for everything and see how you like it. You also agree that Mises said that failing to understand the one single point that money printing makes prices go up, regardless of anything to do with the trade cycle or Hayek or interest rates, is what makes politicians cause incredible damage to the economy, as explained above. It's not the case that inflation "increases prices Of course it is. See above. and that's bad," Of course it is. See above. nor is it the case that "deflation lowers price Of course it is. see first Mises quote. and that's good." Of course it is. But I tire of doing your research for you. One could just as easily (and mistakenly) proclaim that "inflation is good because it increases wages and asset prices, which makes everyone wealthier. Why did you introduce this irrelevancy? Oh, I get it, it's your straw man. These are the naive types of arguments that you consistently make "Inflation makes prices go up and that's bad", is not me, it's Mises [as shown above] and any sane person [won't do your research for you]. "Inflation is good bla bla" is not me, it's your straw man. and they completely ignore major theoretical breakthroughs made by the Austrian school, breakthroughs which distinguish it from the mainstream and other schools of thought. This line made me get what your retarded error is. You think the only problem caused by printing money is the business cycle. You quote Hayek as saying that rising prices don't have much to do with the business cycle. Ergo, you fallaciously conclude, rising prices is not bad, [and may not even exist, you might think. Not sure how far your error has gone.] To make it clear to all, let us say that a country is suffering from a business cycle, and at the same time, a meteor falls on it, killing everyone. Esuric is saying that the falling meteor is not an evil, or may not even exist, because it has nothing to do with the business cycle, and Hayek only wrote about the business cycle. Anyone who disagrees is completely ignoring major breakthroughs, bla bla. What do you think destroyed the Weimar Republic? Business cycles? What wiped out Zimbabwe? Business cycles? Money printing causes two evils, rising prices and business cycles. I'll accept for now that Hayek said they are unrelated, that rising prices don't drive the business cycle. The great Austrian breakthrough was discovering that money printing causes the business cycle. Don't make Esuric's incredible mistake of thinking that they also said or implied that money printing does not cause price rises, or that rising prices caused only by money printing are not an evil. Furthermore, I believe that this is causing a great deal of confusion for you One of us is confused, and it isn't me. Reread the Mises' quotes. and it's why you continuously downplay the potential negative effects of deflation. My downplaying of the [nonexistent] potential negative effects of deflation are based on Hazzlitt's works on the subject, where he says exactly what I am saying. Read them and learn something. The mainstream focuses on a few and relatively unessential effects of inflation, such as inflationary expectations, menu costs, shoe leather costs, and arbitrary redistribution of wealth (from creditors to debtors), while the Austrians tend to focus on the effects that inflation has on the relative structure of prices (Austrians don't deny that the other effects exist). What a silly thing to say. For example, when Cantor wrote exclusively about the infinite levels of infinity, and never once in his brilliant works discussed simple arithmetic, that does not mean he thought simple arithmetic is wrong, or not important in the real world. I challenge you to quote an Austrian who says "Rising prices are fine. Move to Zimbabwe." Your quote from Hayek above certainly does NOT say that. My quote from Mises explicitly says the opposite. The fact is that prices do not instantaneously and simultaneously adjust, and when they do adjust, they do so in ways which actually perpetuates disequilibrium and yields a misallocation of resources towards ultimately untenable productions (what are known as malinvestments). Simply put, an expansion in the supply of money beyond the demand for money, say by 10%, does not yield 10% general price inflation (I'm assuming that total output is constant): some prices may rise by 10%, some may rise by greater than 10%, some prices may not rise at all, and other prices may actually fall (there are time lags between the various price adjustments). It is this uneven adjustment that causes the major problems, namely the trade cycle. All this is irrelevant. You are denying the existence of the meteor that killed everyone by explaining why it did not cause the trade cycle. Similarly, deflation, caused by a reduction in the supply of money below the demand for money, Here you reveal that you misunderstood Eco 101. There is no such thing as supply of money and demand for money. There are supply and demand curves. It is nonsense to speak about supply of money "falling below" demand for money. You forgot about the concept of "price" here. also leads to uneven adjustments. Some prices fall further than others, sometimes wages don't fall fast enough (causing unemployment) and some prices may actually rise. This is due to the fact that money enters (or leaves) the economy at certain points and then permeates amongst the rest of society, altering preferences and expectations. This is apparently your attempt at explaining why deflation is "bad". You reason by analogy. Just as printing money changes things, which is bad, so too deflation changes things, which must therefor also be bad. I challenge you to show me one person, Mises, Hayek, anyone, who writes that a trade cycle [which according to you is the only economic evil that exists] can be caused by deflation. Or to show me one single historical case. Let me explain why inflation and deflation are different. When the govt prints money, it gobbles up our resources, leaving less for everyone. It also gives money to people to gobble up resources for schemes that cannot succeed, leaving less for everyone. The latter is the essence of the trade cycle. But when the govt has less money to gobble resources, and people have less money to spend on wild schemes, then of course they will gobble up less resources. That's why inflation and deflation are different. One is good, one is bad. Either way, the fact that prices (tend to) adjust upwards (as a result of inflation) is the most insignificant problem. You conflate "not being discussed in Hayek's highly specialized works" with "insignificant". The meteor still exists, it killed the whole town, even though Hayek didn't write about it. I hope you realize this now. I hope you realize why you are so horribly wrong. I highly suggest Hayek's Monetary Theory and The Trade Cycle. I highly suggest common sense.
None of those quotes support your argument and none of them invalidate my position
All of them do both. Read them. Do you think mere assertion makes you right, or convincing?
Tell you what, I'll lay it all out for you:
Here is the second quote in full, with more context. Anything in brackets is my addition, either to clarify a minor obscurity, or to point out the parts you must have skipped.
The second mischief [of using "inflation" to mean "price inflation"] is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation-the rise in prices-
[He just said it, black on white. Inflation makes prices go up. Got that?]
are disguising their endeavors as a fight against inflation. While merely fight- ing symptoms, they pretend to fight the root causes of the evil.
[here is point the second. The rise in prices is an "evil". No mention of trade cycles, of interest rates, of Hayek, nothing. The rise is prices is an "evil". Yep, he said it.]
Because they do not comprehend the causal relation betw-een the increase in the quantity of money on the one hand and the rise in prices on the other, they practicalIy make things worse.
[The politicians' error is NOT some misunderstanding of Hayek, or of interest rates, or trade cycles, or anything else. Their misunderstanding is yours. They think money printing does not make prices go up.]
The best example was provided by the sub- sidies granted on the part of the governments of the United States, Canada, and Great Britain to farmers. Price ceilings reduce the supply of the com- modities concerned because production involves a loss for the marginal producers. To prevent this outcome the governments granted subsidies to the farmers producing at the highest costs. These subsidies were financed out of additional increases in the quantity of money. If the consumers had lndirect Exchange 42 1 had to pay higher prices for the products concerned, no further inflation- ary effects would have emerged. The consumers would have had to use for such surplus expenditure only money which had already been issued pre- viously. Thus the confusion of inflation and its consequences in fact can directly bring about more inflation. It is obvious that this new-fangled connotation of the terms inflation and deflation is utterly confusing and misleading and must be unconditionally rejected.
(I'm not sure that you understand what I'm saying).
Your first post said something different than this one seems to do. In any case, you misunderstand all you have read of AE, and I will enlighten you later on in this post.
Also, since we're appealing to authority,
Quoting Mises between two Austrians is not the logical fallacy of an appeal to authority. It shows that the accepted position of the AE community is what I said [assuming for the moment that the quote supports me, which it does], and places the burden of proof on you, a neophyte, to show why Mises is wrong.
The accepted manner in which this is done is to summarize the accepted position [which among other things shows you have understood it in the first place], and then present your evidence. Mere assertion that the accepted position of the community is appeal to authority doesn't cut it.
Also, pointing to you exactly where he makes his logical argument is not an appeal to authority. It is pointing to where you should read to see and understand my argument [= identical to his].
here's Hayek:
Hayek: General price changes are no essential feature of a monetary theory of the trade cycle; they are not only unessential, but they would be completely irrelevant if only they were completely “general” –that is, if they affected all prices at the same time and in the same proportion (pp. 64, Monetary Theory and The Trade Cycle).
General price changes are no essential feature of a monetary theory of the trade cycle; they are not only unessential, but they would be completely irrelevant if only they were completely “general” –that is, if they affected all prices at the same time and in the same proportion (pp. 64, Monetary Theory and The Trade Cycle).
I hope you agree by now, given the above, that inflation makes prices go up, and hopefully agree that our man Mises was saying exactly that. You also must agree by now [given the above] that Mises in the second quote was saying that rising prices is an evil. Actually you don't have to be a Mises or an Albert Einstein to get this. Anyone who stops living rent free in Mama's basement and goes out into the real world for awhile, where they have to work for a living and pay their own bills, gets it. As a thought experiment, imagine paying double for everything and see how you like it.
You also agree that Mises said that failing to understand the one single point that money printing makes prices go up, regardless of anything to do with the trade cycle or Hayek or interest rates, is what makes politicians cause incredible damage to the economy, as explained above.
It's not the case that inflation "increases prices
Of course it is. See above.
and that's bad,"
nor is it the case that "deflation lowers price
Of course it is. see first Mises quote.
and that's good."
Of course it is. But I tire of doing your research for you.
One could just as easily (and mistakenly) proclaim that "inflation is good because it increases wages and asset prices, which makes everyone wealthier.
Why did you introduce this irrelevancy? Oh, I get it, it's your straw man.
These are the naive types of arguments that you consistently make
"Inflation makes prices go up and that's bad", is not me, it's Mises [as shown above] and any sane person [won't do your research for you].
"Inflation is good bla bla" is not me, it's your straw man.
and they completely ignore major theoretical breakthroughs made by the Austrian school, breakthroughs which distinguish it from the mainstream and other schools of thought.
This line made me get what your retarded error is. You think the only problem caused by printing money is the business cycle. You quote Hayek as saying that rising prices don't have much to do with the business cycle. Ergo, you fallaciously conclude, rising prices is not bad, [and may not even exist, you might think. Not sure how far your error has gone.]
To make it clear to all, let us say that a country is suffering from a business cycle, and at the same time, a meteor falls on it, killing everyone. Esuric is saying that the falling meteor is not an evil, or may not even exist, because it has nothing to do with the business cycle, and Hayek only wrote about the business cycle. Anyone who disagrees is completely ignoring major breakthroughs, bla bla.
What do you think destroyed the Weimar Republic? Business cycles? What wiped out Zimbabwe? Business cycles?
Money printing causes two evils, rising prices and business cycles. I'll accept for now that Hayek said they are unrelated, that rising prices don't drive the business cycle. The great Austrian breakthrough was discovering that money printing causes the business cycle. Don't make Esuric's incredible mistake of thinking that they also said or implied that money printing does not cause price rises, or that rising prices caused only by money printing are not an evil.
Furthermore, I believe that this is causing a great deal of confusion for you
One of us is confused, and it isn't me. Reread the Mises' quotes.
and it's why you continuously downplay the potential negative effects of deflation.
My downplaying of the [nonexistent] potential negative effects of deflation are based on Hazzlitt's works on the subject, where he says exactly what I am saying. Read them and learn something.
The mainstream focuses on a few and relatively unessential effects of inflation, such as inflationary expectations, menu costs, shoe leather costs, and arbitrary redistribution of wealth (from creditors to debtors), while the Austrians tend to focus on the effects that inflation has on the relative structure of prices (Austrians don't deny that the other effects exist).
What a silly thing to say. For example, when Cantor wrote exclusively about the infinite levels of infinity, and never once in his brilliant works discussed simple arithmetic, that does not mean he thought simple arithmetic is wrong, or not important in the real world. I challenge you to quote an Austrian who says "Rising prices are fine. Move to Zimbabwe." Your quote from Hayek above certainly does NOT say that. My quote from Mises explicitly says the opposite.
The fact is that prices do not instantaneously and simultaneously adjust, and when they do adjust, they do so in ways which actually perpetuates disequilibrium and yields a misallocation of resources towards ultimately untenable productions (what are known as malinvestments). Simply put, an expansion in the supply of money beyond the demand for money, say by 10%, does not yield 10% general price inflation (I'm assuming that total output is constant): some prices may rise by 10%, some may rise by greater than 10%, some prices may not rise at all, and other prices may actually fall (there are time lags between the various price adjustments). It is this uneven adjustment that causes the major problems, namely the trade cycle.
All this is irrelevant. You are denying the existence of the meteor that killed everyone by explaining why it did not cause the trade cycle.
Similarly, deflation, caused by a reduction in the supply of money below the demand for money,
Here you reveal that you misunderstood Eco 101. There is no such thing as supply of money and demand for money. There are supply and demand curves. It is nonsense to speak about supply of money "falling below" demand for money. You forgot about the concept of "price" here.
also leads to uneven adjustments. Some prices fall further than others, sometimes wages don't fall fast enough (causing unemployment) and some prices may actually rise. This is due to the fact that money enters (or leaves) the economy at certain points and then permeates amongst the rest of society, altering preferences and expectations.
This is apparently your attempt at explaining why deflation is "bad". You reason by analogy. Just as printing money changes things, which is bad, so too deflation changes things, which must therefor also be bad.
I challenge you to show me one person, Mises, Hayek, anyone, who writes that a trade cycle [which according to you is the only economic evil that exists] can be caused by deflation. Or to show me one single historical case.
Let me explain why inflation and deflation are different. When the govt prints money, it gobbles up our resources, leaving less for everyone. It also gives money to people to gobble up resources for schemes that cannot succeed, leaving less for everyone. The latter is the essence of the trade cycle. But when the govt has less money to gobble resources, and people have less money to spend on wild schemes, then of course they will gobble up less resources. That's why inflation and deflation are different. One is good, one is bad.
Either way, the fact that prices (tend to) adjust upwards (as a result of inflation) is the most insignificant problem.
You conflate "not being discussed in Hayek's highly specialized works" with "insignificant". The meteor still exists, it killed the whole town, even though Hayek didn't write about it.
I hope you realize this now.
I hope you realize why you are so horribly wrong.
I highly suggest Hayek's Monetary Theory and The Trade Cycle.
My humble blog
It's easy to refute an argument if you first misrepresent it. William Keizer
Because who gets that new money? Everyone? Nope, only the govt and its friends. And they spend it to gobble up resources, which is by definition a transfer of wealth.
Smiling Dave:Because who gets that new money? Everyone? Nope, only the govt and its friends. And they spend it to gobble up resources, which is by definition a transfer of wealth.
There's a difference between the quantity of money in circulation and the quantity of money period. The former can change not only due to government and/or central-bank machinations, but due to changes in the demand for money. When demand for money increases, ceteris paribus, the amount of money in circulation goes down, and vice-versa.
OK, gotcha
Autolykos:How does a change in the amount of money currently in circulation constitute a transfer of wealth?
Every change in the market data amounts to transfers of purchasing power between different market actors. An increase in demand for commodity A at the expense of commodity B transfers purchasing power from B to A. It doesn't mean that A gains only at the expense of B, as in the case of taxes/theft. It just means that A has better served the consumers and B must realign his activity with the new demands of the consumers, perhaps begin to produce A also.
Now, any changes in the supply of money in circulation occurs through the same process of changes in relative demand between the various goods, thus purchasing power is transferred and the entire production structure is altered. If money was neutral, then no relative changes in demand would occur as a result of changes in the money supply in circulation. This is the case regardless of the cause of the change in money supply in circulation. (I simply refuse on sheer principle to use the term "velocity").
The mistake of MET theorists is that they equivocate the two causes for changes in the money supply in circulation: voluntary changes in demand and monetary inflation that results from new fiat or fiduciary money poured into circulation. The former is not a distortion in prices, while the latter is.
DD5:Every change in the market data amounts to transfers of purchasing power between different market actors. An increase in demand for commodity A at the expense of commodity B transfers purchasing power from B to A. It doesn't mean that A gains only at the expense of B, as in the case of taxes/theft. It just means that A has better served the consumers and B must realign his activity with the new demands of the consumers, perhaps begin to produce A also. Now, any changes in the supply of money in circulation occurs through the same process of changes in relative demand between the various goods, thus purchasing power is transferred and the entire production structure is altered. If money was neutral, then no relative changes in demand would occur as a result of changes in the money supply in circulation. This is the case regardless of the cause of the change in money supply in circulation. (I simply refuse on sheer principle to use the term "velocity").
When you write "money supply in circulation", do you mean only the money which is currently being spent on things? Or are you talking about the total quantity of money? I just want to make sure we're on the same page.
Either way, do you think it can be said that a decrease in demand for a commodity is the same as an increase in demand for money vis-à-vis that commodity?
DD5:The mistake of MET theorists is that they equivocate the two causes: voluntary changes in demand and monetary inflation that results from new fiat or fiduciary money poured into circulation. The former is not a distortion in prices, while the latter is.
By "MET" do you mean "Monetary Economic Theory"? Otherwise, I agree with you here.
Autolykos:When you write "money supply in circulation", do you mean only the money which is currently being spent on things? Or are you talking about the total quantity of money? I just want to make sure we're on the same page.
same page.
Autolykos:Either way, do you think it can be said that a decrease in demand for a commodity is the same as an increase in demand for money vis-à-vis that commodity?
No. it could mean an increase in another commodity.
Autolykos:By "MET" do you mean "Monetary Economic Theory"? Otherwise, I agree with you here.
MET - Monetary Equilibrium Theory.
No, once again, you're simply confused. I'll explain why in a moment.
One could just as easily (and mistakenly) proclaim that "inflation is good because it increases wages and asset prices, which makes everyone wealthier. Why did you introduce this irrelevancy? Oh, I get it, it's your straw man.
It's not irrelevant, you moron. If prices merely "went up," as you assert, then wages, rent (which are also prices) and asset prices would go up too, so that there's no change in real incomes. For example,
What then, would be the effects of inflation under such circumstances? Well, people would have to go to the ATM more often in order to increase their cash balances and pay the higher prices (shoe-leather costs), restaurants and other firms would have to change the prices listed for their goods and services (menu costs), and banks would ask for higher rates of return on their financial capital (fisher effect). These effects are relatively inconsequential; society would not be any poorer.
But, as I've already explained, this is not how inflation works: there is no "general price level," (you must disaggregate “P”) and the adjustments to alterations in the supply of money are uneven. Again, some wages during an inflationary episode may rise, some may rise even more, some may fall, the price of C1 (commodity one) may rise, the price of C2 may rise even more, and the price of C3 may remain the same.
Why can't you understand this? Are you really this unforgivably stupid?
This line made me get what your retarded error is. You think the only problem caused by printing money is the business cycle.
I specifically said,
Esuric: The mainstream focuses on a few and relatively unessential effects of inflation, such as inflationary expectations, menu costs, shoe leather costs, and arbitrary redistribution of wealth (from creditors to debtors), while the Austrians tend to focus on the effects that inflation has on the relative structure of prices (they don't deny the other effects, of course).
So what the hell are you talking about?
I highly suggest common sense.
Stop appealing to what you consider to be "common sense." What a fool considers to be "common sense" means absolutely nothing to me. Economics exists precisely because idiots like you frequently derive incorrect conclusions from "common sense" (like, for example, "trade deficits are bad," the oldest fallacy in all of economics).
I'm not going to respond to the rest of your post because it's incoherent and belligerent. Furthermore, it shows a fundamental misunderstanding of basic economic doctrine, eg,
There is no such thing as supply of money and demand for money.
and extremely feeble reading comprehension, eg,
Money printing causes two evils, rising prices and business cycles. I'll accept for now that Hayek said they are unrelated, that rising prices don't drive the business cycle.
I just want people on this forum to understand that this,
When someone engages in printing money. prices will certainly adjust. The problem is, we know which way they will adjust. Up.
is incorrect from an Austrian point-of-view. Again, if prices merely "adjusted up" then inflation would basically be reduced to merely a nuisance (up until the point that monetary expansion leads to a collapse in the demand for money).
"If we wish to preserve a free society, it is essential that we recognize that the desirability of a particular object is not sufficient justification for the use of coercion."