News & Analysis
Is It Deflation Yet?
Why Deflation Never Had a Chance. Lately we've been hearing a lot of talk about Kondratieff cycles, Elliot Wave super cycle, end of the world, deflation, deflation, deflation. What the deflationists fail to acknowledge is that in a purely fiat monetary system, deflation is a choice, not an inevitability. To put it in simple terms, if a government is willing to sacrifice its currency, there's absolutely no way deflation can take hold in a modern monetary system. It doesn't matter how large the debt contraction is – 10 trillion, 100 trillion, or 1,000 trillion – any government with a purely fiat currency can, with the stroke of a computer key, print enough money to wipe out the debt. Granted they'll destroy the currency by doing so, but at some point we're going to be faced with the choice of print or deflate. I have little doubt Ben Bernanke will choose to throw the dollar on the sacrificial altar. – Toby Conner/Minyanville
Dominant Social Theme: What is inflation? What is deflation? We don't want you to know. Don't worry about the definitions, just go out and find a job.
Free-Market Analysis: Issues of inflation and deflation did not seem so important earlier in the 2000s, but the inflation versus deflation debate has heated up lately. The above article that we have excerpted has attracted considerable attention on the blogosphere, maybe because it runs boldly counter to the perceived wisdom of the Internet alternative media, which is that deflation is rampant. Yes, the Internet's alternative hard-money press does seem to have generated a kind of dominant social theme all of its own: "Deflation will undo Western society, and will have destructive effects especially in America."
Dominant social themes as we use them are involved with power elite promotions, so to attribute a dominant social theme to the alternative news media of the Internet implies a similar mechanism that likely does not exist. It is important to make this distinction. There is a whole segment of the hard-money news community that analyzes inflation and deflation in ways that we would not, coming at these subjects from a free-market thinking, Austrian point of view. Let us call this point of view Deflationist. It is to some degree shared by the larger mainstream economic and media community.
What is the difference between the Deflationist point of view and our own? In the past, but we have not always been as clear as we should be because the elite itself has done such a good job of confusing the larger money-conversation. Inflation, for instance, according to the mainstream media, is a rise in prices. Deflation means falling prices. These are inaccurate descriptions and one can make the argument that they have simply evolved over time. But from our point of view, this is probably not accurate. The terminology has evolved in a specific way to take the onus off central banking and monetary manipulation. Even in the article excerpted above, we find a difference in terminology, though the article itself is very good and points out what we have pointed out in the past, that real deflation is hard to accomplish in a central banking fiat-money environment.
Deflation is a shrinkage of the money supply, though deflation is also involved with the slowing of monetary velocity (supply and demand). Thus merely to print new money does not guarantee inflation, or certainly not price inflation, unless it circulates. Inflation is therefore an expansion of the money supply (bank credit). A corollary to this is that money is not merely credit. The mainstream media and modern economists, including central bankers, have blurred the definition of money by including secondary credit (credit card companies, etc.).
It helps of course to think of money as gold and silver. This is the crux of the problem. The powers-that-be don't want people returning to this fundamental understanding of money and thus all sorts of fuzzy concepts about money have been advanced. Inflation is perhaps easier to understand in a fiat-money environment because it is simply money printed and injected into the economy by a central bank via the distribution mechanism of commercial banks. Of course an added element of inflation is circulation of money.
The article we have excerpted makes the good point (that we too have made many times before) which is that if central banks really wanted to counteract "deflation" central banks would simply find a way to get money into the hands of individuals. The article suggests this can be done via tax cuts. But we would suggest that the most effective way to re-inflate the economy in America and Europe would be simply to add, say, US$10,000 to individual checking and savings accounts, because that is money people probably would use immediately. But central banks would never do such a thing because as soon as they did, people would realize that the central bankers print the stuff from thin air and give it out as they choose.
This is why central bankers make such a fetish of commercial bank distribution as if this were somehow the only way that money can be issued in to the economy. All of the strange, indecipherable talk about quantitative easing and differing kinds of money supplies is really besides the point. Central bankers print money and nothing stops them from distributing it any way they like. (They choose not to give it to individual citizens because that strip away the mystery and cause them to lose control, besides.)
In any event, let us return to deflation, which is a slightly more complicated matter than inflation. Deflation, as the article points out, is not a very practical matter in the current fiat money environment. That is because there are few ways to take money OUT of circulation. This means the money supply does not easily shrink.
It is because in a fiat money environment there can likely be little deflation in terms of the money supply that we take issue with some of our alternative-news Internet bretheren (with the exception really of the Mises Intitute and a few other places) who write ably and fluidly about "deflation." Debt contraction, just for the record, is not deflation either. If you forgive a debt, you are not necessarily receiving MONEY. You are releasing an obligation. But given that there is so much debt in the West today, even once money starts to circulate with more velocity consumer and business debt will act as a brake.
Conclusion: We hope this little essay, which repeats points that we have made before, contributes to clarity about money. The powers-that-be have done everything they can in our view (including inventing at least three separate definitions of money) to confuse things. But money is simple stuff. It comes from the ground and circulates as gold and silver through the economy. In an inflation there is more circulating money with more velocity (demand). In a deflation, less. For the most part, we can conclude that deflation is a shrinking of the money supply plus a slowdown of monetary demand. And as the article points outs in a fiat-money environment, real deflation is far less likely than inflation, and price inflation.
Edited
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Posted by Dan on 09/13/10 10:37 PM
Credit grew at 6 times the rate that the GDP increased. So, we have all that accumulated money inflation that is eroding away daily. We have money inflation and price inflation in areas and money and price deflation in other areas.
A close examination of "Weimar" shows price deflation in rent while they had price inflation in food.
We'll see price deflation in areas that aren't essentials and are not subject to monopoly control. We'll see price inflation in essentials and monopoly-controlled areas,,, subject to supply and demand.
We'll see price inflation in things like wheat as our weather severely deteriorates. Read Jennifer Lawson.
We'll see price deflation in things that have an over-supply,,, such as commercial buildings. The U.S. has 5 times the retail space per person that France has. We already see price deflation in retail buildings. There are plenty more examples of both deflation and inflation in prices.
The deflation / inflation of the money supply is another subject entirely. Don't bet the farm on price inflation on anything connected to RE. While velocity has been given too little consideration, there is another area that merits more attention. Creditworthiness. The consumer has historically accounted for 64% of the economy. He's burned out and can no longer be counted on to account for his recent 78%. That will revert.
So, while currency inflation is a given, it's poison will only affect certain parts of the economic body.
We can easily see that currency inflation is only going to make it's effects felt in certain segments of the economy. We will have price deflation. We will have a decreasing velocity as GOV does more layoffs.
Eventually, we will have enough price inflation that GOV will have to do substantial printing to keep itself functioning. The bond market just won't suffice to pay the bills. That is when we look at hyperinflation. FOFOA just did a very interesting article on that subject.
All very interesting.
Reply from The Daily Bell
Thank you for the informative feedback. We were actually trying to use velocity within terms of supply and demand as according to Austrian theory it is supply and demand for money that has perhaps the most influence on the inflation-deflation debate.
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Posted by Ingo Bischoff on 09/13/10 08:03 PM
I always bow to the market. All I ask is to have choice.
Reply from The Daily Bell
Exactly! Why seek to remove or reduce conversations about real bills or even fractional reserve banking so long as they are market driven? The idea that these issues amount to "heresy" and are beyond the pale in free-market conversations has not made much sense to us.
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Posted by Ingo Bischoff on 09/13/10 02:49 PM
I have the feeling that the Mises Institute is more convinced about Murray Rothbard's writings than about the writings of Adam Smith in relation to a workable monetary system.
The original Federal Reserve Act of 1913 was based on the Adam Smith currency ideas. In my opinion, it would have worked extremely well, had it not been for the undermining of the congressional oversight Federal Reserve Board by the big banks with the connivance of certain federal politicians. The rest is history.
The redeemable currency system, utilizing "Bills of Exchange" and Gold as backing, was the existing monetary system throughout the world until the first decade of the 20th Century. The size of world trade in real terms in 1890 was not again reached until 1990. The growth in trade, which the redeemable currency system and Real Bills were able to accomplish in less than 25 years after the Civil War, took 75 years for central banking to match.
The history of the benefits of Real Bills in consumption production and trade financing is solid enough to impress on the Mises Institute the need to widen its inquiries.
Reply from The Daily Bell
Rothbard quite disliked Adam Smith, considering his Wealth of Nations to be inaccurately titled (we agree), as it should have been Wealth of Individuals. In a sense, he considered him statist apologist.
Thanks for the lucid explanation of Real Bills. We have asked in the past, Why not let the market decide?
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Posted by Ingo Bischoff on 09/13/10 12:55 AM
A fractional reserve system benefits production financing. A "Bills of Exchange" based redeemable currency is ideally suited for consumption production. Through its redeemability, it is also suited for savings and investing into bonds to finance production of durable goods.
I would trust the automatic adjustment of the currency quantity in circulation under a "Real Bills" system far more than a decision by a vault owner to practice fractional reserve banking.
However, if a vault owner advertises its practice, by all means let the market decide which currency is to be preferred. I have no problem with that at all.
The Real Bills backed redeemable currency and the discounting of Bills of Exchange are much better suited in "Austrian Free Market Economics" than any fractional reserve gold backed banking. It is difficult for me to understand why the Ludwig von Mises Institute fails to see this.
Reply from The Daily Bell
However, if a vault owner advertises its practice, by all means let the market decide which currency is to be preferred.
This would be our position.
As far as Real Bills go, think the Mises Institute simply believes the case is overstated. Anyway, they do not believe in them, historically, from what we can tell.
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Posted by Ingo Bischoff on 09/12/10 04:24 PM
That is my point, you don't know that fractional reserve banking is not practiced within the warehouse receipt system. The solution inevitably is government supervision. The dreaded involvement of government in private business.
This situation does not occur under the "Bills of Exchange" redeemable currency system, since fraud does not occur unless the currency fails to be redeemed. Therefore, preventive supervision by the government is not warranted. The system is actually configured to police itself.
Since 100% gold backed warehouse receipts do have use in the monetary system, such as large outright purchases or inventorying reserves in an easier format, the Treasury Department took on the task of issuing "Gold Certificates". It made sense. If you cannot trust the ultimate enforcer of honest dealings in gold warehouse receipts, who can you trust?
Reply from The Daily Bell
We refer to Selgin and White who believe private fractional reserve was practiced successfully in various historical intervals. Doesn't it make sense to let the market decide?
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Posted by Ingo Bischoff on 09/12/10 01:27 AM
The Bills of Exchange redeemable currency system is the one that was codified in the 1913 FRA. Historically, in the USA the commercial banks acquired "Real Bills" at a discount and monetized them into redeemable currency. This currency would fluctuate with the ebbs and flow of the 90 day Real Bills inventory. The bank's capital reserve had to be kept in gold for redemption purposes.
Real Bills are clearing instruments and the redeemable currency based on them is non inflationary. Can fraud occur? Yes, but it will be detected in short order. Any business which draws double or triple bills on the same goods would not only immediately be ostracite from further banking relationships, but fellow businesses would shun the offender as well. Real Bills bring liquid production capital into circulation without having to invade a pool of gold savings. Real Bills finance production with a minimum of gold reserves.
As regards storage or warehouse receipts, they are in essence a 100% gold backed currency. To finance consumption production (anything consumed within 90 days) with such a currency, would quickly exhaust the available amount of storage receipts.
Furthermore, if gold, for which a storage receipts has been issued, is loaned out without the owners knowledge or consent, a fraud is committed. With regard to currency based on Real Bills, fraud can only be charged, if the redemption request is refused or not honored, until then no fraud can be charged.
The upshot is that Real Bills and Gold, as under the original 1913 FRA, make for a much superior monetary system than one built on storage receipts backed 100% by gold.
Reply from The Daily Bell
But Mr. Bischoff how do you you know that fractional reserve banking was NOT practiced within the warehouse receipt system. (See Selgin, White et. al)
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Posted by Potomac Oracle on 09/11/10 09:39 PM
"To put it in simple terms, if a government is willing to sacrifice its currency, there's absolutely no way deflation can take hold in a modern monetary system. It doesn't matter how large the debt contraction is ' 10 trillion, 100 trillion, or 1,000 trillion ' any government with a purely fiat currency can, with the stroke of a computer key, print enough money to wipe out the debt. Granted they'll destroy the currency by doing so, but at some point we're going to be faced with the choice of print or deflate."
Author, Ellen Brown offers the following from her article:
"How to Reverse a Deflation:
Do a Helicopter Drop on the States"
The government could pay its bills by issuing Greenbacks as Lincoln did, but it probably won't, given the current deadlock in Congress. Today only the Federal Reserve Chairman seems to be in a position to act unilaterally, without asking anyone's permission. Chairman Bernanke could execute his own plan and generate the credit needed to get the economy churning again, by aiming his "quantitative easing" tool at the states. After all, if Wall Street (which got us into this mess) can borrow at .2%, underwritten by the Fed as "lender of last resort," then state and local governments should be able to as well. Chairman Bernanke could credit the Fed's account with money created ex nihilo (out of nothing) and swap it for state and municipal bonds at the Fed funds rate.
A "state" might not qualify as an "individual, partnership or corporation" under Section 13(3) of the Federal Reserve Act, but a state-owned bank would. Bruce Cahan, an attorney and social entrepreneur in Silicon Valley, California, proposes that the Fed could diversify its role by buying long-term bonds in existing or newly-chartered state-owned banks. These banks, which would have a mandate to serve state and local communities, would more quickly and accountably lend for in-state purposes than private banks do now. They could be required to use accepted transparency accounting standards to trace how the proceeds of their loans flowed into the economy.
Local needs would thus determine how best to jumpstart and keep alive businesses and households that the "too big to fail" megabanks no longer want to fund on fair credit terms. Adding a state-owned bank would also bring competition to regional banking markets such as that of the San Francisco Bay area, which are now dominated by out-of-state megabanks. By funding state-owned banks, the Fed could inject "liquidity" where it is most needed, in local markets where workers are hired and real goods and services are sold.
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Posted by Onebornfree on 09/11/10 01:41 PM
"Again, the money supply is NOT really the central banking "supply" (see Rothbard TMS). The money supply can be actively circulated, and dependent on monetary velocity within the supply/demand cycle " as you have pointed out."
onebornfree:
OK DB, lets lose all of the handy Rothbardian definitions[or anyone else's] of "real" supply, or "real" demand ,"velocity" etc. etc., and simply "cut to the chase" ; the "big picture" if you will.
In summary, you are claiming that:
The purchasing power of a fiat currency in the market place [i.e its real world value in relation to goods/services], at any point in time; unlike everything else in that market place, is _not_ the direct result of final outcome of the interplay of the two factors of :
[1] available supply [however defined] of the currency at that point in time, and ...
[2] the total demand [however defined] for that available supply at that point in time.
Correct?
And also that Von Mises himself never pointed out that it _was_ .
Correct?
P.S. this is my final post on this subject here. If what I've said gives anyone here pause for thought, righteous indignation etc. etc., E-mails only from now on will be answered [address below].
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Reply from The Daily Bell
YOU WROTE ...
The purchasing power of a fiat currency in the market place [i.e its real world value in relation to goods/services], at any point in time; unlike everything else in that market place, is _not_ the direct result of final outcome of the interplay of the two factors of :
[1] available supply [however defined] of the currency at that point in time, and ...
[2] the total demand [however defined] for that available supply at that point in time.
----
RESPONSE ...
We have no idea what you are trying to explain in the above. Here is what we have written in simplest terms:
1. We have explained that an expansion in the money supply, coupled with a rise in the demand for money (and "velocity") creates inflation.
2. We have stated that deflation (the removal of money) from the economy is difficult in a fiat money environment. However, price deflation can certainly result from a reduction in demand for money (a slowing in "velocity").
You find this objectionable and cause for righteous indignation? We do not.
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Posted by Weeble on 09/11/10 12:18 AM
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Posted by Weeble on 09/10/10 11:58 PM
Reply from The Daily Bell
Weeble, just read Murray Rothbard's What Has Government Done to Our Money. This tiny book will tell you all about the evolution of gold and silver warehouses and how they began issuing receipts that became a stand-in for gold and silver at a local level. Here at the Bell, we also believe that fractional reserve private-banking likely ought to be part of a market for money - so the market itself can decide on its validity. These are basic monetary concepts. Real bills in our view were also historically utilized, though they are not true fractional reserve currency in the modern sense of the word.
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Posted by Weeble on 09/10/10 11:50 PM
What would your response be to Ingo?
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Posted by Weeble on 09/10/10 11:45 PM
but 300 cases of toilet paper = BUY 300 cases of toilet paper
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Posted by Weeble on 09/10/10 11:41 PM
Cite: "The idea of gold and silver circulating as a currency is completely unrealistic, regardless of any velocity factor. If consumption production, which is pro[b]ably 90% of all production, is to be financed by silver and gold, our modern economy will come to a halt within a matter of days."
I thought about that for a few minutes. If you were a retail customer, you wanted to buy something, and you have to pay in gold/silver, and you have some, then why would it not work? If you did not have the gold/silver, then the seller would have to make a choice on whether to sell to you "on account" and pay later. They could choose a trusted 3rd party to quarterback the deal(s).
If you were a distributor and you wanted to but 300 cases of toilet paper, then you would buy it "on account" and pay later.
You make it sound like gold/silver has to swing around in your pockets all day, and everything is COD. Have you been talking to F.Beard?
Reply from The Daily Bell
No, Weeble. Gold and silver circulate via bills of storage.
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Posted by Neil Miller on 09/10/10 05:20 PM
Yet right now the US in a fiat money environment has shrinking money supply and a slowdown in monetary demand (velocity).
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Reply from The Daily Bell
It depends how you define the money supply. Certainly there is less demand for money.
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Posted by Ingo on 09/10/10 03:46 PM
However, if the gold standard was to be resurrected by eliminating Paragraph (b) in Section 14 from the Federal Reserve Act of 1913 and the Federal Reserve Note was to be stripped of its "Legal Tender" protection, a "redeemable currency" system based "Bills of Exchange" could revive the economy overnight. Employment opportunities would be immediate. People again would have the chance to save for "Old Age", rendering the Social Security Program obsolete. The mere logic of a redeemable currency system, and the positive experience with it in the past, will inevitably cause its restoration. There is no other solution.
As to the "deflation" versus "hyper inflation" debate, it is important to understand the U.S. Banking system.
The 1913 FRA hired a manager of the national currency. A "Reserve Bank" (an association of money center banks in which the members guaranteed solvency to each other) known as the "Federal Reserve" got the job.
In the 1920s this manager of the national currency started to violate the provisions of the 1913 FRA by monetizing "Anticipation Bills" (government debt) to overcome the 1920 Depression. However, it was the pro business policy of President Harding and President Coolidge which revived the economy.
After the onset of the 1930s Depression, FDRs Executive Order 6102 eliminated the gold standard. The "Real Bills" market was destroyed by the Congress adding Paragraph (b) to Section 14 of the FRA of 1913. Paragraph (b) made it legal for the FED to monetize government debt through Open Market Operations.
What had started out to be a national "redeemable currency" under a "gold standard" to be managed by a "Reserve Bank", was turned into a "Central Bank" by the Congress for the purpose of monetizing government debt.
Real Bills which served as currency backing and as clearing instruments, were now replaced by Federal Reserve Notes backed by the U.S. taxpayer.
A Reserve Bank which set out to guarantee solvency to its member banks, now functions as a central bank which uses its member banks as a distribution channel of the "irredeemable currency" created by monetizing government debt.
However, banks as such cannot exist as a business to simply hand out FRNs. Since commercial banks were robbed of their real business of discounting "Real Bills", they were given the right to create a "Deposit Currency" (Mortgages, Credit Card Loans, etc.). The value of this deposit currency can only be realized by converting it into Federal Reserve Currency by having the debtors pay off the "Deposit Currency" debt in the form of FRNs.
What shook the central banking system to its core was something that should have been easily foreseen. It is the explosion of the interest due on government debt. The FED in its monetization process finally ran up against the exponential function of compound interest mathematics, and the system was shaken to its roots in 2007. To weather this crisis, the Federal Reserve Currency was diluted with Deposit Currency through TARP, Congress was persuaded to come up with trillions of dollars of stimulus funds charging it to our kids and grand children. It is hyperinflation that is mentioned as a solution to escape the exploding interest due. The mood of the electorate will not permit it.
The point of it all is, that this system has to be changed from an "irredeemable currency" system, back to a "redeemable currency" system. As the electorate will indicate in the November elections, deflation is the medicine they prefer.
As the recent rally in Washington, DC advertised, the people will refuse to have the Congress pass any sizable deficits. With no sizable debt to monetize, deflation will is the only likely scenario.
Undoubtedly, the FED is mindful of the fact that what the Congress gave in 1913 and in 1934, it can take back in 2013. The FED will be compliant and bow to the Congress to save itself. In my opinion, it will not be enough to save central banking in the U.S. after the election of 2012.
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Posted by Onebornfree on 09/10/10 09:38 AM
onebornfree:
Actually I said at the outset that I agreed with your initial observation, which was:[DB]: "The Austrian view that inflation and deflation are merely the expansion and contraction of the money supply is not quite true in our opinion. "
In response to that I had said: "With all due respect, that is not the Austrian view, at least as far as Ludwig Von Mises himself is concerned" and I then said: " Your own explanation may actually be "Austrian", or at least, more "Misean"!
I was agreeing with your original comment [or I thought I was!].
In summary , [amazing what a little sleep will do!] , my own point was that Mises points out that the _action_ of increasing the money supply [what some may call "inflating" the money supply] by the central bank, does not necessarily later on result in the economic _effect_ [or condition] known as "inflation" [i.e the condition of real world loss of per unit purchasing power, or "price inflation", as you have called it].
Because, in the end, the supply of money factor can never be more, [or less!] than 50% of the price of money [or real value] equation.
The other, _equally_ important factor[not lesser, not greater!] in the real world value of money equation[ meaning its "price", or "purchasing power" as I like to say] , as Von Mises pointed out, is the _demand_ for that central bank supply.
The demand for the central bank supply [as Von Mises also pointed out] was/is ultimately beyond the control of the central bank, being as it is fully dependent on the continually changing, subjective valuations of individuals and their scales of values- in other words it [demand] is ultimately dependent on various psychological factors outside of central bank control.
What I tried to say [in the spirit of Von Mises!] was that the central bank supply of money was _not_ the only factor to be considered- of [exactly] equal importance was/is the _demand_ for that supply at any point in time.
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Reply from The Daily Bell
YOU WRITE: "What I tried to say [in the spirit of Von Mises!] was that the central bank supply of money was _not_ the only factor to be considered- of [exactly] equal importance was/is the _demand_ for that supply at any point in time."
RESPONSE: We have already point out that the central banking money supply is not regarded by Misesians (Austrians) as part of the CIRCULATING money supply. (See Rothbard: True Money Supply). The initial observation you are agreeing with is not in the initial article; however we DO have some issues with the way that the velocity of money has been described versus "supply and demand" which relate to the comment about "expansion and contraction" of the money supply.
YOU WRITE: "The demand for the central bank supply [as Von Mises also pointed out] was/is ultimately beyond the control of the central bank, being as it is fully dependent on the continually changing, subjective valuations of individuals and their scales of values- in other words it [demand] is ultimately dependent on various psychological factors outside of central bank control."
RESPONSE: Again, the money supply is NOT really the central banking "supply" (see Rothbard TMS). The money supply can be actively circulated, and dependent on monetary velocity within the supply/demand cycle - as you have pointed out.
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Posted by Onebornfree on 09/10/10 08:54 AM
Sorry, bad phrasing maybe? It was not in any way meant as a criticism of your format- only a suggestion as a for a way for a reader to guarantee a reply.
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Posted by Weeble on 09/10/10 07:03 AM
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Posted by Weeble on 09/10/10 06:09 AM
My small piece was just an anecdotal story on a small boat rising and falling on the prices up, prices down wave. I tried to exclude the dilution of the currency by printing, as it is the main source of the wave. Without central banking, money printing, and general interference, the waves would be shallow and non compounding. A boom in tomatoes and a bust in Blackberries would be like ripples from either end of a large pond. They would eventually intersect, but would not compound and rock the economic boat. However, if tomatoes are subsidized, then the boom is bigger, and if Blackberries are useful for monitoring the population, then that bust would be averted in any way possible. Everything is warped now, and it is difficult for all to see what "hands off" would look like.
My key point was not evident, and for that I am kicking myself for missing the boat on it. Debt took hold when I was a small child during an inflationary time. Pierre Trudeau buried Canada in debt in the late 60s early 70s, and the population got into it. But we all lost sight of how it happened, and the purpose of taking on debt (er, to pay it off?) Once people lose sight of the debt being repaid, it becomes an albatross around your neck (or sitting on the deck.)
Now, 40 years later, I feel we are going to make the albatross take flight. I just think that simple bite sized pieces would make us all less seasick with respect to money, and what it really is. Your articles do a great job, but today was a sea monster of a subject to tackle.
As Venus Ramey just explained in a very succinct way on today's China article, money is a means to an end, and not the end in itself.
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Posted by Onebornfree on 09/10/10 03:36 AM
Onebornfree: I believe I have. Perhaps I was not clear enough.
To my mind, "monetary inflation" would be an increase in the supply of money by the central bank.
Although I would not choose to use the term in this way normally, with that meaning in mind, I deliberately referred and ideologically linked to "Chicagoans" and "monetarists" in the first post [2nd actual post in the thread],since our dialogue on this issue started, if you check back there.
On the other hand, price inflation as you call it [ or as Von Mises and I would have it, the economic effect/condition usually referred to as "inflation"] , describes the condition when the per unit value of the fiat currency is falling [ i.e a falling purchasing power when measured against most goods and services], which consequently requires the consumer to spend more units of currency to buy the same amount of goods and services than previously , as each unit of currency has lost some of its purchasing power[value] relative to those goods/services.
I believe I made these distinctions, although perhaps not clearly enough.[it happens!]
Reply from the Daily Bell: "But apparently you do not believe that the supply and demand of money has an effect on prices " so it doesn't matter!"
onebornfree: Not at all. As I tried to stress, the purchasing power[real world value] of each unit is, and in fact must always be, the final outcome of the two factors, the supply of money by the central bank, and the demand in the marketplace for that supply.
If the supply/demand equation causes the final value of each monetary unit to decrease[for whatever reason], making it worth less than before, then prices must rise, and each consumer must spend more to get the same value of goods when compared to what they could purchase with the same amount of money 1 month, 2 months, 6 months or longer, before.
In reality, as you ar no doubt aware, these goods /services have not increased in price- the value of each unit of currency used to buy them has decreased, meaning to get the same amount in goods/services , more units of the currency now have to be spent.
I hope this clarifies somewhat- if not I'm afraid I'll have to ask you to direct further observations/comments to my email address below.
Its been my pleasure, goodnight.
regards, onebornfree
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N.B. it is easy for me to miss replies to my posts in the Daily Bell format ,so if anyone would like to more or less guarantee a direct response from me, rather than me replying to you here, please email me at : onebornfree at yahoo dot com
Reply from The Daily Bell
Reply from the Daily Bell: "You do not seem to be distinguishing between price inflation and monetary inflation." Onebornfree: I believe I have. Perhaps I was not clear enough. To my mind, "monetary inflation" would be an increase in the supply of money by the central bank.
RESPONSE: This is not how the TMS is defined by Rothbard (see previous reponse).
Reply from the Daily Bell: "But apparently you do not believe that the supply and demand of money has an effect on prices " so it doesn't matter!"
onebornfree: Not at all. As I tried to stress, the purchasing power[real world value] of each unit is, and in fact must always be, the final outcome of the two factors, the supply of money by the central bank, and the demand in the marketplace for that supply. If the supply/demand equation causes the final value of each monetary unit to decrease[for whatever reason], making it worth less than before, then prices must rise, and each consumer must spend more to get the same value of goods when compared to what they could purchase with the same amount of money 1 month, 2 months, 6 months or longer, before. In reality, as you ar no doubt aware, these goods /services have not increased in price- the value of each unit of currency used to buy them has decreased, meaning to get the same amount in goods/services , more units of the currency now have to be spent.
RESPONSE: Our points has been that Mises believed the money supply was an important component of inflation. Your distinction implies that we have stated somewhere it was the ONLY driver. We have not and did not.
I hope this clarifies somewhat- if not I'm afraid I'll have to ask you to direct further observations/comments to my email address below.
Its been my pleasure, goodnight.
regards, onebornfree
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N.B. it is easy for me to miss replies to my posts in the Daily Bell format ,so if anyone would like to more or less guarantee a direct response from me, rather than me replying to you here, please email me at : onebornfree at yahoo dot com
RESPONSE: You do not need to repetitively criticize our format. It works, though it could certainly be improved.
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