I am trying to understand this point, so bear with me…
If Blarg, a nation with a monetary system, irrelevant what kind, increases the supply of currency, but does not increase production, you have an inflationary effect, but if production, therefore demand of these dollars increase inflation does not happen?
So if Blarg has stringent controls on production, like a cap and trade propsed in US, production will undoubtedly decrease and inflation will occur, but if Blarg has a free market policy and does not hinder business, it should not be an issue?
money supply inflation or in short inflation is a common explanation for (common cause of ) general price level inflation, which is not inflation. since inflation is shorthand for money supplyinflation
For simplicities sake, forget about the production of anything and everything; except the production of $'s , or “Blargs” or whatever the unit is called.
As LVM has observed__*__, all final market prices [ie real world valuations] of all goods, including money, are determined by the interaction of the two factors of supply and demand, and nothing else. [final price = supply/demand].
“Inflation” is a term broadly used to describe a general economic condition where the value, or price of each unit of currency is falling as a result of the particular interaction between the money supply and the demand for that supply that has occurred, for whatever reason. [final price of money unit = supply/demand].
Although referring to increasing the money supply [i.e. inflating it ] may satisfy some narrow grammatical definition because “increasing” can also mean “inflating” , it [inflating the money supply] is not the same as the economic condition generally described as “inflation” , which is as I said before, a state of affairs when a decrease in the value, price, or purchasing power [take your pick] of each single unit of the currency in circulation is constantly occurring.
And of course, the real kicker is that increasing ["ie “inflating”] the money supply, does not necessarily cause the economic condition called “inflation”, simply because the final price of that money in the marketplace , as LVM pointed out, can only be a result of the interaction of 2 factors[ supply and demand], not one [supply].
To illustrate my last point , here are 2 interesting example scenarios:
1] Money supply increasing, but demand for that supply is increasing even faster - demand outruns supply- the result = an increase in per unit value [resultant economic condition: price deflation] .
2] money supply is falling, but demand for that supply is falling even faster- the result = a decrease in per unit value [resultant economic condition: price inflation].
*[This concept was first outlined/explored in LVM’s “The Theory of Money and Credit”.]
I feel dumb asking this and it might of been answered already (i didnt read thru all the posts) but when I read Henry Hazlitt’s book on inflation I thought he referred to it as an increase in the supply of money and credit and not a general increase in prices? Can someone maybe clear this up some more for me? I thought higher prices was just a effect of an increase in the stock of money?
In the price of every good and service, there are two factors that can affect the price. Supply and demand, of course. Obviously, increasing the supply of currency will increase demand of all goods and services across the board, which will tend to increase price. On the flip side, reducing the supply of all goods and services (which is what a government does when it appropriates resources) will also increase prices, given that demand remains constant. In other words, given a constant supply of money, if the government was not stealing money and thereby labor, you might have two people working to produce food. But if the government appropriates one of those people to do something else (which, as far as we know, is almost completely worthless), we now have one person producing food, which means the price of food will have to go up, since demand is constant (supply of currency is constant) and supply has been cut in half.
See, when Austrians say that the increase in the supply of currency is inflation, they are just saying an increase in demand. Demand really just represents the supply of currency.
Okay, now it is my turn asking dumb questions, but why is it necessary to bring up demand? Increasing the supply of money, if it was, in theory, done at once in all places, would not increase demand at all - but it would increase all prices correspondingly (“more money chasing the same amount of goods”). Closer to the real world, increasing the supply of money means some people will get it first. These people can afford to demand more goods and will bid them away from their alternative uses and users; thus the new money enters the economy. But this does not mean there is a general increase in demand - other people will in turn have to change their spending habits and demand less of other goods. If we assume the evenly rotating economy (an unrealistic, but useful construct) and allow this change to propagate until all its effects are played out, there will be a general increase in prices, but still no general increase in demand. In the real world, increasing the supply of money will have tendencies to increase prices, but it does not increase demand in general either. It is not necessary to bring up demand to understand the phenomenon.
Now, while I do not really disagree about your point on government production and interference with markets, it is also not necessary to understand inflation. You could say that a big government increases the effects of inflation via the means described, but it is not its part. You can have inflation without a big government reducing production of goods.
Yes it would. Let us say that you are a business owner. And then let us say that the government decided to double the supply of currency, and distribute it pretty evenly (whatever that may be). So now, you as a business owner all of a sudden see your business increase dramatically. You run out of supplies really fast. What would this look like to you? It would look like “demand” for your product just jumped. So what would you do? You would raise your prices until you reached the equilibrium again. This would be the supply/demand curve.
So yes, it would increase demand. In other words, demand is directly affected by the supply of currency.
As I explained it, it is. Again, prices can go up if either demand is increased across the board (which can only happen with an increase in the supply of currency) or if supply is reduced across the board (which can only happen when the government appropriates resources).
That all depends on who gets the money first, if the people get it (consumers) than yes, but if investors get it, then not so much, as individuals that invest this money will increase production, reducing the likelihood of an inflationary effect, as increased production will move this money to pay for increases in labor, and supplies for production, leading to more employment and more purchasing, therefore the demand will increase.
On the other hand
If you only allow consumption with these dollars, like a small tax rebate to all people in general, without an increase of production capital, the prices will inflate.
Of course this preposes a closed economic system, the real issue is that the $ is a world reserve currency, and the baseless printing of the dollar worries nations that hold reserves of $, this is a decrease in the demand of $…
This is the short sightedness of the issue…
When you increase the money supply and more money is demanded, inflation does not occur, this was the idea (not really capitalism in my opinion, but as close as government would get) of supply side economics.
If you increase the money supply to people who own businesses, they increase the size of their business, increasing production, which puts more goods and services on the market, deflating prices, now when this money reaches the consumers hands there is an increased demand, inflating the prices, system stabilizes. The real issue of government is that when it handiacaps production (regulation) and hands money directly to consumers (welfare) it inflates prices, if you understand that this increases sales tax revenue, the motive becomes all too clear, it is a self sustaining system to move toward socialism. When you add the real world example of the capital gains tax increases, you see that the government has a hand in keeping money away from investing, so businesses can either stagnate (a plus for nationalization) or has to go to the government for money to stay in business (a plus for nationalization).
is therefore false. “Investing” into businesses just means that businesses will consume more, which means prices go up for everything businesses want to buy. Labor will demand more money as will suppliers of raw materials. The labor of the supplier of raw materials will demand more money as well.
I think you are not figuring time delay, the firm will not incur a price increase at first, only after demand is evidently increased, by this time the products are on the market being bought to support this price increase as per volume…
You own company A that supplies widget raw materials
I own company B that makes widgets
Now money increases and you get investment, your production increases, you have more labor, you produce more raw material, the price for your raw material drops, meanwhile there are more consumers on the market for widgets, increasing demand for my widgets, therefore I produce more widgets, which requires an increase in my alottment to labor and raw material (paid for via price increase in widgets). Now when I first purchase a double order of raw material, your price will be low ( a win for me) which is good because I will have increased my labor costs (which subsequently increases my demand further). Prices stabilize, increase in production, money supplied is money demanded, no inflation in the end result…
Then help me understand better, you have to realize that unless my financial situation changes I am relying on what I can get my hands on for nothing…
I know SSE is not capitalism, it is Keynesian market tampering, but I am not talking about the government supplied money at this point (I should have clarified, my error)
Okay, let’s run with the sudden multiplication of money everywhere, unrealistic as it may be. It is hard to imagine that the business owner would overlook, that everybody has twice as much money at their hands. If he understands what it means, he will probably raise his prices, because very soon, all of his costs will also rise correspondingly. (There might be some profit opportunities due to the ongoing change, but that is enterpreneurship proper.)
However, if he doesn’t notice the increase in supply of money, or doesn’t realize what it means (“People have more money, so they will buy more stuff! $$$!”), or speculates wrongly, he might indeed see ‘more demand’, because his wares are suddenly very cheap compared to the competitors that are raising them.. He’ll be happy to sell his stuff until he realizes that he is losing money on the deal. That makes it a self-correcting issue, not a general increase in demand.
But this is one specific example of what a person might do. There is no accounting of what all users of money might do, in their roles as businessmen and consumers. They might as well refuse to pay anyone higher prices, pay their debts, invest the extra money somewhere or put it under their pillow to prepare for an uncertain future, throw a big party, give it to charity, etc, etc, etc. I guess many will do this or that - but how can anyone say what will be the final effect in advance? It might as well be even less demand.
Have to disagree here. Demand (for goods, I presume) can rise due to many reasons. Supply of goods can also be reduced due to many reasons.
I guess you were not around last year when the U.S. government gave just about every adult citizen $600…
Business owners do not see that everyone has more money in their hands. They just see that their stock is all of a sudden gone and that they can obviously demand more money for it, whatever the reason may be.
Yes, all prices go up, because there is more currency.
It has nothing to do with the prices of competition. In a free market, businesses actually try to sell their wares at lower prices than their competition, to get more business. In a free market, the only real way to sell your product at a lower price than your competitors is to be more efficient. So in reality, if your competitors are raising prices for the same product, a business owner would think that it was because they were becoming less efficient.
Again, a business owner would raise his or her prices because their supplies are all of a sudden gone, but demand is still there for more.
When the supply of money is increased, yes there is. It is called a general increase in the price of all goods and services, or inflation.
Of course demand can rise due to many reasons. But there is only one reason demand can increase across the board for all goods and services, and that is an increase in the supply of money.
Also, supply of goods and services can fall due to many reasons. But there is only one reason that supply for valuable goods and services can fall across the board, and that is appropriation of goods and services from the private sector by the government. Now granted, individuals can steal as well, but they cannot steal nearly as much wealth as the government can. Their impact is minimal comparitively speaking.
“now, is my assumption that demand for these $ is related to production, simply put, correct?”
It may be related, although personally I do not see how. The truth of the matter is that nobody really does, or can, know.
Demand for money[to hold, hoard, save, not spend] is just a physical manifestation of the psychological need/demand for security [i.e. the elimination of uncertainty].
For better or worse, the general psychological urge for security exists , to a greater or lesser extent, for all [or most] individuals, at all levels of all societies, whether tribal, nomadic, feudal or industrial, and no matter how regulated, or unregulated they are perceived to be. It is a psychological state that is apparently generally sought after by most humans.
As each individual ultimately acts on his/her personal perception of what they regard their level of safety and security to be or not to be at any point in time, it is impossible to know why any one person, or even large groups may act to demand to hold/save more of a particular medium of exchange, or not.
Furthermore, speculation as to what comprised/ comprises “demand” , [or the level of psychological security sought] at any point in time is pretty much a waste of time because the truth can never be decisively established and it will almost invariably involve making sweeping , unprovable generalizations about supposed actual individual psychological preferences at certain points in time.
All we need to remind ourselves of is that whenever a real world price is involved [in this case the real world “price”, or value, of money], and that price has changed,[or even if it has stayed the same] then that final price is always set, at any point in time, by the final outcome of the interaction of the two factors of supply and demand.
Beyond that basic unchangeable fact, [ie the inevitability of final price of money being decided by the interactions of supply and demand] it is impossible, presumptuous, and entirely unrealistic to claim to know any more about why the price change actually occurred in any one particular instance.
In this case, the absolute broadest, most sweeping generalization actually turns out to be the most honest and the most true : “the price [ie real world value] of the medium of exchange, changed as a direct result of the interactions of supply, and the demand for that supply.”
This is beginning to border nonsense. A need for ‘security’ can’t be fulfilled by just holding more cash. Depending on context ‘hoarding’ cash can be completely useless whereas hoarding real goods can save your life.
Bottom line is, all this talk about ‘demand’ for money when discussing inflation is totally misleading.
You are free to label it however you wish- even to give it some fancy sounding esoteric “economic” name, I suppose, if that’s what floats your boat.
The important thing however, is to recognise that there is a marked difference between money that is deliberately held [saved ] and not spent, in order to make the holder feel more secure under whatever economic circumstances cause them to feel less certain and less secure about the present and the immediate future, and money that continues to circulate through the economy as it is exchanged for goods and services the spender feels he needs.