Inflation vs Deflation and Money supply

Economics Economics Questions
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1

Hello Im economy student (Prague), and during last few months I read some things about austrian economics. I like it, and Im trying to present this view to my friends whenever discussion about economy occurs.

I had a discussion with a friend about inflation vs deflation, where i was a devils advocate for deflation. I’ll write down all arguments. My question for you is : can you suggest any more arguments to support austrian view of the thing, or if i made a error of thinking, plz correct me

So how i understand it, austrian school is against monetary easing, when central banks artificially is lowering the interest rate, and increasing money supply.

So friends argument was that you need some low inflation (he is aware of devastation of faster inflation, but 1-2% looks for him good) as it is motivational to invest. Inflation is a transfer from creditor to debtor. So it motivates to invest. + the low interest rate is also motivational

My argument was that if you have a deflation, it is motivating you to save, that is increasing supply, so therefor lowering the interest rate and increasing investing. The equilibrium would occur eventually. The recovery investment (worn down capital) must be done anyway, and with low interest rate, some investing would happened even despite deflation.

And with the economy where everything works fine, you should be seeing lowering the price level of goods, as technological progress, competition, economies of scale, should decrease the cost per unit of production (computers, eye surgery)

On the other hand, i countered his argument with this. Inflation is decreasing savings, therefor it increase interest rate, and decrease investment, Without central bank interrupting. With central bank, you get spending and investing beyond production possibility frontier, and therefore heating up economy, creation of bubble, and missalocation of resources to investments that are not healthy enough to survive when the bubble burst, or when the inflation in whole economy shows itself.

Moreover, inflation is bad for people (social aspect). As those who gets the best our of it are the subjects the gets to the money as first, before inflation occurs (banks), so its a transfer of wealth from poor, and middle class to banks.

Any more suggestion to this discussion. I plan to bring up this problem during the lecture in school, so want to be prepared

A question about austrian economics and money supply: does austrian prefer inflation or deflation. Sound money, with limited supply (and therefore deflation, as amount of money is limited, but we can expect amount of production to rise, therefore money getting more valuable) or you want to increase money supply in some way, to keep up with the production, and having stable price level.

If you want to increase money supply, how?

Thx for answers

2

You answered him very well.

Austrians are for deflation. No question about it. Stable price level is unneccesary. After all prices of computers and cell phones and many other things that govt does not interfere with have gone down drastically and nobody cares. On the contrary, everyone is happier, especially the companies making the computers etc.

That is because you don’t need to sell at the same price to make the same profit. If the cost of making it goes down the same amount as the selling price, the profit is the same. The difference is that when it is sold for less, more people will buy it. Everyone becomes wealthier. Think how the world and the economy as a whole has improved now that anyone can afford a computer.

3

All good points.

You could even partially agree with one of your friend’s arguments, in that inflation motivates more speculative investment. To have a return on investment, one has to focus on the higher-yield projects, which are usually more risky. And so inflation creates moral hazard, which should resonate strongly with the current crisis.

Without inflation, in order to save for old age one would only need to gather money or invest it in safer, low-yield projects. With inflation, there arises a tendency to risk one’s life savings in dubious investment opportunities.

4

@OP: Well, we have to distinguish between fiat money and natural money. In a fiat money system, I think the answer is that no change to the money supply (expansion or contraction) can be justified and the fiat money should be left to remain interest-neutral as it would if it were not being manipulated for the benefit of the issuing authority.

In the case of natural money, however, we cannot know whether there should be expansion or contraction of the money supply but we can know that expansion and contraction would occur. Basically, expansion of the money supply would occur in proportion to the profitability of mining and minting natural money. So, in a natural money system, we don’t have to know which is preferable, we only need leave the problem to the market and let entrepreneurs find the right solution through profit and loss.

Clayton -

5

The Austrian school is not for or against anything. It simply points out the true effects of a monetary expansion by a central bank. One can support these effects if one also supports theft. Libertarians support or oppose various things, but Austrian economics is a value free science.

Austrian economics points out the effects of intervention in markets. If wealth creation is desired, then unhampered markets, and an unhampered market in money production, would be beneficial toward that end. If wealth destruction is desired, then intervention in markets, and intervention in money production, would be the means to achieve that end.

If you are asking about a value judgement, ie, what is “better” than something else, that is a political question. Libertarians prefer liberty over coercion. Most people prefer coercion over liberty. Austrian economics has nothing to say about what is “better” or “worse”.

6

Sadpraetor,

You should read and really study this article if you want to understant the true nature and cause of price inflation.

http://www.wealthmoney.org/articles/Theory-Of-Inflation.html

7

Of course, tomozope’s article is not Austrian Economics. Just saying.

8

smiling dave,

He ASKED for a correction in his thinking so I provided a correction for him.

9

Perhaps I didn’t read the article too thoroughly, but it seems lacking in several points. The mechanism of an increased amount of money chasing the same amount of goods should be clear enough. Even if the anecdotal claims were accepted (“The only way an increase in the money supply would increase prices would be if almost everything was bought and sold at auctions where the price is determined by the bidding process.”), it still forgets about the rest of the economy - so if the buyers wouldn’t encounter price increases in the first round, there will be more money bidding for scarce resources somewhere down the ladder. Yes, consumers might not see the effect of inflation right away - but the producers will eventually.

That factors like increased government regulation and debt can contribute to rising prices can be agreed with, the rest of the article seems rather misguided though.

10

I think tomozope has confessed his opinion in other threads, that if the gov’t would print mountains of money, Zimbabwe style, but made sure it was not injected into the economy in the form of debt, that no harm would be done.

11

There is a lot of inaccurate statesment in that sentance. First, I do not care who creates the money, be it the banking system (the only creator of money today) or the government. Second, Zimbabwe only operates a debt money system and it was private banks that destroyed that country.

Third, I advocate money being put into circulation as a payment for production that is done. All the literature that I have read said you cannot have any price inflation when money is created as a payment. And yes that is even from the banking system itself. The article I linked is accurate and explains the problem of price inflation. You may not understand it thought because it appears obvious that you do not want to understand.

Maybe you should think more clearly and with an honest and open mind when you being talking about money.

"If men can create electronic bookkeeping entries representing debt and loan them into circulation, men can surely create electronic bookkeeping entries as a payment and spend them into circulation with no debt. Which do you prefer?"

.

- Gregory K. Soderberg, Rep. Candidate MN. Lt. Gov., 2010

12

“First, I do not care who creates the money, be it the banking system (the only creator of money today) or the government.”

I think we are in agreement on this.

“Second, Zimbabwe only operates a debt money system and it was private banks that destroyed that country.”

I might disagree on this matter - wasn’t it the government of that unfortunate country, that printed heaps of money to pay its bills, until the destruction of its currency?

“Third, I advocate money being put into circulation as a payment for production that is done.”

Could you please be more specific how this works? The Federal Reserve’s notes are used as payment as well - although it’s more used to buy various stocks. But there surely were major inflations, where the inflated money was used to buy ‘production’ (maybe this needs to be more specific too).

I would like to know how this precisely works - is this printing new money, then buying various goods with it or did I get it wrong?

13

I might disagree on this matter - wasn’t it the government of that unfortunate country, that printed heaps of money to pay its bills, until the destruction of its currency?

Nope. It was a private banking system that created and loaned all of their bank notes into circulation at interest at 800% interest. There was no final payment in the equation.

Could you please be more specific how this works? The Federal Reserve’s notes are used as payment as well - although it’s more used to buy various stocks. But there surely were major inflations, where the inflated money was used to buy ‘production’ (maybe this needs to be more specific too).

The only thing Federal Reserve Notes are used in absolute payment of is the obligation they represent (Dale vs Federal Reserve Bank of Minneapolis). FRN’s are not used to buy stocks. What is used to buy stocks is demand deposit (check book money). The part you’re missing on inflating the money supply is that the only way the money supply is increased is as an interest bearing debt. FRN (a promise to pay) can be used to pay for real goods and services but all that has happened is the FRB’s now owe the seller instead of the buyer. All that happens is the debt gets shifted around.

The big thing you’re missing is you have to focus on the fact that all the money we get to use is all based on interest bearing debt.

14

And this “private” banking system was brought about to what it was and is, by what means? By the voluntary means of free markets, or by the coercive political means, i.e., government legislation, decrees, regulations, etc…?

15

And this “private” banking system was brought about to what it was and is, by what means? By the voluntary means of free markets, or by the coercive political means, i.e., government legislation, decrees, regulations, etc…?

It really doesn’t matter how it is brought about what matters is who benifits. The bankers got to go into that country, only loan their promise to pay (bank notes or check book entry), charge interest on it, then because of the fact that once you charge interest the debt grows but the money supply does not they end up getting all the real property in time for free.

It is all done through the consent of the people.

16

So if some private businessmen reap in profits as a result of a war, then you conclude that: not the government, but private businessmen carried out the war?

All the people in Zimbabwe gave consent for their banks to destroy their economy? Was there not a few or even one Zimbabwe resident that objected?

17

"The part you’re missing on inflating the money supply is that the only way the money supply is increased is as an interest bearing debt. FRN (a promise to pay) can be used to pay for real goods and services but all that has happened is the FRB’s now owe the seller instead of the buyer. All that happens is the debt gets shifted around.

The big thing you’re missing is you have to focus on the fact that all the money we get to use is all based on interest bearing debt."

I must be still missing out on something. Can you tell me in detail how this works (bank/person/organization prints some money and uses it to buy some goods)? Maybe we are using different terms on something, let’s try to spell it out.

18

tomozope is a greenbacker (scroll down to the bottom of the article). tomozope says, “you cannot have any price inflation when money is created as a payment.” Bullshit. In the modern monetary system, for all practical intents and purposes, the only cause of price inflation is the creation of new money. Of course, general price fluctuations are the result of changes in both the supply of and demand for money (cash balances) vis-a-vis non-money goods and services, but the central bank can create unlimited amounts of money in an arbitrarily short period of time (witness the US Continental, Weimar Republic, Zimbabwe, et. al.), so that supply of fiat money can easily swamp all other variables. Individual demand for cash balances is on the noise margin by comparison.

That the money is made as a “loan” from the “central bank” to the “government” is just obfuscatory accounting, basically money laundering. The system is so complex for the express purpose of scrambling the brains of anyone who takes an interest in the system and who is not already an expert on how the system works. Greenbackers are classic examples of this. They start looking into the complexities of central banking and imagine that it actually has some real-world purpose other than legalizing the unrestricted printing of money.

“The article I linked is accurate and explains the problem of price inflation.”

@tomozope: Not to be harsh but you haven’t understood the problem as well as you think you have. I recommend reading this and this.

Clayton -

19

I must be still missing out on something. Can you tell me in detail how this works (bank/person/organization prints some money and uses it to buy some goods)? Maybe we are using different terms on something, let’s try to spell it out.

First we have to understand that the banking system is the only creator of money and they create all their money as numbers in a checking account. Here is a good two part video series on how all money is created and destroyed. After you watch these two videos we’ll talk more in depth. The con game of the bankers is so simple the mind is repelled.

http://www.wealthmoney.org/BooksAndMedia/Videos/Money-Creation-Destruction.html

20

Clayton,

Why don’t you ever address HOW all that new money is moved into circulation as an interest bearing loan?