Despite his nonsense, it’s worth reading up on the Austrian deflationists like Shostak, North or Shedlock, to see why simply lowering interest rates or printing money may not cause general price increases.
Wait, I thought the ERE was just equivelent to “no change” or unattainable equilibrium. How is it equal to perfect competition?
Inflation (as you describe) is caused by (cerebus perebus):
- Expansion in the money supply.
- Less amount of goods and services.
- Less demand to hold money.
Perfect information and a static equilibrium. They both share that assumption.
inflation is cause by a number of things which can range anywhere from population increases,war,spending,and increases in the demand for money.
Hoff, I beat you to this forum. Read all my posts, and they already answered all your questions. They define inflation using the neoclassic definition and they don’t deviate from it. Adapt. You are talking about price increases, and they are talking about MS.
Ixtellor
The definition of “inflation” as an increase in the money supply has been around a very long time, just as the definition of “monopoly” being a state granted privilege has also been around a long time. we’re merely using these terms in their correct and original context.
But isnt the Austrian distinction between short- and long-run demand more important than aggregate?
Technically, it’s about inter-temporal resource allocations. But if one is going to argue that “aggregate demand has fallen”, then the Austrian response is likely to be that AD has fallen because at some time antecedent to the present, resources were improperly allocated inter-temporally. A decline in AD the likes of which evidences (I don’t believe it causes) a recession/depression is a systematic failure, it’s more than just entrepreneurial error.
Why should i restrict my definition of inflation to there narrow standards?
Ummm, because that’s what we’re talking about. We’re talking about “money supply expansion”, which I call “inflation.” If you don’t like it, you’re free to go somewhere else, but for the sake of this discussion, inflation = money supply expansion.
If you want to use different definitions, please by all means, start a new thread, but don’t hijack this one.
Because it’s not your forum. When we visit Keynes-land, we’ll be sure to add ‘monetary’ to our use of the word inflation, so that we have clear communication. 99/100 times you see ‘inflation’ used on this forum, it is in reference to increasing money and credit supply, not rising prices.
Definitions identify the widest cause in a context and are based on the observation of similarities and differences in a context. Definitions can be too narrow or too wide. See Ayn Rand’s Intro. to. Objectivist Epistemology for the theory of definition.
I can’t tell if hoffmanjohn is attempting to provoke on purpose, or if he is truly ill informed in regards to the Austrian School.
I like the post. Great job. I wanted to add one more piece of information.
The “malinvestment” occurs when resources are taken away from one sector to be used in the sector that has the artificially high demand. Once the demand for a consumer good is revealed to have been artificial due monetary inflation and credit expansion, the malinvestment of capital goods is revealed.
e.g. Low interest rates and money injections into the real estate sector caused demand for real estate to rise. This signaled to construction companies to hire more workers, invest in new machinery that otherwise might not have been purchased until a future date, etc. to meet the increased demand. More construction workers got into the industry developing their construction skills, etc. as well. The increased demand of construction capital goods such as machinery and materials signaled to the producers of those capital goods to expand their appropriate businesses as well to meet that demand and so on. One of the problems is that in order to meet the demand for producing capital goods (typically long term investments), resources must be taken away from the production of other consumer goods or capital goods in other sectors - not real estate. There were a lot of people who could not afford real estate in the long term scheme of things except with artificially lower interest rates and when this realization came about, the malinvestment of all other higher order goods was realized and we are left with millions too many homes and other such related goods.
In order to correct the problem of oversupply - which just means prices are too high - prices must be lowered. I believe this is a correct summation based on the reasoning that who in their right mind wouldn’t buy a home for $2 (assuming you weren’t taxed out the wazzoo for doing so)? Also historically when prices have been kept artificially low on goods, there is almost always the problem of a shortage. e.g. Gas, food, housing, etc. I do realize that as an Austrian Economist, one isn’t supposed to use historical examples like this due to the problem of not being able to prove the relation of cause and effect without pure theoretical reasoning as explained by Mises in his Treatise on Human Action. i.e. I can’t say that the price fixing caused the shortage without already having prior knowledge of what causes shortages. We can’t say based on this example that an increase in demand not related to low prices did not just cause the shortage. e.g. One might argue without apriori knowledge that the price fixing was put in place simply because there was an increase in demand which current supply could not meet and that the shortage was inevitable.
I am not 100% sure of my reasoning and would like to hear your thoughts.
That’s not really true, is it? Isn’t the whole point that the new money is directed away from the stages of production closest to consumption to stages further. Which, without the decrease in interested rates would not have been profitable to invest in.
The decrease in interest rate makes the production of new capital, especially that furthest away from consumption profitable and provides entreprenuers with new and easy credit, hence the lengthening and widening of the capital structure. In fact, it is only when the money reaches the consumers and they begin to reestablish their preferences that problems begin.
this is confusing to me as well. if…
1000 ounces of gold existed and circulated as money in an economy for one year.
six months later several people have invested a total of 500 ounces of that gold into a large strand of timber to process lumber for dwellings.
six months later 1000 ounces of additional gold ( a doubling of the previous money supply in one year) enters the economy from a mining operation and additional timber and timber processing begins and doubles timber production in the same amount of time as previously done.
the 1000 new ounces of gold have all gone into timber processing yet the existing economy, the roughly 500 uninvested ounces of gold is consumer income to buy a portion of the new timber products…all the new processed timber goods are now sitting and not making anyone any money//
is this the jist of the malinvestment??
No, the source of malinvestment proper is an unbacked expansion of the money supply.
A lot of the premises in the scenario you describe are so extreme that it’s kind of impossible to evaluate, for instance, the total above ground stock of gold has never increased by more than 4 or 5% in any given year - and rarely grows by more than about 2% (we have about 5 centuries worth of reasonably reliable data on this).
you yourself say…"When money is injected into the system it causes prices to change without a corresponding change in time preference which would be necessary to meet the “demand”…
“New money, especially fiat money,…”
i know that gold has generally been pulled out of the ground at less than a double digit rate…at least that is what i have read at the mises.org site.
but gold could be fiat money.
i was using ‘gold’ as a general word for money proper.
i dont see how money backing is an issue if what ever the money happens to be is monopoly or govt imposed.
is there something else in my post that mistates the process of inflationary malinvestment?
What you’re missing is that the amount of money in an economy and the rate of interest are not related. The purchasing power of money is determined by individuals demand for liquidity, the amount of money in the economy and the amount of goods in the economy. When an increase in gold occurs that new money filters through the economy and changes the general level of prices, it increases prices and drives down the purchasing power of money, real income and the ratio of prices stays the same. On the other hand, the rate of interest is determined by the time preferences of individuals in the economy, the extent to which individuals are willing to forego current consumption to increase the consumption of future goods.
However, due to FRB, money enters the economy through the loan market. When banks expand credit they push the rate of interest below what it would have otherwise been in order to loan out the expanded credit. It is this reduction of the interest rate that sets the boom bust cycle in motion, as opposed to new money entering the economy which merely distorts the intratemporal price structure. FRB distorts the intertemporal structure of prices, and as such sets in motion the ABCT. The other differences is that when new gold enters the economy it does so through voluntary exchanges, whereas credit expansion is the result of government priveledge and fraud.