A friend of mine posed an interesting scenario, in reference to the current inflation/deflation debate that some are having these days. I suppose this scenario could be possible but I’d like to see some additional input on the matter. The very simple scenario he ran by me is as follows…
In 2010 we have $100 in the economy and 5 apples. In this economy, the price for each apple is $20. In 2011, for whatever reason, we have $90 and only 3 apples produced. Apple prices have gone from $20 in 2010 to $30 each in 2011.
Is it possible that this is happening in our given economy? Another argument made was the fact that government stifles the production of many goods and services and that this could be the cause for the increase in prices we are witnessing. I personally believe that, even if production were down, that our money supply is increasing at an even faster rate.
Our money supply is probably increasing (in all metrics) faster than productivity is falling (if it is falling). It is hard to know productivity and money supply in clear terms.
Inflation isn’t just an increase in the money supply, or just an increase in prices… it’s more like the ratio of money to products. If the money supply is shrinking, and the economy is shrinking even quicker than the money supply, that is also inflationary.
I disagree with your definition. But at any rate, I’m just asking people to comment on whether they believe that the economy is actually shrinking and that there really hasn’t been any increase in the money supply or that there has been a decrease.
Claudius: You talking to me? If so, what do you mean? I merely repeated what a friend of mine had said to me and wanted to know what others thought about it. Thought I made that clear. Is no one comprehending the post and merely replying for the heck of it?
