The Myths surrounding the phenomenon of inflation...

[bluprint]

@A.B. Dada

@justinx0r

Danilo is correct. When the government inflates the money supply it dilutes the purchasing power your dollar, causing prices to rise.

I still disagree completely. Price increases are not always caused by inflation of the money supply. Inflation of the money supply CAN dilute your dollar, but it isn’t required to, because your dollar’s purchasing power is market-specific, not overall economy-specific.

What money supply inflation does do is create malinvestment potential. Picture this: new easy money is created. People want the best return on their money as possible, so they look for recent historical returns in a given market, say housing. Since the recent history of housing showed a price boom, they mal-invested their new money into housing in hopes of a better return. Because the housing market had a flood of new and old money move into it, the increase of money in that market caused prices to go up. Why didn’t the price of computers and cell phones and car tires go up equally? Because they did not have the return on investment that housing seemed to show. In computers, prices went DOWN even in an inflationary (money created) economy.

You can’t just say that newly created money makes prices go up – it doesn’t. If the central bank doubled the money supply overnight, but everyone socked that new money in their mattress, prices wouldn’t change. You also can’t say that inflation automatically makes prices go up if that money disappears outside of our economy.

I’m against central banks, and against fiat money, but I am also aware that inflation does not create generic price increases right away. It is once that new money actually cycles into the economy overall that we see price increases – but not always, as we see with some consumer goods. New money is not as bad as easy credit, I’d say, because money can be exported easily (and out of our market) whereas credit can not be exported so simply. Imagine if immigration was legal and unlimited – immigrants might flood into the country, send their dollars out of the country “back home” and we might see price decreases overall as money left the country and the demand for money increased due to this fleeing of cash from the local economies.

Hey Adam, long time no talk. Having participated in your forums, one thing I always thought is that you didn’t quite get the monetary stuff right. I suppose I’m a bit biased, as I was taught by Austrians and took it for granted a long time that inflation is, by definition, an expansion of the money supply.

The way to think about this stuff, is to think in terms of “trends” or “tendency”. So, when austrians say that inflation will cause prices to rise, in your head you should automatically translate that to “will TEND to cause pricess to rise”. The difference is sublte, but important.

In general, (as pointed out in the post just before this one) prices should fall due to technology and labor improvements and other factors. So, if the downward pressure on prices due to these factors exceeds the upward pressure on prices due to inflation, prices can fall in some cases. However, this doesn’t mean that inflation didn’t, as justinx0r put it, “dilute the purchasing” power. In this case, we can see that if there had been no inflation, the price of the good would have fallen, in nominal terms, even further. In other words, it is a fallacy to say that inflation had no impact on the price of a particular good just because the nominal price of that good dropped during an inflationary period.

If it helps, I’m going to try (formatting be damned) to put a 2x2 chart help demonstrate. Imagine a 4-square grid, where the labels across the top, from left to right, are “no inflation” and “inflation”, indicating the two possibilities that over time we either don’t have any inflation at all, or we do have some amount.

On the left side, the labels from the top down are “old tech” and “new tech”. This indicates a change in production technology, where “new tech” means that production changes for this good should lead to lower prices for whatever reason. I’m holding constant any changes in technology that would change the nature of the good, such as a faster CPU in a computer, or additional safety features in a car. Just assume for this case that the nature/quality of the good is exactly the same. The only thing to change is the production technology to help decrease the price of the good

no inflation inflation
old tech 100 150

new tech 50 75

In this case, without inflation and before any changes to technology the price of the item is 100. Then some new technology comes along that puts downward pressure on prices, and causes the price to rest at 50. But imagine that at the same time the technology is being developed/deployed, inflation is creaping in. In that case, it’s possble that we don’t move down then over, but that we kind of drift directly from the top left to the bottom right, such that, in nominal terms, some of the downward pressure on prices due to new tech is offset by inflation, but still resulting in a nominal price drop.

[ggkrol]

First lets agree that: 1. We have a fiat currency ( irredeemable paper ) in this country. When you’re talking about inflation you’re talking about easy manipulation of the money supply which is only done with fiat currency. 2. We don’t have two inflations (price and money supply)

When the Federal Reserve has the printing presses fired up and their counterfeit money starts rolling off then you will lose purchasing power with the dollars you have in your pocket or bank account whatever (of course this is when the money is actually borrowed into circulation). In reality goods and services don’t actually increase in value which is what is assumed when we see a price increase, actually the federal reserve notes have lost purchasing power and it now requires more of them to buy the same goods or services. Now there are different economic components which dictate the price of a good or service hence a price reduction when the money supply has actually increased. Inflation is the expansion of the money supply and deflation is the contraction of the money supply (without an equal expansion and contraction of goods and services). This is putting aside any gimmics which may artificially hide the real supply of money in circulation.

Just for the record NO economy in history has ever survived when a fiat currency was allowed to circulate conversely NO economy in history has ever failed when real money (gold or silver) was used as a medium of exchange.

[Niccolo]

Monetary economics - along with monopoly and competitive economics - is one of my favorite topics for discussion actually.

In terms of the Austrian view of inflation its a little confusing for anyone and different areas need to be understood.

Austrians generally perpetuate many theories including Cantillon effect, which is what they contribute to government banks and privileged shareholders/corporations taking money from the poor.

To give a graph, this is the best way I can explain the natural increase in the supply of money - what Mises termed as inflation,

Though I do like the Austrian theory of the value of money and find great value in it, I must admit… When speaking of the specific term of the value of money from origin, I’m much more an Andersonian. To demonstrate that I’ll refer you to Anderson’s list in his The Value of money starting on page 388 and ending on 394

[MrJekyll]

$15.4 trillion in bank assets and liabilities is being backed up by a minuscule $40.2 billion. That’s 0.0026%. A quarter of 1% Fractional reserve banking at its finest!

Not even a penny on one dollar!

The real question is how much gold is left in the vaults. Is it all sold or are they still using some to flood the markets to keep gold prices down?

[MrJekyll]

@Niccolò

Monetary economics - along with monopoly and competitive economics - is one of my favorite topics for discussion actually.

In terms of the Austrian view of inflation its a little confusing for anyone and different areas need to be understood.

Austrians generally perpetuate many theories including Cantillon effect, which is what they contribute to government banks and privileged shareholders/corporations taking money from the poor.

To give a graph, this is the best way I can explain the natural increase in the supply of money - what Mises termed as inflation,

Though I do like the Austrian theory of the value of money and find great value in it, I must admit… When speaking of the specific term of the value of money from origin, I’m much more an Andersonian. To demonstrate that I’ll refer you to Anderson’s list in his The Value of money starting on page 388 and ending on 394

If someone pointed a gun to your head and stole your wallet, would you need a chart with circles and arrows and a description on the back of each one to know your being robbed?

[Bostwick]

@foster

The usual scapegoat for inflation is oil and energy prices. Oil and energy are seen as comprising part of every good, because every good uses oil somewhere along the line. So can rising energy prices cause inflation?

The term is misused. The Fed deliberately uses inflation to mean price increases, but the term really only means money supply increases; which causes price increases.

[Niccolo]

@MrJekyll

If someone pointed a gun to your head and stole your wallet, would you need a chart with circles and arrows and a description on the back of each one to know your being robbed?

What does that have to do with anything?

[bluprint]

@MrJekyll

If someone pointed a gun to your head and stole your wallet, would you need a chart with circles and arrows and a description on the back of each one to know your being robbed?

Lol, I’m not sure what this means exactly, but I’ll tip my hat to an arlo guthrie reference any day. Well done.

[gethky]

Thanks Mr Jekyll, your comment reminded me that Fractional Reserve Banking is, beside the Federal Reserve’s nefarious actions such as buying U.S. Treasury bonds with money created out of thin air, an important contributer to money inflation. See this eye-opening video for an explanation.

[ggkrol]

I have to agree that video was very eye opening. So now what? Do we sit back and do nothing, shrug our shoulders and say oh well, as the wealth of this nation concontinues to be stolen. How about we make the decision to stop using the worthless federal reserve notes. I ask everyone that reads this to go to www.libertydollar.org and check out the solution to the evil scam the Fed. has been perpetrating on the American people.

[Niccolo]

Switch to the libertydollar, yes! From one fractional reserve bank to another!

[ggkrol]

Gee, did you go to the web site or are you just popping off! The Liberty Dollar is a 100% backed by silver or gold currency. Monthly third party audits are performed and the audits are posted on the web site.

[EotS]

@gethky

Thanks Mr Jekyll, your comment reminded me that Fractional Reserve Banking is, beside the Federal Reserve’s nefarious actions such as buying U.S. Treasury bonds with money created out of thin air, an important contributer to money inflation. See this eye-opening video for an explanation.

I always point out to people that this video was created by Socialists, and that there is a lot of misinformation in there. (see who posted it and their link.)

They do a halfway decent job of showing how money evolved and how fractional reserve came about, but it goes wrong from there. The Mises Institute has a video you can view here that is much better. I remember the socialist video had leanings toward control over production by government, and represented consumption as the result of capitalist greed.

[ggkrol]

They do a halfway decent job of showing how money evolved and how fractional reserve came about, but it goes wrong from there. The Mises Institute has a video you can view here that is much better. I remember the socialist video had leanings toward control over production by government, and represented consumption as the result of capitalist greed.

I see no blatant contradiction between the two videos, one is a bit more cartoonish but I guess that is what some people need in order to absorb something that is really too scary to think about. So again this leads me to the use of a private currency this is the only way to get government and the federal reserve under control or better yet out of control. Check out www.libertydollar.org

[Niccolo]

Except they aren’t.

Twenty LD = Twenty USD

However, twenty LD also = One ounce of silver.

But one ounce of silver only = $14.00

Thats not even the worst one though! $1,000 for one ounce of gold? Are you kidding me?!? Gold only trades for about $765! Thats an overhead of what? $235?

Listen. I hate the fed just as much as the next guy, maybe more, but I’m not so delusional that I’m willing to get ripped off for something so few people accept anyways.

I don’t know, you do the math.

[ggkrol]

OK, here we go. There are 2 major commodity houses in the world one is in New York and the other is in London (may be one in Zurich not sure). The price we all see on t.v. or in the newspaper is the spot price for a troy ounce silver which you correctly quoted is 14.00 (close enough). Now this price is for a 5000 oz. brick of silver which is purchased through one of the commodity houses (there may be a minumum number of these brick you must purchase on top of that). So now you have hundreds of pounds of silver which must be shipped and then minted (please don’t make me go through the minting process). So YOU do the math. NO WHERE will you be able to buy 1 oz. of silver or gold for the spot price. THE LIBERTY DOLLAR IS NOT AN INVESTMENT BULLION IT IS A CURRENCY and as such many consideration had to be taken into account in order to make it viable. The Fed. is able to print a 100 dollar bill at a cost of about 2 cents but then loans it at face value. Good grief where’s your outrage at that.

[Niccolo]

@ggkrol

. So YOU do the math. NO WHERE will you be able to buy 1 oz. of silver or gold for the spot price. THE LIBERTY DOLLAR IS NOT AN INVESTMENT BULLION IT IS A CURRENCY and as such many consideration had to be taken into account in order to make it viable. The Fed. is able to print a 100 dollar bill at a cost of about 2 cents but then loans it at face value. Good grief where’s your outrage at that.

Really? Because I was. Though to be fair it was five ounces of brick gold in Italia.

Be that as it may though, its still a deceitful scam.

[gethky]

EotS,

An important point made in the socialist video that I didn’t see in the MI video was a detailed explanation of the fact that, in an economy where all the money is created by loaning it into circulation, the debtors have no choice but to use the money created by other borrowers in order to pay the interest on their loans.

[ggkrol]

So you bought 5oz of gold at spot in Italy. Would you tell me the name of the business or maybe a web site I would like to buy much more than 5 oz.

[Mike_Sproul]

Before accepting the Austrian view that price inflation results from more money chasing the same amount of goods, you should read about the real bills doctrine (www.csun.edu/~hceco008/realbills.htm). The real bills view is that the dollar is backed by the Fed’s assets (gold + bonds), and that if the fed issues 1 more dollar, while simultaneously getting another dollar’s worth of assets, then the money will be worth the same as before. Inflation results when the fed loses backing, for example, when the fed issues $100 and gets a bond worth only $99 in return.