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Will We Have Inflation, Deflation, or Hyperinflation?
- Austrian School of Economics
- Ben Bernanke
- Ben Bernanke
- Commercial Paper
- Consumer Credit
- Excess Reserves
- Fisher
- Fractional Reserve Banking
- Gold Bugs
- Gross Domestic Product
- Hyperinflation
- M1
- MF Global
- Milton Friedman
- Money Supply
- Obama Administration
- Quantitative Easing
- Real estate
- Recession
- recovery
- TARP
- Volatility
From The Daily Capitalist
This article is presented in four parts. It deals with what I feel is the primary question investors must now answer: is our future to be inflation or deflation? The answer has vast implications to our investment planning and decisions for the near term, and possibly for our long term. It is a very complex question with a lot of moving parts involving economics and politics.
Like it or not, it is economic theory that is driving macroeconomic policies and political decisions that determine whether we will have inflation or deflation. Since not all of my readers are sophisticated traders I have tried to present the issues in a direct and hopefully understandable way. To those sophisticated readers, please bear with me.
The Problem
The economy is not acting according to plan. At least not the plan devised by the Fed or the Obama Administration. According to the plan we should have liquidity flowing through the economy and the credit crunch should be over. In fact we should have moderate inflation by now. Government likes inflation because it gives the false impression that things are doing better than they really are: people confuse rising prices and wages with economic gain. As well, debtors, especially the government, can pay down debt with newly minted dollars. But the signals from the economy are mixed: mild inflation yet we still have a credit crunch as credit has continues to contract. Initial enthusiasm for a “recovery” is now giving way to concerns about deflation.
So what is it to be: inflation or deflation?
The Dispute
There is a rather significant running argument going on in the Austrian economics theory community about whether we are experiencing inflation or deflation. Further there are the gold bugs who are predicting, as they have for many years, hyperinflation. The deflationists are led by Mike Shedlock, known as “Mish” who argues that we are seeing deflation and that it will continue for some time. The inflationists are a variety of folks, but the loudest voice and harshest critic of Mish is Gary North. The most credible inflationists are Bob Murphy, a well known Austrian school economist, and Frank Shostak, chief economist for MF Global, formerly the trading arm of Man Financial, the world’s largest hedge fund. They insist that we are seeing inflation now and that more is coming.
I will side with the inflationists but I think Mish makes some valid points and that his timing has been good. I would say that some inflationists have been excellent on theory, but less accurate on timing. I call my position Modified Inflationism.
Predictions: All Signs Point to Yes
It’s easy to make predictions, but difficult to get it right. A recent Freakonomics column in the NY Times by Stephen Dubner gave this humorous quote on economic prognostication:
The future will be different from the present to some degree and some point, and I have anecdotes and hearsay to prove it.
My point is that it is not easy to make accurate predictions about the future, and when intelligent people make them they are sticking their necks out, a brave thing to do, but fraught with uncertainty which few of them are willing to acknowledge. We need to consider the implications of randomness in our world where it is hard to know if the prognosticators were right or just lucky. I am not saying that it is impossible to differentiate between luck and skill, but that it is very difficult.
I have found that the best economists and prognosticators derive from the Austrian School of economics, to which I subscribe. These free market gurus stem from a remarkable intellectual tradition, and are the only ones, I believe, to have created a valid theoretical background on human social behavior, which, if one thinks about it, is what economics is.
The problem with forecasting inflation is that we need to be able to predict what the Fed will do under certain circumstances, and how the Fed’s bosses, the politicians, see the world.
With those caveats in mind, I am going to stick my neck out.
What is Inflation?
The first thing we need to understand is what inflation is. It is not rising prices, but rising prices are an indication and one result of inflation. There are impacts other than rising prices. The most significant impact is that capital is misdirected into activities that, but for lower interest rates, would otherwise be unprofitable (malinvestment).
Inflation is purely a monetary phenomenon. It is an increase in the supply of money, assuming that demand for money remains the same.
If everyone woke up one morning with twice as much money as the day before, then people would be buying goods at an increased rate and, since the supply of goods aren’t infinite, prices go up. The fact that we all have twice as much money doesn’t mean we are all wealthier, it just means that we have more pieces of paper to spend. For those who wish to understand why our paper money is not wealth, then please see my article, “Money: A semi Fictional Fable.”
The greatest problem people have with understanding inflation is confusing it with rising prices. For example, the argument goes that if oil prices increase it causes inflation because oil’s use is so pervasive in the economy that it causes all prices to rise. But that isn’t the case. If money supply remains constant, and if I have to spend more money on gasoline, then it means that I will have less money to spend on something else. Thus there is less demand for the goods that I would have otherwise bought and their prices decline. This is a response to supply and demand of goods: some prices go up, some go down. But it isn’t inflation.
Deflation is the opposite of inflation. All things being equal, if the supply of money declines, then prices will also decline because there is less money chasing the same amount of goods.
Money Supply and the Credit Crunch
To cause inflation then, we need to increase the supply of money. To have deflation we need to decrease the supply of money. There are many complexities to the theory and disagreements within the Austrian community, but I’ll stick with my general definition for the moment.
This article is not meant to be a treatise on money and banking, but a few concepts are important to understand.
It is relatively easy to see what money supply is doing. While there are many components to it, and it is a complex topic, there are measures of money that most people use.
Money base[1] is the primary monetary measure of currency in banks and circulating in the economy, and bank reserves held at the Fed. When the Fed starts pumping money into the system, this shows up as money base.
This chart (BASE) shows what the Fed has been doing since the October 2008 crash. As you can see they doubled the money base, and then increased it again to 2.5X by Q1 2010.
The rate of year-over-year (YoY) change in money base is shown in this chart below. You will note the volatility as shown by the verticality of the increases and decreases.
This shows how the Fed was countering the contraction in money supply and credit during the initial stages of the crash. The idea was to provide enough liquidity for financial institutions so they wouldn’t go bankrupt. Economists refer to this as “quantitative easing,” (QE) or monetary stimulus which is a concept of Monetary theory (Milton Friedman and Irving Fisher), of which Ben Bernanke is a follower. Mr. Bernanke also seems to also be Keynesian in his acceptance of fiscal stimulus.
The crash, the rapid decline of real estate asset values, and the questionable value of real estate and consumer loans, led to the credit crunch. As we all know credit dried up, consumers retrenched, business contracted, loan defaults took off, and only the biggest institutions had access to credit at the Fed’s commercial paper window (Commercial Paper Funding Facility). At one point the Fed was responsible for about 90% of the U.S. commercial paper market—almost $350 billion. Major institutions were also backed up with TARP money.
Money base must find its way into the economy to affect the supply of money. The M1 money supply measure (currency in circulation plus demand deposits) immediately jumped.
But the problem was that much of this cash didn’t find its way into the economy. Take a look at what banks did with the new money: they held much of it as excess reserves (EXCRESNS):
The significance of excess reserves is that it is a good indicator of liquidity in the system. These reserves are considered “excess” when they exceed the regulatory requirement for the reserves a bank must hold. As you can see, prior to the crash, excess reserves were nil, reflecting banks’ willingness to lend.
The reason for high excess reserves was that banks were not lending, for very good reasons.
First, their own balance sheets were in jeopardy. Their loan losses grew and in order to meet regulatory requirements, they were uncertain how much capital they would need. Banks didn’t understand the depth of the crash and the impact of the world’s biggest debt induced boom would have on their loans. An uncertain future caused banks to pull in their loans in order to preserve capital. It was obvious that as their loans soured, good borrowers were harder to find. Bankers respond rationally to uncertainty: protect their depositors and their loans. If you don’t think a lender will be able to pay you back, you won’t lend money.
Second, they were unsure what the response of the regulators would be regarding capital requirements, especially what is called Tier 1 capital. It made good sense to hold on to the vast amounts of credit the Fed was providing in order to hedge regulatory uncertainty.
As I have been saying, there were valid economic reasons for banks to hold large reserves; there was nothing “excess” about them.
The impact of high excess reserves shows up as a decline in the M1 multiplier which means that bank lending collapsed. The M1 Multiplier is the multiplier effect of fractional reserve banking from an increase in the M1 money supply. If banks only have to keep 10% of deposits on hand and can lend out 90%, the money effect is multiplied many times. If Bank A has $100 of new money, it can lend $90 to Customer A. Mr. A spends the money which ends up in Bank B, thus increasing their deposits and enabling them to lend out 90% of it, or $81, and so on. The multiplier (10:1) basically turns $100 new dollars into almost $1,000 as it goes through the economy.
Post crash the M1 multiplier collapsed:
This shows the credit crunch as bank lending dropped off a cliff.
The below chart of commercial banks loans (TOTLL) shows what happened to loans:
It is easier to see from the YoY percentage change:
This is the classic credit crunch. No one can get a loan from banks. Large corporations were able to go directly to the Fed, but most businesses and consumers could not get a bank loan.
Consumer credit, the mother’s milk for consumer spending (70% of GDP) dried up:
When consumers don’t spend, the economy goes into recession.
Tomorrow, Part 2. The inflation and deflation arguments.
After Part 4, I will publish the entire article as one downloadable PDF.
[1] See the Wikipedia article on the definitions of money aggregate measures. http://en.wikipedia.org/wiki/Money_supply
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If everyone woke up with twice as much paper money we would all be wealthier. However, if we woke up to also discover all prices for goods and services were doubled, our actual net worth would not have changed, relatively speaking.
If you believe paper money is not wealth (at least as we speak today), I'll let you know how you can send all your paper money to me.
In the example about oil prices, it is assumed the money supply remains constant. This is deceptive and not realistic. Oil is one of the major factors behind inflation of the money supply. Oil composes a major % of our trade deficits, much of which is paid for by "printed money". Oil and our trade imbalance, combined with our monetary policies, cause continuous increases in the world's supply of money.
Also, you may not be able to buy as much if prices go up, but only because your wages haven't adjusted yet. Wage increases are another result of inflation, they just lag behind other increases.
The wealthy who lend out money hate inflation. And although it does hurt people who struggle to get by, their wages have tended to recover. But it's the people who provide loans at 7% interest during times of 10% inflation who scream the loudest. Inflation eats away actual wealth.
I believe we can have both inflation and deflation occurring at the same time, in different sectors of the economy. The only reason why we've seen such low inflation figures the last few years (ignoring the compromised method of calculation this government uses) is because of the reduction in real estate values we've experienced at the same time.
If I were a creditor, I'd hate deflation even more since the chance of complete default is a lot higher.
My theory is that governments hate deflation because they can't tax the increase in purchasing power. Most tax hikes are introduced during deflationary periods.
The way I see it ... inflation can only occur when wage is rising, or house-hold income is rising along with increasing population. Inflation is good as it means company profits are higher, income is rising, and Ponzi scheme is fully operational. Hyper-inflation can only occur when people lose faith in fiat currency. That means people lose faith in government, and literally shit hits the fan. this is outcome where no one benefits, not even those hoarding gold. Deflation is when people are losing jobs, wage is decreasing, and company profits are decreasing. This is also not good but in current climate this may be the best thing to happen. The entire society needs to reset to some normalcy. Perhaps we can round up all the Mac-heads who spend time waiting in line to buy iphone and castrate them to make a point ... idiocy will no longer be allowed or tolerated.
We have Gold, USD and UST's all rallying and clearly outperforming the markets. Equities have completed technical retraceements since the crisis and are signally further corrections which are likely to take out March 09 lows. These are all signals of a deflationary bust caused by capital destruction as seen many times before. Money can actually be destroyed. It's not matter in that sense of the word and it's destruction is rapidly outpacing it's creation through bank loans and credit.
This is unavoidable regardless of QE(X), bank lending (prudent I hope) or stimulus. There is simply too much debt that is waiting to suck any form of loose liquidity hitting the market.
The only disagreement i have with the article is the following:
Yes they can but those who qualify simply don't want it.
This is an awesome post. Thanks Econophile.
Looking forward to Part 2.
Here's another thought....
Pretend it's a hollywood play.....
There are three acts in the play....
Act One
Everybody's happy and has $1,000,000 in some form of wealth....whether it is houses, cash, stocks.....the typical broadly held assets of value.....
Act Two
50% of supposed wealth is lost....and there is struggle as to how assets proved their value as they were interdependent....
Act Three
The core loss was replenished by the government....in the forms of laws and currency....
Since all was ceteras paribus worldwide.... Act One continued....
HEHE, you been reading the FED's comic book from a couple days ago haven't you? LOL Bank has $100, and keeps $10 and lends $90. Straight out of the FED comic book. If this is how it really happened, we wouldn't be having this topic discussion.
Hyperinflation will be certain, 100% guaranteed, because Ben Bernanke will have it no other way. You cannot tell the idiot anything, and he thinks is the great seer of the great depression and he obviously learned nothing.
What you actually need to do is look at M2, CPI inflation and Real GDP growth.
http://www.economypolitics.com/2010/02/what-is-inflation-hint-its-not-cpi.html
So where does the money go once it enters the economy?
The short answer is that it can go two places. If it primarily goes into the hands of consumers, then it will cause CPI and/or PPI inflation. If it goes primarily into assets, it will cause asset bubbles. For example, if you received an extra buck from the fed and used it as a down payment for a house. Or if you were a bank and decided to sink that money into purchasing subprime mortgages. Then you wouldn't see increasing CPI and might be tempted to hold rates artificially low as Alan Greenspan did.
That is exactly what happened. Money supply increases are almost always very closely related to GDP growth rate. On the chart below, when the two diverge, CPI inflation pops up as you can see in the late 70's and early 80's on two occasions. Money supply increase is almost always followed by inflation.
There are only two periods circled that it is not followed by inflation. One was from 2000, to 2003 when Alan Greenspan kept the monetary policy loose for too long. That pumped a lot of money into the system with the Fed Funds rate at 1% for an extended period of time even when growth was returning. The second period starts in 2005, and it is clear what is happening with this money. It is getting placed into housing and mortgages.
The excess reserves are likely to be vaporized as losses are realized. The plan was to see if we could muddle through (extend and pretend) and hope the banks could earn their way into a better balance sheets by way of a steep yield curve. The excess reserves are there as a back up if Plan A doesn't work.
So if you think the economy will double dip, or housing prices will resume a downward trend, or if unemployment will remain stubbornly high, then you are implicitly of the view that the banks will not earn there way out of this mess, or see a reversal of loss trends in their loan book. That my friend is deflationary.
The industrial commodities are not signaling inflation. Look at lumber, oil, copper, etc. Look at Baltic Dry Index.
Why is gold rising? It is a flight to safety. As are US treasuries. Textbook Irving Fisher debt deflation depression. If you are outside the circle of safety (e.g. PIGS sovereign debt, Euro) you get crushed; if you are inside the circle of safety (gold, USD, treasuries) you rally.
Right on BSB.
One thing that concerns me about gold is that it is not in lockstep with other commodities. Therefore the inflationists better understand this phenomena before getting into this bet.
When those three investment instruments you mentioned rise concequtively, it sends a clear and dangerous message regarding the economic future.
Ozzi, I think it is just indicating extreme doubt over the future of the Euro and related sovereign debt. Bernanke seems to understand Irving Fisher; Trichet and Merkel appear in the dark. The corrective move is to take some action that tightens the spread between USD debt and Euro debt, and I thought the Fed's announced FX swap line would have worked towards that goal. But as far as I can tell there has been no draw on that line? Why?
Qualitative easing -- Fed selling Treasuries or MBS, replacing it with the FX swap, keeping the total Fed balance sheet constant -- is the way to go right now.
@Chemba
Hi,
Borrowers can be forced to borrow too. Congress had passed obligatory health insurance. People have to spend more money, if they have no money they will have to borrow. Thus, they are trying to do everything possible even to increase the demand for credit. Moreover, they do all those programs - cash for clunkers, house buyer reductions, etc. They do whatever in the power to force/convince people to borrow. I think Congress and Obama will come up with so many new ways of forcing people to borrow that you may want to change your statement in near future.
I am teasing you a bit. I liked your post.
best,
Radek
Hyperinflation? Yes....ASSET hyperinflation-know the different kinds( Skinner 7 Kinds of Inflation).
Fed QE isn't increasing the money supply of the real economy(consumer is deleveraging) but it is inflating the price of all financial assets. More QE will support higher asset prices until paper wealth collapses( sovereigns can't take on any more debt). As in all inflation, those whom are the closes to beginning of the inflation will benefit most-in this case the financial oligarchy that can monetize paper assets gains into tangible wealth ( why gold,art is increasing). After the bust, sovereigns will be broke and will declare all benefit obligations void.
The rich win again....
This is a great article.
Specially the charts; they really illustrate the problem, and makes it even more understandable.
However, I feel the urge to complicate the issue a little bit:
It is, in fact, possible to have both inflation and deflation at the same time. That’s what we’re experiencing right now.
Some assets, like gold, are inflating because of all the money being pouring into the gold market.
But in the stocks market there is deflation, as investors pulls their money out.
There are lots of other examples.
The reason for this “double-flation” economy is the government’s attempt to stimulate certain parts of the economy. Like the housing market; remember how the prices went up when the US administration launched the tax rebate program?
On the other hand; as soon as the FED began to withdraw its bond purchasing program, the financial markets went straight back into deflation.
One cause to confusion is that this article (like many others) only looks at national (or regional) numbers, in this case US money supply.
We’re living in a global economy, so we have to look at global money supply (M3) to see the whole picture.
And to complicate things even further – there’s differences in the money supply among the continents and among nations.
Yeah, I know the global M3 is hard to pinpoint, but there are some experts who makes some pretty good attempts to come up with some estimates.
This is what Chief Economist Trevor Williams at Lloyds TSB wrote in a report on June 14.
“In summary, broad monetary data are suggesting that the world economy is operating at two speeds. In the developed economies, money supply data suggest that the economic recovery, though underway, is not secure and growth is slow. By contrast, money supply for some key emerging market economies suggests that the economic recovery is robust and growth is fast.”
“However, this may be a misleading conclusion to draw, as should the developed economies falter, there will be significant negative trade implications for growth in the emerging market economies as well.”
In our advanced economies the contraction of credit is clearly still going on.
But no one knows for sure how much money that’s been pulled out of the system on a global scale, and no one knows for sure how much the Central Banks all over the world have pumped into the system to counter the contraction.
So – the big question; what will be the final consequence of the global QE policy?
As I see it, there are 3 possibilities:
1.
Inflation/hyperinflation (“Benflation,” I call it)
2.
Deflation
3.
Stagflation
If, and when, the central banks manage to counter the contraction, we will most likely see a “kneejerk”-reaction when banks suddenly starts lending again, and the private sector feels safe enough to borrow, and go straight into “Benflation”, (or inflation/hyperinflation).
If the authorities fail to reconstruct the financial markets, the contraction – and the deflation – could go on for many years, perhaps decades.
And if none of the other two alternatives happens, we’ll have an unknown period of stagflation. The money supply will rise, but no one is willing to spend/borrow because they are still unsure about the health of the economy. (Ricardian behavior).
What it all boils down to is, in fact, human behavior.
How will consumers and company executives eventually respond to all the stimulus, bailouts and emergency measures?
And there’s no black box in the world that can predict human behavior….
This is a great article.
Unless you have been engaging vigorously in this debate ever since gold was at $750.00; if you have, then this is a silly article.
The reason for this “double-flation” economy is the government’s attempt to stimulate certain parts of the economy.
The reason for this double-flation is even simpler than that; if Ben were no longer able to maintain the psychological possibility of deflation, everyone would bet immediately on inflation and those bets would be self-fulfilling. Ben has mastered the ability to hold falsehoods in weak minds. Sorry about being blunt.
And there’s no black box in the world that can predict human behavior….
No black box is required. I have tried and tried, always to no avail, to get someone to explain to me how sovereigns maintain debt service in a self-reinforcing deflation. Of course, they can't. This is why deflation always leads to currency crisis. And here is where the quibbling about definitions always starts. In a currency crisis within a debt-based fiat currency system, hyperinflation is the result. Period. It will happen suddenly; if you have not bought your tickets for the last chopper from the embassy roof, it will leave without you.
Hi, SWRichmond!
In fact, I've been looking at gold since it was well below $300, but I've leared a thing or two since then...
One thing is; not to be too certain of anything.
However, I can't see we really disagree on anything. "Ben has mastered the ability to hold falsehoods in weak minds," you say, and you're probably right. On the other hand; he managed to do so for quite some time now, so why shouldn't he be able to keep it that way for a while longer?
I also agree with you that - in theory - inflation/hyperinflation will be the result. Eventually. And suddenly? Absolutely! But can you put a timeframe on it? In my opinion, it might take years before the "benflation" kicks in with full force.
And keep in mind that there is no spesific definition of hyperinflation. In Europe, anything above 4 -5 % will be seen as hyperinflation.
As for the last chopper; don't worry. I got one of my own.....;-)
One thing is; not to be too certain of anything.
I still wait for someone to explain to me how any other course is possible. Perhaps you can?
And suddenly? Absolutely! But can you put a timeframe on it? In my opinion, it might take years before the "benflation" kicks in with full force.
If we agree that it will come suddenly, and if we agree that it will happen, then why not take the requisite position and sit on it? I am merely waiting for math to assert itself. I know it will. I have adopted a barbell strategy composed of cash on one end and various dollar shorts on the other. The purpose of the cash is to prevent my being forced to liquidate the dollar shorts during any sustained deflation that might occur before the ultimate currency collapse. The dollar shorts are what will ultimately keep me alive. I consider it a certaintly. This is not investment advice.
Monetary inflation is like the melting of the ice caps is to ocean levels. Ocean levels, like prices, can be affected by more than just the total amount of water... waves, surges, and tides all will affect water level. The same way a harbor master doesn't cry 'global warming' during a tsunami, Austrians do not necessarily conclude inflation when confronted with rising prices.
The real estate boom from 1996 to 2006 (with the crazy HELOC yrs of 2002-2006) drove consumer borrowing and spending, plus accounted for the bulk of job gains during those years.
The real estate bust is having the opposite effect. It has resulted in the loss of home equity wealth, construction and retail related jobs and "easy" credit. People borrowed and spent, because they felt wealthier as their home prices rose 10-30% each year. Now we are looking at the opposite effect, people feel their home is a boat anchor sinking fast and their jobs are at risk. Deflation is the more likely scenario for the near term IMHO.
Why can't we have a mix of both? It looks to me like deflation of real assets and debasement of the fiat. Thats why everything is cheaper when priced in gold.
By definition, it's not possible. You're confusing inflation with appreciation and deflation with depreciation.
...
If money supply remains constant, and if I have to spend more money on gasoline, then it means that I will have less money to spend on something else. Thus there is less demand for the goods that I would have otherwise bought and their prices decline. This is a response to supply and demand of goods: some prices go up, some go down. But it isn’t inflation.
...
again BS BS BS... you're amazingly stupid.. you're assume that basic stuff like
gasoline, food, education, drugs, insurance etc == (equal) not necessary stuff like ipad, gold watches, expensive cars, etc etc..
DO YOU UNDERSTAND how stupid is that ?? here's example from real life... lets say
price of food and gasoline doubled,, but price IPhone cut in half... so what ?? average person will pay more for food/gasoline and will skip expansive Ipad..
so according your logic net net its gonna be same... BUT ITS NOT... its inflation cause average people will pay more for same basic stuff...
whoa ... what can i say
alex
Please do everyone a favor and don't post if you can't conduct yourself with some semblance of civility. Everyone else whether genius or idiot manages this. I ask only that you have enough respect for yourself and others to take the maturity up a notch and out of the fifth grade.
Both of you are making rational points. I don't see where you are at odds with each other. Other than calling him names you are focusing on an increase in prices for basic essentials will result in a change in demand away from non-essential and luxury items. Okay, not a shocker. I can't imagine anyone at odds with that point as discretionary income, the funding source for non-essentials, decreases. Net/net some measures of inflation or pricing may not move but obviously there is a major move going on. There may be more to your point but nothing is at odds to what was written or other points made. Certainly your point doesn't mean someone else is stupid or worthy of being called an idiot.
Thanks
If he is stupid, so are you, because you're saying the same thing. Econo's point - using your specific example - was that if food and gasoline go up, the consumer has less $$ to spend on the ipad/iphone, and is less likely to buy it, which reduces demand for it.
Isn't that what you just said? "average person will pay more for food/gasoline and will skip expansive ipad.."
You attribute it to inflation instead of supply and demand: "its inflation cause average people will pay more for same basic stuff..." Uhhh, no. The definition of inflation is that money supply increases, while the amount of goods stays constant. Paying more for anything doesn't "cause" inflation. If you buy food, gasoline, or an ipad are you "causing" inflation? No, you are increasing demand and decreasing supply at the same time. In other words, Econo is right about that - it's a supply and demand issue.
It becomes inflationary if you violate the main tenet of his example: "if money supply remains constant,..." Exactly. If suddenly everyone did wake up with 2x the money they had the night before, inflation would ensue - by definition. Note that this doesn't preclude natural supply-demand cycles from sinking prices of certain commodity classes. You can have more or less expensive classes of goods during inflation or deflation cycles. If wheat crop yields doubled market supply in a year, prices would fall in relation to the cycle baseline even if inflation is driving commodity prices up across the board.
Don't assume that the consumer is rational. Madison ave spends a boatload of moolah to perpetuate irrationality. Lots of people make irrational decisions in what they purchase. Aside from borrowing for any one of those needs or wants, why wouldn't the consumer drive less and change his diet, if even for a short while, so he can afford the ipad? Lots of people do things like that every day.
you don't get..
he assumes all stuff//services//etc ARE EQUAL.. so
SPENDING MORE ON SOME STUFF AND LESS ON another
will balance each other out.. thus don't worry about inflation in HOUSES/GAS/Food cause
prices on ipad/gold watches/etc are falling down...
THAT'S is wrong ... one thing is necessities ( food, drugs, education,etc)
price hikes are important .. another thing is discreet stuff..
alex
...
Inflation is purely a monetary phenomenon. It is an increase in the supply of money, assuming that demand for money remains the same.
If everyone woke up one morning with twice as much money as the day before, then people would be buying goods at an increased rate and, since the supply of goods aren’t infinite, prices go up.
...
each time i read such nonsense I puke..
hey stupid check Iceland for example. in 2009 they had negative GDP, all negative monetary aggregates and POSITIVE INFLATION.. I know why .. do you?
or RUSSIA same 2009 year,, GDP down -10%,, M2 -10% yy ( BTW 2 years ago it was +40% yy),
but official inflation( wink-wink) was almost 10% (unofficial closer to 20%)..
2010 - RUSSIA,, GDP barely grows (3-4% despite oil prices doubled yy), M2 40% yy ( goverment prints money to finance budget deficit), BUT credit aggregates still % negative yy
, but inflation is falling ,, official around 5-7%, unofficial 10%..
can you explain ?
alex
ps
why do yo think people would be buy goods at an increased rate ??? what if they would pay out debts ( == no inflation), or stash away in form gold/bonds/ (== no inflation)??
do you think people stupid as seems you're ???
psps
that's why world so ##ucked up... people are not ashamed to print that kind of financial rubbish..
Rising prices occurs for various reasons, one of which is increasing money supply. Scarcity is another reason.
Inflation can come from several sources:
Technically, however, the real "inflation" is number #1 in the list above, as Econophile points out. Cases #2 and #3 are, more appropriately, defined as a rise in prices - which may or may not happen at the same time there is an economic crisis.
Therefore, it is possible to have an economic crisis, which is deflationary in nature, with rising prices (for instance: Iceland). Counter-intuitive, but I believe this pretty much covers the examples you gave.
Of course, I don't know anything, so make of that what you will.
you got it right w/ iceland.. :) import...
but mr 'know it all' says 'Inflation is purely a monetary phenomenon'
so is picture more compliacted and includes also import/export,
local currency rates, et etc..?
or its simple ? M2 is UP, inflation is up and opposite..
you're smarter than that ... thank you
alex
ps
dont use 'Inflation can come from several sources' ..
its not a fruit that hangs on trees
You should re-read what I wrote:
Inflation is defined by a larger amount of money circulating in the economy.
Everything else is a rise in price.
The confusion comes from the fact that a rise in price is one consequence of Inflation.
However, it is perfectly possible to have a rise in price that is tied to other factors than Inflation. Therefore, it is possible to have a rise in prices even though the economy is deflating.
>Inflation is defined by a larger amount of money circulating in the economy.
amazing.. just cant think outside barn can we.. ?
by whom ?? by Newton, Born, Stalin , Obama ????
are you aware about math ? do you know diff between axiom and theorem ?
i just showed inflation is possible despite falling amount of money (==M2), and opposite
larger amount of money dont lead to inflation ..
bye , alex
The worst of this crisis could have been averted by two simple steps. Instead of the TBTF bailouts, Bush should have announced a one-year payroll tax holiday and establishment of a fund to guarantee deposits at failed institutions. The extra cash in the hands of consumers and businesses would have goosed the economy while the banking system sorted out its mess. Six months of ugliness and it would have been over. Instead we got zombie banks, zombie GSEs, and a zombie POTUS.
There are only two solutions to a financial crisis: make the stockholders pay or make the taxpayers pay.
Don't kid yourself: giving a tax break to the public wouldn't have solved anything. As a matter of fatc, if I remember correctly, Bush did give a tax break to a lot of people to cushion the shock of the crisis. Did not work.
Bush, being he nice corporate crony he was, decided to make the taxpayers pay. Obama is simply following with his own insane plan. The banks should have been nationalized, all over the world, for US$1. Nice haircut to the stockholders, but, hey, they should have done their "jobs" and punish the banks top managers for their incompetence and reckless gambling.
Oh, and there is a fund established to guarantee bank deposits: it's the FDIC. The Federal Deposit Insurance Corporation. Unfortunately, it has been woefully under-funded for decades now, which virtually guarantees that you will lose most of your money when the SHTF.
Again, my dear "Rogerwilco", you are displaying a stunning lack of knowledge about even the simplest facts of the world around you. Typical.
@Anton Lavey
Typical? -- yes -- your prescription is typical of statist dipshits who actually believe that a group of "wise" people can manage complex economic systems. Bush failed because he listened to idiotic advice from the bank lobbies. Obama will fail because he listens to idiotic advice from people of your ilk.
How about use the bailout money to start new banks that aren't overleveraged while letting the casinoholic banks go TU?
This is the disease that is out of control on Wall St:
fliiby.com/file/324459/djo06dwqui.html
HOLY SHIT! Someone actually understands this stuff. What a change from the usual stuff I read here...
"
The first thing we need to understand is what inflation is. It is not rising prices, but rising prices are an indication and one result of inflation. There are impacts other than rising prices.
Inflation is purely a monetary phenomenon. It is an increase in the supply of money, assuming that demand for money remains the same.
If everyone woke up one morning with twice as much money as the day before, then people would be buying goods at an increased rate and, since the supply of goods aren’t infinite, prices go up. The fact that we all have twice as much money doesn’t mean we are all wealthier, it just means that we have more pieces of paper to spend. For those who wish to understand why our paper money is not wealth, then please see my article, “Money: A semi Fictional Fable.”"
Econophile,
Other, more (or less) knowledgeable people may disagree with your conclusions (I am not competent to have a strong opinion). No one can disagree that you are a lucid thinker and a good writer and that you are doing a great service by not just throwing out your opinions but also showing us your reasoning. Thanks!
PS: The captcha's are getting where you need a calculator (and I am a physicist). -874/-23 is too hard to do in my head this early!
Indehyperflation,, yes yes good news.
Fox,
OK if I steal this? (fair use applies) ;-)
- Ned
Thank you Econophile, looking forward for the rest. I am very much concerned with this topic as the corect positionning wil make a huge difference to my material future. I hope I will be able to make up my mind after your full piece.
The core argument is more basic....
Taxes come from the sales of goods and services from the private sector....
If government further restricts the sales of goods and services from the private sector....then it is restricting tax revenues....
Deflation is the natural movement stemming from bankers betting that assets would not decline 5%....a stupid move under any magnifying glass....and THEY should be the ones getting wiped put....Instead the government has chosen to wipe out the "savers" ...those people who believed in the previous system....
Furthermore the government is insisting that it becomes larger rather than smaller....at the exact moment that it should be downsizing....
.............................
The current situation is akin to this...
In order for widgets to sell...they have to be profitable at $1.00 price....
There are several components of price...besides material and labor...there is legal largesse and taxation cost inputs....
The government is insisting on raising its costs inputs while still expecting that sales will increase....THIS is INSANE....."beyond stupidity"....
......................................
The problem is that the government wants to eat more apples while cutting down the orchard...
.....................................
The orchard must be replanted....In Deflation the savers are rewarded with lower prices...the losers are those that over-levered high prices....Deflation is just a market correction.....the assets going to the intelligent....
....................................
At the moment the US is acting like a Chavez lead Venezuela...
Chavez is obvious because he is openly taking assets from private hands into public hands...thinking that the end result would be better....He thinks that society would rather wake up everyday...knowing that the state owns all the assets ....and it is their priviledge to always work for the government...never owning anything themselves....
The US is taking money from "savers" just as Chavez is taking production facilities from private hands....
.........................................
Deflation should be happening during the "great unwind" ....which could last more than 20 years...
The US is following the same path as Japan and Venezuela....
The US should change its name to Japazuela....
+2 oz.
Good summary of credit contraction, except for one point. The author describes this phenomena as "credit drying up" and characterizes it as "banks are not lending". This is the way most authors describe it; always as a supply side constraint. In truth, credit is also contracting because the demand for credit is contracting. I'm going to borrow money for what? I'm going to borrow money to buy a house, whose value is falling and whose ownership gives the State a license to tax me to the poor-house? I'm going to borrow money to start or expand a business, in the face of a socialist controlling State that wants to tax all of my gains, regulate my activities and force me to pay wages not only for my employees, but for the 1 out of 5 neighbors of my employees who don't work?
We are in a credit contraction (deflation) because the supply and demand for credit are both contracting. Banana Ben can print all he wants, and he can even coerce lenders (to a degree) but he can't make potential borrowers "borrow" if they don't want to.
I get the fact that businesses are reluctant to borrow, but if they wanted to, it is difficult to get credit. The Minneapolis Fed came out with a study early last year that noted that banks were having problems finding lenders. It was for the very reasons you mentioned that businesses were reluctant to borrow. Uncertainty. decline in economic activity. The main problem is with regional and local banks. Please stay tuned. Part 2 was just published.
he can't make potential borrowers "borrow" if they don't want to.
Absolutely WRONG. The federal government can borrow from Ben and spend all it likes, being completely insulated from the voters by the vote buying power of Wall Street and the complicit owned MSM. Consumer and business borrowing could stop dead in its tracks tomorrow and fed dot gov would just ramp up deficit spending. It's what they've already done, in order to mask the depression; $1.5 Trillion deficit is 10% of GDP, so without the deficit spending we'd have seen a 10% drop in GDP.
Do any of you really believe they won't do it again, and with even greater gusto? Those fucking criminals and traitors in DC keep on borrowing and spending and signing my name on the loans. Nothing will stop them except a USD collapse, which is coming.
3yr @ 1.06% votes for Chemba also.
+1 Chemba
Decreasing demand for credit is the root of the issue. You can't push on a string.
But true printing, when it occurs in earnest won't require borrowing. It will consist of "stimulus checks" arriving in the mailboxes of every American. You can't force someone to borrow, but it's damn easy to get them to cash a check.
Well done.
Chem-Nailed it. Why buy today for 100 (with that as a tax base) when I can wait with money getting more "valuable" and buy for 90 with lower tax base. cf. Japan. The old velocity of money, who cares if QE 2.0 goes to $5TT if it is parked (really, all of those ones and zeros are already in place, it still is virtual money). But on one side of the curtain it has v=0; on the other side it has v .ge. 0 => more of an inflatoinary problem.
- Ned
+1 to each of you.