You are using an out of date browser. It may not display this or other websites correctly.
You should upgrade or use an alternative browser.
You should upgrade or use an alternative browser.
M
morganist
Quote from Kassz007:
????
i am glad i got so many responses to this thread and that it is a divided response.
i would say from reading the comments though that although i understand the points made that inflation is purely related to money supply this is something that you have to take into consideration.
when the money supply changes yes it has an affect on the purchasing power of the currency namely deflation or inflation. the point made that a reduction in the amount supplied impacts on the ratio between goods and money supply is important. although it is due to supply and demand it in it self makes certain goods or the overall cost of goods more expensive. so although it is not necessarily what the current macroeconomic perspective would consider to be inflation it will have an affect on the affordability of goods that people can purchase.
this relative affordability is something that affects peoples lives and has to be recorded so whether it is inflation (a price rise due to money supply increase) or whether it is simply a shortage in the supply of the goods it has to be acknowledged as it has an impact on peoples lives. as it means that goods are less available to people and more of the currency has to be expended to attain the same number of goods than before the supply shift it has to be acknowledged as a form of inflation even if it is not technically inflation as it has an impact on the purchasing power of people in society. the whole purpose of the inflation measurement is to see how it affects people lives through the goods that they can purchase.
i will make one final comment. the concept of cost push inflation was devised by keynes who set the inflation rate as a way of measuring the availability of resources people could purchase with their income. the monetarists do not see the supply of a good as inflation not because it is not something that impacts on peoples lives but because they believe it to be related to money supply, which in its own way is correct. it is as a result of supply shifts not the alteration of money supply.
my point being neither is incorrect they are simply different definitions of the term inflation. the keynesian definition is related to the purchasing power of individuals relating to the affect supply of goods and the money supply has on peoples lives. the monetarists on the other hand believe inflation is merely the quantity of the money supply and reductions in the availability of goods supplied is a supply shift and if it impacts on peoples lives it should not be considered a form of inflation.
my view is that the keynesian definition of inflation although not necessarily the correct understanding is the more useful in providing standard of living, which is in my opinion the reason the inflation figures are collected. i will continue to use the term cost push inflation even if it not correct because it is a way that something that impacts on peoples lives can be described and should be recognised.
is that a good answer?
Quote from morganist:
my view is that the keynesian definition of inflation although not necessarily the correct understanding is the more useful in providing standard of living, which is in my opinion the reason the inflation figures are collected. i will continue to use the term cost push inflation even if it not correct because it is a way that something that impacts on peoples lives can be described and should be recognised.
is that a good answer?
How about this for a concept? When inflation is "demand pull", it's true (traditional) inflation. People have so much "valueless" cash that they can pay higher prices, and so prices go up as goods are allocated in a bidding war.
But "cost push" inflation, is actually stagflation. Like if the price of oil goes up, product manufacturers dependent on it must raise their prices to cover costs. The consumer is "pushed" into paying higher prices.
Don't know nothing about book learnin'...but to me, true "traditional" inflation is demand pull from cheap money. Stagflation is cost push stemming from supply scarcity of a necessary good. One has to do with the abundance of unnecessary money. One has to do with the shortage of the goods. Both are created by something happening outside individual transactions that put pressure on pricing equilibrium.
I'll take that Nobel prize for economics now.
SM
Inflation/deflation of any asset is directly controlled by the availability of credit for that asset. The money supply itself is not the originator of inflation. Maybe in a non-credit based monetary system, but not in this world.
The amount of leverage available to purchase an asset lures speculative behavior, which allows for asset bubbles. Given enough time, with high leverage ratios, and low cost of the credit, inflation will emerge.
In the case of the current US financial system, banks had 30 to 1 leverage, which collapsed the US economy when the rug was pulled out by foreign investors. This collapsed almost every asset bubble within the economy. The federal reserve came in and supported asset prices by providing credit to banks for free essentially. The resulting actions have reflated paper assets within the economy.
Once the banks have recovered all their losses from this new free credit, they will begin to lend to the real economy, to reflate the real economy's asset prices.
But as of this moment, we have only seen paper assets rising, with massive deleveraging still happening.
The amount of leverage available to purchase an asset lures speculative behavior, which allows for asset bubbles. Given enough time, with high leverage ratios, and low cost of the credit, inflation will emerge.
In the case of the current US financial system, banks had 30 to 1 leverage, which collapsed the US economy when the rug was pulled out by foreign investors. This collapsed almost every asset bubble within the economy. The federal reserve came in and supported asset prices by providing credit to banks for free essentially. The resulting actions have reflated paper assets within the economy.
Once the banks have recovered all their losses from this new free credit, they will begin to lend to the real economy, to reflate the real economy's asset prices.
But as of this moment, we have only seen paper assets rising, with massive deleveraging still happening.
M
morganist
Quote from Smart Money:
How about this for a concept? When inflation is "demand pull", it's true (traditional) inflation. People have so much "valueless" cash that they can pay higher prices, and so prices go up as goods are allocated in a bidding war.
But "cost push" inflation, is actually stagflation. Like if the price of oil goes up, product manufacturers dependent on it must raise their prices to cover costs. The consumer is "pushed" into paying higher prices.
Don't know nothing about book learnin'...but to me, true "traditional" inflation is demand pull from cheap money. Stagflation is cost push stemming from supply scarcity of a necessary good. One has to do with the abundance of unnecessary money. One has to do with the shortage of the goods. Both are created by something happening outside individual transactions that put pressure on pricing equilibrium.
I'll take that Nobel prize for economics now.
SM
i agree with most of what your saying. the problem is that the mainstream economic perspective does not see what you consider stagflation to be a result of shortages of goods or an increase in costs of production. they think that the stagflation in the 70's was a a result of previous excess money supply and it took time for the market to react to that increase in money relative to the supply. the point being the money supply increased but the affect of that increase did not hit to a later date. they use a model called the augmented expectations phillips curve to support this. they say that when an increase in demand occurred it did not create further output because people expected the price of goods to rise due to the excess money supply and did not expend their currency.
this opposes the phillips curve which stated that when inflation rises unemployment falls. namely increase in money supply creates employment. my problem with the current inflation definition is that it does not represent all of the rising costs seen in an economy and as a result fails people.
the point being even if they say inflation is just a rise in the money supply. they are not acknowledging that a shortage of supply makes peoples costs higher. thus they are not fully showing the cost of living for people with the current inflation measurement, which means they are not acknowledging the reduction in the living standards of people.
so either they come out with another figure that shows the supply shift affect on the cost of living or they include it in the inflationary figure whether it is true inflation or not. whether it is true inflation or not it has to been acknowledged to show the costs of peoples lives.
also rather than inflation being defined as the rising prices of goods. it should be defined as the rising cost of goods to individuals.
M
morganist
Quote from RiceRocket:
Inflation/deflation of any asset is directly controlled by the availability of credit for that asset. The money supply itself is not the originator of inflation. Maybe in a non-credit based monetary system, but not in this world.
The amount of leverage available to purchase an asset lures speculative behavior, which allows for asset bubbles. Given enough time, with high leverage ratios, and low cost of the credit, inflation will emerge.
In the case of the current US financial system, banks had 30 to 1 leverage, which collapsed the US economy when the rug was pulled out by foreign investors. This collapsed almost every asset bubble within the economy. The federal reserve came in and supported asset prices by providing credit to banks for free essentially. The resulting actions have reflated paper assets within the economy.
Once the banks have recovered all their losses from this new free credit, they will begin to lend to the real economy, to reflate the real economy's asset prices.
But as of this moment, we have only seen paper assets rising, with massive deleveraging still happening.
i like your point that the main factor should be credit rather than current expendable income as credit is now available to people. however when credit is introduced into the economy it becomes part of the money supply just like when the government spends more. any function that increases the number of currency units in circulation during a specific period of time become classed as the money supply during that specific period of time thus credit is part of money supply.
although your argument adds further dimension to the debate i would still include it in the money supply terminology for the above reason.
my point posted after yours states that the whole reason for inflation measurements is to estimate the increased or decreased cost of living to estimate the increased or decreased living standard. as a result of this whether the money comes from credit or simply income the so called money supply does not explain the complete determinators to the cost of living.
thus if the current understanding of inflation is based purely on the money supply it does not meet that requirement.
The definition of inflation was changed to shift the blame (of rising prices) over to the the private sector and diverts it from The Fed. In a thriving economy prices fall as production becomes more efficient. Blatant manipulation in electronic exchanges keeps precious metals and commodities
I used to foolishly think that inflation was when something cost a nickle last year costs a dime this year. But since the Fed has told me that we have virtually no inflation, but nevertheless much of what i buy or pay for,e.g., food, electric power, insurance, property taxes, etc. is costing me much more this year than last, i must be wrong about inflation.
M
morganist
there seems to be a lot of confusion about inflation. which is important as it is (should be) an important measure. if people are not clear about what inflation is then how can it be used to measure peoples standards of living. if this is not done there is no consistent methodology to show whether the living standard is improving or not and whether government policy is working. thus is the grey area in inflation part of the problem or at least the cause of the problems we are experiencing now.
also the current economic prospect does not so much disprove cost push inflation it merely re defines inflation and FAILS to express the diminishing affect supply and the mechanisms of supply can have on an economy.
is this a good final statement.
like is said this is an important post for the above reasons. i am very happy that so many of have responded to the posts and i am pleased with your input. could you please state whether you agree or disagree with my statements as it is important to establish a consistent measurement of the standard of living and any arguments as to why the current system is failing are important to point out. so if they are good arguments i need to know so i can use them in the future.
thank you.
also the current economic prospect does not so much disprove cost push inflation it merely re defines inflation and FAILS to express the diminishing affect supply and the mechanisms of supply can have on an economy.
is this a good final statement.
like is said this is an important post for the above reasons. i am very happy that so many of have responded to the posts and i am pleased with your input. could you please state whether you agree or disagree with my statements as it is important to establish a consistent measurement of the standard of living and any arguments as to why the current system is failing are important to point out. so if they are good arguments i need to know so i can use them in the future.
thank you.