HYPERINFLATION VS DEFLATION

Sorry Morganist, but none of this discussion makes any sense; not your article not the general responses; not even the definition of deflation, the definition (or lack of it) of 'money supply,' nor the definition of 'velocity'.

Lets start with getting the words defined in a functional way and then see how the process works. First, you have to understand 'money supply' in the fiat money credit world that we live in now. You cannot seperate the concept of money from the concept of credit when you talk about 'money supply,' which springs from 19th century notions and a gold backed currency. Today, money and credit are the same thing...you need to think about the supply and availability of credit as being the same as your notion of money supply. That is the only way to make modern sense out of the 'Quantity Theory of Money'.

Once you understand that money and credit have merged then you can understand that the 'velocity' of money is simply the rate of private credit formation. Velocity is the rate of increase in aggregate private credit assets. Where private credit formation is not pulling money throught the banking system there can be no inflation despite the amount of base money supply or 'printing.' Demand for private credit, so private credit creation, is driven by fiscal policy context creating a consensus for investment in collateral assets. Where that fiscal context does not exist or where it in fact produces a negative expectaion of future investment performance, then private credit will not increase, it will stagnate or decrease...that is called 'deleveraging.' Where private credit is 'deleveraging' no amount of interest rate manipulation or 'QE' to produce base money in the banking system, can produce inflation...becuae the 'velocity' required to produce the inflation is the private credit formation that is not taking place....so the new money can only back up in the banking system as excess reserves...and that is what we see.

Inflation and deflation have to be understod as processess that involve credit formation and collateral asset values. You have understand both economics and finance. Inflation is the flow of capital out of financial assets and into tangible assets of collateral value. The inflaton process is characterized by increasing private credit formation and increasing leverage ratios on collateral assets that form the basis for credit formation. Capital moves out of reserve and financial instruments and into tangible assets that increase in value as their leverage ratios are increased, fueling the credit expansion. In a gross way, inflation is credit expansion...driving up collateral asset values. This process usually takes place in a context of increasing interest rates...which may not translate into stronger currency prices.

Deflation is the opposit process. Capital comes out of collateral assets as leverage ratios contract and collateral asset value drops. Interest rates decline even as the value of the currency may remain strong. Lower interest rates do not drive credit formation where collateral asset values are declining.

So, we have a deleveraging of private credit since the Lehmen collapse. That is a delflationary process. World CB's have been attempting to stop this process by reducing interest rates, increasing soverieng borrowing and government spending, and through QE, (Converting declining or illiquid finacial assets owned by banks to new base money in the banking system). The efforts of the World's CBs has increased bank liquidity and prevented widespread major bank collapses after Lehman. However, the massive sovereign borrowing and spending in the face of reduced sovereign revenues has introduced the real fear of sovereign default and downgrade of sovereign debt. The increase of base money in the Western banking system has moved through a carry trade to emerging markets where private credit formation is occuring, so inflation is exported from the domestic economies that seek asset price recovery but becomes a problem in emerging markets where it fuels credit expansion...and malinvestment (Witness RE bubble in Hong Kong, China, Singapore, etc.)

The action of the World CBs has not defeated the deflationary process, it simply props up international banking and the sovereign debt markets while western private credit markets continue to deleverage as the supply of money/cedit assets declines, and collateral assets do not increase in price.
 
Quote from Ed Breen:

Sorry Morganist, but none of this discussion makes any sense; not your article not the general responses; not even the definition of deflation, the definition (or lack of it) of 'money supply,' nor the definition of 'velocity'.

Lets start with getting the words defined in a functional way and then see how the process works. First, you have to understand 'money supply' in the fiat money credit world that we live in now. You cannot seperate the concept of money from the concept of credit when you talk about 'money supply,' which springs from 19th century notions and a gold backed currency. Today, money and credit are the same thing...you need to think about the supply and availability of credit as being the same as your notion of money supply. That is the only way to make modern sense out of the 'Quantity Theory of Money'.

Once you understand that money and credit have merged then you can understand that the 'velocity' of money is simply the rate of private credit formation. Velocity is the rate of increase in aggregate private credit assets. Where private credit formation is not pulling money throught the banking system there can be no inflation despite the amount of base money supply or 'printing.' Demand for private credit, so private credit creation, is driven by fiscal policy context creating a consensus for investment in collateral assets. Where that fiscal context does not exist or where it in fact produces a negative expectaion of future investment performance, then private credit will not increase, it will stagnate or decrease...that is called 'deleveraging.' Where private credit is 'deleveraging' no amount of interest rate manipulation or 'QE' to produce base money in the banking system, can produce inflation...becuae the 'velocity' required to produce the inflation is the private credit formation that is not taking place....so the new money can only back up in the banking system as excess reserves...and that is what we see.

Inflation and deflation have to be understod as processess that involve credit formation and collateral asset values. You have understand both economics and finance. Inflation is the flow of capital out of financial assets and into tangible assets of collateral value. The inflaton process is characterized by increasing private credit formation and increasing leverage ratios on collateral assets that form the basis for credit formation. Capital moves out of reserve and financial instruments and into tangible assets that increase in value as their leverage ratios are increased, fueling the credit expansion. In a gross way, inflation is credit expansion...driving up collateral asset values. This process usually takes place in a context of increasing interest rates...which may not translate into stronger currency prices.

Deflation is the opposit process. Capital comes out of collateral assets as leverage ratios contract and collateral asset value drops. Interest rates decline even as the value of the currency may remain strong. Lower interest rates do not drive credit formation where collateral asset values are declining.

So, we have a deleveraging of private credit since the Lehmen collapse. That is a delflationary process. World CB's have been attempting to stop this process by reducing interest rates, increasing soverieng borrowing and government spending, and through QE, (Converting declining or illiquid finacial assets owned by banks to new base money in the banking system). The efforts of the World's CBs has increased bank liquidity and prevented widespread major bank collapses after Lehman. However, the massive sovereign borrowing and spending in the face of reduced sovereign revenues has introduced the real fear of sovereign default and downgrade of sovereign debt. The increase of base money in the Western banking system has moved through a carry trade to emerging markets where private credit formation is occuring, so inflation is exported from the domestic economies that seek asset price recovery but becomes a problem in emerging markets where it fuels credit expansion...and malinvestment (Witness RE bubble in Hong Kong, China, Singapore, etc.)

The action of the World CBs has not defeated the deflationary process, it simply props up international banking and the sovereign debt markets while western private credit markets continue to deleverage as the supply of money/cedit assets declines, and collateral assets do not increase in price.
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I going to stop you there and I am not going to go into a discussion with you on this because I think you have become so set in one of of thinking that it has completely jaded your opinion to the point of blindness.

I will say a couple of things. The first is an out and out fact the definition of inflation and deflation is the increase or decrease of the price of a basket of goods from one period of time to another. There is absolutely no getting round this they are messured through either a paasche or laspeyre index. This is absolute fact. If your monetary concepts are even true then you have to understand that even though they might create the inflation or deflation they are not the phenomenon itself. It is a matter of cause and effect. Money supply might be the cause in your opinion but it is definitely not the effect. The two are absolutely different by definition.

The second point I would like to make is you have become consumed by the concept of credit. You think credit is the only way to provide the investment and return function of an economy. This is simply not true. There is equity and funds from abroad, which can both influence capital in an economy.

My final point I think the issue I have with your analysis in general is it is so domesticated. I think the reason you have such difficulty with the article I have written is because it points out the area you seems to be blind of. The presumed assumption domestic output and domestic money supply determine inflation is one I believe is flawed. I would argue that rather than the cuase of inflation being too great a money supply chasing too few goods in the domestic economy it is the impact the currency value and the deprecation of the currency value has on the ability to purchase foreign goods. I don't just mean the end product but any foreign good that is required to make domestic goods.

This is my concern with QE unlike interest rate alterations which expand credit and is anticipated to be repaid. QE shows foreign investors the economy is in deep trouble this will impact currency value more than interest rate alterations and the velocity of money is irrelevant. What is relevant is the confidence investors have in the currency as a medium of exchange and in turn whether it can hold is demand and ability to purchase foreigns goods. QE is an alarm bell that the standard economy tools are failing and require debasement. This will deter investors from using the currency as an investment vehicle.

If the currency value falls and the goods become more expensive to purchase inflation will rise.

I have nothing more to say on the issue we clearly disagree on the subject. I think that the main point I am making, which I will say again is in a world with global markets the output of one country even America will not be the only factor that determines prices.
 
Index change in time defines inflation. Well, of course it defines price change but what does it really tell you? Is the change because of supply demand dynamics that are likely to correct in another time frame? Is that how we should think about the concept of 'inflation.' What does the price change say about the process of how and why prices change. It is almost tautology to say that inflation is defined by the change in the price index. You are confusing a measure with a process.

Equity funds from abroad, not considerations of aggregate credit, drive and define captital flows? So, direct investment, without credit, is what defines a domestic economy. That seems ridiculous, so I must not understand what you mean to say. I am not obsessed with credit; I am merely pointing out the extent to which the expansion of credit defines the modern money supply and value assumptions in developled economies. If you want to take leverage out of value considerations with regard to assets; if you would consider all assets valued at zero leverage and all economic transactions without use of credit...well, OK...but you are not talking about the world we live in...and I thinkg the adjustment that it would take to get there would be apocyliptic. But, you go ahead a pretend that credit is not a major economic consideration in the flow of capital....what is credit, anywhat, but the other side of capital assets. What do you think is going on with velocity? How do you think velocity is measured? You should take a look at the St. Louis Fed measure of velocity and consider how they construct it.

My analysis is too domesticated...well, I did allow for the exportation of inflation through the process I described, but how can really talk about inflation in international terms. We are of necessity talking about prices denominated in a domestic currency. We are talking about a domestic CB increasing or decreasing the 'money supply' with various tools related to domestic interest rates and the trading of sovereign domestic securities. I will grant you that the U.S. monetary policy effecting the dollar has immediate international ramifications in that it is the world reserve currency, oil and strategic commodities are traded in dollars, it makes up so much of international commerce, and many other currencies are managed against it. I don't see how that contradicts anything I was talking about.

Capital is international...currencies are domestic creations accepted in trade. It is fair to talk about monetary inflation that is effected by domestic policy and that impacts the value of domestic currency and so domestic price structures...so what?

You can call me blind if you want...though that is hardly an argument; it would be better if you just spoke to the ideas.
 
Quote from Ed Breen:

Index change in time defines inflation. Well, of course it defines price change but what does it really tell you? Is the change because of supply demand dynamics that are likely to correct in another time frame? Is that how we should think about the concept of 'inflation.' What does the price change say about the process of how and why prices change. It is almost tautology to say that inflation is defined by the change in the price index. You are confusing a measure with a process.
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I did not say inflation was defined by something. I said the definition of inflation or deflation is something. You are getting cause and effect confused.

Like I said I said my piece you disagree. Let's not fall out about it. I am sure that there are other people that got something out of the article even if it is just seeing another point of view. I still think my view is more accurate.
 
Quote from morganist:

I did not say inflation was defined by something. I said the definition of inflation or deflation is something.
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Pardon me, that really must be something; I just thought you said something else.

Really, what are you trying to say...what something is 'inflation?'
 
Quote from Ed Breen:

Pardon me, that really must be something; I just thought you said something else.

Really, what are you trying to say...what something is 'inflation?'
More...

No that there is a specific definition for deflation and that what many economist including you seem to think is that one mechanism that impacts price is inflation or deflation. The is a differentiation of cause and effect. Like I have said many times including in the article is that inflation and deflation are changes in the price of a basket of goods over a period of time. What you are alluding to is one cause of this price change is actually the defintion.

You have accused me of exactly what you and other economists have done.
 
now you guys are starting to crack me up. I've never lived through hyper inflation, but I've lived through inflation. It's like quick sand. No matter how smart you are you can't find a safe place to stand.

not really sure what deflation is, so I'm enjoying the posts and trying to learn something.
 
Quote from morganist:

I did not say inflation was defined by something. I said the definition of inflation or deflation is something. You are getting cause and effect confused.

Like I said I said my piece you disagree. Let's not fall out about it. I am sure that there are other people that got something out of the article even if it is just seeing another point of view. I still think my view is more accurate.
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"I still think my view is more accurate." this is the 2nd time in this thread you have made this point. what is your agenda?
 
Quote from zdreg:

"I still think my view is more accurate." this is the 2nd time in this thread you have made this point. what is your agenda?
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To get people to appreciate that the impact observed in relation to inflation and deflation which is assumed to be money supply related is actually a international trade issue and that the perceived outcome of QE will not be to fill the whole of a money supply shortage deflation will create but in actual fact damage the ability to buy foreign goods.

In short the action to deal with a reduction in money supply will not bring money supply up to the level needed to sustain inflationary targets but create (high) inflation due to the impact it will create on the ability to obtain foreign goods.

This is an important point to make as it would make people appreciate the full consequence of QE and not to support the idea that it will just enable inflationary targets to be attained. Not only will affect the ability to obtain goods but it will deter investment in both the currency and infrastrucutre. That is my agenda.
 
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