the changing role of inflation

[morganist]

i am thinking about writing something on the changing role of inflation with the introduction of monetarism from keynesian economics. i was wondering if you had any thoughts.

my own are the distinction of inflation as a wealth measurement tool to a statistic tool relating to investment devalue, which i think occurred in the 70's and 80's. the other movement being the transition of aggregate demand from being a mechanism to repair disequilibrium with labour to the control of the stability of currency.

although the move has benefits the standard of living and inflation as a measurement is no longer considered in the same way.

 

[davidtraderjoe]

u can start by analysing the bond futures market before wrting a book

 

[morganist]

Quote from davidtraderjoe:

u can start by analysing the bond futures market before wrting a book

i am not writing a book. just a paper looking at how inflation has changed in its role through the perspectives of economists.

 

[Ed Breen]

You should start by discussing how each school defines and measures inflation.

The Monetarist school represented by Friedman says that inflation is always and only a monetary event. By this the Monetarists mean that it is the increase in the supply of base money alone that drives inflation. The Monetarists advocate a policy of small expansion of money supply to allow for growth of population. The problem with the monetarist paradigm is that it has no way define velocity, they treat velocity as a fudge factor to explain what happened after the fact..."there was inflation becuase velocity increased, there was no inflation even though the money supply grew rapidly becuase velocity dropped..." Problem is that they don't know what velocity is, how it operates and what policy could modulate velocity to supply to produce growth with no inflation or to even have a target to achieve that.

Supply-Side Fiscalists criticize the monetarists for their blindness with regard to velocity. The supply siders discuss velocity as demand for money. They modify the monetarist orthodoxy by suggesting that it is the supply of money relative to the demand for money that produces inflation and not the absolute supply of money by itself. Supply siders theorize that the demand for money can be influenced by fiscal incentives that encourage production and that where proper incentives are in place the money supply can be expanded to accomodate increased demand for money to produce growth without inflation. Supply-siders theorize that growth itself is a deflationary force in that it increases the demand for base money. Supply-siders however argue over what metric to use to guage the demand for money. Many supply-siders suggest that gold price opperates to reflect the realtive supply of money to the demand for money. They would advocate a gold price target range that is maintained by selling Bonds to reduce money supply when the gold price rises above the target range and buying Bonds to increase the money supply when gold price drops below the target range. Supply-siders theorize that such monetary policy would keep the supply and demad for money in balance and would result in a stable economic price level with no inflation.

Keynesians were never so concerned with inflation per se as the General Theory was born in reaction to deflation. In its simplist understanding Kenesianism sought equilibrium in prices and positive economic growth by maintaining a positive flow of investment such that when private investment contracted then govenment investment spending would compensate to return to equilibrium. Keynes did not however contemplate situations where govenments operated in a constant state of deficit so he did not entertain the limits of sovereign solvency. It is also important to remember that Keynes did not advocate spending per se...he was talking about investment spending. Todays perveersion of the theory seems to believe that profound deficit spending on unsustainable operations will have the same effect as govenmtne spending on investment infrastructure that would have lasting future value. Keynes policies were at their core focused on fiscal policy and response in contrast with both the monetarist paradigm and the supply side response.

Problem with all these approaches is that they don't address how money supply created by monetary policy moves from the Federal and fractional reserve banking system into the general fiscal economy as inflaiton. The missing link in the thinking has been insight into the financial operation of leverage in the private economy. In actuality, money supply alone does not drive inflation in the private economy. Inflation cannot take hold unless leverage is increasing...money supply is only important in that it is the base limit of leverage in a fractional banking system but it is the money multiplier effect of leverage expansion that causes inflation. When deleveraging is taking place in the private economy it is impossible for money supply expansion to cause inflation.

 

[morganist]

Quote from Ed Breen:

You should start by discussing how each school defines and measures inflation.

The Monetarist school represented by Friedman says that inflation is always and only a monetary event. By this the Monetarists mean that it is the increase in the supply of base money alone that drives inflation. The Monetarists advocate a policy of small expansion of money supply to allow for growth of population. The problem with the monetarist paradigm is that it has no way define velocity, they treat velocity as a fudge factor to explain what happened after the fact..."there was inflation becuase velocity increased, there was no inflation even though the money supply grew rapidly becuase velocity dropped..." Problem is that they don't know what velocity is, how it operates and what policy could modulate velocity to supply to produce growth with no inflation or to even have a target to achieve that.

Supply-Side Fiscalists criticize the monetarists for their blindness with regard to velocity. The supply siders discuss velocity as demand for money. They modify the monetarist orthodoxy by suggesting that it is the supply of money relative to the demand for money that produces inflation and not the absolute supply of money by itself. Supply siders theorize that the demand for money can be influenced by fiscal incentives that encourage production and that where proper incentives are in place the money supply can be expanded to accomodate increased demand for money to produce growth without inflation. Supply-siders theorize that growth itself is a deflationary force in that it increases the demand for base money. Supply-siders however argue over what metric to use to guage the demand for money. Many supply-siders suggest that gold price opperates to reflect the realtive supply of money to the demand for money. They would advocate a gold price target range that is maintained by selling Bonds to reduce money supply when the gold price rises above the target range and buying Bonds to increase the money supply when gold price drops below the target range. Supply-siders theorize that such monetary policy would keep the supply and demad for money in balance and would result in a stable economic price level with no inflation.

Keynesians were never so concerned with inflation per se as the General Theory was born in reaction to deflation. In its simplist understanding Kenesianism sought equilibrium in prices and positive economic growth by maintaining a positive flow of investment such that when private investment contracted then govenment investment spending would compensate to return to equilibrium. Keynes did not however contemplate situations where govenments operated in a constant state of deficit so he did not entertain the limits of sovereign solvency. It is also important to remember that Keynes did not advocate spending per se...he was talking about investment spending. Todays perveersion of the theory seems to believe that profound deficit spending on unsustainable operations will have the same effect as govenmtne spending on investment infrastructure that would have lasting future value. Keynes policies were at their core focused on fiscal policy and response in contrast with both the monetarist paradigm and the supply side response.

Problem with all these approaches is that they don't address how money supply created by monetary policy moves from the Federal and fractional reserve banking system into the general fiscal economy as inflaiton. The missing link in the thinking has been insight into the financial operation of leverage in the private economy. In actuality, money supply alone does not drive inflation in the private economy. Inflation cannot take hold unless leverage is increasing...money supply is only important in that it is the base limit of leverage in a fractional banking system but it is the money multiplier effect of leverage expansion that causes inflation. When deleveraging is taking place in the private economy it is impossible for money supply expansion to cause inflation.

thank you for your post. interesting comments. what do you think about controlling aggregate demand with other methods?

 

[Ed Breen]

Aggregate demand is a function of production. So, you would be better to promote production and see it show up in aggregate demand. Like excess reserves, aggregate demand is a symptom and not a cause.

The big deceit in the current attempt to drive GNP by gross government spending, not investing, is that the GNP is primarily a measure of consumption...in a sense the GNP multiply counts production by including both transfers of inputs into production and transfers of the production at multiple levels. In a very real way all consumers are really producers or the dependents of producers. So, it is misleading to confuse inventory restocking, or government debt financed spending on payrolls or unemployment benifits or other entitlements as any meaningful (i.e. sustainable improvement in the economy). With growth of production, GNP will give back points when inventory restocking is done or government debt financing of payrolls ends, and if nothing is done to incent an increase in production spending, borrowed money for payroll will have to end sooner or later.

Just watch how it works in Greece whether they roll over the debt or not. So, aggregate demand is a fool's target; you should look at metrics of production.

 

[morganist]

Quote from Ed Breen:

Aggregate demand is a function of production. So, you would be better to promote production and see it show up in aggregate demand. Like excess reserves, aggregate demand is a symptom and not a cause.

The big deceit in the current attempt to drive GNP by gross government spending, not investing, is that the GNP is primarily a measure of consumption...in a sense the GNP multiply counts production by including both transfers of inputs into production and transfers of the production at multiple levels. In a very real way all consumers are really producers or the dependents of producers. So, it is misleading to confuse inventory restocking, or government debt financed spending on payrolls or unemployment benifits or other entitlements as any meaningful (i.e. sustainable improvement in the economy). With growth of production, GNP will give back points when inventory restocking is done or government debt financing of payrolls ends, and if nothing is done to incent an increase in production spending, borrowed money for payroll will have to end sooner or later.

Just watch how it works in Greece whether they roll over the debt or not. So, aggregate demand is a fool's target; you should look at metrics of production.

i think aggregate demand is more than just a function of production. it is a tool of transaction or the element of the economy that enables trade. it is also something that in itself is a determinant of price. although i agree with you in relation to the government spending especially with greece.

have you seen the stability and growth pact criteria. how was greece ever allowed into the eu in the first place.

 

[Ed Breen]

Aggregate demand is a metric, its a result...it doesn't drive anything...it is driven by something else...its a total, its a product in a mathmatical sense, not a multiplier. You could argue that demand has an impact on price in a micro sense but you cannot make a logical argument of that in an aggregate sense.

I know all about the realtionship between Greece and the EU. I once wrote a thesis on disconnect of central EMU Monetary Policy and decentralized EMU Fiscal Policy. I argued that it couldn't work. Do you know of any country in the EMU or the EU that currently complies with the stability and growth pact criteria? How different is the U.K. debt to GDP criteria from Greece's purported 12.7%?

Greece is screwed because it has long been borrowing money at German credit rates and spending the debt without investing it in any way that would increase productivity, production, in their economy. Now Greece has to account for how it used the money and it has to pay Greek Credit rates on the debt roll over. Too Bad for Greece it spent the cheap debt on payrolls and graft and now it has nothing to show for it; now it has to pay the debt back and service the debt at Greek rates which are likely to go higher and higher. Papandreau is on record saying that it is not enough that the debt be rolled over under terms of the March rollover (i.e. 6% plus interest), but he says the debt must be rolled over at lower rates, like the 3% German Rate, becuase Greece cannot raise the revenue to perform the rollover debt at rates over 6%. So, he needs both a roll over and a subsidy. As soon as he said that he admitted that Greece was already insolvent.

He will be even more unable to pay his debts as the austerity program destroys what is left of the Greek economy. When they bring in the IMF the worst will just happen quicker. Everyone should recognize that Greece is in default no matter what happens, just like Iceland, Ireland and Latvia...where CPI is >-4.5%, unemployment is >20%, and GDP is negative. What do you think will happen to the Greek debt to GDP ratio when the denominator is cut in half, when it drops below zero?

 

[morganist]

Quote from Ed Breen:

Aggregate demand is a metric, its a result...it doesn't drive anything...it is driven by something else...its a total, its a product in a mathmatical sense, not a multiplier. You could argue that demand has an impact on price in a micro sense but you cannot make a logical argument of that in an aggregate sense.

i understand the point you are making but there are economists who believe the level of aggregate demand can drive more output. whether you agree with them or not.

also without aggregate demand the transaction function cannot exist. the ability to have a liquid currency is in itself a function that enables productivity (note enable not create but allow or encourage). liquidity and capital enable the means of production thus is a requirement of trade. if the level of liquidity is not sufficient it can prevent the ability to trade and hinder the function of production. people cannot build things without tools materials, labour etc. this all comes at a cost and sometimes needs greater liquidity to enable it or make it more efficient. constraints on liquidity can prevent maximum potential output so having deflation can create bottlenecks and produce limitations on output.

in an advanced economy where there are various entities that can produce substitute goods namely competition the emphasis of a growing economy is on the funding and demand for the goods. this changes the premise of the quantity theory of money that was developed in a time of production restraints. demand has become more important and the level of liquidity is a potent force in the economy that can either help or hinder output.

 

[Misthos]

I know you said your paper will focus on the changing role of inflation with the introduction of monetarism from keynesian economics, but your title of the thread is the changing role of inflation - and that has me thinking something else.

I think unconventionally when it comes to economics. (You can probably tell from my posts I have no formal training. ) Biophysical economics and Econophysics would be examples I am begining to follow.

To apply what I'm saying to the past:

Volker and fed policy alone did not tame inflation. Technological advances, productivity and outsourcing/offshoring had just a great impact. So did these other factors really tame inflation? I think it was Nicholas Brady that said it best: When commodities increase in price, we call that inflation, when stocks and real estate values increase, we call that wealth creation.

I think there's a lot of truth to that as seen in the past 30 some years with the rise of the F.I.R.E. economy. So did we really tame inflation using monetary tools? Or did we merely take advantage of agricultural, technological, productivity improvements as well as offshoring to lower prices of goods? And the inflation that never went away was seen in ridiculous asset values. We basically steered inflation into certain asset classes to create a Ponzi Economy built on ever expanding inflation (credit.).

Another example: what influenced the economy the most when we came out of the great depression? Was it the Treasury and the Fed working together, or was it an event called WWII?

My point is that central banking, and economics is often a lot of hooey. (that's a highly technical term) In the end, the study of economics is captured and twisted by elites for their own benefit, and central banking is merely a mechanism for maintaining the power and wealth of the status quo. Central Banking distorts economies, and in the end, is much more destructive than productive.

You want proof? What are the schools of thought of economists in the big banks and government, and why is that? Didn't these guys blow the system up? And aren't they also the ones getting hired and paid to "fix it?" You want to make a lot of money in economics? You better sing the right tune to get hired.

But honestly, good luck with your paper, I enjoy your posts morganist.