A question about inflation

[TonyG666]

I have seen some people that demonize inflation by saying that the prices rise and that makes it worse in their lives. My question is:"Doesn't supply/demand leads to prices to stabilize since if prices rise, than people buy less and businesses lower the price again so the people buy enough to keep the business running?"

[dsayers]

Inflation is an increase in the money supply. If there are only $100 in circulation, a dollar is worth 1/100th of all currency. If there is $1million in circulation, a dollar is worth 1/1,000,000 of all currency. Prices increase as an effect of inflation. Yes, supply and demand cause VALUE to stabilize, but amid a paradigm of fiat currency, prices can actually rise while value declines.

[Swingpirate]

The relevant critique of inflation is not that it causes prices to rise, but rather that it shifts the relative prices of goods and services in ways not justified by demand, causing a misallocation of real resources. Keynesians and monetarists assume that prices tend to rise evenly over the economy in the aftermath of monetary shocks, which is why they advocate inflation to "stabilize the price level".

[Kevin Beal]

Computers and other electronics deflate consistently all the time and that doesn't stop Apple from making billions of dollars.

 

The value of deflation is that people can actually have real savings and don't have to invest in a ton of things just to prevent the value of their savings from decreasing due to inflation.

 

Inflation can be good if it's predictable and not outrageously high, in which case we would need competition to make sure the people inflating are held accountable. Some cryptocurrencies and the new blockchain technology Ethereum use an inflationary model and it could be really good for certain types of transactions, but as far as savings goes, my money is in the non-inflating crypto-currency bitcoin specifically because I want the deflation.

[JohnPozzi]

At the Global Resource Bank there's no inflation or deflation of GRB ecocredit currency because this of line of code in the GRB Shareholders Program maintains a steady-state. "The GRB income account receives ecocredit from ecosystem impact charges on shareholders and commercial accounts, and exchanges ecocredit with the reserve to maintain equilibrium." John www.grb.net

[GRosado]

I have seen some people that demonize inflation by saynatureat the prices rise and that makes it worse in their lives. My question is:"Doesn't supply/demand leads to prices to stabilize since if prices rise, than people buy less and businesses lower the price again so the people buy enough to keep the business running?"

Inflation leads to higher prices & this reduces the purchasing power of whatever currency. The scenario you laid out holds true For goods with an elastic demand but does not hold for goods that have inelastic demand such as Gas, food & things of such nature.Inflation is any increase in the money supply without a corresponding increase in the demand for money. That is the Austrian view on inflation.Monetary inflation is an increase in the money supply.Price inflation is an increase in prices.

[Songbirdo]

"Doesn't supply/demand leads to prices to stabilize since if prices rise, than people buy less and businesses lower the price again so the people buy enough to keep the business running?"

If I understand it, the above only if you're talking about elastic prices.

 

From Wikipedia on IN-elastic prices:

In general, the demand for a good is said to be inelastic (or relatively inelastic) when the PED is less than one (in absolute value): that is, changes in price have a relatively small effect on the quantity of the good demanded

http://en.wikipedia.org/wiki/Price_elasticity_of_demand

 

Necessities like food, fuel/energy and housing you can find alternatives for to some extent (chicken over steak, generic brands over brand names, etc), but fundamentally you require them in some form, regardless of the price.

 

Side note:

In regards to the current CPI (Consumer Price Index) calculations to measure of inflation and in particular their use of substitution: "Well ground beef only rose by this much when steak rose by much more, let's use the beef instead." They use the symptom of rising prices (the consumer seeking alternatives via substitution) to discount inflation. One more reason their CP-Lie is nick-named as such.

[cynicist]

I have seen some people that demonize inflation by saying that the prices rise and that makes it worse in their lives. My question is:"Doesn't supply/demand leads to prices to stabilize since if prices rise, than people buy less and businesses lower the price again so the people buy enough to keep the business running?"

 

It's not about prices rising, it's about the value of your currency being diluted, the price change is just a side effect of that. If a business didn't raise their prices they would need to cut costs somehow or their profit margin would be affected. (and if prices go up across an entire industry, do you think people are just going to stop buying things that they need?)

 

Imagine a game of monopoly where you found a second set of bank notes from another monopoly set and kept it for yourself (printing). Say the total amount all players had started at $1k and now it's $2k total. After doubling the amount in circulation, each bill is worth half as much as it used to be. If the price of properties was $100 a piece before you added the money, and players are aware that you just halved what their money was worth, they would double the price of their properties to $200 to compensate. The point of this manipulation is to spend the money you printed before other people realize what's going on and adjust their prices, thereby avoiding the correction and making out like a thieving bandit. 

[Daniel Unplugged]

 Side note:In regards to the current CPI (Consumer Price Index) calculations to measure of inflation and in particular their use of substitution: "Well ground beef only rose by this much when steak rose by much more, let's use the beef instead." They use the symptom of rising prices (the consumer seeking alternatives via substitution) to discount inflation. One more reason their CP-Lie is nick-named as such.

Price inflation affects all prices all prices equally. If CPI is 3%, and good A rises by 4%, then the extra 1% increase was due to other market forces, not inflation. If the price of good B rose by only 2%, then other market forces caused a reduction of 1%.If gas prices rise by 10%, it is inaccurate to say that the rise was caused by inflation alone. 3% was inflation, 7% was due to changes in supply and demand.Inflation reduces the value of all of the fiat currency equally. Since all of the fiat currency is the same, it cannot be otherwise.

[Songbirdo]

Are you suggesting the current official CPI from the BLS is an accurate indicator for the amount of inflation in the currency supply?

[st434u]

Inflation of the supply of credit of the money that everybody is forced to use is theft on top of theft. By expanding the credit supply, the State through the Central Bank steals resources from everybody by making new money which devalues the money already in existence, and the commercial banks (banks licensed and allowed to operate as oligopolies, by the Central Bank) pyramid this new money to several multiples more in new loans that they make with money that doesn't even exist, maximizing the process.

 

Furthermore, while prices do eventually adjust, it takes time for them to do so, and in the meantime, it can appear to entrepreneurs that more resources than those that actually exist are available for investment in long-term business ventures. It can also affect the relationship of relative prices of one good to another while the new credit makes it's way through the economy, bidding up individual prices as it moves along.

 

This creates a misallocation of resources or "artificial boom" that must necessarily bring about a corresponding bust down the line.

[cobra2411]

Are you suggesting the current official CPI from the BLS is an accurate indicator for the amount of inflation in the currency supply?

You can trust the bureau of lies and scams, they're from the government and here to help...

 

The BLS will regularly use substitutes for items like ground beef for steak if the prices rise too high. Once you start comparing apples to oranges while acting like you're not, you've admitted that it's fraudulent. Additionally since the money is injected at the top, the top banks will use that hot money to chase returns and it frequently results in market distortions - commodity prices anyone? These distortions usually result in bubbles as more and more people chase the return. The early money will rotate out and leave the late comers to be the bag holders when the music stops. 

 

IMO the bankers love mild inflation because it spurs the desire to buy now and pay later - after all it will be more expensive later. Also, even if your money never sets foot into a bank they still can rob it by devaluation. Since 1913 the value of the dollar has declined by over 97%. Stolen by the banksters. 

 

In growth areas there is likely to be price increases due to supply/demand, however that will balance out and later become deflationary as the market matures and technology improves to reduce costs. Ultimately you reach a utility value where the cost is unlikely to go significantly lower. Computers are a great example as are cell phone contracts. Sure, some carriers aren't giving you "free" phones, but they're also not charging you $1,000 over 2 years in higher service fees to pay for that "free" phone. 

[Songbirdo]

You can trust the bureau of lies and scams, they're from the government and here to help...

 

The BLS will regularly use substitutes for items like ground beef for steak if the prices rise too high. Once you start comparing apples to oranges while acting like you're not, you've admitted that it's fraudulent. Additionally since the money is injected at the top, the top banks will use that hot money to chase returns and it frequently results in market distortions - commodity prices anyone? These distortions usually result in bubbles as more and more people chase the return. The early money will rotate out and leave the late comers to be the bag holders when the music stops.  

That's all I was trying to say with the post before that. Thank you.

[Daniel Unplugged]

Are you suggesting the current official CPI from the BLS is an accurate indicator for the amount of inflation in the currency supply?

I assume that you mean price inflation, since CPI is in not said to be a measure of the currency supply. The measures of currency supply are M0, M1, M2 etc. No, I am not suggesting that the CPI as reported is particularly accurate, and that fact does not affect my argument in any meaningful way.

Inflation of the supply of credit of the money that everybody is forced to use is theft on top of theft

The amount of theft from me due to inflation is near zero, since I keep (nearly) none of my wealth in fiat currency. I do however, keep all of my debt in fiat. I can't wait for hyperinflation, because it will eliminate my homeloan. Message to my bank - Suckers! Message to their creditors - Fools!

IMO the bankers love mild inflation because....

At the risk of sounding like my grandma, what is IMO?

[Sal9000]

Inflation is an increase in the money supply.

 

 

According to the Austrian Economy. In mainstream economics it is seen as a rise of the general level of goods and services. I think this view is more accurate since an inflation of money does not necessarily lead to an increase in the price level of goods and services. Most Austrians expected a hyperinflation after the collapse of 2008. This did not happen since the new money was used to pay back debt. Hence it did not enter the market. In fact, the velocity of money went down for some time. 

pyramid this new money to several multiples more in new loans that they make with money that doesn't even exist, maximizing the process.

 

 

Indeed, there are two culprits. The state offers the drug and the banks take it willingly. This is often missed by Austrian economicists who like to blame the State when the government gives in fact an incentive to create money. Most money is created by banks and not the State.

[cobra2411]

At the risk of sounding like my grandma, what is IMO?

Sorry, IMO = In my opinion. 

 

I use very little txt speak, but there are a few that I do use and that's one of them. I hope that's ok here. 

[Songbirdo]

I assume that you mean price inflation, since CPI is in not said to be a measure of the currency supply. The measures of currency supply are M0, M1, M2 etc. No, I am not suggesting that the CPI as reported is particularly accurate, and that fact does not affect my argument in any meaningful way.

I'm not arguing against your method for +/- the actual currency inflation rate is market demand's effect. That makes sense. I'm only debating how accurate the inflation rate you're using in the calculation is.

 

Yes, rising prices ("price inflation") is the symptom, not the true cause of inflation (which is actually an increase in the currency supply). Where we may have some disagreement is what we mean by "currency supply". By supply I don't just mean counting the number of dollars represented by the M's.

http://en.wikipedia.org/wiki/Money_supply

 

If the newly dollars are all stashed in a vault (not leveraged for loans, etc), and never enter circulation, prices aren't affected. The newly created currency effectively doesn't exist. Counting how many dollars are in circulation isn't a true measure of the currency supply because it doesn't take into account the velocity of money. 

 

Velocity is defined by the number of times one dollar is spent to buy goods and services per unit of time

http://en.wikipedia.org/wiki/Velocity_of_money

 

The BLS takes an indirect route of calculating the currency supply increases/decreases by measuring the prices of the goods and using that aggregate (the CPI) to approximate the currency supply change.

 

The government then uses the CPI-based inflation rate to drive everything with inflationary cost-increases: social security and I-bonds comes to mind. And don't forget justifying Fed policy with QE since inflation is "low".

 

Which means they have motive to understate inflation, through the CPI, anyway they can. 

 

If their measure of price inflation (the CPI) is understated, then the market forces you're explaining, based on the difference with the CPI-based inflation rate, are overstated.

[st434u]

The amount of theft from me due to inflation is near zero, since I keep (nearly) none of my wealth in fiat currency.

You don't touch fiat currency or have any in your bank account at all? Because if at any time you hold any of it whatsoever, you are getting robbed by inflation. Assuming you are like most people, you keep an oscillating, but constant holding of fiat currency at your disposal, ready to be spent on the things you need daily. All you have to do is figure out what your average holding is, then figure out the inflation rate, and that's how much you're getting stolen off you.Also, even if you avoided fiat currency entirely, but you have significant costs in doing so due to everyone else around you being forced to use it, you are still being robbed indirectly, due to the State forcing you to spend all of these resources in order to avoid fiat currency. 

I do however, keep all of my debt in fiat. I can't wait for hyperinflation, because it will eliminate my homeloan. Message to my bank - Suckers! Message to their creditors - Fools!

Well if the banks were loaning you their own currency, the inflation rate would already be calculated in your interest payments. The private creditors of banks are generally people who don't know what to do with their currency, and they may be aware that inflation is making them lose more than the bank pays, but they have no other option available to them. In this case you would just be benefiting from the fact that the State steals from them.In most cases, however, banks are either loaning currency that the Central Bank created out of thin air and loaned to them at a super low rate way below inflation (or gave it to them by overpaying immensely for something useless or close to useless, like non-performing mortgages or treasury bonds), or they are loaning you bank credit that they themselves created out of thin air, and doesn't really exist even as fiat currency. In either of these cases, you are simply benefiting off of the fact that others (and you yourself as a holder of fiat currency) are getting their wealth stolen, in order to provide a somewhat lower interest to you (but the State and/or the banks keep most of the loot).

[TimS]

Inflation has a bad rap because of its association with fiat currency (a state institution), because of its association with war (fiat currency is typically instituted to finance imperial aggression), because the state uses inflation to "regulate" the market, and because the state and its pet institutions use inflation to steal resources, since they spend the newly minted "money" before prices have had a chance to adjust.

 

However outside the context of fiat currency and inside the context of free market money, inflation is neither good nor bad. If precious metals are used as a bias for money, there will be some level of inflation as additional precious metals are mined, and perhaps some level of deflation if precious metals are taken out of circulation--probably for industrial use.

 

But it doesn't matter because prices simply adjust to reflect the scarcity of money.

[st434u]

However outside the context of fiat currency and inside the context of free market money, inflation is neither good nor bad. If precious metals are used as a bias for money, there will be some level of inflation as additional precious metals are mined, and perhaps some level of deflation if precious metals are taken out of circulation--probably for industrial use.But it doesn't matter because prices simply adjust to reflect the scarcity of money.

 

When you are talking about real money, i.e. gold, this is correct.

 

I quote from Murray Rothbard: The Mystery Of Banking, page 48:

 

"It might be objected that even a small annual increase in gold production is an example of free market failure. For if any M is as good as any other, isn't it wasteful and even inflationary for the market to produce gold, however small the quantity? 

 

But this charge ignores a crucial point about gold (or any other money-commodity). While any increase in gold is indeed useless from a monetary point of view, it will confer a nonmonetary social benefit. For an increase in the supply of gold or silver will raise it's supply, and lower it's price, for consumption or industrial uses, and in that sense will confer a net benefit to society."

 

Notice that the above analysis does not apply to things like Bitcoin 

[st434u]

According to the Austrian Economy (sic). In mainstream economics it is seen as a rise of the general level of goods and services.

If you find a dictionary that was printed before 1983, you will see that the original definition of inflation was an increase in the money supply, which tends to, but does not necessarily lead to general prices rising (it could also lead to prices not falling as much as they otherwise would have). 

I think this view is more accurate since an inflation of money does not necessarily lead to an increase in the price level of goods and services.

Nor do austrian economists say that it does. 

Most Austrians expected a hyperinflation after the collapse of 2008. This did not happen since the new money was used to pay back debt. Hence it did not enter the market. In fact, the velocity of money went down for some time.

Well most didn't expect hyperinflation (you mean general prices rising more than 50% a month, or 1000% a year), at least not right away.In any case, there have been significant general price rises since before '08, and continuing and accelerating until today. It's just that governments make up their own statistics, and pretend to show that prices are not rising as much as they really are. They use all sort of tricks and gimmicks.The first obvious one, is that the measuring stick is not a fixed basket. The basket changes from year to year based on all sorts of things. But one of the most revealing is that the composition of the basket changes based on how much people have bought of each component. But what this immediately shows you is that if prices have gone up a lot for one thing, and not so much for another similar thing, people will tend to buy more of the latter. But the governments see this and say, "oh, so the consumer wants more of THIS... therefore the basket should be more heavily weighted towards considering the price changes in this". The same goes for calculating the cost-of-living. Since in an environment where people are getting poorer due to rising prices, they will substitute higher quality products for lower quality ones, the governments say that the cost of living hasn't risen much, when in fact it has, it's just that people's standards of living have gone down.Then come the adjustments for quality, and here they excel. For instance, they can say that cars are safer this year than the year before, because they're adhering to some government safety guidelines that didn't exist the year before (and that probably don't add any real safety anyway), and they say that this constitutes an increase in quality of 30%, so even if cars went up by 20%, that's really a reduction in price of 8%. Even if now cars are made with lower quality materials and will start to break down sooner than last year's cars. Maybe last year the cars had really nice leather finishes, and now it's all synthetic; the govt just never counts that as a quality decrease.If in order to board a flight you have to go through extra cancer-causing radiation scans and/or sexual abuse, they force you to throw away perfectly good food and beverages and make you pay for the garbage that they serve (which used to be free), all in the name of safety, courtesy of the govt, why of course that is a quality increase. But if the seats are getting smaller and there's less leg room and they constantly lose your luggage, well that just doesn't count. Anyways, even if the velocity went down or debt was repayed, the additional money (reserves, the monetary base) is not gonna come out of the system and be destroyed, so when velocity picks up, or everybody starts leveraging up again, prices will start rising a lot faster, and there's nothing anyone will be able to do to stop it. 

Indeed, there are two culprits. The state offers the drug and the banks take it willingly. This is often missed by Austrian economicists who like to blame the State when the government gives in fact an incentive to create money. Most money is created by banks and not the State.

Austrian economists are well aware of the fact that banks pyramid bank credit several times on top of all new monetary reserves that the Central Bank creates. But the blame should still be placed on the State. It's the State that forces everybody to use their monopoly money. It's the State that creates new notes and reserves. It's the State that promises banks perpetual bailouts if they were ever to experience the early stages of a run, and these bailouts are delivered regularly, not just when a big one makes the news. Without the State doing all of this, the commercial banks would never be able to get away with what they do.

[GRosado]

According to the Austrian Economy. In mainstream economics it is seen as a rise of the general level of goods and services. I think this view is more accurate since an inflation of money does not necessarily lead to an increase in the price level of goods and services. Most Austrians expected a hyperinflation after the collapse of 2008. This did not happen since the new money was used to pay back debt. Hence it did not enter the market. In fact, the velocity of money went down for some time.Indeed, there are two culprits. The state offers the drug and the banks take it willingly. This is often missed by Austrian economicists who like to blame the State when the government gives in fact an incentive to create money. Most money is created by banks and not the State.

The Austrian view on inflation isn't simply an increase in the money supply that's where non Austrians & supposed Austrians get it wrong. Inflation is an increase in the money supply without a corresponding increase in the demand for money. When there is an increase in the money supply people have more liquidity & so they proceed to purchase more goods since they have more money which in turn increases the demand for goods which increases the price for the quantity demanded(refer to a S/D graph or AS/AD graph to get an illustration of the effects). There is massive monetary inflation & the only reason hyperinflation has not occurred is because the banks aren't loaning it out they are sitting on all the printed money from Quantitative Easing but as soon as they begin to make loans they are gonna create hyperinflation due to the Money Multiplier effect. While the velocity of money creation by the Fed has significantly slowed down when the banks begin to loan them out the velocity of money will rise sharply.The Austrians don't only blame the central bank that's why they hold a Syncretic view of the Exogenous & Endogenous money creation if you analyze their material on banking.

Well most didn't expect hyperinflation (you mean general prices rising more than 50% a month, or 1000% a year), at least not right away.

No they expected it right away they just didn't expect the banks to sit on its reserves the way they did & currently are.

Well most didn't expect hyperinflation (you mean general prices rising more than 50% a month, or 1000% a year), at least not right away.

No they expected it right away they just didn't expect the banks to sit on its reserves the way they did & currently are.