^correct Over the long run, there is economic growth which with a constant money supply would result in deflation. However, because we typically see both economic growth and inflation, we can say that the inflation is caused by the increase in the money supply. However, if there are supply shocks (i.e. decline in output) then there will be inflation even if the money supply remains constant.
This post was much more fun than I had anticipated. Hayek- It’s OK to be wrong. I know you’re proud of your education, but it doesn’t mean you’re infallible. Your definition of something is not the end-all, be-all. Economic variables which impact pricing can manifest themselves as inflation or deflation (including supply). BChad’s educational credentials are also more impressive than yours - it’s Dr. BChad if you were curious.
I don’t mean to come off as an ahole, and I can understand that it appears that I am arguing over semantics or numerator/denominator. I really do believe it matters. Today sucked and I’m tired.von Mises is going to argue this one for me. Here is a wonderful quote from him: “Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. . . . As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.” Furthermore, price increases due to scarcity need to be left to the market, with substitutions, technological innovation etc working as it should. So yes, it does matter what causes prices to move.
I’m quite happy to admit when I’m wrong. If we were arguing over an accounting issue, I can pretty much guarantee I’d be wrong! I’m aware of Dr. BChad’s credentials, and they are indeed impressive and indicative of an intelligent person who has worked very hard. We are of opposing ideologies, neither fully testable or provable beyond any doubt. I appear to be in the minority on this forum, and that’s fine with me. I’m not so vain as think that the school of thought I so eagerly defend won’t be proven wrong tomorrow. I sincerely hope it’s not, because I like it very much.
Hayek Governments all over the world calculate inflation through the consumer price index, now can you explain what the consumer price index is?
Props to Hayek - a respectable rebuttal. Good day sir.
The CPI will let you measure the change in the price level of a basket of goods. Depending on the definition of inflation, you may accept this as a reasonable measure of inflation. Here is the issue with using the CPI to measure inflation. Let’s say I want to plot a graph of real oil prices over the last 20 years. I get my CPI index and deflate all the daily/weekly/monthly/annual - whatever - prices. Problem is, as someone (I can’t remember who right now) pointed out earlier, oil drives some/lots of the increases we see in in the CPI. So what the heck did I just calculate? I just deflated the price of oil using an index that is driven, in part (small/large?) by the price of oil. I’m not clever enough to figure out what that is.
Ok that is a good point, but the underlying purpose of the index is to measure how the cost of living is going up for an average household, thats why the weights used in the index are from the household buget survey. Inflation is a rise in the general price level of good and services, what is driving the inflation is beside’s the point, however important.
As an exercise in measurement, the CPI is good fun. When asking for a wage increase, it can be very useful. As I said earlier when I quoted von Mises, some people do believe that the cause of price changes is fundamental to our understanding of inflation and the role of government in the economy. Other equally clever people disagree, that’s fine. Let’s stop beating this poor horse.
Yes we all have our own opinions, lets not ride the horse while its down
“Inflation is caused by debasing the currency, because if the currency isn’t debased, it doesn’t qualify as inflation,” just isn’t a useful piece of knowledge for anyone who is seriously trying to work public policy or understand markets. It may be comforting, because tautologies are true, but you can’t base useful policy or investment decisions on tautologies. We care about inflation because it messes up our calculations of how productive we are and because we are concerned about the real purchasing power of our dollars and labor. But why should we care if things cost twice as much, if at the same time we have twice as much paper in our wallets. We care for pretty much two reasons: one, we may think we are richer than we actually are, and therefore fail to make prudent allocation decisions, but that can be solved by awareness. The other reason is that the government controls the printing press, and those who are first in line to pay or be paid by the new dollars benefit disproportionately as the new dollars work their way into the system. Except for this primarily political concern, we really shouldn’t care if it costs $1 or $100 for a cheeseburger, if I’m getting paid $10 per hour in the former case and $1000 an hour in the latter, I’m no better or worse off. But there are other reasons to care, which is if our real purchasing power declines. If we have a supply shock, and prices rise across the board, it’s pointless to say, ah, that’s not inflation, when in fact peoples real purchasing power has been eroded even when no extra printing has taken place. Worse, because most people define inflation as a rising price level, this othe definition allows disingenuous hacks to use people’s concern over what they call inflation to be manipulated into policy prescriptions that should not be applied under the inflation=debasement definition.
Brad, First paragraph: I haven’t presented a tautology. I’ve said that there is a school of thought that defines inflation as a purely monetary phenomenon. I’ve further argued that separating the cause and effect of monetary inflation is important for policy decisions because monetary inflation is the result of government action. If this is the issue a policy wonk would like to address, the solution seems quite obvious. The issue of rising prices through mechanisms other than an increase in the money supply is extremely complex and riddled with feedback loops the complexity of which no person, especially a government official, can conceive of. If, for whatever ideological reason, the government would like to address rising prices, let them do it with the knowledge that these prices are moving independent of changes in the money supply. Paragraph two: I agree with most of your second paragraph, those are good reasons to care about rising price levels. I’ve never said that a person shouldn’t be concerned with inflation, I’m just arguing that people should be concerned with the supply of money as the cause of widespread price increases and not the widespread price increases themselves because there are perfectly legitimate reasons for the price of a scarce good to increase. Paragraph 3: I have a lot of faith in unfettered markets. If there is a supply shock that causes the price of one or more goods to increase, agents can substitute away, they can innovate etc. It might not be fast or pretty, but it will happen. I can’t imagine a situation where the supply of anything, other than money, can cause a situation in which all prices are likely to increase. I haven’t called you any names, I don’t appreciate being referred to as disingenuous hack.
Hayek Wrote: ------------------------------------------------------- > The CPI will let you measure the change in the > price level of a basket of goods. Depending on the > definition of inflation, you may accept this as a > reasonable measure of inflation. Here is the issue > with using the CPI to measure inflation. > > Let’s say I want to plot a graph of real oil > prices over the last 20 years. I get my CPI index > and deflate all the daily/weekly/monthly/annual - > whatever - prices. Problem is, as someone (I can’t > remember who right now) pointed out earlier, oil > drives some/lots of the increases we see in in the > CPI. So what the heck did I just calculate? > > I just deflated the price of oil using an index > that is driven, in part (small/large?) by the > price of oil. I’m not clever enough to figure out > what that is. That may be an interesting theoretical issue but I don’t see how it diminishes the usefulness of the exercise or the results, the point of which you described in your initial post in the thread.
Is it reasonable to think of the big picture roughly as the money supply determining aggregate nominal values of everything in a given economy, with supply and demand and the surely endless other factors and interplays between them determining relative prices among goods, services, etc.? Sort of the (nominal) size of the whole pie on the one hand and the relative sizes of the various pieces of it on the other?
I’ll bet that’s how Mike Reno thinks of it.
My comment about a hack wasn’t directed at you, specifically. I don’t see you as a hack. My apologies if it sounded that way. I agree that debasing the currency is an excellent way to provoke inflation. And, at some strange definitional level, you can say that if prices seem high, that must mean that there is too much money chasing too few goods. Suddenly taking away x% of peoples money will basically make prices fall by approximately x%, so you can get prices back to what they were before by doing something like that. I think we can both agree on that. My point is simply that there are other ways that you can get a general increase in prices across the economy, not just printing up too much money. A supply shock is the main way, particularly if it is a key resource input like energy, or perhaps a capital strike, but it also could be if labor is getting scarce too. Now, one can go say that price increases that are because of scarcity aren’t “real” inflation, but that’s really just silly. First of all, most people will call that inflation whether or not anything has happened to the money supply, and the only reason to tell them that they are wrong is if one has a particular axe to grind about money printing and think that any other general price increase isn’t worth worrying about, because it will all be corrected out somehow in the end. The normal definition of inflation is “a general increase in the price level without an accompanying increase in the quality or quantity of a good or service sold.” You can look it up all over and I would guess that at least 80-90% of references will define it more or less that way. Now you can say, “I don’t like that definition, I’m going to choose my own definition which captures the one thing I care about, which is money printing, and hey, look, Von Mises says it the way I like it.” That’s ok, but you can’t then go into regular company and tell them that what they are talking about when they say “Inflation” is what you are talking about when you say “Inflation.” You can go and argue “Hey, my definition is a better one, because it’s more useful, or it explains more,” but as far as I can tell, you haven’t shown how it is more useful, or how it explains more. Nor has von Mises. All he’s done is draw attention to the fact that many people think that rising prices are just people getting greedy, when in fact the debasement of currency is the culprit in the majority of cases, and particularly chronic hyperinflation, as with Weimar Germany. It seems strange to us now, but in the early part of the 20th century, the concept of inflation was really quite new. Obviously hyperinflation as with Germany, or the US South in the Civil War were times when people recognized that something was out of control and didn’t quite know how or why it was happening. So the money printing explanation was a major advance, and von Mises gets deserved credit for that. But around the same time Irving Fisher pointed out that much milder inflation was happening even when economies were operating more or less “normally,” and this is the innovation that led to the more common definition of “general rise in prices.” And this is the definition which is more useful too, because we can separate the effect we care about (rising prices / reduced purchasing power) with a variety of causes (abundance of money and/or scarcity of goods). Yes, the price level is really about the relative abundance of money to the scarcity of goods, but to concentrate on the money printing side of the equation misses the point (some would say von Mises the point) that the scarcity of goods can change for its own reasons, and an economic policy maker or an investor has to keep an eye out for those things as well. Finally, the thing one has to be careful about with inflation is that inflation is a *GENERAL* increase in price levels. Many people think that the price of something going up means there’s inflation, but that can be just a change in supply and demand. If the price of apples goes up, that’s not necessarily inflation, because it may just mean that people want more apples and are willing to buy fewer oranges. It’s when the price of apples *and* oranges *and* pears *and* electricity *and* medical care *and* education all go up simultaneously that we have inflation.
Are you really saying that the price of everything could hypothetically go up uniformly, say, 25% (or whatever - that is a lot, but just to make a point) overnight without the money supply increasing at all? I’m having a little trouble getting my mind around that.
Uniformly? Probably not. On average, yes. (Though 25 % is a lot) Overnight? Probably not, but it could do it in a very short time, like say a month, during which time (if the Fed is asleep or has other reasons) the money supply might not change. The problem is that the normal reaction to a price shock is that the central bank will usually ease monetary policy. That’s not necessarily a bad thing to do, particularly if that money can be used to develop substitutes and conservation technologies, but it also makes for lots of murky data and great debating about whether prices went up because of eased monetary policy or because of supply shocks. But when a key input like energy goes up in price, particularly when much of it is imported, it’s essentially like a tax (remember all those people talking about how carbon allowances are just a tax by another name - that’s the same thing). If you suddenly have a tax, just one that goes to a foreign producer rather than the government, and that tax is applied to almost all goods (as energy is), is it really so difficult to believe that average prices can rise rapidly, even if the money supply stays constant?
Thanks for the response. I need to step away now but I’ll reformulate my question(s) and respond again later tonight or tomorrow in case you’re still interested.
Hayek Wrote: ------------------------------------------------------- > 1) Inflation is always and and everywhere a > monetary phenomenon. This talk of cost push or > demand pull is nonsense. If you don’t agree, > google my first sentence and take it up with the > original author - his credentials are slightly > more impressive than mine. > > 2) Considering nominal prices in conjunction with > inflation gives us real prices (ie: prices > adjusted for inflation). Real prices are key to > understanding price changes over time because, > with inflation accounted for, any price changes > should (with the exception of some retarded > government fiddling) reflect the interplay of > supply and demand. 1) He’s dead so I can’t 2) The oil shock in the 70’s was that monetary. There are plenty of examples in history where the absence of sufficient supplies has caused inflation, particularly in pre-modern economies which didn’t have have fractional reserve banking systems.