Hayek Wrote: ------------------------------------------------------- > bchadwick Wrote: > -------------------------------------------------- > ----- > > That’s rubbish. If the supply of oil suddenly > > drops because half of the world’s oil supply > has > > been nuked and is too radioactive to use, > prices > > everywhere are going up, and that’s not a > monetary > > phenomenon. Sure, you can jack up interest > rates > > and try to restrict the monetary supply to > bring > > the prices of everything back down, but that > > doesn’t mean that monetary policy caused > > inflation. > > > What you’re describing isn’t inflation, it’s > prices reacting to a supply shock. Oil happens to > be an input into many other goods and this is the > mechanism through which other price may change. > > Inflation is not a blanket term for price > increases. Inflation is caused by too much money > chasing too few goods. > > This is econ 101 guys. Sounds more like fundamentalism 101
Hayek, you yourself used the phrase: inflation is too much money chasing too few goods. If it were just monetary, the definition would be: inflation is too much money. But instead you ignored the second part entirely, the “too few goods” is key.
That being said Hayek, origionally I took your intent as fairly offensive, that was my misinterpretation. Truthefully, you’re at least intelligently defending your stance and this convo beats the pants off the other ones that’ve been floating around this forum over the lull.
I have to say, this discussion has been pretty fun. I’m pretty busy today, so I’m going to throw up a few quick thoughts right now and try to get back on here tonight. Bodhisattva: I realize you’re being snide, but I don’t think Milton Friedman being dead is an excuse to avoid discussing his ideas - he did leave a book or two behind. Read his work, formulate an argument and post it. I agree, the rapid oil price increase in the 70’s was purely a supply issue. Yes, there are lots of historical examples of money supply increases causing inflation without the presence of fractional reserve banking. Fractional reserve banking can exacerbate money supply increases, but they are not a necessary condition for increases in the money supply to cause inflation. Countries using precious metal as currency often ran into the issue of new discoveries increasing the supply of gold/silver and causing prices to rise. I’m not sure what you’re arguing here. I don’t think we need to resort to ad hominem attacks. I’d hardly equate my willingness to discuss this issue to fundamentalism. BChadwick: Sorry I overreacted to the hack comment. My back was up when it shouldn’t have been. I’m really enjoying our conversation by the way. Inflation isn’t as recent a phenomenon as you’ve indicated. A good example of increased money supply causing massive inflation is France in the early 1700s. Panicked note printing was identified as the cause in this case. When you comment re: a central banks tendency to increase money supply in reaction to price increases you’ve nailed the issue on the head. This is precisely why I posted that earlier quote by VM - increasing the money supply will prevent relative price adjustments and cause prices to increase, albeit by varying amounts, across the board. If we define inflation as price increases and then fight it with increasing money supply, we’re just reinforcing the initial price increases. Not only is the data used for ex post analysis sullied, but the market didn’t get to react to the initial relative price changes. If attention is focused on a stable supply of money, then the market can sort out relative price changes. If the price of oil is increasing because the supply is limited, the information in that price signal is valuable. Oil will be put to its highest valued use and agents be incented to innovate and use substitutes etc. Having a government react to the oil price change by increasing the money supply will ultimately have the effect of muting that price signal because an increase in the money supply won’t affect all good uniformly. The relative price information is lost. People need to focus on price level changes in order to understand how well off they are, but if order for goods to be properly allocated these people need to understand if prices changed due to scarcity or monetary policy. That is why I believe a distinction between price level increases and inflation is important. We’re going in circles now, I’m saying we should distinguish between price increases and inflation because the former can be caused by scarcity and increased money supply while the latter is increased money supply. I think the price signals from the scarcity side of things are important to preserve. The counter argument seems to be the inflation is a price level increase and it can be caused by increased money or scarcity, but it doesn’t matter what caused it as long as we can adjust to it. I have more to say but I need to get back to work. This is fun.
bchadwick Wrote: ------------------------------------------------------- > 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. This is really the crux of the matter. I believe, and I’m willing to bet Hayek agrees, that external shocks to a particular good (i.e. an oil pipeline exploding) causing prices to temporarily rise, is not inflation. Looking at it another way, would you say we’re experiencing deflation in the plasma TV market because prices have gone from $3000 to $1500 in 10 years? I’d say no, that’s just competition doing its job. I completely agree prices can go up because of other reasons. I don’t think anyone is arguing that. But, overwhelmingly, those external events aren’t sustained over the long term. Inflation has to be linked to the permenent destruction of purchasing power, particularly when considering fiat currencies.
Sorry for the double post but I had to copy this from ZH. It’s somewhat relevant here, but has more to do with a discussion on inflation Chad and I were having in another thread. This just made me chuckle: “World Bank President Robert Zoellick says global food prices have hit “dangerous levels” that could contribute to political instability, push millions of people into poverty and raise the cost of groceries.” Not to worry. According to Fed VP Christine Cumming who spoke earlier somewhere, rising commodity costs merely indicate “stronger global demand.” Oddly enough, it is this supposed demand for products that has forced 44 million people to enter “extreme poverty”… out of their own volition. We are not sure, but something tells us the Fed’s Cumming has a Ph.D."
I think we all agree that the government is capable of printing up too much money and that this is something to be on the lookout for. I’m not trying to argue that government actions are always sensible. But I don’t think that all bad things that happen are because of government. If prices are rising, it is not automatically because there is too much money in the economy. Maybe you agree with me on that point, and just choose to say that inflation is only the kind of price rise that comes from printing up too much money (would there be any other way of figuring out how much money is “too much” without referring to prices?). I disagree that that is a good definition of inflation, but I can say that if we define inflation that way, then yes the only way inflation can happen is when too much money is printed. To me, it still looks like a tautology, but if it means we can have beers without arguing incessantly, then that’s fine with me. If we do agree on this definition (which I’ll do for the sake of this post), then we also agree that there are ways that the price level can rise that don’t have to do with money printing. I would normally call that inflation, but you dont. OK, then, it sounds like we agree on the causality of thigns, but we disagree on the terminology. However, when scarcity pushes up prices, do both call it a “supply shock” though, so maybe we’ll just agree on that. The next question then, is whether an eased monetary policy is ever called for. We both agree that what you are calling “inflation” doesn’t call for an eased monetary policy, at least not if it is severe. If anything, it calls for a tightened one. We agree on this too. We disagree on an empirical aspect, however. You said: "When you comment re: a central banks tendency to increase money supply in reaction to price increases you’ve nailed the issue on the head. " I did not mean that central banks tend to increase money supply in reaction to *all* price increases. I said that they tend to increase money supply in reaction to supply shocks. The reason is that supply shocks create recessions, and recession tends to trump inflation in terms of Fed priorities (other central banks have different rules, but there is usually pressure to ease during a supply shock). So it’s only during a supply shock that CBs usually ease. Many CBs will tighten when they see inflation happening without recession. That’s what they’re supposed to do. Now, let’s say we have a supply shock, which means that there is a generalized increase in prices and people’s purchasing power is now eroded because a key input is now soaking up substantially more of their resources, and those price increases get passed on to other goods in the production chain. I would normally call this inflation because those price increases are diffused across products all over the economy; you don’t, however, you just say it is “prices going up because of scarcity.” Again, we disagree on semantics, but we at least agree on what is happening. So the question is whether an eased monetary policy is reasonable in this situation. I imagine that your position is that no, because an eased monetary policy is pretty much never justified, because it might lead to inflation, and everyone will just get used to the new prices and we’ll have a new equilibrium for everything. Now that equilibrium will be at a higher price for everything in the economy, but that isn’t inflation, as far as you’re concerned. I would say - and this is something on which reasonable people can disagree - that some short term easing can be suitable in this scenario as a temporary measure to make it easier for individuals and companies to transition to new equilibria. Supply shocks are usually sudden and unexpected, and therefore pre-existing agreements may need to be renegotiated, plans for conservation and asset deployment may need to be re-evaluated, and it will be a net loss for the economy if people have insufficient liquidity or wiggle room to adjust to these economy-wide shifts. Supply shocks can be temporary or permanent. A supply shock from a failed wheat crop or a politically motivated oil embargo like the 1970s is almost certainly temporary. In this scenario, we can expect prices to return to previous levels when the supply disruption passes. Given that this event is temporary and unexpected, additional credit/money supply can be useful as a bridge to reduce disruptions and effectively borrow from the future, when we can expect supplies to be more plentiful than they are now. The fact that it is reasonable to expect supplies to be more plentiful in the future is the reason that this is rational. Borrowing today when supplies are not more plentiful in the future is definitely a bad idea. What if the supply shock is permanent, such as a large portion of arable land going out of production, or some key input being discovered as poisionous or a supply of oil being completely destroyed permanently. In that case, the problem is that this will reduce the real productive capacity of the economy. The production-possibilities frontier will shift inward because we have fewer resources. Potential GDP will go down and NOT go back up. The recession that follows will be painful, and all the more so because it will be combined with rising prices. The danger here is that a central bank might mistake this situation for a recessionary gap and start printing up money until we get back to previous levels of production. This will eventually exacerbate the price rise, and create both the cost-push price increases that come from the supply shock, and additional monetary inflation that we both call inflation. So printing money until we get to the previous level of production is a recipie for more inflation. However, some monetary easing to allow for retrofitting and adaptation (of physical and human capital) to the new environment is justified. This is best done with both monetary and fiscal policy in practice, although fiscal policy can run into troubles if the policy designers try to pick adaptation technologies too specifically. Even though in a permanent supply shock, we will get a permanent decline in potential GDP, that doesn’t mean that innovation and improvements all stop. The economy can start to grow again and even surpass the old levels of production as technology and productivity improvements are discovered and installed. It’s just that it will grow off of this reduced base. So there are a lot of contingencies to consider here. I find that blanket statements about monetary policy very hard to stomach, because it really depends on what the policy priorities are.
Then do we measure inflation on a macro scale or on an individual product basis? /don’t go the CPI route
Well I guess we have a difference in what we consider the definition of inflation to be. Since it appears that you are irreconcilable to the ‘mainstream’ definition of inflation there is no point in continuing this.
You wanna see inflation, look at the length of individual posts over the course of this discussion. Holy cats, hold on while I get my kindle. Seems we’ll have to agree to disagree on the definition.
bchad, Nicely put. I’m with you all the way up until the discussion of monetary policy. The only exception being that I would would argue that you can measure inflation as I define it by calculating the number of currency units available for immediate exchange, but that’s really not important as it stems from the same definitional issue we’ve been over already so let’s forget it. Not surprisingly, we differ over monetary policy. As you say, that’s a pretty standard point of contention amongst economists. I completely agree that blanket statements about monetary policy are utterly useless. Let’s leave it at that. I enjoyed our back and forth. If I didn’t respond to someone’s question/criticism at some point, sorry.
There is only one way to truly settle this debate: a bchadwick versus Hayek rap off. Until then I remain un-swayed by either side. http://www.youtube.com/watch?v=d0nERTFo-Sk
i have a beat box - whoever goes first, let me know if you want me to set it to ‘diss’ or ‘rep build’
I promise the last thing in the whole world anyone wants to see is me rap!