On Monetary Inflation Leading to Price Inflation

laliberty:

heavygrenadier:

After reading what Dan linked, I realized that at the root of the Austrian definition of inflation is their belief that an increase in M necessarily leads to increases in prices.

Again, if I print up a bunch of currency and sit on it, there has been an increase in the money supply but there would be no increase in the general level of prices.

So if an increase in the money supply (inflation) doesn’t lead to a general increase in prices (price inflation) then inflation doesn’t actually seem bad because price inflation is what erodes real savings, wages, and creates other intertemporal distortions.

Austrians do not claim that an increase in M necessarily leads to price inflation under any and all conditions. Instead, we assert that it tends to. But if - like you explain - the new money is not actually introduced into the economy (which includes even non-circulated money since there would be a reasonable expectation that it eventually will be. After all, what purpose is served by money that earns no interest, is not counted as a store of value, and is never exchanged?) or if demand for the money increases enough to offset the new supply, then that may not necessarily lead to price inflation.

Mises, in his Theory of Money and Credit, built that demand caveat right into his definition of inflation:

In theoretical investigation there is only one meaning that can rationally be attached to the expression Inflation: an increase in the quantity of money (in the broader sense of the term, so as to include fiduciary media as well), that is not offset by a corresponding increase in the need for money (again in the broader sense of the term), so that a fall in the objective exchange-value of money must occur.

Hazlitt, in What You Should Know About Inflation, offered this caveat by framing it in terms of the supply of goods that money would be used to exchange for:

When the supply of money is increased, people have more money to offer for goods. If the supply of goods does not increase — or does not increase as much as the supply of money — then the prices of goods will go up.

Indeed, Hazlitt later stated as true that “to attribute [price] inflation solely to an increase in the volume of money is ‘oversimplification.’” And went on to provide other means with which money can be made to change in value.

The value of money, like the value of goods, is not determined by merely mechanical or physical relationships, but primarily by psychological factors which may often be complicated. 

Also, Hazlitt noted that an expectation in a change in the supply of money can also lead to changes in prices:

It is also an oversimplification to say that the value of an individual dollar depends simply on the present supply of dollars outstanding. It depends also on the expected future supply of dollars. If most people fear, for example, that the supply of dollars is going to be even greater a year from now than at present, then the present value of the dollar (as measured by its purchasing power) will be lower than the present quantity of dollars would otherwise warrant.

Rothbard, in What Has Government Done to Our Money?, explained that the process of new money entering and circulating through the economy is what drives price inflation:

[After the first creators] take the newly-created money and use it to buy goods and services… The new money works its way, step by step, throughout the economic system. As the new money spreads, it bids prices up—as we have seen, new money can only dilute the effectiveness of each dollar.

So it is only under certain conditions (which, ultimately, are nearly all real-world conditions) in which monetary inflation “necessarily” leads to price inflation. When Austrians use the terms inevitable and necessarily, as Mises does here, it is by implicitly assuming - as all economists tend to - ceteris paribus conditions:

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.

Again, the new money must be introduced into the economy (or recognized to exist and therefore expected to be used) and demand for this new money must not increase commensurate to the new supply. Only under these conditions can the “Austrian definition of inflation” be said to state that an increase in the money supply necessarily leads to an increase in price inflation. 

What we do explain is that price inflation is a primary consequence of monetary inflation and, conversely, that monetary inflation is the true cause of price inflation (Austrians are usually careful to distinguish between such inflation and mere changes in prices). Not many years ago, this was mostly an uncontroversial and pretty universally accepted truth. Indeed, many Keynesians and Monetarists today will claim a “target” for price inflation (usually 2% or 4% or some ostensibly innocuous - and ultimately dubious - figure) and flatly recognize that the central bank’s mechanism for monetary expansion is precisely the primary means to that end. Austrians, like other economists, understand that price inflation is the goal of monetary policy.

Assuming that the demand for money is always constant for the remainder of this post and doesn’t play a factor in keeping prices static.

I think that the problem here is that there are a few schools of thought within the Austrian camp. One that believes in the hard-line Quantitative Theory of Money, where any new money instantly leads to inflation. Another, which applies a more flexible approach to money supply increases and views increased supply as “eventually” leading to inflation. Within that second group, there can be smaller niches of thought, where some believe in sticky prices and some don’t. Correct me if I’m wrong here, but most Austrians don’t believe in sticky prices, correct?  

My take:

Certainly, the introduction of additional liquidity which has no demand and is introduced into circulation can lead to inflation. But even this is no guarantee. It is possible that you can increase money supply, not just to those who hoard it, but into the system, beyond the system’s demand for additional funds and then at a later time decrease the money supply before any inflation takes place and you’ll have no inflationary impact. It’s no guarantee but it is possible. 

In other words, it’s all about the stickiness or unstickiness of prices. 

If you believe that prices are sticky, then you also believe that introduction of additional capital can have a delayed impact and that one can counter that impact and decrease the money supply before prices react. 

As Hazlitt said, it’s all psychological. Prices can change irrespective of money supply because the prices are set by the preferences of people.

I personally believe in price stickiness, for many reasons; contracts, wages with yearly raise agreements, convenience, laziness, etc, etc. Lot’s of reasons why prices might stay static longer than they should.

For this reason I think that it is possible to introduce additional money into a system and not have a (eventual) inflation. There are some Austrians who would disagree and there are some Austrians who would say I’m not an Austrian. 

Side Note: I like this discussion and I think that almost all of economics should focus on inflation because it is the key, one way or another. It’s probably safe to say that the three main schools (Austrian, Keynesian and Monetarist/Chicagoan) differ on inflation as the main factor. Both on the causes and the impact of inflation and it’s toxicity to the system. Fun topic. 

P.S. I’m just wrapping up 20 hours of work, 80 hours this week, so if this is a bit incoherent, I’m sorry. 

EDIT: i forgot to comment on the last paragraph that LAL posted. I agree that price inflation is the goal of monetary policy. Because there’s a belief that current spending/debts are made more affordable in the future via inflation. You can secure spending today and finance it overtime so that once the debt is paid off, looking back in retrospect, the cost seems relatively lower because the money is worth less and supply is greater and more available. 

(via michaelangerlo)

heavygrenadier:

sugashane:

The Fed says that given the current situation, inflation isn’t an issue, but it would be if velocity where to increase. 

I think that they are being a little bit disingenuous here. Looking at commodity prices, they have obviously shot up as of late. 

Imagine if velocity were to increase, which it eventually will, how high will prices go? How hard will inflation hit?

Can the Fed figure it out in time or is the value of the dollar doomed?

Gold has been trending downward for quite some time.  

Why will velocity “eventually increase”?  There’s no iron law of velocity.  We could potentially have a permanently lower velocity.

The Fed has a lot of tools at its disposal to stop inflation, and the lessons from the 70s (just like the lessons from 1929) will make the Fed act quickly if inflation starts up.

You’re right, it might not increase. Nothing is guaranteed. 

But M2 is at a historical low and bank holdings, which are increasing only due to QE, are at an all-time high. Banks are just sitting on the money. They don’t have to eventually use it, but they probably will. 

Sure, we could be headed for very low velocity, but there’s no way that you believe that. Besides, wouldn’t very low velocity with a high holding rate by banks lead to either a credit crunch or force the Fed to just increase printing of money?

Either way, I’m not a fan. 

(via libertarians-and-stoya)

The Fed says that given the current situation, inflation isn’t an issue, but it would be if velocity where to increase. 

I think that they are being a little bit disingenuous here. Looking at commodity prices, they have obviously shot up as of late. 

Imagine if velocity were to increase, which it eventually will, how high will prices go? How hard will inflation hit?

Can the Fed figure it out in time or is the value of the dollar doomed?

Econtalk: Richard Fisher on Too Big to Fail and the Fed

Richard Fisher, President of the Federal Reserve Bank of Dallas, talks with EconTalk host Russ Roberts about the problems with “too big to fail”—the policy idea that certain financial institutions are too large to face the bankruptcy or failure and need to be rescued or bailed-out. Fisher argues that “too big to fail” remains a serious problem despite claims that recent financial regulation has eliminated it. Fisher discusses various ways to deal with too-big-to-fail, including his own preferred policy. The last part of the conversation deals with quantitative easing and monetary policy during the crisis.

This was a good talk about The Fed, the Bailouts, the stupidity of too big to fail and so on. But it’s nice to hear from a regional Fed president who doesn’t support the majority of what the Fed has done or is doing. 

It’s important to remember that the Fed is made up of 12 different regional banks, all with their own private membership and that there are different groups and boards which have to discuss and approve policy. It’s not some grand scheme to bankrupt the country. It’s just another example of how humans and central planning is more than just fallible. 

Never attribute to malice that which is adequately explained by stupidity

Bitcoin Banking and Money Supply

A few bitcoin thoughts (been hurting my mind trying to think of everything before I invest). Please let me know if I’m making a mistake with some of this logic, or if there is more info on it. I’m just thinking out loud here. 

Note: All of this is under the assumption that 1. bitcoin stays static at 21 million coins. 2. bitcoin becomes the universal and only currency. 

- Loans are almost obsolete. At least those that bare interest, since fractional reserve banking becomes impossible. At least not based on bitcoins. 

- Loans can be made, but you would have to literally had over control of your bitcoins to the debtor. This would require either 100% trust or a securing of the loan in some sort of asset. of course this makes banking harder. it also makes entrepreneurship harder because you’d have to have something to leverage or earn complete trust of the lender.

- One of the ways I can think of how loans would work in a 100% BTC world is that your money would net you an actual ownership in whatever it was used for when loaned to strangers. 

- Banking can still be possible, bitcoin banks would charge a deposit fee to have multiple back up servers that store your info with near impossible to hack encryption and possibly offline back up of info as well as paper copy of the coding (yes, a little over kill, but it’s security). 

- These banks wouldn’t be able to pay you interest unless they were making money from your btc, which is, again, not possible given the fixed number of bitcoins. 

- How will money supply expand to keep up with the needs of the public? I understand that the set value of each coin can increase and that bitcoin can be broken down into smaller and smaller denominations, but at a certain point, you reach a limit. 

- I know that printing more dollars than there is a need for (beyond production value) creates inflation and that the smarter way is to create smaller denominations and let the value of people’s holdings go down. When you create new money, you must distribute it equally among whoever currently holds the money. If you don’t, then you are robbing holders of that money of value. Bitcoin can be broken down into smaller denominations, but there is a limit. I don’t like the limit because it creates a finality to the money supply. 

- If there is a limit on the total money supply, then you are theoretically creating a zero-sum system. Unless alternate currencies are also adopted and help expand the money supply that way. 

- I don’t like the implications of a world that only runs on Bitcoin. 

- I don’t like Zero-Sum games because it goes against everything free markets try to achieve. 

- If no other currency is created and BitCoin becomes the only currency in the world, it will be very valuable, but certain crucial aspect of economics would be difficult if not impossible. 

- REPEAT: I don’t like the implications of a world that only runs on Bitcoin. 

- There is this uneasy feeling of all money supply being finite. It means that one must lose money in order for someone else to gain money. Again; uneasy feeling. 

- Austrians like the gold standard and gold is more or less finite in supply. But we forget that along with the gold standard, money had to be expanded to include other precious metals, like silver and bronze and copper. But also, other substances were considered money, like jewels and such. 

- Likewise, bitcoin can not be the only currency in the world if decentralized digital currency is in fact the future. Being limited in supply will give way to complications down the road. 

Sorry if these are a bit hard to follow. I tried to give some order to it but these are just random thoughts and concerns about bitcoins going forward. 

if anyone has any thoughts to add to it, please let me know why I’m stupid and bitcoin is fantastic. 

Edit: Started this on reddit, join in: http://www.reddit.com/r/Bitcoin/comments/1bfuzr/think_out_loud_with_me_bitcoin_banking_and_money/




US to Win Currency War, Then ‘Implode’ 







The U.S. will win the global currency race to the bottom but decimate its economy in the process, economist Peter Schiff said.
With global central banks using currency manipulation to spur growth, capital markets have been awash in talk of what the fallout will be for investing strategies and consumers who may have to bear the weight of inflation.
LongtimeFederal Reservecritic Schiff said the central bank is being forced to prop up an ailing U.S. economy and the only way it can is by weakening the dollar.
"There is a currency war going on," Schiff said at the Inside ETFs conference presented by Index Universe. "The irony of a currency war which makes it different from other wars is the object is to kill itself. Unfortunately, I think the U.S. is going to win the currency war."
The CEO of Euro Pacific Capital in New York has been one of the market’s most outspoken supporters of gold as a hedge against inflation specifically and global turmoil in general.




He believes the metal will be a prime beneficiary of the currency war, while consumers will be its main victim.
"Anybody who believes there is no inflation isn’t shopping," he said.
Government cost-of-living indexes such as theconsumer price indexare a “total fraud. Consumer prices in the U.S. are moving up much faster than indicated by the CPI. It is manipulated. It is deliberately designed to mask inflation, not report it,” he said.
As for U.S. economic prospects, Schiff believes they are gloomy.
Gross domestic productindicated a slight contraction in the fourth quarter, though most economists expect that to change in future revisions and growth to be steady but modest through the year. In the meantime, the European sovereign debt crisis is beginning to return to the news as well, though the stock market hasn’t seemed to mind any of it.
But that could change quickly.
"We’re broke. We owe trillions. Look at our budget deficit, look at the debt to GDP (ratio), the unfunded liabilities," Schiff said. "If we were in the euro zone they would kick us out."
For Schiff, such talk, though incendiary, is fairly routine.
He found a good deal of interest at the conference, though, with attendees crowding him after his panel discussion even as some other participants were beginning to catch flights out.
"The Fed knows that the U.S. economy is not recovering," he said. "It simply is being kept from collapse by artificially low interest rates and quantitative easing. As that support goes, the economy will implode.” 





Sometimes the consistent propagation of doom & gloom, especially from a well known and trusted source, causes the doom & gloom to come into fruition. 
Even if I didn’t believe the US dollar was ready to collapse, which I do, I’d still bet that it would due to so much talk and preparation of it. The sell-offs will come and the investments will shift and it will all happen very quickly by those that have large sums of capital and the sophisticated machinery to detect and move said capital, leaving the unsophisticated investors at the bottom of the leftover rubble. 
My advice to small time players is to get out and never come back in or know how hot of a fire they are playing with. 

The U.S. will win the global currency race to the bottom but decimate its economy in the process, economist Peter Schiff said.

With global central banks using currency manipulation to spur growth, capital markets have been awash in talk of what the fallout will be for investing strategies and consumers who may have to bear the weight of inflation.

LongtimeFederal Reservecritic Schiff said the central bank is being forced to prop up an ailing U.S. economy and the only way it can is by weakening the dollar.

"There is a currency war going on," Schiff said at the Inside ETFs conference presented by Index Universe. "The irony of a currency war which makes it different from other wars is the object is to kill itself. Unfortunately, I think the U.S. is going to win the currency war."

The CEO of Euro Pacific Capital in New York has been one of the market’s most outspoken supporters of gold as a hedge against inflation specifically and global turmoil in general.

He believes the metal will be a prime beneficiary of the currency war, while consumers will be its main victim.

"Anybody who believes there is no inflation isn’t shopping," he said.

Government cost-of-living indexes such as theconsumer price indexare a “total fraud. Consumer prices in the U.S. are moving up much faster than indicated by the CPI. It is manipulated. It is deliberately designed to mask inflation, not report it,” he said.

As for U.S. economic prospects, Schiff believes they are gloomy.

Gross domestic productindicated a slight contraction in the fourth quarter, though most economists expect that to change in future revisions and growth to be steady but modest through the year. In the meantime, the European sovereign debt crisis is beginning to return to the news as well, though the stock market hasn’t seemed to mind any of it.

But that could change quickly.

"We’re broke. We owe trillions. Look at our budget deficit, look at the debt to GDP (ratio), the unfunded liabilities," Schiff said. "If we were in the euro zone they would kick us out."

For Schiff, such talk, though incendiary, is fairly routine.

He found a good deal of interest at the conference, though, with attendees crowding him after his panel discussion even as some other participants were beginning to catch flights out.

"The Fed knows that the U.S. economy is not recovering," he said. "It simply is being kept from collapse by artificially low interest rates and quantitative easing. As that support goes, the economy will implode.” 

Sometimes the consistent propagation of doom & gloom, especially from a well known and trusted source, causes the doom & gloom to come into fruition. 

Even if I didn’t believe the US dollar was ready to collapse, which I do, I’d still bet that it would due to so much talk and preparation of it. The sell-offs will come and the investments will shift and it will all happen very quickly by those that have large sums of capital and the sophisticated machinery to detect and move said capital, leaving the unsophisticated investors at the bottom of the leftover rubble. 

My advice to small time players is to get out and never come back in or know how hot of a fire they are playing with. 

cgpgrey:

Today is the end of the Canadian penny.

eltigrechico:

In The Know : Should The Government Stop Dumping Money Into A Giant Hole?

"I LOVE THE MONEY FIRE!"

Charles de Gaulle, in 1965, predicting the global debt crisis due to the fiat currency of  the US. 

via

asker

openourminds-deactivated2013022 asked: simply the point is that this whole fucked up system could be solved by our govt. issuing it's own currency. paying off the fiat debt with fiat currency that the banks didn't EARN - they simply loaned profit into existence with no labor, OFF the backs of real laborers - get rid of the the 2 houses and instill a democracy - but that's not the reality. so we must loosen the FED grip first. how? STOP BORROWING. best way? pay the debt back? how? NOT by austerity. lol. look at the EU.

You are a perfect example of why I barely answer asks on here. 

The notion of THE Coin is not the federal government minting and using it’s own sovereign currency. The whole idea behind it is to create a fiat asset and use that to get more of the Federal Reserve’s fiat currency (the one thing you don’t want to happen). 

THE Coin would not be used to pay off debt to the banks, which you seem to be targeting. THE Coin would essentially be used to pay off debts the government has to other people, like the military, post office, social security and medicare. 

We don’t even try to pay off our debt. I’m not even sure we are paying off any principle at the moment. I think we barely pay the interest like a broke college student paying minimum payments. 

As for the rest of your ideas, you want to dump the House of Reps and the Senate? Oh god. As if we don’t already have a dictatorship… Besides, America is NOT a democracy, it is a Democratic Republic. It was founded as a Republic, but that has slowly changed. 

Stop borrowing? Yes, I agree. 

Pay back the debt? I disagree. Pay back other sovereign nations? Sure. Pay back the people (social security and private bond/bill holders)? Sure. But I don’t think we should pay back any of the debt obligations to the banks/Fed. Fuck ‘em. Let’s take a page out of the Icelandic Revolution and tell the banks to scram. 

- Sha

asker

openourminds-deactivated2013022 asked: LOL. no the coin doesn't have to be a trillion dollars. just like the FED loaning $ doesn't have to be backed by any standard. just a few keyboard crunches. the coin would be issued to PAY THE BANKS BACK with money we create out of thin aoir just as they do. it's playing their game back at them. we pay our debt back, issue a real SOVEREIGN MONETARY SYSTEM and the banks don't twist our arm like after JFK did the same. a trillion dollar coin with real value? LOL. you're too into the head space.

You’re right, the coin doesn’t have to contain a trillion dollars worth of platinum (or even be backed by a trillion dollars worth of platinum or anything for that matter). But, you would essentially be creating another fiat currency if it wasn’t backed by anything. 

I also think you’re very confused by who wants and benefits from the Federal Reserve and a fiat currency system with valuation based solely on confidence. The Federal Government does not want to end the relationship with the Federal Reserve. The Reserve helps debt disappear and gives the government endless money to spend while the government lets the Federal Reserve leech off profits via the taxation arm of the government all while the government protects the value of that currency through the military arm of the state. 

So, no, THE Coin isn’t trying to End the Fed, it’s giving it more power. We aren’t trying to “pay our debt back” with THE Coin, we are trying to borrow even more money by using THE Coin as leverage to obtain more Federal Reserve notes. 

asker

openourminds-deactivated2013022 asked: trillion dollar coin: pay banks back: reinstate sovereign monetary system; banks stop loaning to state, state loans to banks now. problem beginning to be solved.

I don’t think THE Coin is to become a loaning agent from State to Bank. It’s the opposite, actually. THE Coin becomes an asset which we  (The Federal Government) will use to leverage with the Bank (The Federal Reserve) so that the Bank will loan us more money so that we can continue to spend. 

This is the exact opposite of what we should be doing. In fact, not only are we now creating money out of thin air, we would also start creating assets out of thin air. 

You see, if THE Coin isn’t actually made of a trillion dollars in platinum, it is just a fiat currency, but we aren’t using it as such. instead, we are using it as collateral or leverage to obtain another fiat currency, US Dollars, from the Federal Reserve. 

Anyway, I haven’t yet looked into THE Coin with much detail because I’ve been dismissive of both the idea and the possibility that our government is that stupid or irresponsible. Minting THE Coin would be a public admittance that our currency and our system are completely arbitrary and our money is valueless and our system is imaginary. 

Maybe I should look into the idea more because you never know just how crazy politicians are, but as far as I’ve read, we’d mint THE Coin and send it to the Fed as a deposit for more federal liquidity. 

I may be completely wrong on this but as far as I know, that’s how it would work out. 

- Sha

moralanarchism:

Hans-Hermann Hoppe On How To Blow Away Paul Krugman


Boom.

Keynesian theory destroyed in less than 60 seconds by Hans-Hermann Hoppe.