money supply can grow much faster than inflation

[blazespinnaker]

But on the whole it is simply not possible to continually create currency faster than population growth without its being inflationary.

Finster said something that I completely disagree with, and I've been thinking about this for awhile, and I think it is why I am greatly at odds with a lot of things that are said around here.

The money supply can grow as fast as inflation + productivity + growth in your producers.

What does this mean?

If globalisation adds tonnes more producers into the world, and they become much more productive, then you can increase the world money supply much more faster.

We see huge growths in M3 numbers and what not ... well, this is doable because as a world, we're becoming much more productive and globalisation (WTO) is adding a lot more in the way of producers.

Right now, this liquidity is not distributing itself evenly throughout the world wide economic system .. but rather it is finding homes in certain areas and creating speculative bubbles (because bubbling, I believe, is a viable economic activity for those who have experience with bubbles and there are no economic rules to stop it from happening). These bubbles will burst, cause a lot of pain, but I think in the end we will see a more even dispersal of economic wealth.

There are things that could screw this up, namely war, bird flu, macroeconomic bubbles bursting rapidly, climate change ... external, world wide factors which will cause problems with globalisation and productivity.

[Finster]

Re: money supply can grow much faster than inflation

Finster said something that I completely disagree with, and I've been thinking about this for awhile, and I think it is why I am greatly at odds with a lot of things that are said around here.

...

Right now, this liquidity is not distributing itself evenly throughout the world wide economic system .. but rather it is finding homes in certain areas and creating speculative bubbles (because bubbling, I believe, is a viable economic activity for those who have experience with bubbles and there are no economic rules to stop it from happening). These bubbles will burst, cause a lot of pain, but I think in the end we will see a more even dispersal of economic wealth.

There are things that could screw this up, namely war, bird flu, macroeconomic bubbles bursting rapidly, climate change ... external, world wide factors which will cause problems with globalisation and productivity.

Blaze, you start too many new threads. The loss of continuity makes it hard to keep comments in context.

The money supply can grow as fast as inflation + productivity + growth in your producers.

What does this mean?

If globalisation adds tonnes more producers into the world, and they become much more productive, then you can increase the world money supply much more faster.

We see huge growths in M3 numbers and what not ... well, this is doable because as a world, we're becoming much more productive and globalisation (WTO) is adding a lot more in the way of producers.

No. This is the selfsame screwed up paradigm that Greenspan used to justify getting us into the mess we're in now. Read my lips:

Productivity has nothing whatsoever to do with how much inflation you have.

Productivity is not now and has never been holding down inflation. Globalization is not now and has never been capable of holding down inflation.

Suppose ten years ago it took 5 man-hours of labor to produce something. Now, because of technology and productivity, it only takes 2.5 man hours of labor. The real cost of the item has therefore been cut in half. If there is no inflation, the resulting article therefore now costs exactly half as many dollars. If it costs the same dollars, then you have had 100% inflation over the course of those ten years. Had there been no change in technology or productivity, the dollar price of the article would have doubled.

Asserting otherwise is tantamount to having the government claim for itself all of the benefits of the advancement of technology. The rest of us may as well still be living in the stone age.

[WDCRob]

Re: money supply can grow much faster than inflation

Finster...Is this correctly restating what you just wrote?

Globalization and productivity growth allow central bankers to increase the money supply without a change in nominal prices.

If so, are there any benefits to stable (instead of falling) nominal prices?

[jk]

Re: money supply can grow much faster than inflation

finster, you can choose to define the value of the dollar as a measure of the hours of labor input [sounds very marxist, actually], then blaze can define the dollar by how many widgets can purchase with a fixed quantity of dollars. if you want, you can argue that your definition is better, more accurate according to some 3rd metric, more useful in generating useful conclusions. but neither of these definitions is written in the heavens.

[WDCRob]

Re: money supply can grow much faster than inflation

JK, if the cost (in whatever measurment you want to use) of producing something is cut in half, but the price doesn't change do you judge that to be inflation, or not?

And I'm not trying to wind you up. I've just managed to follow Finster's reasoning and I want to understand why someone would think it's not inflation.

[Finster]

Re: money supply can grow much faster than inflation

finster, you can choose to define the value of the dollar as a measure of the hours of labor input [sounds very marxist, actually], then blaze can define the dollar by how many widgets can purchase with a fixed quantity of dollars. if you want, you can argue that your definition is better, more accurate according to some 3rd metric, more useful in generating useful conclusions. but neither of these definitions is written in the heavens.

False. Techology and productivity can go as well as come. There are such things as wars and epidemics, after all. Remember the Dark Ages? Betcha dollars to donuts in those circumstances of falling "productivity" central bankers and other statist econotypes would switch to a labor-based definition of value.

But more to the point, trying to use widgets as a value standard leads to hopeless subjectivity, caprice, and fungibility. Just try, for example, to define the dollar in terms of a basket of today's widgets and carry the analysis back 80 years. One dollar today is worth probably 1/4000 of a flat-screen TV, while eighty years ago is was worth 1/infinity of a flat-screen TV. Application of reducio ad absurdum to your thesis (which so richly merits it), we conclude that we have had an infinite amount of deflation since 1926.

No ... the basket of goods is ever-changing. But the value of an hour of a man's time is, on average, just the same to him now as it was in the age of Shakespeare.

[jk]

Re: money supply can grow much faster than inflation

False. Techology and productivity can go as well as come. There are such things as wars and epidemics, after all. Remember the Dark Ages? Betcha dollars to donuts in those circumstances of falling "productivity" central bankers and other statist econotypes would switch to a labor-based definition of value.

But more to the point, trying to use widgets as a value standard leads to hopeless subjectivity, caprice, and fungibility. Just try, for example, to define the dollar in terms of a basket of today's widgets and carry the analysis back 80 years. One dollar today is worth probably 1/4000 of a flat-screen TV, while eighty years ago is was worth 1/infinity of a flat-screen TV. Application of reducio ad absurdum to your thesis (which so richly merits it), we conclude that we have had an infinite amount of deflation since 1926.

No ... the basket of goods is ever-changing. But the value of an hour of a man's time is, on average, just the same to him now as it was in the age of Shakespeare.

finster, definitions are arbitrary. they are axioms, not theorems. if you want to use widgets you chain weight them through intermediary baskets and so on ad infinitum. and i think the value of an hour with a life expectancy of 80 is not the same as the value of an hour with a life expectancy of less than a year. ask someone with cancer.

[Finster]

Re: money supply can grow much faster than inflation

finster, definitions are arbitrary. they are axioms, not theorems. if you want to use widgets you chain weight them through intermediary baskets and so on ad infinitum. and i think the value of an hour with a life expectancy of 80 is not the same as the value of an hour with a life expectancy of less than a year. ask someone with cancer.

You should try reading a post before responding. You apparently missed the part about "on average".

And if you have one method which requires going through all sorts of questionable contortions like "chain weightings" and one that doesn't, you prefer the one subject to the largest number of errors?

Finally, if you are going to insist on using "stuff" as your standard of value, then I am going to insist upon including a mile of pristine ocean front in that basket. As global population has doubled from three to six billion, by my reckoning the real value of that mile has doubled. Including things whose real cost has fallen, such as silicon chips, gives your inflation statistic a rather benign bias, no? Suppose you broaden your basket to include things whose real value has risen? Like that Lake Tahoe resort property??? Empty space for landfills? Pure river water? Clean air?

[Spartacus]

Re: money supply can grow much faster than inflation

if the cost of producing is cut in half, but the price doesn't change ... inflation, or not?

maybe yes, maybe no. Your implicit definitions leave you open to price/inflation ambiguities.

if the demand for a product increases incredibly, and/or the supply is decreased, the price could go UP as the cost of production falls, even if it falls to near zero - and theoretically, at the same time, all other prices could be going down - either because of a general deflation, or because the supply of all other products.

I lean toward DEFINING increased liquidity as inflation.

If product demand, supply and money-dispensation patterns remain constant, increased inflation GUARANTEES general price increases, IMHO. More money going through identical channels must raise prices.

But they (demand, supply and money-dispensation patterns) never do remain the same, so we get some demand going up while other demand decreases, some supply rising and other supply decreasing.

[Finster]

Re: money supply can grow much faster than inflation

Finster...Is this correctly restating what you just wrote?

Globalization and productivity growth allow central bankers to increase the money supply without a change in nominal prices.

If so, are there any benefits to stable (instead of falling) nominal prices?

That would be correct, provided you are focusing on the prices of produced goods. Other things, particularly land and natural resources, tend to rise in real value as population increases.

Nominal prices of produced goods ought to fall in the absence of inflation so long as technology and productivity advance. Not everything, however, is a produced good.

I'm not necessarily arguing for a totally inflation free monetary system. Such an argument might be advanced, but the gist of what I'm saying here is that inflation has been running much higher than the government admits. The "productivity" argument advanced by Greenspan was essentially a rationalization of higher inflation. Seemed fine then, since inflation in the early stages usually feels good, just like cocaine might. When the prices of stocks and bonds and real estate are soaring, it's inflation just the same, but people like it. That is, until it starts lifting the prices of gasoline and heating bills. Then they don't like it so much. But this is the insidious thing about inflation. Greenspan took advantage of that phenomenon, chalked it up to "productivity", and became a rock star central banker. But his real legacy persists today and is not nearly so flattering.

if the cost of producing is cut in half, but the price doesn't change ... inflation, or not?

If the real cost of producing is cut in half and the price stays the same, you've had exactly the same amount of inflation as if the real cost of producing stayed the same, but the price doubled. The "cost of producing" is a real economic phenomenon having nothing to do with the presence or absence of inflation. "Inflation", as the recently deceased Nobel Laureate Milton Friedman stated, "is always and everywhere a monetary phenomenon".

[WDCRob]

Re: money supply can grow much faster than inflation

Thanks to both of you. Spartacus, I should have said so, but I was holding everything else equal to get at the theoritical question Finster has now answered.

It's not clear to me, logically, why people disagree with him or find his premise controversial. I can understand the argument over whether FDI is the best measure, but that seems to avoid the underlying question I was asking (or trying to ask).

[blazespinnaker]

Re: money supply can grow much faster than inflation

Yah, finster, you're talking about falling prices. General price decline (ie, deflation) being a good idea is a pretty novel idea. Do you have a link to some research on that topic which agrees with your premise?

I think the fed wants to keep FED inflation (i'll use FED, hopefully that'll make you happy) above 0 because below 0 would mean business people would make money by taking 0 risk. That's not so good for any economy.

There is a balancing act, and the fed wants to keep FED inflation between 1% and 2%. Just enough to discourage risk takers from sitting on their money, but not too high to let FED inflation roar out of control. Productivity and globalisation have created deflation risks, and when the economy went into a tailspin in 2001, that risk was severly heightened.

Galbraith ads a very interesting twist to this all, because he's thinking that FED inflation isn't a problem. I find that to be a pretty fascinating thought.

Also, as for me posting a lot of threads, I have to say I find you hijack quite a few of my threads, so I guess that makes us even. ;) Anyways, this thread is about how money supply can grow faster then inflation. The other one was about Galbraith. Having to weed through dozens of responses to find out what they're about is a little tough..;) But, I'll cut down on thread posting if it'll make you happy. ;)

[jk]

Re: money supply can grow much faster than inflation

how money supply can grow faster than inflation.

easy. hedonically adjust the numbers after first throwing out everything [like food and energy] that's getting more expensive very fast, and reducing the proportional representation of everything [like healthcare] that's growing moderately fast.

alternatively, if you'ld like the monetarists to think the money supply isn't growing faster than "inflation," stop publishing any measure of the money supply that's growing faster than you'd like "inflation" to be.

preferably, do both and neither the growth in the money supply nor inflation will look very menacing.

problem solved!

[bart]

Re: money supply can grow much faster than inflation

finster, definitions are arbitrary. they are axioms, not theorems.
...

What a wild semantic content that has... the concept of an arbitrary axiom sounds like it could have come from 1984?

[Finster]

Re: money supply can grow much faster than inflation

Yah, finster, you're talking about falling prices. General price decline (ie, deflation) being a good idea is a pretty novel idea. Do you have a link to some research on that topic which agrees with your premise?

I think the fed wants to keep FED inflation (i'll use FED, hopefully that'll make you happy) above 0 because below 0 would mean business people would make money by taking 0 risk. That's not so good for any economy.

There is a balancing act, and the fed wants to keep FED inflation between 1% and 2%. Just enough to discourage risk takers from sitting on their money, but not too high to let FED inflation roar out of control. Productivity and globalisation have created deflation risks, and when the economy went into a tailspin in 2001, that risk was severly heightened.

No. Without inflation, people invest in projects because of their productive merit. With inflation, they buy stocks just to get out of depreciating dollars. This results in a lot of wasteful projects being funded. Like companies whose only virtue is having a .com at the end of their name.

But we don't have to resort to hypotheticals. Before we had "FED inflation" the US grew from a ragtag group of colonies to the most productive economic power in the world. Now that we have it, it's on the decline.

But don't let silly things like facts and logic get in the way of your pet theory...