money supply can grow much faster than inflation

[Sapiens]

Re: money supply can grow much faster than inflation

money supply can grow much faster than inflation

No. Money supply growth rate = rate of inflation.

Inflation is the growth rate of the money supply.

-Sapiens

[Sapiens]

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?

http://www.mises.org/fullstory.aspx?control=1298#

[jk]

Re: money supply can grow much faster than inflation

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

axioms are assumptions that are not and cannot be proven within a system of assumptions. that's what math is. if a so-called "axiom" can in fact be proven, assuming only other axioms, then it is not an axiom, it is a theorem. [i did a term paper as a h.s. junior attempting to prove that any infinite series which has an upper bound, has a least upper bound. this statement had been presented as an axiom in our textbook, but it appeared to me that it should have been a theorem. i did a fair job of proving it, before finding the original proof which had been done, i believe, in the 19th century.] these ideas of axiom and theorem should be presented in any good high school geometry course, in which you are taught the idea of proof.

this is not to say that all axioms are equally interesting. some systems of axioms generate interesting mathematics, while other systems of axioms may not be fruitful at all. further some systems of mathematics e.g. group theory, will turn out to be useful in, e.g., physics, while others, e.g. number theory, are to my knowledge not useful in this way, yet.

[bart]

Re: money supply can grow much faster than inflation

axioms are assumptions that are not and cannot be proven within a system of assumptions. that's what math is. if a so-called "axiom" can in fact be proven, assuming only other axioms, then it is not an axiom, it is a theorem. [i did a term paper as a h.s. junior attempting to prove that any infinite series which has an upper bound, has a least upper bound. this statement had been presented as an axiom in our textbook, but it appeared to me that it should have been a theorem. i did a fair job of proving it, before finding the original proof which had been done, i believe, in the 19th century.] these ideas of axiom and theorem should be presented in any good high school geometry course, in which you are taught the idea of proof.

this is not to say that all axioms are equally interesting. some systems of axioms generate interesting mathematics, while other systems of axioms may not be fruitful at all. further some systems of mathematics e.g. group theory, will turn out to be useful in, e.g., physics, while others, e.g. number theory, are to my knowledge not useful in this way, yet.

Your comment was in the context of word definitions:

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.

It not only seems to me that using multi valued logic in the specific when it was being used in the general, and also strongly implying that a dictionary is arbitrary in the general case, is quite odd and struck me as a bit Orwellian.

You also neglected to note that the other main definition of axiom is a self evident truth.

[bart]

Re: money supply can grow much faster than inflation

No. Money supply growth rate = rate of inflation.

Inflation is the growth rate of the money supply.

-Sapiens

That's only a partial definition and does not take into account growth or contraction in goods and services.

[Sapiens]

Re: money supply can grow much faster than inflation

That's only a partial definition and does not take into account growth or contraction in goods and services.

It is not. The contraction or growth of goods and services is something else, more like regression or progress.

Similar things are not the same.

-Sapiens

[Finster]

Re: money supply can grow much faster than inflation

That's only a partial definition and does not take into account growth or contraction in goods and services.

I think Sapiens' head is in the right place though. The central idea is that inflation is a monetary phenomenon, not merely the symptom of rising prices. We really only differ on the particulars. I don't subscribe to the "goods and services" part because that way leads to hedonics. Instead, I prefer money supply in relation to population. Both, however pose the practical problem of exactly what (goods and services or) population a particular money supply covers (since there are multiple money supplies in the world). Since there is no practical way to make that determination, ultimately we must resort to looking at prices.

But even this doesn't yet address the issue of how, assuming the money supply changes, the money enters or exits the economy. If one particular institution creates new money, it can enrich itself at the expense of others who hold it. Money supply is not generally created by distributing new money in equal amounts to all citizens, which means there is inevitably an inequity. That being the case, any added money supply involves a transfer of wealth without the assent of those from whom wealth is being transferred, and is therefore inherently fraudulent.

We have yet to hear from the proponents of inflation any explanation how they justify the involuntary taking that virtually every existing inflationary system involves.

[bart]

Re: money supply can grow much faster than inflation

It is not. The contraction or growth of goods and services is something else, more like regression or progress.

Similar things are not the same.

-Sapiens

Thats not correct - unless you just don't believe in basic economics or a decent dictionary, or like/prefer to use popular and water-cooler style definitions.

[Sapiens]

Re: money supply can grow much faster than inflation

Thats not correct - unless you just don't believe in basic economics or a decent dictionary, or like/prefer to use popular and water-cooler style definitions.

Mmmm, what is your definition of basic economics?

Where do you want to begin? Or better yet, where do you want to go?

-Sapiens

[Sapiens]

Re: money supply can grow much faster than inflation

I prefer money supply in relation to population.

Finster, I agree with you here 100%.

[blazespinnaker]

Re: money supply can grow much faster than inflation

If you want to say that monetary growth can not grow faster than monetary growth, yeah, I'll agree with that. But please, let's all use the same dictionary, ok?

[blazespinnaker]

Re: money supply can grow much faster than inflation

Something to read for the Miltonites in this thread..

http://www.thomaspalley.com/?p=59#more-59

That’s about the size of it, Tom. This to add, however. A couple of years ago Friedman published a column on the op-ed page of the Wall Street Journal in which he noted the comparative stability of the post-war economy, an outcome that he attributed to wise management by the Fed. This floored me! It seemed an explicit reversal of much of what he had advocated during his professional life, at least as far as discretionary monetary policy is concerned.

Milton Friedman: The Great Conservative Partisan

Milton Friedman died on November 16, 2006 at the age of 94. Without doubt, Friedman was one of the most influential (perhaps the most influential) economists of the second half of the twentieth century. Not only did he contribute to reviving belief in the economic efficacy of the market system, he also had a profound political impact by linking capitalism with freedom.

Friedman’s treatment of capitalism and freedom colored understandings so that many among America’s elite now see a simplistic identity between the two. However, the reality is a complicated tango whereby free markets promote certain dimensions of freedom but can also bruise others – including democracy, meritocracy, and equality of opportunity. To paraphrase George Orwell, in market systems we are all free but some are (a lot) freer than others.

In 1976 Friedman was awarded the Nobel Prize in economics for his contributions to scientific economics. These contributions are marked by two characteristics. First, they are imbued with an underlying conservative partisanship characterized by profound animus to government. Second, Friedman achieved public standing through his macroeconomic work, much of which has been discredited. In a sense, Friedman is the economist who lost the battle but ended up winning the war, convincing society to adopt his view of the world.

One of Friedman’s most widely recognized contributions is monetarism, which recommends that central banks target money supply growth. Monetarism flourished in the late 1960s and 1970s and was briefly adopted by central banks as a policy framework in the late 1970s and early 1980s. That experiment produced devastating interest rate volatility, prompting central banks to revert to their traditional practice of targeting interest rates.

Monetarism was supported by Friedman’s joint work with Anna Schwartz in which they argued that the Federal Reserve caused the Great Depression through mistaken monetary tightening. This was Friedman’s first major salvo in his crusade against government, implicitly blaming government for the Depression. Friedman’s claim has always smacked of the tail wagging the dog since the Fed’s tightening was modest and brief, suggesting an underlying instability of the 1929 economy. The 1929 stock market was characterized by feverish speculation, and the Fed would indeed have done better to provide easy liquidity when investors rushed to exit. However, that also proves the dangerous instability of financial markets and makes the case for an active government regulatory presence, the very opposite of Friedman’s philosophical perspective.

At the theoretical level, monetarism asserts that central banks control the money supply and should aim for steady money supply growth. Friedman even recommended replacing the Fed with a computer that would mechanically manage the money supply regardless of the economy’s state. Furthermore, he suggested the Fed aim for a zero nominal interest rate. If the equilibrium real interest rate is three percent, that policy implies steady deflation of three percent.

These monetarist propositions reflect a flawed understanding of money. Money is a form of credit - an IOU. If central banks try to control the narrow money supply, the private sector just moves to create other forms of credit. That is why the Fed was unsuccessful in targeting the money supply, and why predicating economic policy on the relationship between the money supply and economic activity is a will o’ the wisp. With regard to deflation, Japan’s recent experience has confirmed the lessons of the Great Depression. In a credit-money economy generalized deflation is catastrophic and should be avoided.

Monetarism’s most famous aphorism is that “inflation is always and everywhere a monetary phenomenon.” This saying reflects Friedman’s polemical powers, capturing for monetarists what all sensible economists already knew. Inflation is about rising prices, and prices are intrinsically a monetary phenomenon since they are denominated in money terms.

Sustained inflation requires that the money supply grow in order to finance transacting at higher prices. For Friedman, this made villainous central banks the exclusive cause of inflation because of his belief that they control the money supply. However, the reality is that the private sector can also inflate the money supply through its own credit creation activities. Additionally, central banks (viz. the Bernanke Fed) may be compelled to temporarily accommodate inflationary private sector pressures to avoid triggering costly recessions. The implication is that inflation can have different causes, something Friedman denied. Sometimes inflation is caused by excessively easy monetary policy or large budget deficits financed by central banks. Other times it is due to private sector forces, including speculative booms and conflicts over income distribution.

Monetarism asserts that monetary policy is all-powerful. Subsequently, Friedman changed his view and argued that monetary policy had no long-run real economic impacts. Friedman cleverly termed his later theory the natural rate of unemployment, thereby enlisting nature on his side.

His new theory supported an extreme conservative policy agenda that still lives. According to the theory, the minimum wage increases unemployment by driving up wages, and should therefore be done away with. The same holds for unions. No consideration is given to the possibility that these institutions create an income distribution that promotes mass consumption and full employment. Finally, since central banks supposedly have no long run effect on unemployment and wages, they are not responsible for labor market outcomes. Natural rate theory thereby allows the Fed and European Central Bank to take full employment policy off the table while protecting them from charges that their policies may contribute to wage suppression.

Close inspection reveals natural rate theory to be akin to a religious doctrine. This is because it is not possible to conceive of a test that can falsify the theory. When predictions of the natural rate turn out wrong (as they repeatedly have), proponents just assert that the natural rate has changed. That has led to the most recent incarnation of the theory in which the natural rate is basically the trend rate of unemployment. Whatever trend is observed is natural – case closed.

Since natural rate theory cannot be tested, a sensible thing would be to examine its assumptions for plausibility and reasonableness. However, Friedman’s early work on economic methodology blocks this route by asserting that realism and plausibility of assumptions have no place in economics. With most economists blindly accepting this position, the result is a church in which entry is conditional on accepting particular assumptions about the working of markets.

The theory of consumption is another area in which Friedman contributed. His permanent income theory of consumption sensibly argues that household consumption and saving decisions are made on the basis of households’ assessments of their long term sustainable income, and not just on the basis of today’s income. However, Friedman also asserted that all households save the same proportion of their sustainable income. This proposition is manifestly false, as shown by the behavior of the super-paid. It also has clear conservative implications. Since all save the same proportion, transferring income from higher paid to lower paid households generates no economic stimulus. Progressive taxes can still be justified on ethical grounds, but not on economic stimulus grounds.

Lastly, Friedman was an early proponent of flexible exchange rates. Whereas the argument that flexible exchange rates facilitate macroeconomic adjustment has worn well, Friedman’s arguments against the dangers of destabilizing speculation have not. In line with his ideological predisposition for markets and against government intervention, Friedman ruled out destabilizing speculation. His argument was there exists a fundamental equilibrium price, and if prices depart from this speculators see a profit opportunity and drive prices back. However, experience has shown that exchange rates and asset markets are prone to speculative bubbles, and it has been extremely difficult to find a relation between exchange rates and fundamentals – whatever they are.

While such findings do not support fixed exchange rates, they do support a case for sensible exchange rate management by well-informed officials who can do a better job than speculative casino markets. Yet, the triumph of Friedman’s anti-government economics means that this sensible policy approach has been ignored by U.S. policymakers.

In sum, Milton Friedman’s political economy helped provide a corrective to the excessive disregard of markets and the price system engendered by the Great Depression, and his advocacy of the power of economic incentives abides. However, Friedman was not a lone defender of markets. Keynes, himself, always held an enormous regard for the market system – what he termed the Manchester System. Leading American and British Keynesians also shared that regard. However, whereas these Keynesian economists understood the limits of the market and the importance of government in making capitalism work for ordinary people, Friedman did not. By all accounts, Milton Friedman was a considerate and compassionate person, and he was a revered teacher. However, his fame rests on his ideas, and those ideas suffer from an excess of conservative partisanship.

[Sapiens]

Re: money supply can grow much faster than inflation

Unfortunately, I sense religion in this discussion. I'm not really into religion as a substrate for discourse, so I'm exiting this thread.

I'm glad you're all fans of milton friedman, and he was a very powerful dude.

?

But I think going around creating your own definitions of words like inflation is particularly polite and then expecting us to discuss on your terms.

If you want to say that monetary growth can not grow faster than monetary growth, yeah, I'll agree with that. But please, let's all use the same dictionary, ok?

I don't expect you to do anything, the point is to distill, extract and understand the concept. If your definition of a concept causes you to commit errors in judgment and unpredictable outcomes, you have not understood what you are doing. Hence, you can refer to an increase in prices as inflation at your peril.

-Sapiens

[Sapiens]

Re: money supply can grow much faster than inflation

If you want to say that monetary growth can not grow faster than monetary growth, yeah, I'll agree with that. But please, let's all use the same dictionary, ok?

?

LOL, is this what in the US they call a Yogism? http://www.rinkworks.com/said/yogiberra.shtml

-Sapiens

[bart]

Re: money supply can grow much faster than inflation

Mmmm, what is your definition of basic economics?

Where do you want to begin? Or better yet, where do you want to go?

-Sapiens

No sense in going there. You either know what I'm talking about or are bored, or something else.

You're welcome to invent your own definitions and not use or believe in the precision ones that are in major dictionaries.