Inflation and Deflation of Price and Money Supply

[bitinlet]

Yes.  Modern economic theory is Keynesian.  It can get confusing sometimes, because the textbooks just say "Economics", and not "Keynesian Economics".  A shame really, because Keynes himself isn't so bad compared to those that formed the school around his name.

Governments love Keynesianism, because governments love to meddle, and Kenyesianism says that meddling is good.

As far as I remember, a modern economic theory based on Keynesian is called Neo-Keynesian economics. And Monetarism (in its present state often referred to as Neo-Monetarism) is also a modern economic theory. In fact, I don't remember the textbooks I happened to read calling the Keynesian economic theory as just "Economics"...

Yes, governments may love Keynesianism, but to say that they they love only Keynesianism would be a bit far-fetched (mildly speaking). They employ Monetarism principles just as easily, especially in questions of money supply and central banking

No, they pretty much love Keynesianism. Monetarism is more towards a self-regulator style than Keynesianism is. Politicians prefer to spend without consequence because they prefer to be able to be re-elected and want to reward the special interests that got them the money to get them where they are. As for the Fed, and monetary policy, they have the dubious task of the dual mandate. For argument's sake, let's say the Phillip's Curve holds, how the F are they supposed to do their job? Fight unemployment, you get more inflation. Fight inflation, you get more unemployment. Trying to fight both is Keynesianism idealism at it's stupidest.

[deisik]

As far as I remember, a modern economic theory based on Keynesian is called Neo-Keynesian economics. And Monetarism (in its present state often referred to as Neo-Monetarism) is also a modern economic theory. In fact, I don't remember the textbooks I happened to read calling the Keynesian economic theory as just "Economics"...

Yes, governments may love Keynesianism, but to say that they they love only Keynesianism would be a bit far-fetched (mildly speaking). They employ Monetarism principles just as easily, especially in questions of money supply and central banking

No, they pretty much love Keynesianism. Monetarism is more towards a self-regulator style than Keynesianism is. Politicians prefer to spend without consequence because they prefer to be able to be re-elected and want to reward the special interests that got them the money to get them where they are. As for the Fed, and monetary policy, they have the dubious task of the dual mandate. For argument's sake, let's say the Phillip's Curve holds, how the F are they supposed to do their job? Fight unemployment, you get more inflation. Fight inflation, you get more unemployment. Trying to fight both is Keynesianism idealism at it's stupidest.

If we exclude voluntary unemployment (which by definition doesn't make much sense to fight with unless we're in a communist state or on something else beyond economics), what exactly are you blaming Keynesianism in? What's inherently wrong in trying to lower involuntary unemployment and keep inflation within the limits? As far as I remember, the Phillips curve is nowadays considered as being too simplistic and the relationship is not actually observed in the long term...

[bitinlet]

As far as I remember, a modern economic theory based on Keynesian is called Neo-Keynesian economics. And Monetarism (in its present state often referred to as Neo-Monetarism) is also a modern economic theory. In fact, I don't remember the textbooks I happened to read calling the Keynesian economic theory as just "Economics"...

Yes, governments may love Keynesianism, but to say that they they love only Keynesianism would be a bit far-fetched (mildly speaking). They employ Monetarism principles just as easily, especially in questions of money supply and central banking

No, they pretty much love Keynesianism. Monetarism is more towards a self-regulator style than Keynesianism is. Politicians prefer to spend without consequence because they prefer to be able to be re-elected and want to reward the special interests that got them the money to get them where they are. As for the Fed, and monetary policy, they have the dubious task of the dual mandate. For argument's sake, let's say the Phillip's Curve holds, how the F are they supposed to do their job? Fight unemployment, you get more inflation. Fight inflation, you get more unemployment. Trying to fight both is Keynesianism idealism at it's stupidest.

If we exclude voluntary unemployment (which by definition doesn't make much sense to fight with unless we're in a communist state or on something else beyond economics), what exactly are you blaming Keynesianism in? What's inherently wrong in trying to lower involuntary unemployment and keep inflation within the limits? As far as I remember, the Phillips curve is nowadays considered as being too simplistic and the relationship is not actually observed in the long term...

Lol. Why even bring up voluntary unemployment (structural and frictional, is the correct name by the way). You know what I meant.

As for the Phillip's Curve, I said "for argument's sake, let's say it holds".... which it often does seem to hold, except in times of stagflation. That's why they use the expectations augmented Phillip's Curve. Anyway, the problem with trying to lower cyclical unemployment and fight inflation is that there's (most often) a trade-off between the two.... AND... we have monetary AND fiscal policy. Even for Keynesians, why not devote one to each? Further, having the dual mandate leaves one of the two (inflation or unemployment) being favored over the other within the monetary policy framework. Having the dual mandate also encourages bubbles. How? Well, it encourages more targets (inflation and unemployment), and therefore, more proactive monetary policy. We get more situations were interest rates are altered to stimulate growth. This leads to excess supply or excess demand (bubbles). We also get a bigger likelihood of money printing.

Long story short, the dual mandate is not a wise decision because, for the most part, there's a direct trade-off between unemployment and inflation rates (expected or even current). 

[godislove]

The only problem with inflation and deflation is that prices, wages, bank accounts, and contracts are "sticky" in terms of the number that shows up on shelves, paychecks, bank statements and contracts.  If our perceived valuation of the currency immediately changed in proportion to the money supply (that is, if all those number affixed to everything immediately changed), then nothing would change from an increase or decrease in the money supply (assuming the increase in the supply were spread around according to where the existing money is such as in the bank accounts).

So rather than letting the tail wag the dog, the money supply should follow the perceived valuation that was expected when the numbers for the prices, wages, and contracts were selected.  This would allow the (von Mises) "price signal" to accurately reflect the relative value of things in society to each other rather than to an artificially contrived currency "value". Keynes, Hayek, and Benjamin Graham agreed that a basket of commodities was the way this should be done.

Bitcoin is a largely reactionary movement to the inflationary theft that is occurring.  Trying to imitate gold is not such a bad thing, but not ideal to classical economists and most of the modern ones.  Radical republicans think it is, but Austrians who follow Hayek do not think gold is ideal (search "basket commodities hayek"), same as Keynsians who follow Keynes do not like uncontrolled printing.

Worse than inflation, the printing is not going towards M2, but towards buying toxic assets off the banks at the future expense of the taxpayer.  This is why inflation is not (yet) worse now than in the 1990's.  Once the banks' balance sheets are secure, they'll try to stop the printing and the interest rates will rise (bank profits), again at taxpayer expense (and existing bondholder expense).  But that will cause housing values and Fed bonds to go down from the rising interest rates and since those assets are now held by the taxpayer through the Fed, the government has to print away the increasing interest rates, but this time it might go into M2 (inflation) and keep the unemployment numbers from looking too bad for awhile.  

November unemployment report looks great, showing steady improvement compared to last year in all 7 categories they mentioned (manufacturing was the only category that went down but they neglected to mention the decrease).   But based on percent of population "not in labor force" (a more honest measure of unemployment), there was 0.6% increase in unemployment year over year, rather than the reported 0.8% decrease. So they report everything is better, and yet there was a 1.4% increase in the percent of the population that is not employed.  This decrease is because the $1 trillion was printed to continue buying toxic assets from the banks so that banks could drive up stock prices instead of being sent to main street.  From TARP until now is when the theft has occurred, not what happened before TARP.

[deisik]

The only problem with inflation and deflation is that prices, wages, bank accounts, and contracts are "sticky" in terms of the number that shows up on shelves, paychecks, bank statements and contracts.  If our perceived valuation of the currency immediately changed in proportion to the money supply (that is, if all those number affixed to everything immediately changed), then nothing would change from an increase or decrease in the money supply (assuming the increase in the supply were spread around according to where the existing money is such as in the bank accounts)

The problem with such logic is that the newly printed money in reality doesn't enter the economy uniformly. In fact, even if government creates money, it may not flow into the economy at all (so called "liquidity trap"). So, even if prices, wages, etc were were perfectly elastic, that wouldn't mend matters much better...

[godislove]

The only problem with inflation and deflation is that prices, wages, bank accounts, and contracts are "sticky" in terms of the number that shows up on shelves, paychecks, bank statements and contracts.  If our perceived valuation of the currency immediately changed in proportion to the money supply (that is, if all those number affixed to everything immediately changed), then nothing would change from an increase or decrease in the money supply (assuming the increase in the supply were spread around according to where the existing money is such as in the bank accounts)

The problem with such logic is that the newly printed money in reality doesn't enter the economy uniformly.

Yes that's what I said in the parenthesis you quoted.

In fact, even if government creates money, it may not flow into the economy at all (so called "liquidity trap").

Yes that's what I said in the rest of the post showing how hoarding is not even necessary to cause a liquidity trap.

So, even if prices, wages, etc were were perfectly elastic, that wouldn't mend matters much better...

Yes, if the government prints money to go to a special group, then price and wage elasticity will not help. 

I'm glad you agree with everything I said.

[deisik]

So, even if prices, wages, etc were were perfectly elastic, that wouldn't mend matters much better...

Yes, if the government prints money to go to a special group, then price and wage elasticity will not help.  

I'm glad you agree with everything I said.

If so, then the problem with inflation and deflation for the reason of prices, wages, etc being inelastic is certainly not the only one, right?

[godislove]

If so, then the problem with inflation and deflation for the reason of prices, wages, etc being inelastic is certainly not the only one, right?

You're assuming a monetary authority is biasing the method of inflation or deflation, whereas I was describing a situation where no one is biasing the method of inflation and deflation.  So the problem is with the central authority, not inflation or deflation. A non-biasing method of inflation and deflation is possible now thanks to cryptocurrencies electronically capable of handling the details everywhere.  As an example to indicate it's not inflation and deflation that is the problem, but a bias from a central authority, consider bitcoin transaction fees, which are not inflationary or deflationary, but bleed wealth from the group of high-frequency transactors to low-frequency transactors.  You may think it is only fair to charge the people who use the nodes most to get charged, but the ones who use the system to store wealth are getting a great benefit without paying for it. The transactions add legitimacy and security to the wealth that is stored.  My estimate is that the fees can't be more than 1 Satoshi per transaction AND equitably function as the world's monetary supply (At $20 T world currency supply,  1 satoshi = $0.01), such as smart phones being used 2 or 3 times per day to buy stuff like $1 of a kilogram of vegetables in a Peruvian marketplace, without having a noticeable long-term biasing effect at the expense of the poor for the benefit of the wealthy (as detailed in my previous post).  The poor spend a higher percentage of their net worth each year, and in smaller transactions.  But the existence of all the small frequent transactions give legitimacy to the value of the large bitcoin holders, and ad security to the infrequent large transactions that a 51% attack will wait for.  So although the nodes and the core programmers look only at the network costs, there is more to it than that if you want an equitable coin.  So inflation and deflation per se are not a problem except for stickiness.  Central authorities making bad decisions is the problem.  1% per year may not sound like much to bleed from the poor to the wealthy, but I think it matters.  To say "it's not as bad as credit card" and "this is a great service to the poor" does not solve the problem and make the coin closer to ideal.

[godislove]

A fixed-supply currency is deflationary relative to prices if its use in the economy (or the economy it's used in) expands.  It will slow the economic expansion rate thanks to sticky prices, wages, and contracts, which might be good.  Sudden deflation results in crops rotting while people starve, so inflation to offset deflation is not always bad.  The money supply should expand with the economy that uses it, as measured by a basket of commodities so that all our numbers on things stay the same and the price signal reverberating through the system can be accurate.  The economy is an artificial intelligence algorithm that needs an accurate price signal as Eric Drexler (nanotechnology guy) described in his Agoric Papers.

In free markets without democratic government using votes to spread the wealth, the wealthy have always had ways to slowly increase their percent share of the wealth and thereby control other people more effectively.  They plan ahead better.  This is great for the biosphere because it causes feudalism and population decrease through widespread misery, except for the wealthy who usually only break even thanks to slowing the general economy of strong middle class buyers.  Bitcoin is a boon for the wealthy, even having its roots in creating more wealth for the wealthy (control of other people) in exchange for no work except to bet on the right programmers to do their bidding.  Early adopters also get wealthy in exchange for promoting it so that the wealthy can learn about it and drive up the price.  Securing control of your assets for all future time is securing a debt that society owes you.  But society leaps ahead only when the polarizing state of wealth is ended with debt erasure, freeing the masses.  Bitcoin is doing this. It is a debt-erasure of dollar-backed assets.  You spend your dollars on it and dollars flood the economy, devaluing themselves.  It is going to erase our old debt structures.  But it is enabling the next one.  Satoshi and Hayek liked the idea of competing currencies, but I doubt if they had debt erasure in mind as a way to re-democratize society.  Litecoin is not a bad bet to make.  Silver was a way to take control back out of the holders of Gold.  There's a great theory as to symbolism in the Wizard of Oz (oz = ounce) as speaking of the times in which it was written, where silver was the original color of her shoes and she only needed to tap them to get back home, away from the enslaving path and promise of the gold (yellow brick) road, and the fake (fiat) green (emerald) city.  Oiling industry (tin man), and making farmers smarter (scarecrow), and giving courage to the voters.

[bitinlet]

The term "sticky" in reference to wages, prices, etc. is a short run phenomenon. Further, that phenomenon may not need to exist (even in the short run) in the future, if the prices/wages can move freely. But, that's speculative. Clearly, there is some degree of stickiness in the very short term. My point is technology is making this less necessary (imagine pricing that varies - I can envision this, imagine wages that vary based on something - if you're paid in Bitcoin, this is already necessary).

I think that Bitcoin prices (for goods and services) will stabilize at some point in the future. The current problem with Bitcoin prices stabilizing is simply a function of Bitcoin exchange rate volatility. In other words, it all stems from domestic currency valuations. As is, the existing currencies (like the dollar), are over-supplied and under-demanded. This liquidity that central banks pumped out is sloshing through our system and not being utilized much. On top of this, governments and people remain in debt. Right now our system is use to the way it is.

Bitcoin can act as a slow moving, deleveraging medium. Something that is sorely needed within our world economy that is held afloat by too much debt. As more people move towards cyptocurrencies as an alternative to the dollar (and other currencies), the existing problems (with domestic currencies) will most likely worsen. But, I believe, the hope is the bleed out will be slow enough to happen with the potential increasing for new technological advancements that could spur economic growth. It's quite possible, that a slow movement from central banking to cyptocurrencies, the world won't notice the absolute devastation that could occur if we don't find an alternative to the current reserve currency (and others like it). Bottom line, the world's currencies (and governments, and arguably people) are heading for horrible, leverage-driven scenario if nothing is done. I also think that technological advancement may actually be in Bitcoin (and others). Look at the companies that have already been created. I think, as more learn about cyrptocurrencies, more jobs are possible, more growth is possible and new ideas (that we can't envision based on these new currencies) are possible. Cyrpoto currencies provide a bit of hope.

I think cyptocurrencies could potentially act as a world currency down the line. If it ever gets to that, I also have thought for a long time that a basket of cryptocurrencies may actually be the real answer, not simply Bitcoin. But, our system doesn't work that way. Bitcoin will be first. Litecoin is following. But, there's a lot of these and they are quite different.

For me, the key is that the supply is either fixed or set with very, very low growth. I don't see the issue with prices falling "if" we can envision a world where decimals matter more and more. The problem with deflation is when wages fall faster than prices. I highly doubt that will occur. But, that's the true fear with deflation. I trust markets to equilibriate, if they are provided with no interference. The great thing about cryptocurrencies is it appears it would be tough to intervene (at least currently). 

There's potential for a better world ahead.


 

[godislove]

I agree with all of that.

[virtualmaster]

A very good explanation.

[fruitbat]

In a cryptocurrency, we can potentially design methods of money movement and rebalancing of value that are neither "inflation" nor "deflation."

A currency sketch that I've been working on - but have put aside partially finished for the moment - involves using the history of each coin to enforce a restriction on who can have it next. The underlying goal is for the entire money supply to eventually visit all or nearly all (a high ratio, over 50%) the accounts before it can start revisiting previous accounts. I am pleased with the concept because it presents the idea of money velocity and its incentives in a specific, targeted way that makes money "homing" or "heat-seeking" - serendipitously, you can expect money to come to you somehow as the other options for it close off. This money also presents the basic rationales for economic activity that are in capitalism - spend within your means, provide goods and services, invest in real assets, etc. - the key difference being that it naturally leaks out of capital pools and into the hands of the masses.

In the full writing, I also discuss some attacks and ways to stop them, and incentives for speculators to enter such a currency. It does not attempt to solve environmental sustainability, governance, or other issues, just the idea of "income equality."

[spartacusrex]

Bitcoin is a new 'Way of Money'.

It allows for rules to dictate how the Money Supply 'grows/shrinks/stays the same' so that no Human Meddling can take place.

When reviewing the Keynsian economic model the main criticism I see, is that 'The Government' or some other human entity cannot be trusted and just prints their way out of trouble.

What if you take the Keynsian logic and apply it to a crypto-currency, so that a mathematical rule is used, AND CANNOT BE FAKED by greedy humans, to regulate the money supply.

So.. What I am saying is,

If it were possible to tell how much the economy had grown, and if it were also possible to judge the Velocity of Money accurately, THEN would it be ok to grow and shrink the money supply in a cryptographically secure mathematical way across all TXNS, sort of like Friecoin but with increase as well as decrease, so that we had Price Stability ?
 
So that MV= PQ could be set correctly ? If we want P to stay the same, and can change M to do so..

No meddling Humans to muck it up. Just Maths. Would that not work ?

I am discussing this very thing in another post.. https://bitcointalk.org/index.php?topic=382204.0

[earonesty]

>>> It allows for rules to dictate how the Money Supply 'grows/shrinks/stays the same' so that no Human Meddling can take place.


Human meddling can take place.   As long as the majority of miners agree to change how bitcoin is mined, then bitcoin can change.   This is a very real possibility in the future when mining becomes less profitable.    I suspect the 21mil limit will be removed at some point.  But other changes may be necessary to prevent the 51% consolidation problem.

[.begemot.]

YEAAAH!

[PolkRB]

In inflationary system like we have today it's suggested that 2% inflation is "healthy" for the economy. I can't imagine if inflation was 10% or more.

Can someone calculate or explain what % of deflation will be with Bitcoin currency once it stabilizes? I think If it's relatively low around 2% deflation then it's manageable and economy will have time to prosper. If deflation will be at much higher rate then economy will truly hurt because no one will be wanting to buy anything and it will be unprofitable for companies to produce goods because from the moment it's produced to get to shelves for customers the goods would decrease in price drastically.

Hope someone can explain this to me.

[deisik]

In inflationary system like we have today it's suggested that 2% inflation is "healthy" for the economy. I can't imagine if inflation was 10% or more.

Can someone calculate or explain what % of deflation will be with Bitcoin currency once it stabilizes? I think If it's relatively low around 2% deflation then it's manageable and economy will have time to prosper. If deflation will be at much higher rate then economy will truly hurt because no one will be wanting to buy anything and it will be unprofitable for companies to produce goods because from the moment it's produced to get to shelves for customers the goods would decrease in price drastically.

Hope someone can explain this to me.

It is one of the dangers of deflation that people often don't take serious of fully understand. Once it sets in, it will go into ever deepening circles. Also note, that even 2% deflation is not a one timer...

[minerva]

This chart isn't accurate. There isn't exactly 52560 blocks in a year, and there never will be.

[GnB]

Bitcoin is a new 'Way of Money'.

It allows for rules to dictate how the Money Supply 'grows/shrinks/stays the same' so that no Human Meddling can take place.

When reviewing the Keynsian economic model the main criticism I see, is that 'The Government' or some other human entity cannot be trusted and just prints their way out of trouble.

What if you take the Keynsian logic and apply it to a crypto-currency, so that a mathematical rule is used, AND CANNOT BE FAKED by greedy humans, to regulate the money supply.

So.. What I am saying is,

If it were possible to tell how much the economy had grown, and if it were also possible to judge the Velocity of Money accurately, THEN would it be ok to grow and shrink the money supply in a cryptographically secure mathematical way across all TXNS, sort of like Friecoin but with increase as well as decrease, so that we had Price Stability ?
 
So that MV= PQ could be set correctly ? If we want P to stay the same, and can change M to do so..

No meddling Humans to muck it up. Just Maths. Would that not work ?

I am discussing this very thing in another post.. https://bitcointalk.org/index.php?topic=382204.0

Unfortunately adoption of btc isn't at a level where meddling from humans is off the table, the economy in this regard is still a baby per say so until everything stabilizes and it's adopted on a wider scale we'll never know what will become of it.

I agree with the first bit you mentioned though, human entity can not be trusted.