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Author Topic: Inflation and Deflation of Price and Money Supply  (Read 508182 times)
tee-rex
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February 24, 2015, 03:54:09 PM
 #501

As I said before, your definition of speculation is marginal at best. Its main drawback is that it doesn't make things more understandable or throws a new light but only washes out the notion thus further complicating things. The best you can do is think up a new term.

You're entitled to that opinion, of course, but I find the definition of speculation as "betting on the future economic behaviour of others to value the acquisition of an asset" rather concentrated on its essential notion.  It distinguishes that part of the value estimation from the "usage" value estimation which is the core of all economic activity: creating value (that is, obtaining satisfaction).

It seems that now I understand why you expanded the meaning of this pretty narrowly defined economic term to such a broad scope. From the Merriam-Webster dictionary:

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speculate : to think about something and make guesses about it : to form ideas or theories about something usually when there are many things not known about it

Sounds similar, hah?
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dinofelis
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February 25, 2015, 05:07:28 AM
 #502

As I said before, your definition of speculation is marginal at best. Its main drawback is that it doesn't make things more understandable or throws a new light but only washes out the notion thus further complicating things. The best you can do is think up a new term.

You're entitled to that opinion, of course, but I find the definition of speculation as "betting on the future economic behaviour of others to value the acquisition of an asset" rather concentrated on its essential notion.  It distinguishes that part of the value estimation from the "usage" value estimation which is the core of all economic activity: creating value (that is, obtaining satisfaction).

It seems that now I understand why you expanded the meaning of this pretty narrowly defined economic term to such a broad scope. From the Merriam-Webster dictionary:

Quote
speculate : to think about something and make guesses about it : to form ideas or theories about something usually when there are many things not known about it

Sounds similar, hah?


You've got it. 

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February 25, 2015, 05:19:47 AM
 #503

Under price instability, there is less growing back after the slaughter since the credit structure is in such chaos.  With price stability, liability production is much calmer while a large failure is occurring like an LTM, allowing everything to move smoothly.  

But what is that notion of price stability ?



Ideal price stability is 0% price inflation and 0% price deflation with an ideal index and and an ideal sampling interval.  The 0% price inflation/deflation is the beneficial part since it provides a foundation for a crystal clear financial structure, monetarily speaking.  The ideal sampling period is continuous.  The ideal price index is actually very nonrestrictive for very short time periods, but the Ideal Fisher Index would still be the safest bet for now.


After all, if we include in the price basket, everything that is bought with money, including "store of value", then with a constant amount of money, by definition we have price stability.  You only get price fluctuations with "sound money" if you leave out part of what is bought with it.



Finding for M, the quantity theory of money looks like

Code:
M=PQ/V

Under a price stability, P never changes so is equal to 1.

Now M looks like

Code:
M=Q/V

which is very interesting because it simply states that M should change in proportion to the change of production by velocity or that money should increase sometimes when production increases and/or sometimes when the rate that we are trading M increases.

We reach a dead end of sorts because V actually cannot be sampled, it is a derived figure, so only the previous V is ever known.  Over infinitesimally small time periods, this is not a problem, but it is still inconvenient and inefficient because financial data is now being processed at alarming rates, V can change on a dime like it did in 2008 with little time to react. 

Regardless of those problems, M is of primary importance in achieving any sort of inflation target.  Q and V cannot be controlled, or, at least, I think most agree that Communism is not ideal.


The price stability of a regulated money is only the stability of a certain basket, putting all the fluctuations in the complementary basket (usually speculative products, and store of value).

If you take the monetary formula,  P x Q = V x M, then all the price fluctuation comes from the fluctuation of V with sound money (M constant).



Very interesting argument.  You may be the first to put Austrian school into Chicago-subscribed models.


Smiley

I'm not a strict Austrian.  I find a lot of good ideas in Austrian thinking, but I'm not religious and I didn't sell my soul to them.


Quote
I see that the fundamental assumption is that M should remain constant over the long run.  Now we have:

It is the idea behind "sound money doctrine", although maybe it hasn't anything sound to it. 

Sound money has a few fundamental advantages in relationship to fundamentally corrupt people (which is my basic assumption):
- once the initial putting in place is done, there is no seigniorage any more to get into someone's pocket
- money forms closed loops (is a conservative system) so that in the long term, goods and services follow opposite paths without infinite accumulation

I wrote this:


The point is that Q is only part of the economy: the other part is "store of value".  Now let V be precisely the "inverse of store of value": the higher V, the lower the demand for store of value (the lower the price of store of value).

So if you take the TOTAL economy, namely Q AND "store of value" then the price of that basket will only depend on M.

This is why sound money gives total price stability, and that the "price fluctuations" you observe are nothing else but price fluctuations between sub baskets, because they are related to changing offer and demand, which is exactly the price signal.

Now, I don't know if TOTAL price stability is any good.  Not more than whether keeping P constant, is any good (which is your basic axiom).

So when you say:
Quote
Yes, I agree that the demand for money goes up, but why is this beneficial?  Since output has remained constant, and prices were allowed to float instead of the money supply, liabilities just became twice as expensive, so loans are now twice as onerous to pay off.  This will be where the financial structure tied to credits collapses.

I tell you the same thing: Why is constant P beneficial ?

After all, Q is made up of different contributions.  We have Q1, which is, say, services, and Q2 which is, say, goods.

We have P Q = P1 Q1 + P2 Q2.

Now, if you require P to be constant, and for some reason, P1 rises, it means that P2 has to fall.  Why should an increase in price for services imply a drop of the general price level for goods ?  I don't see why this is anything beneficial either.

So this is why I wanted to make the analogy.

We have P Q on one hand, and "store of value" (1/V) on the other.

If store of value rises, then P lowers.  In what way is that any different then when P1 rises, P2 drops ?

If it is beneficial that when P1 rises, then P2 has to drop (that's YOUR axiom, by wanting P to be constant), then why isn't it beneficial that when (1/V) rises, that P drops ?

If there is a good reason for the first statement, then why doesn't that apply to the second ?
And if there is a problem with the second, then why doesn't that apply to the first ?


My point was namely that P Q is only part of the economy, in the same way as P1 Q1 is only part of the economy. 

Wanting a part of the economy to have stable prices, and hence make the complementary part absorb all the fluctuations, why is that beneficial ?
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February 25, 2015, 08:44:14 PM
 #504

You have to stop a bit a think about stability. You can not have it, neither in money value nor prices. If you somehow manage to do the impossible despite its impossibility, you make the system static and no progress is possible, and you also eradicate all risk. The wiping out of risk, by itself changes the system. So it is doubly impossible.

It is like fishballs in white sauce. If you press one down, another pops up. The best (and as stable as you get) is to just leave everything floating.

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February 26, 2015, 05:34:01 AM
 #505

Within only the quantity theory of money, and the choices being either price stability or supply stability, both outcomes are identical, but price stability does not force massive liability restructuring.  Economic aggregates can fluctuate, and the amount owed or benefited from liabilities does not change due to price instability.

Yes, that is right.  "price stability" means that financial products expressed in currency have the same goods-and-services-basket-overall purchase power.

But why should holders of financial products expressed in currency get an advantage over all other stock holders ?

What price stability actually means (as you explain further on), is that upon more demand for store of value, there is also more production of store of value (more M printed, say).  In other words, the "store of value in currency" becomes an infinitely elastic asset at "constant buying power".  Its market signal is entirely wiped out.  Now, you are right that that is beneficial for those holding currency-expressed assets, because it eliminates a risk for them (the volatility of the holding).

But if you are holding houses, oil, cars, production capital, .... then you have to take ALL of the fluctuation ; but not when you are holding financial products.  That makes that holding financial products gets an advantage over holding everything else.  All the rest can float according to the market forces.  If you are holding oil, and there is more demand for oil, then you will make a benefit, and if there is less demand (or more offer) for oil, you will loose.  But if you are lending out, whether there is more or less demand for money as storage of value, you are protected from fluctuations by the FED's printing.

That makes that we encourage people not to invest in capital, but in financial-all products.  This stimulates the existence of financial institutions.

If on top of that, the FED doesn't impose PRICE stability, but rather INFLATION-stability, all money-storage looses value, which makes it more interesting to hold debt than to hold value.  This, again, stimulates the existence of financial institutions, which, moreover, have to grind out interest to compensate for the inflation loss.  They can obtain this interest from the seigniorage which is inevitably generated with the constant printing to compensate not only for economic growth but also to provoke (constant) inflation.  As such, these financial institutions are the natural beneficiaries of the seigniorage.

You can hardly speak about price stability when prices have increased by a factor of 23 or so in a century.

Store of value over 100 years doesn't work in FED-based money.  With a sound money system, you can store value over 100 years, and you get even as interest the economic growth over that period without any intervention of a financial institution which can take part of it.


Quote
If BTC falls 50% against the USD, BTC denominated investments are now worth half as much in real terms.  If the BTC rises 100% against the USD, BTC denominated loans are now twice as onerous in real terms.  Imagine a BTC loan, and your income is in USD, BTC has doubled vs USD, and now you all of the sudden owe twice on your house relative to income.

People having exactly the same problem when their house is half of the value or twice the value due to fluctuations in the housing market.  I don't see why holders of financial products should be "free of volatility" while all others have to undergo the market fluctuations.

BTW, (idiot) people living in the Euro zone who have contracted loans in Swiss Frank have the same problem.

Quote
  Even if the income is denominated in BTC, workers would need frequent pay reductions when the BTC price deflates and frequent pay raises when the BTC price inflates as it did for nearly all of 2014.

Bitcoin is very volatile because it is not a currency yet, and because price is not determined by the demand for usage of BTC for buying stuff and labor, but purely as speculative device.  Its market is very shallow, and has almost no inertia.  If bitcoin would be used like the USD, it would show much much less volatility.

And if BTC were used like the USD for 100 years, it wouldn't indicate a value loss of a factor of 23.

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March 04, 2015, 12:17:17 AM
 #506

So I see a director of the Ugandan Central Bank says that
Quote
mobile money transactions may affect the velocity of circulation of money, which would result into higher inflation
- http://www.independent.co.ug/business/business-news/9760-mobile-cash-dash

It would make sense to me that fast payments (e.g., bitcoin or mobile payments) cause a higher velocity of the same money supply and that would mean that price inflation is the result.  I have a Quora question asking if this is true:

Are PayPal, Dwolla, M-Pesa, and Bitcoin responsible for inflation?
 - http://www.quora.com/Are-PayPal-Dwolla-M-Pesa-and-Bitcoin-responsible-for-inflation

I didn't read the 25 pages of this thread, so if velocity increases from instant settlement payment networks is something already addressed here please share a link.

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March 05, 2015, 06:21:01 AM
 #507

So I see a director of the Ugandan Central Bank says that
Quote
mobile money transactions may affect the velocity of circulation of money, which would result into higher inflation
- http://www.independent.co.ug/business/business-news/9760-mobile-cash-dash

It would make sense to me that fast payments (e.g., bitcoin or mobile payments) cause a higher velocity of the same money supply and that would mean that price inflation is the result.  I have a Quora question asking if this is true:

Are PayPal, Dwolla, M-Pesa, and Bitcoin responsible for inflation?
 - http://www.quora.com/Are-PayPal-Dwolla-M-Pesa-and-Bitcoin-responsible-for-inflation

I didn't read the 25 pages of this thread, so if velocity increases from instant settlement payment networks is something already addressed here please share a link.


No, in fact.  Of course, a high velocity REQUIRES fast payments.  The velocity cannot be higher than one over the time it takes to make a payment evidently.  If it takes 20 minutes to complete a single transaction, then the velocity can never be larger than 1 year / 20 minutes.

But in the velocity of money, it is not the speed of a single transaction that counts, but the NUMBER of transactions in a given period (say, a year).  As such, it is a decision of the consumer to do so, and not inherent in the payment protocol.

After all, with cash, it takes what, 5 or 10 seconds (the time to take the bills out of your wallet, count them, and hand them over).  But it is not because you got the cash in 5 or 10 seconds, that you will spend the money every 5 or 10 seconds, right !

If you get cash for something you did (say, your labor), and you get that cash in 10 seconds, you're not going to spend it immediately.  You're going to spread your spendings over the time it takes to your next salary.  So the transaction time doesn't intervene much in the velocity of money.

You would indeed cause inflation if you (and everybody else) decided to get rid of your money sooner.  To buy up everything you need for the next month right away when you receive it, and when the store holder where you buy wants to get rid of the money you give him also immediately, and so on.  THEN you would get inflation: when you do not want to HOLD the money any more.
In extreme cases, this is hyperinflation: you've lost all faith in the money and you want to get rid of it as soon as you can.  Weimar Reichsmark for instance.

In fact, in your link, you mention something which is rather interesting.  If fast payment methods are used to liquidate a DEBT, then it was the DEBT that caused the inflation, and not the fast liquidation of it !

Credit card companies create money because they allow debt.   If you spend $50 with a credit card, you didn't receive those $50 yet.  The merchant accepts the $50 PROMISE because he has confidence in Visa or Mastercard that he will be able to spend that promise.  So it is the merchant, accepting your credit card payment, where he accepts not real dollars, but a promise from Visa to give him $50, that creates money: the PROMISE from Visa turned into money, as if it were really $50, because the merchant accepted that (because he knows that his bank will accept it too).

Now, Visa wanted to make that promise to the merchant, because Visa ultimately made you promise that you owe them now $50.  So ultimately it is YOUR promise to pay $50 that allowed visa to promise $50 to the merchant: visa was just an intermediary because of confidence.  A merchant will have more confidence in visa than in you, and will accept $50 promises as "money" from visa, but not from you.  Visa, on their side, are willing to accept a promise from you.

So all these PROMISES to pay $50 have turned into money as if it were actual dollars, and it is this generalized acceptance of promises for dollars as dollars that increase the money supply.

When people accept promises (debt certificates) as money, the money supply increases of course.

Of course, one day you will pay off your debt to visa.  At that moment, money is destroyed.  Each time a debt is reimbursed, money is destroyed.  But ON AVERAGE, Visa has many outstanding debts, and that is money creation.  Not that they print dollars, no.  The money creation comes from the fact that people accept promises from Visa as money.
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March 05, 2015, 03:13:04 PM
 #508

The velocity of money is a consumer spends his money, the money makes it's way through the production structure, and comes back to the consumer as salary. It does not have much, if anything,  to do with the actual time to perform a transaction in the payment system. The velocity, together with the volume of money in the system, is supposed to be a measure of consumption per unit of time, similar to the gross national product. It is hard to measure.


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March 06, 2015, 07:29:43 AM
 #509

The velocity of money is a consumer spends his money, the money makes it's way through the production structure, and comes back to the consumer as salary. It does not have much, if anything,  to do with the actual time to perform a transaction in the payment system. The velocity, together with the volume of money in the system, is supposed to be a measure of consumption per unit of time, similar to the gross national product. It is hard to measure.

I like more to think not of the velocity, but of the inverse.  That is the (harmonic) average HOLDING time of the currency, in other words, the equivalent of "bitcoinyears".  It is an amount of "store of value".

If you store 1 bitcoin for 2 years, or you store 2 bitcoins for 1 year, or you store 100 coins for a week, these are equivalent concerning the amount of store of value, and contribute to the 1/V value.

There is an aggregate demand for "store of value" (which is a general human action decision), and then there is a specific demand for store of value in bitcoin, another in gold, another in stock, another in dollars, another in this and that.  currencies are players in that market, and they have variable market share of the agregate demand for store of value, which by itself changes according to the mood of people.  If 99% of the population is convinced that the world will end next week, the aggregate demand for store of value will probably plummet.  If 60% of people think that there are difficult years ahead, maybe the aggregate demand for store of value will increase.  How much from that demand bitcoin, gold, etc... will be able to pick in is a matter of competition on that market.

The particular part of the demand for store of value in bitcoin will determine the 1/V of bitcoin.

That store of value can have different aspects: from "just in between earning and consumption" to "investment for the longer periods".

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March 06, 2015, 09:52:56 AM
 #510

The velocity of money is a consumer spends his money, the money makes it's way through the production structure, and comes back to the consumer as salary. It does not have much, if anything,  to do with the actual time to perform a transaction in the payment system. The velocity, together with the volume of money in the system, is supposed to be a measure of consumption per unit of time, similar to the gross national product. It is hard to measure.

I like more to think not of the velocity, but of the inverse.  That is the (harmonic) average HOLDING time of the currency, in other words, the equivalent of "bitcoinyears".  It is an amount of "store of value".

If you store 1 bitcoin for 2 years, or you store 2 bitcoins for 1 year, or you store 100 coins for a week, these are equivalent concerning the amount of store of value, and contribute to the 1/V value.

There is an aggregate demand for "store of value" (which is a general human action decision), and then there is a specific demand for store of value in bitcoin, another in gold, another in stock, another in dollars, another in this and that.  currencies are players in that market, and they have variable market share of the agregate demand for store of value, which by itself changes according to the mood of people.  If 99% of the population is convinced that the world will end next week, the aggregate demand for store of value will probably plummet.  If 60% of people think that there are difficult years ahead, maybe the aggregate demand for store of value will increase.  How much from that demand bitcoin, gold, etc... will be able to pick in is a matter of competition on that market.

The particular part of the demand for store of value in bitcoin will determine the 1/V of bitcoin.

That store of value can have different aspects: from "just in between earning and consumption" to "investment for the longer periods".


I agree that the holding time is the key, which is the same as the tendency to hold, or the demand to hold money.

If I modify my story just a bit, and assume that when a consumer has bought something, the money is exchanged very quickly in the system and comes back as salary, the holding is basically only on the consumer part. Note that velocity is about consumption.

So it comes down to that these models are similar. I think the most straightforward model is the one about demand to hold money. This in part because the velocity is hard to measure anyway, it is normally computed, the total amount of money can only be roughly estimated, the price level can not be adequately determined, the total output of the economy can not be estimated, especially under a regime with heavy government distortions.

Of course the demand to hold money is also not calculable, but at least we know that it comes from the minds of all economic actors, depends on interest rate, on how much direct use value you can get out of the money, general social habits, and general future risk outlook etc.

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March 06, 2015, 08:29:27 PM
 #511

If you get cash for something you did (say, your labor), and you get that cash in 10 seconds, you're not going to spend it immediately.  You're going to spread your spendings over the time it takes to your next salary.  So the transaction time doesn't intervene much in the velocity of money.

Ok, so let's say I have purchases I want to make but have no cash.  As soon as the funds owed me arrive and are spendable I plan to use them to make some purchases.

Let's say I receive payment for an invoice via PayPal.  I would then do a withdrawal in PayPal to have the funds sent to my bank (which takes a couple days and these transactions finalize in the middle of the night).  After the amount finally shows in my account I then go to an ATM to withdraw at a time of day that it is convenient to me.  I then can make my cash-based purchases.

So the payment network velocity is faster with mobile payments (or Bitcoin).  Instead of receiving PayPal, let's say I received M-Pesa.  After the payment was sent to me I can then immediately visit an M-Pesa agent to withdraw cash.  Alternatively I could use the M-Pesa funds for paying a merchant that accepts M-Pesa (without cashing out to fiat).

The (annual) velocity of the money when I receive via PayPal is less than 100.   The velocity of that same money if I had received it via M-Pesa can be a couple orders of magnitude larger.

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March 08, 2015, 04:40:51 AM
 #512

Except that velocity and productivity, ie technological advancement, are inversely proportional, the Great Inflation notwithstanding:

Is this a ad hoc correlation, or is velocity decrease a cause of technological advancement ?  Grin
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March 08, 2015, 06:51:35 AM
 #513

Except that velocity and productivity, ie technological advancement, are inversely proportional, the Great Inflation notwithstanding:

Is this a ad hoc correlation, or is velocity decrease a cause of technological advancement ?  Grin

There's very little research and even less conclusions offered as to why velocity has fallen.

Considering its rise during the Great Inflation, I'd say its due to price stability since price stability produces a larger financial structure, thus more cash on hand is needed to service obligations.

That's your vision on its head !!  If price stability has CAUSED velocity decrease with an increasing regulator money supply, it would have meant that velocity would probably have remained constant if the regulator hadn't been printing money !

Your vision is that price stability should be obtained by regulating M.  Now you say that price stability causes a falling V.  Moreover, we know that we didn't have price stability, but strong price increase during the 20th century (a factor of 23 or so of price increase since 1914).  If that price increase has caused a drop in velocity, you are saying that velocity is a NATURAL REGULATOR of price !

But if it is a natural regulator of price, counter acting partially the manipulation of M, then there's absolutely no need for regulating M !

In other words, M has been blowing up during the 20th century to:
- compensate the increase in Q (to keep prices stable instead of having them fall with technological improvement)
- cause a 23-fold price increase
- counter-act the falling of V that would have lowered the price increases if done nothing.

If you are saying that V drops whenever M is increased to obtain "price stability", and hence V counter-acts this increase in M by the regulator, then you should also conclude that V would remain constant (or would have tendency to remain constant) if M is NOT increased, right ?

So in supply-stable model, we would, according to you, finally also have V constant.... and hence P constant as long as Q is constant, right ?

And have a slight deflation if there's a slight economic growth (slight increase in Q).

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March 08, 2015, 09:58:36 AM
 #514

V drops while the short run inflation rate is closest to 0%.  Short run V cannot be predicted by short run M without knowledge of short run P.

Aren't we inverting cause and effect here ?  We get a low inflation BECAUSE V drops, of course !

Quote
Supply stability produces chaotic short run P thus high long run V.

There's nothing wrong with "long run high V".  In fact, it would satisfy Keynesians: the relative holding of value in the currency is then quite low.

If price stability implies low V, this would mean that price stability implies hoarding of money.  

As such, assuming your hypotheses correct, a FED that tries to stabilize prices would cause a falling V, and hence should have to print and print and print, for people to hoard, and hoard, and hoard.  The falling V then compensates the printing.

But this is a dangerous and potentially unstable situation: with low V (caused by a price stabilisation policy - which is your hypothesis), it means that people have been storing A LOT OF MONEY.  Now why is that a dangerous situation ?
Because several things can happen in this unnatural situation of higher-than-normal demand for store of value in the currency when people start to find that there's a lot of money stored and want to do things with it.

One thing would be a loss in confidence in the currency, where the people are going to spend, or are going to place their store of value in another asset.  In the first case, we obtain unstoppable inflation.  Maybe this was part of the inflation problem in the 70ies.  For a FED, it is hard to destroy money if it is being SPEND.

The other possibility is that people are going to store a lot of value in other assets, which get over inflated.  In other words, bubbles are blown on speculative assets.  Now, that's exactly what we've had for the .com bubble, and the housing bubble, and the banking bubble.

So artificially low V which you claim is a consequence of stable price policy is a time bomb, because or it leads to uncontrollable inflation (when the V goes back to normal long-term values), or it leads to blowing bubbles in speculative assets.

And that's exactly what we've seen during the FED years.
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March 08, 2015, 04:28:01 PM
 #515

This is an amazing post, I sure will keep this for my knowledge.  Wink

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doggieTattoo
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March 09, 2015, 02:45:42 AM
 #516

An area dedicated to discussing the differences of these two terms and the theories supporting them.

I'm looking forward to an in-depth discussion on the subject! I've noticed that confusion between the two seems to come up quite a bit on the forum, and thought it may be reasonable to dedicate a thread on the matter.

Pulled from a discussion in Wall Observer



Price-Deflation is what you are used to hearing about in Bitcoin. That term is used to describe the prices of goods/services as they decrease, because the value of Bitcoin goes up.

Price-Inflation is the opposite. When prices of goods/services increase because the value of Bitcoin goes down.

So, when dealing with Price-Inflation or Deflation, there is an inverse relationship of price and value, in regard to goods/services and Bitcoin.

Example: As the Bitcoin price goes from $10 to $20, the prices of goods/services goes down from 20BTC to 10BTC. As the Bitcoin price goes from $20 to $10, the prices of goods/services goes from 10BTC to 20BTC!

Why does the price of Bitcoin go up and down? The price of BTC goes up and down based on the exchange rate, or market price, which is set by buyers and sellers, or traders. They directly trade the Bitcoin currency with all sorts of other currency, and even some with gold; the most popular being the USD (US dollar). They set the price when executing orders to buy or sell. I will get into the actual reason of why the price fluctuates in the last section.



Now that we've gone over PRICE Inflation and Deflation (which honestly, to me, is a term made popular by Keynesian's to hide the real facts, as price inflation/deflation is simply the market exchange rate, reflective of the money supply into a currency from itself and other currencies), let's go over the REAL inflation/deflation of a currency (otherwise known by many as Monetary Inflation).

MoneySupply-Inflation is when the value of Bitcoin decreases when the total supply of Bitcoin increases. In our current state, this is at a generation rate of 25 BTC every 10 minutes.

MoneySupply-Deflation will essentially never occur. It is when the value of Bitcoin increases when the total supply of Bitcoin decreases. This may happen, say, when someone loses their private key and all the BTC associated with it are lost. This effectively "makes the rest of us richer". That being said, there is a SET DECREASE in the generation rate of BTC, so you have sort of a "deflationary effect" in the value, as long as more exchange occurs for BTC at a rate which is faster than that set generation rate.

When all 21 million coins are produced, the MoneySupply will be neutral, and the value will continue to increase (prices will decrease, consequently), as long as people continue to exchange in BTC.

This leads me to the last section.



What determines the PRICE of Bitcoin? The VALUE of Bitcoin at a particular moment.

What determines the VALUE of Bitcoin? The SUPPLY and DEMAND of Bitcoin in the economy.

What determines the SUPPLY of Bitcoin? Currently, the MoneySupply-Inflation rate of 25 BTC every 10 minutes, and traders willing to SELL Bitcoin to BUYERS in exchange for other supplies of money (currencies).

What determines the DEMAND of Bitcoin? Traders willing to BUY Bitcoin from SELLERS in exchange for other currencies.


Therefore: BUYERS, SELLERS, and MONEYSUPPLY-INFLATION (miners) determine the VALUE of Bitcoin, which determines the PRICE of BTC as BUYERS and SELLERS trade based on that VALUE (or supply and demand) of Bitcoin.


We don't exactly know the totality of the supply and demand. Sure, we could try and aggregate data from all the exchanges, but we will never be accurate as there are exchanges which can not be accounted for (OTC). The cool thing is that we DO know the MoneySupply rate, and we DO know the exchange rate. From this, we can determine a real value of Bitcoin when simply multiplying the two factors; a sort of inflation-adjusted view of the currency.

Effectively, the quantitative analysis of supply and demand is really what the currency exchange traders attempt to accurately determine which is conveyed through buying and selling of Bitcoin, setting a VALUE via the PRICED exchange rate of the currency. On a side note, most of the big Market Makers (FX Traders) use this price movement as a way to make a profitable living, as well. Especially when price fluctuations are a consequence of hype or fear (bubbles, cliffs), not factual supply/demand data, and are wildly out of the real price range.

Thus, if you analyze the proper macroeconomic data in an attempt to forecast future DEMAND for more Bitcoin (price increase), you will realize some very interesting things, and have a more accurate picture of where the price is going...

Happy trading! Wink

A great post here, I learnt a lot about not just economics but I just realized a lot about the bitcoin economic infastructure aswell.  stickied to show some friends later.

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dinofelis
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March 09, 2015, 05:25:21 AM
 #517

V drops while the short run inflation rate is closest to 0%.  Short run V cannot be predicted by short run M without knowledge of short run P.

Aren't we inverting cause and effect here ?  We get a low inflation BECAUSE V drops, of course !

No, the Fed controls M.  It cannot control V.


Cause and effect are something else than "what the FED can control" !
If I fall on the floor and I bleed, then the fall is the cause of the bleeding, and the bleeding is not the cause of the fall.  Even if the FED doesn't control nor my falling, nor my bleeding !

What I mean is: you said that low inflation causes V to fall.  But "inflation" is not decided upon by anybody.  And in as much as the FED wanted low inflation, as you say, she can control M, but she cannot control V.  V is a "human action" that is the result from individual decisions of people to hold or to spend.  The price is a RESULT of Q (what people decide to produce), M (what the FED decides it to be) and V (what the people decide).  If we see that the price doesn't increase, then it would be strange that this CAUSES V to drop, right ?  Indirectly, this is not impossible, is this is a general behavior of people.  They may indeed have more confidence in the currency and store value in it if they observe that the prices are constant, and that the currency doesn't loose value.

But I see why you think that the price level determines V: it is because you CALCULATE it that way.  It is because you see V as a kind of fitting parameter that you can estimate after the fact by knowing P and knowing Q and knowing M.

However, to me, V is a genuine economic behavior: the (inverse of) the demand for store of value in the currency. 

The dependent variable is always the price.  The price is never chosen first.  The price is always an EFFECT.  It is a result of market forces, of offer and demand.  Nobody decides upon a price in advance.  The price is the thing that comes last.   So "price" can never be the cause of anything, except in an artificial setting such as a FED, where the FED measures the past prices, and fixes the future M as a function of it.

You could say that "hyperinflation causes V to explode", but no.  That not how hyperinflation is physically established.  People don't wake up one day, and decide "today we do hyperinflation".  No.  People decide NOT TO HOLD the money any more.  They decide to increase V.  They decide that they don't have any confidence in the money any more, and want to get rid of it.
Their DECISION is to get rid of the money.   The RESULT is hyper inflation.  Not the other way around.


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Are you now changing your previous position that you want to maximize store of value S which is the inverse of V?

I don't want anything.  It is not up to me (or any body else) to decide human action of others.  Nothing should be maximized or minimized or whatever.  Human action should be able to be expressed in its most free form.  That's all. 

If people want to hoard, they should be able to hoard.  If people want to spend, they should be able to spend.  If people want to produce, they should be able to produce.  If people want to stop producing, they should be able to stop producing.  I don't think any central authority should say what "should be good" and "what should be bad".   The economic dynamics must be left as much as possible to free, decentralized, individual decisions.
There is no collective "good" or "bad", and no collective "goal to attain" or "disaster to avoid".
The dynamics which is the result of all individual decisions should be respected.  Whether that leads to booms and busts, famine and joy, doesn't matter.  It is the result of people's decisions.  That should be respected.

This is why I don't have to say whether V should be large or small.  It should be FREE, so that it adapts to whatever people decide to do.
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March 09, 2015, 06:23:33 AM
 #518

No, the 70s were mostly the fault of Nixon who did not want to risk a recession, ever.  "Inflation is always and everywhere a monetary phenomenon."  He allowed Carter to take it to the extreme, and it all only stopped once Reagan gave Volcker, who improperly receives the credit, the permission to reduce inflation.  All he did was raise interest rates above the inflation rate, Fed assets were quickly sold, and inflation collapsed.

This is the main reason to have a supprely-stable currency: there is no policy involved !
From the moment there is a policy that can have a monetary regulation, there will be a misuse of that policy: by ignorance, for popularity, or for whatever other agenda.
Only a supply-stable currency, or one with a supply graved in stone can resist misuse and manipulation.  From the moment that there are monopolized and privileged deciders, it will be abused, it will be mismangled.

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Do you have evidence of this?  V continues to drop while inflation remains well controlled in the US.  The fears of massive inflation spikes never seem to materialize.

Except when they happen, and then it is the fault of an individual, and not of the possibility that it could be mismangled :-)
But you're right that "inflation" as calculated the way it is, is more or less under control.  On the other hand, blowing bubbles in speculative assets is now the result.

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They will once policy changes, and the Fed is forced to fund the government with inflation.

You see what I mean.  If it is centrally "regulated", it can, at any moment, be centrally abused and mismangled.

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March 09, 2015, 06:33:06 AM
 #519

The massive houses that the average American lives in compared to the shacks of the 50s cannot be produced without debt.  That debt cannot be serviced without comfortable amounts of cash on hand.

That begs the question of course !  You need a lot of money, because there is a lot of money !
If the money supply is fixed, then prices would drop if there was more production.  So these big houses would cost a lot less nominally in a fixed supply regime than in a fixed-price regime, and hence the demand for debt would be much less too.

Debt is not excluded in a constant-supply system of course !

In fact, the possibility or not to borrow and to invest (for instance, in big houses) is determined by the money market, which fixes the interest rate.   That interest rate will be an incentive to store value, and as such, it will determine also V and hence the price level.

If people really want a big house, and a loan for it, they will offer a large interest to borrow the money.  That will induce others not to spend, but to save money, and to lend it to those borrowers.  That, in its turn, will lower V, as people consume less (save more), and that will make prices fall.  As such, nominal interest rates can lower, because deflation increases.  At a certain point, borrowing money is not interesting any more as compared to hoarding.  At that point a new equilibrium is reached.

So everything started with the desire to build larger houses and the willingness to pay higher interests on it.

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With total BTC denomination, Americans would live in almost the same relative poverty of the 19th century.

Absolutely not.

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It is a wonderful situation, unless of course if you prefer the bursting rather than the bubbling.

There is no preference to have.  People decide whether they want bursting or bubbling.  There shouldn't be an imposed policy to counter one or the other.  Human action should be free to express itself.

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March 10, 2015, 01:23:29 AM
 #520


I don't want anything.  It is not up to me (or any body else) to decide human action of others.  Nothing should be maximized or minimized or whatever.  Human action should be able to be expressed in its most free form.  That's all.  

You're the most reasoned person I've found on this board, but restating, are you saying that one should not decide one's own destiny but also should?

If free markets are taken to the philosophical extreme, your subjective opinion is just as valid as any other's within constraints.  I hope you do not relent from your own standards that you've defended across many posts.  Either that, or I hope that you discover a more optimal strategy and pursue it without sentimental or hopelessly loyal limitation.


Ok, let me try to express myself somewhat better.  Of course everybody is entitled to have his own micro-economic agenda.  That's after all, what freedom and a free market is about !  Of course you should decide your own destiny, and take your own action for what you think is going to achieve your own destiny.

But my point is that your own destiny is micro-economic.  You shouldn't have macro-economic indicators in your own destiny.  Now, that' is somewhat contradictory, because if you are supposed to be free to set your own destiny, I'm not supposed to tell you what should be or shouldn't be that destiny of course :-)  This is probably the contradiction you want to point out to me.

So yes, individually, you are free to act as pleases yourself to manipulate a macro-economic indicator, in the same way as you are free to act to manipulate any market.  But you see, I put this on the same level.  Market manipulators who want to pump and dump are also attaching their own destiny to a (smaller) macro-economic indicator: the price in a certain market.  As I'm for total economic freedom, I'm against forbidding market manipulation such as pump and dump.  But it is in my opinion not something that should be systemically encouraged or so.  The "American Institute for Pump and Dump" doesn't sound like a good idea, although, in the name of individual freedom, I wouldn't want to put a pump-and-dumper in jail.
In the same way, I think that wanting to influence a global macro-economic indicator on purpose falls in the same category.  In the name of freedom, I don't want to put people who set a goal for manipulating ("regulating") any macro economic variable, in jail, but I think it is not a good idea to institutionalise such very indirect economic action.

I think that macro-economic indicators are not to be taken as goals.  I think that "setting indicators" is of the same kind of stupidity as "setting prices", "setting exchange rates" or the like.  But again, in the name of freedom, I wouldn't want to have any action taken against people setting themselves as a goal to do exactly that, as long as they try to do it with their own private means.  But to institutionalise this with state monopoly and privilege is to me the same as institutionalising the setting of the price of bread: a big, big mistake.  In the name of freedom, people are free to make mistakes.  But please, let us not institutionalise it (as has been done about everywhere in the world).

If you ask me something like "do you want to achieve maximum S" or something, then I have no answer to the question, in the same way as I don't have an answer to the question "do you want to achieve minimum petrol price".  The petrol price has to be the price that the market decides, and not what I want as a pet desire.  Of course, individually, when taking petrol at the petrol station, I would prefer the petrol to be cheap !  :-)  But I think that trying to manipulate things to have a low petrol price, or worse, SETTING the petrol price, is a Bad Thing to do.  The petrol price has to be determined by offer and demand in the short run, and this petrol price, whether high or low, will guide investors to do things.  It is not up to me to decide what SHOULD be the petrol price, whether it should be high or low.  It should be what the market decides it to be.
In the same way, I shouldn't decide what S ought to be.  S should be decided by the market, and I shouldn't have any personal preference for S.  Any collective policy that actively tries to steer S or whatever other macro-economic parameter is to me an interference with the free market, on the same level as wanting to impose specific prices.

And the general price level is for me also such an indicator that shouldn't be actively manipulated, but that should be the result of market forces.  Now, if you have a private "money" in which private people, with their private means, try to stabilise the price, that's their good right (as it is, in my opinion, their good right to manipulate any indicator).  As long as it is with their private means.

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