Inflation and Deflation of Price and Money Supply

[deisik]

....
This is oversimplification. Inflation (as price increase) also depends on money velocity and productivity. I am also curious about the source of the data...

I didn't say that money supply is the only variable in the equation of exchange. But we need to respect the economic terms for what they are and not mix different categories even if they are in a cause and effect relationship

Right, but we should always keep in mind that there are at least two more independent factors (since Fisher's equation isn't perfect either as it may just not work) that can and do override the money supply factor in this cause-and-effect relation...

Wow, bamboozle me with BS why don't you? What? You mean an economic formula called Fisher's equation is not perfect? Unbelievable! Imagine that, an imperfect economic equation that may not work.

When I said Fisher's equation is not perfect (and yes, you read me correctly) I meant it doesn't always hold true. As with most formulas (and this is especially true for economic ones), in practice they don't always work as mathematics put in them dictates. Regarding this one, increasing money supply doesn't necessarily lead to price inflation (even if other factors are constant) as happens, for example, in a liquidity trap...

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[Lloydie]

....
This is oversimplification. Inflation (as price increase) also depends on money velocity and productivity. I am also curious about the source of the data...

I didn't say that money supply is the only variable in the equation of exchange. But we need to respect the economic terms for what they are and not mix different categories even if they are in a cause and effect relationship

Right, but we should always keep in mind that there are at least two more independent factors (since Fisher's equation isn't perfect either as it may just not work) that can and do override the money supply factor in this cause-and-effect relation...

Wow, bamboozle me with BS why don't you? What? You mean an economic formula called Fisher's equation is not perfect? Unbelievable! Imagine that, an imperfect economic equation that may not work.

When I said Fisher's equation is not perfect (and yes, you read me correctly) I meant it doesn't always hold true. As with most formulas (and this is especially true for economic ones), in practice they don't always work as mathematics put in them dictates. Regarding this one, increasing money supply doesn't necessarily lead to price inflation (even if other factors are constant) as happens, for example, in a liquidity trap...

That there upsets me no end. A mathematical formula that doesn't work is an oxymoron.

The real questions to be asking is, should we be printing boat loads of money when the formula doesn't work?  Is it right to suppress long term interest rates and hurt the savers/retirees/prudent people? How did we end up in a liquidity trap? Can we still deny it is the debt?

I really can't wait for bitcoin to takeover the world. There will be no more of such inane debates.

[deisik]

....
This is oversimplification. Inflation (as price increase) also depends on money velocity and productivity. I am also curious about the source of the data...

I didn't say that money supply is the only variable in the equation of exchange. But we need to respect the economic terms for what they are and not mix different categories even if they are in a cause and effect relationship

Right, but we should always keep in mind that there are at least two more independent factors (since Fisher's equation isn't perfect either as it may just not work) that can and do override the money supply factor in this cause-and-effect relation...

Wow, bamboozle me with BS why don't you? What? You mean an economic formula called Fisher's equation is not perfect? Unbelievable! Imagine that, an imperfect economic equation that may not work.

When I said Fisher's equation is not perfect (and yes, you read me correctly) I meant it doesn't always hold true. As with most formulas (and this is especially true for economic ones), in practice they don't always work as mathematics put in them dictates. Regarding this one, increasing money supply doesn't necessarily lead to price inflation (even if other factors are constant) as happens, for example, in a liquidity trap...

That there upsets me no end. A mathematical formula that doesn't work is an oxymoron.

The real questions to be asking is, should we be printing boat loads of money when the formula doesn't work?  Is it right to suppress long term interest rates and hurt the savers/retirees/prudent people? How did we end up in a liquidity trap? Can we still deny it is the debt?

I really can't wait for bitcoin to takeover the world. There will be no more of such inane debates.

The meaning is that the results you get by using a formula don't correspond well to actual data. Usually it means that you chose the wrong formula or the formula has some limitations. What is oxymoronic in that?

In short, stop trolling...

[Lloydie]

....
This is oversimplification. Inflation (as price increase) also depends on money velocity and productivity. I am also curious about the source of the data...

I didn't say that money supply is the only variable in the equation of exchange. But we need to respect the economic terms for what they are and not mix different categories even if they are in a cause and effect relationship

Right, but we should always keep in mind that there are at least two more independent factors (since Fisher's equation isn't perfect either as it may just not work) that can and do override the money supply factor in this cause-and-effect relation...

Wow, bamboozle me with BS why don't you? What? You mean an economic formula called Fisher's equation is not perfect? Unbelievable! Imagine that, an imperfect economic equation that may not work.

When I said Fisher's equation is not perfect (and yes, you read me correctly) I meant it doesn't always hold true. As with most formulas (and this is especially true for economic ones), in practice they don't always work as mathematics put in them dictates. Regarding this one, increasing money supply doesn't necessarily lead to price inflation (even if other factors are constant) as happens, for example, in a liquidity trap...

That there upsets me no end. A mathematical formula that doesn't work is an oxymoron.

The real questions to be asking is, should we be printing boat loads of money when the formula doesn't work?  Is it right to suppress long term interest rates and hurt the savers/retirees/prudent people? How did we end up in a liquidity trap? Can we still deny it is the debt?

I really can't wait for bitcoin to takeover the world. There will be no more of such inane debates.

The meaning is that the results you get by using a formula don't correspond well to actual data. Usually it means that you chose the wrong formula or the formula has some limitations. What is oxymoronic in that?

In short, stop trolling...

Only an economist can make that statement and not feel embarrassed. Economists are trolls by definition, IMHO. They just don't know it.

[bambou]

@ Lloydie: i think he just doesnt know what he is talking about. he trolled over coupled other threads so dont bother.

[Lloydie]

The meaning is that the results you get by using a formula don't correspond well to actual data. Usually it means that you chose the wrong formula or the formula has some limitations. What is oxymoronic in that?

In short, stop trolling...

In Maths the above statement = fail
In Chem the above statement = fail
In Physics the above statement = fail
In Computer Science the above statement = fail
Even in sociology the above statement = fail

Economics is littered with examples of "formulas that don't correspond well to actual data".  Then economists run a massive economic experiment called Quantitative Easing with these formulas...

I can't really believe anyone can be so stupid.  Yellen was afterall cum laude of her year.  I really think these people get pressured/corrupted by the system the higher they are promoted.  Would you believe Greenspan's Phd thesis in 1977 forecasted the collapse of the housing bubble?  http://www.webcitation.org/6DKm7EZfn

Writes Greenspan: "There is no perpetual motion machine which generates an ever-rising path for the prices of homes."

This implies he knowingly inflated the housing bubble and then goes on to deny that asset bubbles can be identified when they occur.  Greenspan says: bubbles can only be identified after they have burst.  How convenient!

This is precisely why I'm one hundred percent behind an incorruptible mathematical algorithm to replace human central banks.  Absolute power, corrupts absolutely.

This is also what gives Bitcoin value over the other 194 currencies.

[The One]

...
What did you meant by inflation in EU is very low?.....you call inflation running at 10% to 20% very low. I think you were referring to CPI which IS not inflation. Companies can borrow from the bank via people's savings. Look at China and S. Korea.

We need to go to the start of this thread. The idea of dividing price inflation and money supply inflation makes no sense. According to all major sources, these two categories are just cause and effect of inflation. CPI is the most basic measure of inflation worldwide.

What are your 10-20% supposed to mean and where did you get this data?

As for China; i wouldn't refer to it as an example of a place where people i.e. workers have a good and fair life, it is in fact quite the opposite. See Foxconn...?

When you have inflation, the prices for all goods and services do not go up straight away, hence price inflation would generally be lower than inflation. Food take months to grow and any increases in price would take months to kick in.

Understand Mises and Rothbard and you will understand better.

What are your 10-20% supposed to mean and where did you get this data? You will need to see the m1 to m4 money supply data to work it out and use the Austrian formulae.

[The One]

We need to go to the start of this thread. The idea of dividing price inflation and money supply inflation makes no sense. According to all major sources, these two categories are just cause and effect of inflation. CPI is the most basic measure of inflation worldwide.

What are your 10-20% supposed to mean and where did you get this data?

This is oversimplification. Inflation (as price increase) also depends on money velocity and productivity. I am also curious about the source of the data...

Oh dear.

[The One]

....
This is oversimplification. Inflation (as price increase) also depends on money velocity and productivity. I am also curious about the source of the data...

I didn't say that money supply is the only variable in the equation of exchange. But we need to respect the economic terms for what they are and not mix different categories even if they are in a cause and effect relationship.

Equation of exchange (most popular form): M*V = P*Q

M - money supply (mass of money in circ.)
V - velocity
P - price level
Q - productivity or quantity of product (goods, services)

So if you have a growing economy (Q is rising) and there is no change in the way you do business i.e. trade (V doesn't change) you need to increase the money supply to support this growth. Most prices are downward rigid and this is the only way to make it work. If Q and M are in proportion there is no inflation, just healthy growth supported by growing money supply.

This is all pretty elementary, no differences in opinions between economic theories etc.

There is no objective way to measure something that is subjective. Any growth caused by inflation are false growth.

[benzone]

..
There is no objective way to measure something that is subjective. Any growth caused by inflation are false growth.

Two mistakes in your reasoning:
1. It is the other way around; when an economy has by itself a business opportunity to grow, but the money supply doesn't get increased accordingly, this growth will be at least partially hampered.
2. If the prices don't grow, there is no inflation. Please read any definition of inflation you can find apart from the first post in this thread.

[deisik]

The meaning is that the results you get by using a formula don't correspond well to actual data. Usually it means that you chose the wrong formula or the formula has some limitations. What is oxymoronic in that?

In short, stop trolling...

In Maths the above statement = fail
In Chem the above statement = fail
In Physics the above statement = fail
In Computer Science the above statement = fail
Even in sociology the above statement = fail

Economics is littered with examples of "formulas that don't correspond well to actual data".  Then economists run a massive economic experiment called Quantitative Easing with these formulas...

It is hard to impossible to gauge human behavior (which is what economics is primarily concerned about) with strict mathematics. Also, wrong premises will lead to wrong conclusions which would not correlate with empirical data. I don't see how economics is different in this aspect from any other empirical science that operates with and checks its models against empirical evidence...

[Lloydie]

The meaning is that the results you get by using a formula don't correspond well to actual data. Usually it means that you chose the wrong formula or the formula has some limitations. What is oxymoronic in that?

In short, stop trolling...

In Maths the above statement = fail
In Chem the above statement = fail
In Physics the above statement = fail
In Computer Science the above statement = fail
Even in sociology the above statement = fail

Economics is littered with examples of "formulas that don't correspond well to actual data".  Then economists run a massive economic experiment called Quantitative Easing with these formulas...

It is hard to impossible to gauge human behavior (which is what economics is primarily concerned about) with strict mathematics. Also, wrong premises will lead to wrong conclusions which would not correlate with empirical data. I don't see how economics is different in this aspect from any other empirical science that operates with and checks its models against empirical evidence...

Then it is not a mathematical formula is it? It is a very flawed approximation of reality that should not be used to run a massive experiment. Economics should be frank about this but it is not.

That's the whole problem: economics ignores the empirical evidence to achieve political outcomes. It's bamboozle with BS all the way.

[deisik]

In Maths the above statement = fail
In Chem the above statement = fail
In Physics the above statement = fail
In Computer Science the above statement = fail
Even in sociology the above statement = fail

Economics is littered with examples of "formulas that don't correspond well to actual data".  Then economists run a massive economic experiment called Quantitative Easing with these formulas...

It is hard to impossible to gauge human behavior (which is what economics is primarily concerned about) with strict mathematics. Also, wrong premises will lead to wrong conclusions which would not correlate with empirical data. I don't see how economics is different in this aspect from any other empirical science that operates with and checks its models against empirical evidence...

Then it is not a mathematical formula is it? It is a very flawed approximation of reality that should not be used to run a massive experiment. Economics should be frank about this but it is not.

That's the whole problem: economics ignores the empirical evidence to achieve political outcomes. It's bamboozle with BS all the way.

It is still a mathematical equation

But now it seems I see your point. And you're blaming the wrong party here. Economics is a science, and as a science all scientific methods (techniques for investigating things, acquiring new and correcting prior knowledge) are fully applicable to it. As far as I know Fisher's formula has never been considered as an ultimate truth in itself, but only as a very rough approximation to real life economical phenomena...

It is surely not economics that you refer to here when saying that it ignores the empirical evidence to achieve political outcomes

[bitinlet]

....
This is oversimplification. Inflation (as price increase) also depends on money velocity and productivity. I am also curious about the source of the data...

I didn't say that money supply is the only variable in the equation of exchange. But we need to respect the economic terms for what they are and not mix different categories even if they are in a cause and effect relationship.

Equation of exchange (most popular form): M*V = P*Q

M - money supply (mass of money in circ.)
V - velocity
P - price level
Q - productivity or quantity of product (goods, services)

So if you have a growing economy (Q is rising) and there is no change in the way you do business i.e. trade (V doesn't change) you need to increase the money supply to support this growth. Most prices are downward rigid and this is the only way to make it work. If Q and M are in proportion there is no inflation, just healthy growth supported by growing money supply.

This is all pretty elementary, no differences in opinions between economic theories etc.

The above is a BS equation as since the ZLB, the Fed has added to money supply but velocity has fallen to 1965 levels. And get this, the Fed can't explain why!!!

Yes my friends, QE/money printing is one huge EXPERIMENT that no one truly understands. But I have a pretty good idea it's not going to end well.

Honestly, we should get these fucking useless equations out of here.

Just because Q is increasing doesn't mean the economy is growing. It could simply be asset price inflation and speculative activity creating the false impression of economic growth.  You are assuming V doesn't change when it has fallen to decade lows? WTF?

As the money supply has increased V has fallen commensurately. Bet you can't find that one in your neo classical text books.

This is the only way to make it work?!? Heads up fellas, it's not working. Period.

For everything else there is Bitcoin.

Curious about your "1965 velocity level" point. Haven't heard that. I guess that seems plausible, but I would like to see the data on that. I mean, velocity, as I'm sure you know, isn't really possible to capture (this is actually the beauty of bitcoin, it can be captured there).... velocity is often thought to remain pretty stable. If it's being calculated from the equation via other variables, there's problems there too, since inflation, gdp and even MS are all calculated differently then they once were (in 65). Yet, it should also be pointed out, if your using the variables and the equation to calculate velocity, your clearly saying the equation matters.

As for QE - I agree it's an experiment. But, it's not an experiment for the sake of experimenting. I do agree it won't end well. But, why it's happening? I think I have a theory. The Fed knew we were in a shit storm in 2008/09. They utilized every tool they had in the aftermath, and still in a shit storm. Their sole hope with QE is to buy time because they know everything is being held up by a thread. I do not think, for one second, those on the Fed don't know the severity of damage that QE most likely will cause. I think they simply think in terms of immediate gratification (or in the short run). They didn't care about the long run consequences. The irony here is that's exactly how Greenspan and the former Fed administration thought about the 01' recession and 9/11.... 'let's just heal the world now' (as if they could)... that sort of logic may hold things up temporarily, but as we all know, those actions led to the housing bubble, which burst and caused worse problems. Point being, problems will continue to erupt and the tools are growing less and less, as the severity grows. It will end in devastation and most likely a world war because as the US goes down, the world will too. Desperation will get bad.... real bad and poor choices will be made so that countries can eat and survive.

Bitcoin provides a new hope to this chain of events because it could help the world deleverage, which is the primary problem. Bitcoin, or something like it, not the Fed's policy, could help save the world.  It's always that way. Technology is what lifts economies... not government (or psuedo-gov'ts in this case).

[benzone]

....
This is oversimplification. Inflation (as price increase) also depends on money velocity and productivity. I am also curious about the source of the data...

I didn't say that money supply is the only variable in the equation of exchange. But we need to respect the economic terms for what they are and not mix different categories even if they are in a cause and effect relationship.

Equation of exchange (most popular form): M*V = P*Q

M - money supply (mass of money in circ.)
V - velocity
P - price level
Q - productivity or quantity of product (goods, services)

So if you have a growing economy (Q is rising) and there is no change in the way you do business i.e. trade (V doesn't change) you need to increase the money supply to support this growth. Most prices are downward rigid and this is the only way to make it work. If Q and M are in proportion there is no inflation, just healthy growth supported by growing money supply.

This is all pretty elementary, no differences in opinions between economic theories etc.

The above is a BS equation as since the ZLB, the Fed has added to money supply but velocity has fallen to 1965 levels. And get this, the Fed can't explain why!!!

Yes my friends, QE/money printing is one huge EXPERIMENT that no one truly understands. But I have a pretty good idea it's not going to end well.

Honestly, we should get these fucking useless equations out of here.

Just because Q is increasing doesn't mean the economy is growing. It could simply be asset price inflation and speculative activity creating the false impression of economic growth.  You are assuming V doesn't change when it has fallen to decade lows? WTF?

As the money supply has increased V has fallen commensurately. Bet you can't find that one in your neo classical text books.

This is the only way to make it work?!? Heads up fellas, it's not working. Period.

For everything else there is Bitcoin.

Q is quantity of product, price is a separate variabale ... ah what's the point. Go ahead, ignore all theory and blindly believe that almighty Bitcoin will save us all.

[The One]

..
There is no objective way to measure something that is subjective. Any growth caused by inflation are false growth.

Two mistakes in your reasoning:
1. It is the other way around; when an economy has by itself a business opportunity to grow, but the money supply doesn't get increased accordingly, this growth will be at least partially hampered.
2. If the prices don't grow, there is no inflation. Please read any definition of inflation you can find apart from the first post in this thread.

1. Utter nonsense, if the business has something the consumer want, they will buy. Growth can be done using Say's Law, reducing price to increase demand. No need to print money out of thin air - inflation.

2. Inflation is when the money supplies expand. Simply as that. Inflation leads to prices going up. Simple as that. Don't tell me to read as i already knew 20 years ago.

[The One]

In Maths the above statement = fail
In Chem the above statement = fail
In Physics the above statement = fail
In Computer Science the above statement = fail
Even in sociology the above statement = fail

Economics is littered with examples of "formulas that don't correspond well to actual data".  Then economists run a massive economic experiment called Quantitative Easing with these formulas...

It is hard to impossible to gauge human behavior (which is what economics is primarily concerned about) with strict mathematics. Also, wrong premises will lead to wrong conclusions which would not correlate with empirical data. I don't see how economics is different in this aspect from any other empirical science that operates with and checks its models against empirical evidence...

Then it is not a mathematical formula is it? It is a very flawed approximation of reality that should not be used to run a massive experiment. Economics should be frank about this but it is not.

That's the whole problem: economics ignores the empirical evidence to achieve political outcomes. It's bamboozle with BS all the way.

It is still a mathematical equation

Flawed and useless.

Economics is a science,

No it isn't.

[benzone]

..
There is no objective way to measure something that is subjective. Any growth caused by inflation are false growth.

Two mistakes in your reasoning:
1. It is the other way around; when an economy has by itself a business opportunity to grow, but the money supply doesn't get increased accordingly, this growth will be at least partially hampered.
2. If the prices don't grow, there is no inflation. Please read any definition of inflation you can find apart from the first post in this thread.

1. Utter nonsense, if the business has something the consumer want, they will buy. Growth can be done using Say's Law, reducing price to increase demand. No need to print money out of thin air - inflation.

2. Inflation is when the money supplies expand. Simply as that. Inflation leads to prices going up. Simple as that. Don't tell me to read as i already knew 20 years ago.

1. Company X invents a new product, new sgement and all other prices of unrelated products will fall at once so X can make more money? Yea right, dream on. Most prices are rigid.
2. If you read anything in those 20 years, please post a link where we can find your fabricated definition of inflation. Wikipedia - no, Investopedia - no, any economics scholbook - no ...

[ascalon]

1. Company X invents a new product, new sgement and all other prices of unrelated products will fall at once so X can make more money? Yea right, dream on. Most prices are rigid.
2. If you read anything in those 20 years, please post a link where we can find your fabricated definition of inflation. Wikipedia - no, Investopedia - no, any economics scholbook - no ...

Hello, the answer to point 2 is contained within the answer for point 1

1. The economy is something of a feedback loop, so while you're correct that prices are sticky/rigid, this is a time-sensitive scenario. It takes time for actors to adjust to new realities, and some times, they refuse to do so - but that's their own problem.

2. Inflation is an increase in the money supply relative to the goods and services it is chasing; so, ceteris paribus, this would lead to an increase in prices. But like I said above, the economy is a bit of a feedback loop, and signals take, again, time to move into all sectors. And some sectors are more sensitive to inflation that others: the stock market is going up at unprecedented levels right now, the housing market is 'recovering' etc etc.

[Ceballos]

nice post! very interesting