Inflation and Deflation of Price and Money Supply

[Lloydie]

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.

Velocity crashing due to QE. http://www.zerohedge.com/news/2013-10-21/qes-gross-misallocation-capital

So the fed pumps money in, expecting velocity to stay constant, but it doesn't. Fisher was wrong. There at times when even near zero rates will not cause credit growth to increase.

So what do they do? Force feed credit gavage style to students, automobile loans, corporate debt to fund buy backs, REO to buy property, property refinancings, margin debt and of course government debt.

Sure they are going to succeed for awhile. Then it's going to blow up in their faces all over again.

[aminorex]

The ideal gas law for 1 mole of gas is PV = RT.  Compare to the quantity theory, PQ = MV.  The form is identical.   The analogy is very strong.  The ideal gas law is a perfect description within its domain.  When applied to actual masses of gas, it is an approximation.  The ideal gas law derives its inevitability from the statistical behaviour of the ensemble.  The quantity theory is a perfect description within its domain.  When applied to actual exchange economies, it is in approximation.  The quantity theory derives its inevitability from the statistical behaviour of the ensemble.

Unless there is present a reasoned argument or substantive evidence that the ideal gas law is a useful approximation in a given circumstance, it would be folly to think that it was not.  Likewise, the quantity theory.  Within the realms of practical experience both have proven reliable, and both have compelling principled explanations.  Indeed one could say that both are obviously true, if anything were ever obvious.

On the other hand, one could say that the ideal gas law is a definition of R.  One could say that the quantity theory is a definition of M.  The value of Boltzmann's constant can be read from PV/T, empirical observables.  The value of a unit of currency can be read from PQ/V, empirical observables.   In this sense, the ideal gas law is useful if R holds true in other circumstances.   Likewise the quantity theory is useful if the value computed enables arbitrage with other currencies.  In fact, it does.

[bitinlet]

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.

Velocity crashing due to QE. http://www.zerohedge.com/news/2013-10-21/qes-gross-misallocation-capital

I get that. But, how are they calculating velocity? They are using the quantity theory of money equation. There's no way to calculate it otherwise.

So the fed pumps money in, expecting velocity to stay constant, but it doesn't. Fisher was wrong.

How does this prove Fisher or Friedman wrong? I don't get it. Seems to me you're still implying that if a change in M doesn't affect P*Q, it's because V declined. I agree and I think they would too. I mean by even discussing V, we're assuming the quantity theory or equation of exchange is correct. The reason is the V variable is computed from the equation itself. Anyway, when V picks up, it will primarily hit P. Which is the other point of the equation.

There at times when even near zero rates will not cause credit growth to increase.

So what do they do? Force feed credit gavage style to students, automobile loans, corporate debt to fund buy backs, REO to buy property, property refinancings, margin debt and of course government debt.

Sure they are going to succeed for awhile. Then it's going to blow up in their faces all over again.

I agree that all this will blow up. And I also agree the expansion of credit isn't working.

[eboard10]

Velocity crashing due to QE. http://www.zerohedge.com/news/2013-10-21/qes-gross-misallocation-capital

So the fed pumps money in, expecting velocity to stay constant, but it doesn't. Fisher was wrong. There at times when even near zero rates will not cause credit growth to increase.

So what do they do? Force feed credit gavage style to students, automobile loans, corporate debt to fund buy backs, REO to buy property, property refinancings, margin debt and of course government debt.

Sure they are going to succeed for awhile. Then it's going to blow up in their faces all over again.

Agree on this point. I'm expecting a deflationary collapse sometime within the next 2-3 years but I don't think that the crash will come from the US but rather from Japan and we'll see investors rush to the dollar and possibly gold and bitcoins too.

[Lloydie]

Velocity crashing due to QE. http://www.zerohedge.com/news/2013-10-21/qes-gross-misallocation-capital

So the fed pumps money in, expecting velocity to stay constant, but it doesn't. Fisher was wrong. There at times when even near zero rates will not cause credit growth to increase.

So what do they do? Force feed credit gavage style to students, automobile loans, corporate debt to fund buy backs, REO to buy property, property refinancings, margin debt and of course government debt.

Sure they are going to succeed for awhile. Then it's going to blow up in their faces all over again.

Agree on this point. I'm expecting a deflationary collapse sometime within the next 2-3 years but I don't think that the crash will come from the US but rather from Japan and we'll see investors rush to the dollar and possibly gold and bitcoins too.

Japan or China or Europe. China is experiencing issues in their shadow financing sector. One of the investment trusts sold via ICBC (world's largest bank) has lost money to a coal company. Payment deadline to investors is end of jan. Many more trust products in the sidelines just waiting to blow up.

Europe hangs on by a thread. Greece government run by ex Goldman partner has a majority by a margin of three out of three hundred seats. We'll see how long things continue before Merkel is forced to reveal to Germany that their loans to Greece are not actually safe. Also, the whole area is falling into deflation, which is the correction they need. But of course crushing debt levels make this option unpalatable.

[deus]

pillo sitio

[Ix]

I get that. But, how are they calculating velocity? They are using the quantity theory of money equation. There's no way to calculate it otherwise.

Won't it be interesting when cryptocurrencies have a big enough economy to warrant serious analysis? There will be literally billions of data points. While the numbers won't be everything, comparing the data year over year will lead to some significant economic insight, I think.

[WynX]

Yes, interesting case. Yet it would not be fully representative of the current (fiat) monetary systems. By observing the system, you change the system (hint at quantum properties (i.e. wave-particle duality)).

[billyjoeallen]

The velocity of money is decreasing because the Fed is intentionally decreasing it to dampen inflation. They are doing this by paying risk free interest to member bank deposits, effectively paying banks not to lend out their bail-out money. The bail-outs were intentionally designed to re-capitalize zombie banks without causing inflation from the fractional reserve money multiplier. It worked, and all they had to do was counterfeit  a trillion dollars and give it to the very people who failed at their one and only job: lend money to people who will pay it back.

This was a patch job to a badly failing system that is still failing, but it was a brilliant patch. The most brilliant thing about it is that they managed to get away with it with no more consequence than some hippies occupying a park.

The body of the economy needs the protein of capital formation, but doesn't get it because of zero interest rates. So like the Grateful Dead song, it keeps truckin; livin' on reds, vitamic C, and cocaine. Meanwhile, the muscles (industries) atrophy. This is not a fixable problem The patient is dying, too weak for the surgery (correction/bust/depression) that would save it by re-allocating capital to the places it could be used it most productively.

[Ix]

The velocity of money is decreasing because the Fed is intentionally decreasing it to dampen inflation. They are doing this by paying risk free interest to member bank deposits, effectively paying banks not to lend out their bail-out money. The bail-outs were intentionally designed to re-capitalize zombie banks without causing inflation from the fractional reserve money multiplier. It worked, and all they had to do was counterfeit  a trillion dollars and give it to the very people who failed at their one and only job: lend money to people who will pay it back.

This was a patch job to a badly failing system that is still failing, but it was a brilliant patch. The most brilliant thing about it is that they managed to get away with it with no more consequence than some hippies occupying a park.

The body of the economy needs the protein of capital formation, but doesn't get it because of zero interest rates. So like the Grateful Dead song, it keeps truckin; livin' on reds, vitamic C, and cocaine. Meanwhile, the muscles (industries) atrophy. This is not a fixable problem The patient is dying, too weak for the surgery (correction/bust/depression) that would save it by re-allocating capital to the places it could be used it most productively.

Eloquent post.

[crimsonskies]

The long term viability of bitcoin as currency interests me, because ultimately, it is this quality that will sustain or derail it after all the speculation has moved on to more interesting pastures.

The theory of money, therefore, is an important one to contemplate for those interested in the long game.

Money theory can be complicated... and controversial.

Let's add this thought to the mix:

"Enter, bitcoin, a cryptography-based currency and technology developed by someone with the pseudonym Satoshi Nakamoto. It has been designed to have a limited rate of growth in the total quantity of currency, up to a predefined cap. There can never be more than 21M bitcoins. The Quantity Theory says that this will make prices of goods measured in bitcoins stable.

One problem with this theory is that the real costs in terms of land, capital, and labor to produce things is steadily falling. Every productive enterprise is constantly seeking to drive cost out of production. If a currency had a constant value, then prices in terms of this currency would be falling.

As we shall see below, the value of bitcoin will be anything but constant. Without a mechanism for responding to increased market demand by creating more currency, there is a fatal flaw."


excerpt from:  http://monetary-metals.com/bitcoin-gold-and-the-quantity-of-mone/

[Lloydie]

The long term viability of bitcoin as currency interests me, because ultimately, it is this quality that will sustain or derail it after all the speculation has moved on to more interesting pastures.

The theory of money, therefore, is an important one to contemplate for those interested in the long game.

Money theory can be complicated... and controversial.

Let's add this thought to the mix:

"Enter, bitcoin, a cryptography-based currency and technology developed by someone with the pseudonym Satoshi Nakamoto. It has been designed to have a limited rate of growth in the total quantity of currency, up to a predefined cap. There can never be more than 21M bitcoins. The Quantity Theory says that this will make prices of goods measured in bitcoins stable.

One problem with this theory is that the real costs in terms of land, capital, and labor to produce things is steadily falling. Every productive enterprise is constantly seeking to drive cost out of production. If a currency had a constant value, then prices in terms of this currency would be falling.

As we shall see below, the value of bitcoin will be anything but constant. Without a mechanism for responding to increased market demand by creating more currency, there is a fatal flaw."


excerpt from:  http://monetary-metals.com/bitcoin-gold-and-the-quantity-of-mone/

Falling prices will lead to greater efficiency instead of wasting scarce resources.  See Japan.  Stagnant GDP but super clean cities, machinery not needing replacement for 15 years, wonderful food, low unemployment.  Deflation is ok. If their population levels weren't declining I think their GDP might even be slightly growing.  Now they've got Abenomics to screw things up by trying to create GDP growth.  Growth in what? Speculative assets?  Why is growth necessary for a shrinking population?  No wonder Abe's popularity is falling.  Since, Abenomics, Japan's current account deficit has only been getting wider. Imports growth is outstripping exports growth.

[deisik]

Falling prices will lead to greater efficiency instead of wasting scarce resources.  See Japan.  Stagnant GDP but super clean cities, machinery not needing replacement for 15 years, wonderful food, low unemployment.  Deflation is ok. If their population levels weren't declining I think their GDP might even be slightly growing.  Now they've got Abenomics to screw things up by trying to create GDP growth.  Growth in what? Speculative assets?  Why is growth necessary for a shrinking population?  No wonder Abe's popularity is falling.  Since, Abenomics, Japan's current account deficit has only been getting wider. Imports growth is outstripping exports growth.

It is not population shrinking that actually matters here but rather age distribution skewing, i.e. more elders and less young productive hands. So things become yet more complicated, and to keep their standard of living, they have to increase productivity that would possibly lead to GDP growth (since Japan's population is not that much shrinking as it is aging)...

[deisik]

Falling prices will lead to greater efficiency instead of wasting scarce resources.  See Japan.  Stagnant GDP but super clean cities, machinery not needing replacement for 15 years, wonderful food, low unemployment.  Deflation is ok

How come? If we take this source, the rate of unemployment in Japan had been steadily raising through 90s and on, peaking twice in 2004 and 2009...

[ZephramC]

Falling prices will lead to greater efficiency instead of wasting scarce resources.  See Japan.  Stagnant GDP but super clean cities, machinery not needing replacement for 15 years, wonderful food, low unemployment.  Deflation is ok

How come? If we take this source, the rate of unemployment in Japan had been steadily raising through 90s and on, peaking twice in 2004 and 2009...

You can say that high unemployment also leads to greater efficiency (only the best of the best are doing things) instead of wasting scarce resources (people's workforce and free time). 

[zipmaster]

One key aspect worth noting is that, up until the advent of virtual currencies, one large edge of inflationary over deflationary policies is the fundamental limit to how small your currency can be functionally made for transfer.

The indefinite divisibility of bitcoin completely bypasses this incentivizing increasing monetary velocity as a result.

[ascalon]

One key aspect worth noting is that, up until the advent of virtual currencies, one large edge of inflationary over deflationary policies is the fundamental limit to how small your currency can be functionally made for transfer.

The indefinite divisibility of bitcoin completely bypasses this incentivizing increasing monetary velocity as a result.

Good post. Most people who argue against Bitcoin miss this point.

[ZephramC]

One key aspect worth noting is that, up until the advent of virtual currencies, one large edge of inflationary over deflationary policies is the fundamental limit to how small your currency can be functionally made for transfer.

The indefinite divisibility of bitcoin completely bypasses this incentivizing increasing monetary velocity as a result.

Bitcoin is not and never will be infinitely* divisible. Amount 0.00000001 BTC is currently the smallest unit. Value is currently expressed by 8byte (64bit) number of this units. This means there is space for 18 446 744 073 709 551 616 units. Considering maximum 21M coins, smallest unit would be ~1.14E-12 BTC. Effectively this means space for adding additional 3 decimal places up to 1E-11 BTC without change of data field.

We can estimate gross domestic product of planet Earth to be less than 1E14 USD (about 0.83E14 in 2012). If all the world economy was converted to bitcoins then 1 Satoshi would be worth 4.762 cents in current USD. This is too much for micropayments. Above mentioned "smallest unit" would be worth thousand times less. I consider this to be adequate (for the planetary phase of human evolution) :-].

* - not infinitely divisible. But division up to the number of atoms in the observed universe would be no problem. Still long shot to infinity.

[deisik]

One key aspect worth noting is that, up until the advent of virtual currencies, one large edge of inflationary over deflationary policies is the fundamental limit to how small your currency can be functionally made for transfer.

The indefinite divisibility of bitcoin completely bypasses this incentivizing increasing monetary velocity as a result.

Bitcoin is not and never will be infinitely* divisible. Amount 0.00000001 BTC is currently the smallest unit. Value is currently expressed by 8byte (64bit) number of this units. This means there is space for 18 446 744 073 709 551 616 units. Considering maximum 21M coins, smallest unit would be ~1.14E-12 BTC. Effectively this means space for adding additional 3 decimal places up to 1E-11 BTC without change of data field.

We can estimate gross domestic product of planet Earth to be less than 1E14 USD (about 0.83E14 in 2012). If all the world economy was converted to bitcoins then 1 Satoshi would be worth 4.762 cents in current USD. This is too much for micropayments. Above mentioned "smallest unit" would be worth thousand times less. I consider this to be adequate (for the planetary phase of human evolution) :-].

* - not infinitely divisible. But division up to the number of atoms in the observed universe would be no problem. Still long shot to infinity.

And to correctly write down this number would require even more atoms (let alone making a transaction or handling it in some way, lol)...

[ZephramC]

One key aspect worth noting is that, up until the advent of virtual currencies, one large edge of inflationary over deflationary policies is the fundamental limit to how small your currency can be functionally made for transfer.

The indefinite divisibility of bitcoin completely bypasses this incentivizing increasing monetary velocity as a result.

Bitcoin is not and never will be infinitely* divisible. Amount 0.00000001 BTC is currently the smallest unit. Value is currently expressed by 8byte (64bit) number of this units. This means there is space for 18 446 744 073 709 551 616 units. Considering maximum 21M coins, smallest unit would be ~1.14E-12 BTC. Effectively this means space for adding additional 3 decimal places up to 1E-11 BTC without change of data field.

We can estimate gross domestic product of planet Earth to be less than 1E14 USD (about 0.83E14 in 2012). If all the world economy was converted to bitcoins then 1 Satoshi would be worth 4.762 cents in current USD. This is too much for micropayments. Above mentioned "smallest unit" would be worth thousand times less. I consider this to be adequate (for the planetary phase of human evolution) :-].

* - not infinitely divisible. But division up to the number of atoms in the observed universe would be no problem. Still long shot to infinity.

And to correctly write down this number would require even more atoms (let alone making a transaction or handling it in some way, lol)...

You can write this number (its lower and higher estimate) quite easily. But you can not write all numbers from 1 to this number (without exhausting matter and energy in the universe).