The price stability fallacy

[grondilu]

All current montetary politics is a joke.

Basically it consists in adjusting money supply (via interest rates) in order to maintain a relative price stability.  But why would we want price stability ?  Theoretically it's because it's difficult to have economic activity without it.  How to pay wages if the value of money varies from one month to an other ?  How to sign a long term contract if we have no way to know exactly what 100 monetary units will be able to buy next year ?  This is the whole idea behind current economics and monetary policy.  And this is bullshit.


Prices are not something that have to be decided by anyone.   An apple is an apple, and there is no reason why it should cost more next year than right now.  That's what some people think.  But what if the production techniques have been improved ?  What if suddenly less people like to eat apples ?  Or if an other fruit gets invented (why not ?).

They say that when there is economic growth, we should increase the money supply in accordance, so that prices remain stable.  But if bankers increase money supply to counter production improvement, isn't that a theft of consummers, who otherwise would have benefited from this improvement of productivity ?  Isn't that also a theft of the producer, whose products gets to be at the same price although he had increased his productivity ?

Who on earth are those guys who get to decide what should be the price of the things we produce and  consume ?


It's tough to pay wages in deflation.  True.  But sometimes the market wants it.  The labour of someone may have some value at a certain time, but the same labour can have a different value a few months later.  Some things can have happened.  A machine can have been invented that does the same work.  Other workers can have come up with more motivation to work, or better skills.   Price stability has no reason to be prefered if it does not reflect economic reality.

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[kiba]

So we're experiencing price instability in the bitcoin economy right now. The value of my saving sure like to fluctuate, but it's going up. If my saving maintain its present value or goes up in the long run, that's a good thing.

[caveden]

But why would we want price stability ?

I see you never lived under hyperinflation.

I know you were talking about price deflation, and "hyperdeflation" doesn't exist. But some level of stability and predictability is important.
In an economy under stable money supply you do have enough of it.

[Timo Y]

An apple is an apple, and there is no reason why it should cost more next year than right now.  That's what some people think. 

Those people should buy apple futures.

But if bankers increase money supply to counter production improvement, isn't that a theft of consummers, who otherwise would have benefited from this improvement of productivity ?  Isn't that also a theft of the producer, whose products gets to be at the same price although he had increased his productivity ?

It's not theft, because if you agree to use a mint's currency you implicitly accept the possibility of them printing new money at their discretion.  It would only be theft if they were contractually bound to refrain from printing money. The central bank doesn't force you to use legal tender. It's your choice.

Who on earth are those guys who get to decide what should be the price of the things we produce and  consume ?

That's right. We should be able to decide ourselves.

Hedging doesn't seem to be part of our everyday culture though. For instance, every time I go to some social gathering, inevitably there will be someone there who complains endlessly about rising petrol prices. (it's odd that this person never cheers when petrol prices go down, he only moans when they rise). 

But they never actually DO anything. If you care so deeply about keeping your petrol costs stable for the next 10 years I am sure it's not hard to find some financier who will offer you a hedge. But people just moan instead and demand that government does it for them.

or perhaps buying petrol futures is too impractical for joe average?

[grondilu]

But they never actually DO anything. If you care so deeply about keeping your petrol costs stable for the next 10 years I am sure it's not hard to find some financier who will offer you a hedge. But people just moan instead and demand that government does it for them.

or perhaps buying petrol futures is too impractical for joe average?

Very true.  Some financial instruments could easily be used by people.  I'm not sure about futures, but I know warrants are very easy to buy.

[kiba]

So, if future is impractical to buy...then somebody could make a load of money by opening up a bitcoin future market and making it so easy to do so.

[grondilu]

So, if future is impractical to buy...then somebody could make a load of money by opening up a bitcoin future market and making it so easy to do so.

When bitcoin becomes world famous, then international finance is gonna get wild.  It will be fun.

But right now nobody has enough reputation to make it come true.  But it will happen, I'm sure of it.

[lucky]

But why would we want price stability ?

Because it's very hard to plan without stability, both in our personal lives and as businesses.

E.g., Most people's wages are reviewed at most several times a year.  If you're being paid 100 units of currency a week and food to feed your family goes from 4 units a week to 6000 units a week, you're screwed.

If your business buys raw materials which vary from 5 units to 0.01 units to 5000 units over the course of a month, how do you finance or plan for that?

You make some good points against centrally-imposed prices, but stability itself is a good thing.  Sharp variations are beneficial to only a small minority and injurious to most.

[grondilu]

Because it's very hard to plan without stability, both in our personal lives and as businesses.

E.g., Most people's wages are reviewed at most several times a year.  If you're being paid 100 units of currency a week and food to feed your family goes from 4 units a week to 6000 units a week, you're screwed.

If your business buys raw materials which vary from 5 units to 0.01 units to 5000 units over the course of a month, how do you finance or plan for that?

You make some good points against centrally-imposed prices, but stability itself is a good thing.  Sharp variations are beneficial to only a small minority and injurious to most.

If the market really wants price instability, so be it.

Sure, it's easier to plan on a business activity with relatively stable prices.  But such a stability doesn't have to be artificial.  It's possible that price instability destroy businesses, but it will only be a consequence of the inaptitude to adapt to market.

I mean, say you sell audio CDs.  Suddenly the MP3 comes out.  Your product suddenly doesn't worth nothing.  So that's a huge and rapid price instability.  Are you going to blame central banks for not having printed money to fight this deflation ?

Economic factors influence prices.  They can make them increase or decrease.  Nobody should try to do anything against that.

[lucky]

I mean, say you sell audio CDs.  Suddenly the MP3 comes out.  Your product suddenly doesn't worth nothing.  So that's a huge and rapid price instability.  Are you going to blame central banks for not having printed money to fight this deflation ?

Instability isn't always a bad thing and I'm sorry if I made it sound like I meant that, if there is an actual shift in the value of something, then the price *should* change. 

But more generally, bulk commodities in high volume with stable demand should have stable prices for the sake of economic sanity and functioning.  I actually think markets will generally tend towards that anyway, even without intervention.

[grondilu]

But more generally, bulk commodities in high volume with stable demand should have stable prices for the sake of economic sanity and functioning.  I actually think markets will generally tend towards that anyway, even without intervention.

Well, I guess we more or less agree then.

[nowhereman]

The most important thing in a market is not 'stable' prices, but predictable prices. Indeed the economy can look like anything in general, but the fact that people can predict future conditions and plan accordingly is the most important thing when it comes to an economy. So the reason why printing money is bad is not just the fact that this money is funneled from one place to another without regard to the morality of it (it is appalling though), but the fact that any additional money printed or taxed and placed somewhere else will have a massive effect upon the economy. These effects make the economy unpredictable and hence will harm the economy in both the short run and probably the long run. In a way, printing money to combat deflation is a little like giving CPR with a sledgehammer. Sure the man might come back and take a few breathes, but he won't be thanking you when he starts coughing up part of his lung.