Maurice -
...In a deflationary environment, I can imagine the E could be successfully doubled without causing inflation by the simple expedient of doubling the number of dollars [which wouldn't really be needed because what's really needed is a doubling of money velocity rather than the actual dollars - one dollar moving at the speed of light would be enough to handle the world's transactions - hmm, actually, it wouldn't, but maybe a couple of million dollars would do it. Maybe a 20% increase in money would cause a doubling of the E]. I'm making up this economic stuff as I go, so maybe a real economist can tell me if this is right.
Inflation IS the increase in the money supply, including money substitutes and credit, and does not necessarily immediately result in an increase in prices, or more precisely, a decrease in the objective exchange value of the monetary unit. The velocity of money may have had some significance early in the evolution of money, but has long since become obsolete in the face of the widespread use of credit and the virtually unlimited supply of costless and weightless paper money. The demand for money is not directly related to the level of economic transactions, but rather follows the ebb and flow of changes in the level of actual cash balances desired. If you double your earnings next month, and spend all of the increase as well, your cash balance will not necessarily change in response. The need to hold cash balances is primarily the result of an uncertain future in which unscheduled emergencies or opportunistic bargains may appear. The availability of credit reduces this need.
Regards, Don |
