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Non-Tech : Money Supply & The Federal Reserve
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To: glenn_a who wrote (343)8/16/2002 8:22:45 AM
From: UnBelievable  Read Replies (2) of 1379
 
I Appreciate Your Comments

Your comments about forces other than the Fed that may decrease the money supply are very useful.

I'd like to take a little bit of time and think about them before responding. Your explanation does seem to illustrate quite clearly the way in which deflation may arise regardless of the Fed's monetary policy. I'll try to post something this weekend. The nuance which you have highlighted is "in circulation".

While your definitions of Inflation and Deflation are correct (and ones to which I fully subscribe) the difficulty is defining (not to mention quantifying) money and real goods and services tends to enable the definitions to both be correct and yet somehow not very meaningful from a practical perspective.

Previously I have written a post on Inflation and Deflation; Money and Wealth which attempted to clarify the distinction between money and wealth. It was written in response to someone expression of the idea that we might see both inflation and deflation at the same time depending in various sectors of the economy (inflation in health care. deflation in building products or commodities).

In that post, a copy of which I'll post as a response to this post, I took issue with the concept of sector based inflation or deflation. In it I drew a clear distinction between wealth (anything that participants in an economy have a demand for because of some characteristic of the thing itself) and money (something which participants in an economy value solely because of the existence of a shared belief or understanding that it will be exchangeable for wealth). I also attempted to explain inflation and deflation from an "operational" perspective.

I even made the point that if stock is goods and services and not money then when the value of stock declines the money supply should be decreased if the objective is stability of the unit of money.

Part of what became clear to me in the process of developing that post was that the concept implicit in the classical definitions i.e. that maintaining a constant relationship between absolute increases or decreases in money vis a vis an absolute increase of decrease in goods and services may not be not produce a stable currency.

Its getting to be time when I need to focus on the market if I hope to maintain my unemployed status so I'll have to finish later. In the meantime any comments you may have on the post would be of interest.
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