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Strategies & Market Trends : The Residential Real Estate Crash Index
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To: GraceZ who wrote (25872)12/11/2004 11:46:33 PM
From: Mike JohnstonRead Replies (1) of 306849
 
Ideally the money supply should grow at the long run rate of productivity growth which is around 2-3%.

That is correct, in that case inflation would be 0, an ideal situation. The problem is that money supply is growing at much higher rates than productivity growth + population growth, thus we have constant inflation. Great for the bankers and great for the government, especially when they can fool the population into believing that there is no inflation.

try to imagine the US with the same amount of money we had in say 1965.

If money supply was constant then increases in productivity and innovation would lead to a mild deflation (2-3% a year), which would actually not be a bad thing. When Ford Model T was introduced in 1908 it retailed for $825. By 1912 the price has dropped to $199. Two years later it was $99. Talk about good deflation, huge real productivity increase and rising standard of living ! Compare that to today's situation where rising house prices and inflation actually lower living standards.
When talking about deflation one has to consider two kinds of deflation:

a)bad deflation is caused by a decline in demand.
b)good deflation which is caused by increases in innovation and productivity.
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