For starters let me thank you for attempting to bring the level of discussion down to neutral as opposed to ridicule of each others positions.
Now with a much cooler head, let's try and continue.
The chart is consistent with the fact that reserves (excluding the currency holding demands of the public) have not grown much if at all since 1986. Perhaps I wasn’t as clear as I could have been on that. Your thesis is that the money supply measures have exploded, and the absence of outright inflation you must explain away by referring to bubbles, government manipulation of data (hedonics), or some other invention, which I view as nothing more than circular logic.
The chart is consistent with nothing (at least from my point of view). It is a measure of CPI or prices not money supply.
Money supply can AND DID find its way into asset prices including stocks not reflected in the CPI.
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Are you saying weather cause inflation? We’re talking about what factors determine the price level, not individual prices. It really does appear that you are having trouble distinguishing between changes in relative prices (which evolve to match individuals’ marginal rates of substitution between the multitude of possible consumption, savings, and investment choices, spanning both the present and future), and the factors that determine the price level.
Of course not. Weather can NEVER cause inflation. Given that my belief that inflation = increase in money and credit. Weather can indeed HEAVILY influences prices which of course is another matter. I am saying and have been saying and how many times do I have to say it: Inflation = increase in money supply and credit. If you prefer a simpleton view (inflation is a measure of price increases caused by increasing money supply). That is a poor view as increased money supply can work its way into the stock market rather than everyday prices. There is also the IMPOSSIBLE problem of determining why prices rose (eg weather, peak oil, etc). Measuring prices is a fool's game. That is exactly how Greenspan f*d up. He did not regard the rapid expanse of credit as infaltion since it primarily affected stock prices not the CPI.
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That would be true only in static equilibrium. Under a dynamic intertemporal model, given a marginal increase in demand for loanable funds, marginal output increases such that over the long haul the price level remains constant. This fact is why I wanted you to go through the exercise of determining if a free market in money would be prone to instability and failure. You might also want to check historical money supply and price level figures that obtained under commodity standards.
Is a free market is money prone to instability?
I am not sure if I am answering your question but let me try this:
There are theoretical ways in which Money does not have to be backed by a commodity to simulate the affect of money backed by gold. The problem of course is that Nixon proved what happens. There is no constraint put on spending. A very good book on this subject is The Monetary Elite vs. Gold's Honest Dicipline. amazon.com
It can be achieved and perhaps what Vince proposes will be some sort of solution years down the road with or without Gold backing up money.
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Your views are consistent with a hard money school advocate, i.e. a commodity standard and 100% reserves - no fractional reserve banking. That is hardly a free market in money. I’m not distorting your views; neglecting for the moment that I have simply corrected some of your more flagrant errors, I’m pointing out the inherent tension between what you think you believe and what you actually advocate.
OK you tell me what does a free market in money mean? Whatever it is, yes I agree I probably am not in favor of it. I am in favor of a free market in interest rates. That is a different thing. Assume that money is backed by gold. Exactly what does a "free market" mean. Gold is there and it is real. It is either there or it is not there. Money supply does not increase unless the supply of gold increases. That is the world view. From an individual country view, money increases when balance of trade increases. Eventually this forces interest rates higher externally and the flow of gold to reverse. Nixon took the US off the gold standard because France and other were cashing in.
The US needed to raise interst rates and stop spending to stem the tide. They refused to do so. Money supply world wide has accelertaed ever since nothing has backed it up. It is all totally funny money everywhere.
Hyperinflation has a definition, and that is a price level rising greater than 50% per month. By that stage of the game it doesn’t matter what the money supply is doing, and that is why Cagan, among others, have measured the money supply failing. Again, hyperinflation is characterized by a rapid and continuous decline in the demand for money. The point of the exercise is that the price level may fall or rise depending upon the money holding decisions of the general public regardless of what money stock is doing. This isn’t idle theory, it goes to the heart of being able to distinguish between endogenous increases in the money supply which impact output, but not the price level, and exogenous increases that must have an effect on both output and the price level.
I do not care what is happening at that stage of the game. The only two ways to get to hyperinflation are
1) Rampant increase in money supply
2) Loss of faith in the government
The weimar republic printed like mad to pay off debts. No doubt you can find some examples where a govt collapsed. I fail to see how a collapse of a government is relevant to this discussion. The only other way to get there is the printing press. Money supply simply does not fall in hyperinflation barring governmental collapse of some kind.
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Given that my statement is theoretically sound and has historical precedence, for you to make the assertion that it is preposterous indicates that you have very little understanding of monetary theory. It must be that the term “money demand” doesn’t evoke a meaning concept for you.
I understand the concept of "money demand". The demand for money in the US will be extremely high to someone that goes thru bankruptcy under the new laws and has to pay back something. That person may well never charge a damn thing ever again. The demand for money for someone struggling to pay they mortgage and unable to get credit will be very high. That person too will be damn reluctant to spend money on frivolous goods and services. When the flow of creidt is shut off and cash out refis stop unnecessary spending the demand for money will soar IMO. I have a hard time believing you do not see this. If you do what the H are we arguing about?
ah… haha, I knew it! I knew you were a hard money advocate and wrote it above before I even read this far. You have shown a lot of confusion about what constitutes the money supply. You should know that the even under a hard money system the money supply would still fluctuate – you would know that if you had a concept of the demand side.
I am indeed a hard money advocate. But as I said before there are in theory other ways to achieve the same thing, Greenspan said it and I agree. But the way he said it was preposterous. He said we were there now. A totally absurd statement. I am aware that money supply can fluctuate in a hard regime so you are mistaken. I think I proved your belief wrong by discussing the balance of trade and Nixon. It is damn time consuming to type out every freaking detail of what one knows and it is equally hard to express an opinion in a few lines. I hate people making huge assumptions based on a single sentence I write. It really really pisses me off so once again I thank you for attempting to bring this discussion back to a more civil tone.
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Oh my god! I didn’t read this far and I again correctly assumed that your fondness for a hard money system was an erroneous belief that it provided a constant money supply.
I will repeat what I said above: I am aware that money supply can fluctuate in a hard regime so you are mistaken. I think I proved your belief wrong by discussing the balance of trade and Nixon. It is damn time consuming to type out every freaking detail of what one knows and it is equally hard to express an opinion in a few lines. I hate people making huge assumptions based on a singe sentence I write. I will continue with this:
Please do no extrapolate other off the wall comments into a hard and fast positions. When I discussed increasing money supply by 2% a year I was attempting to describe a more pragmatic approach of a FED that wanted to maintain positive inflation ie. increase money at 2% a year come hell or high water. I am not in favor of that but it would be a far better policy than attempting to target a price rise 2% a year. The latter I maintain is impossible.
Mish |
