Lower price causes lower supply, a profit disincentive.
The price doesn't drop. Its value does. Since the core component cost has risen for all goods, demand must show that it will hold or else the good will cease to be produced. This is just the proving stage. The test of survivability comes when the producer attempts to raise the good's price commensurate with its increased production cost. If demand will hold at the higher price, then the value becomes equal to the price in asymptotic equilibrium. Thus, you are taking the wrong derivative. It's the time rate of change of value averaged until and if equilibrium exists, is achieved, and is stable. You didn't see anyone lowering prices when the oil embargoes of the '70s hit.
The availability of money, that is, price elasticity with respect to marginal demand, is only one factor. Money can be easy to get but people don't necessarily want it because they fear that taking it has strings attached. Your view comes from the economic school of demand management where it is always assumed cheap money will be demanded. Japan is currently refuting that thesis as we did 20 years ago under a different set of parameters. The idea is that you can't push on a string.
Further, if money becomes unavailable, prices may or may not be effected. It depends on other factors too. Tightening interest rates in the '70s did not slow inflation. Tightening in '94 did not slow the CPI. Loosening may not cause M2 to grow, but tightening always makes it shrink. The connection between the availability of money and prices is unclear, but when the growth of money exceeds the growth of output eventually prices will rise.
The prices of all previous centuries were much like what they have been in the 20th century until the 50s. Then prices were not allowed to deflate because the central bank had learned techniques to prevent it. In the past authority could not stop the deflations. The problem for the last 50 years is the election of prosperity and the elimination of suffering by declaration. The only problem is that during the suffering part of the cycle which the central bank neutralizes, destructive forces eliminate the fly-by-nighters. Consequently, preclusion of that part of the process allows inefficiency to become rampant. We will see how far the FED lets the market take apart the Internets.
If gold rises substantially ceteris paribus, the prices of other goods may or may not rise depending on what monetary authority does. If the authority uses the base increase to create currency in excess of output, then prices of goods would rise. This is a monetary phenomenon which is different from an economic phenomenon that has a monetary result. Economic phenomena can proceed without money ever being reified. Thus, land, commodities, and lasting things under the sun would rise assuming the money authority created extra money, because their prices would reflect the availability of money.
I disagree about an increase in the supply of gold out of the ground being inflationary. It isn't either inflationary or deflationary. It depends upon what monetary authority does with the increase in the supply of gold. It is almost certain that central banks would not change policy based on that. Central banks are where all gold will end up minus that which is used in jewelry or industry. Gold price would have to be scale orders higher in price before it had the least monetary effect for central banks policy actions.
Central banks do not rule the financial world. We, the people, do. They do what we want. If there is inflation, it is caused by our choices. If we demand more compensation than our output, we can have the central bank monetize the difference, but the consequence will be inflation. You can't get something for nothing. Sometimes central banks are eager to create prosperity and fulfill the demands as laid out in promulgations like Humphrey-Hawkins and in their zeal go beyond the true intent of the people. In that case you may blame the universities because they teach the bankers that a little money never hurt anyone. |
