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To: NOW who wrote (25266)	12/15/2001 2:03:02 PM
From: UnBelievable	Respond to of 209892

Inflation and Deflation: Money and Wealth Inflation and deflation are terms that only have meaning at the macro level. They describe changes in the value of a unit of a medium of exchange (fiat money) relative to real goods and services. The prices of all of the goods and services being produced and exchanged within an economy are always changing relative to each other. Constant changes in the supply and demand for each individual item mean that the price of one item in terms of another is also always changing. While people may speak of “inflation in health care” or “deflation in the computers”, the use of these terms in this manner is not accurate. (I suppose it can be argued that when a word is consistently misused in a commonly understood manner that it has acquired new meaning and therefore is not in fact being misused, but let’s hold that for Sunday when we can discuss it with Bill Safire. <gg>) Strictly speaking, inflation or deflation can only exist with economies that have implemented some form of notional value to facilitate commerce. Inflation or deflation do not exist in barter economies, even though the number of goats one must exchange for a VCR can and does change. Rather the terms refers to the changes in the value of a unit of the item of common exchange (money) to all real goods and services. A distinction that must be made is between wealth and such money. Wealth is anything that participants in an economy have a demand for because of some characteristic of the thing itself. Money is 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. The wealth of the society is the inventory of what it has, that is considered to be of value. To avoid confusion it should probably be expressed in terms of the things themselves, rather than in terms of the units of the notional medium of exchange of those things at the time it is being compiled. Such an expression of wealth would be two cows, three goats, four tulip bulbs, etc. However, because of the size of the list and the difficulty of using any such measures of wealth in this form, it has become come practice to express wealth in terms of units of the notional medium of exchange. Under these definitions, stock is wealth not money. Of course, just like any other form of wealth within an economy, it can be exchanged for money, and money can be exchanged for stock. Changes in the perception of the participants in the economy of the value of, or the demand for, any particular item within that economy does not change that economies wealth or money supply, although they affect the perception of the former and have significant implications for the latter. The idea of a common medium of exchange is to facilitate commerce by eliminating the need for all of the cross transactions which are required in an economy that does not have such a medium. I raise goats. I wish to exchange these goats for many things. Some of the people who have the things I want need goats and that is great. But most don’t. Without a medium of notional value, I have to find out what the person who has something I want needs, find someone who has that thing and wants goats, exchange my goats for that thing, and then exchange that thing for what it was that I in fact wanted. In the context of this complexity, the usefulness of a common medium of exchange is apparent. However to perform the function for which it is being implemented it is necessary that there be consistency over time of the exchange rate between units of common exchange and any particular form of wealth as long as the economies subjective perception of the value of the form of wealth remains constant. The fact is within an economy what is considered wealth, and the cross exchange rate between the various items, are very subjective. They are based on the perception of the participants in the economy. Growing within an economy may be a particular herb. It is not thought to have any use or value so it is not included as part of that economies wealth. One day it is found that it has some characteristic, which makes it desirable to the people of that economy, and it now is included in that economies inventory of wealth. Has the wealth of that economy changed? If we have defined wealth at the times themselves, it has not. Has the exchange rates between all of the other items of wealth within the economy changed? Yes. Will this change affect the need for money? Yes. How? It’s going to vary. If anyone is still reading you may be wondering where this is going. The answer is money heaven. Shares of stock are wealth. The exchange rate of such wealth for other forms of wealth is based solely on the perceptions and resulting value that the members of the economy choose to place on them. When exchanged as claims on the ownership of value generating enterprises, their value is the claim on the fraction of the expected value of that enterprise to which they entitle the owner. When determined based on other criteria their value can vary considerably. How many goats a person would be willing to exchange for a share of stock if that share is understood to be an alchemists stone capable of converting lead to gold, will be very different that if the shares are valued as wallpaper. However, these changes do not change the real wealth of the economy, regardless of changes in the goats per share exchange rate, from a wealth perspective it still has as many shares of stock as it has. A change in the perceptions of the value of a particular form of wealth does need to be considered by those managing the notional money supply. In general a stable monetary unit is achieved by maintaining a consistent relationship between the total perceived value of the wealth to units of money. So if the marketplace has determined that the value of a share of stock has decreased relative to all other forms of wealth, in fact that constancy is achieved by reducing the number of units of common exchange available. Failure to do so, or doing the opposite, increasing the number of units of common exchange available will result in an increase in the cost of all of the other units of wealth, in terms of the unit of common exchange, which is the phenomena of inflation.