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Non-Tech : Money Supply & The Federal Reserve -- Ignore unavailable to you. Want to Upgrade?

To: UnBelievable who wrote (346)	8/16/2002 8:23:41 AM
From: UnBelievable	Respond to of 1379

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 the myriad of 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 as the thingss 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. As I have defined it, 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.

To: UnBelievable who wrote (346)	8/17/2002 2:29:51 PM
From: glenn_a	Respond to of 1379

Hi UnBelievable, Cush, rr_burns, et al. UnBelievable, I very much enjoyed your posts on Inflation/Deflation and Money/Wealth. It sheds light on important definition in Macroeconomics. I'd like to suggest a framework for Monetary analysis. It would be comprised of the following levels - from the fundamentally causal to the more symptomatic: 1 - Wealth/Capital/Debt . - this includes different forms of wealth/capital including Social Capital, Technical and Organizational Knowledge, and the productive Industrial Base. Classic Economics is most concerned with Financial Capital as a primary quantification of a Society's wealth. 2 - Money . - primarily concerns the designated "store of value" used to represent and quantify value in a society. . - When we seek to determine the "liquidity" in an economy, economists typically look to the primary monetary measures of M1, M2, and M3. 3 - Credit, specifically Bank Credit. Of more importance than Money IMO for understanding our modern Banking System. Inflation is de facto caused by excessive Credit creation that may or may not show up as Consumer Goods inflation. BTW, an excellent monthly publication that explores the role of Bank Credit in the Economy is The Bank Credit Analyst, published by the BCA Group out of Montreal. 4 - Monetary policy ... which has as its role the management of Money as a representational unit of value, but also the availability of Credit in a modern financial economy. Of particular interest is the use of Debt as collateral for the wealth of an economy to underlie the extension of Credit in an Economy. This is where I think there are serious problems lurking in the U.S. Financial System ... with a strong latent deflationary bias. Such is the nature of extreme Debt. 5 - Inflation/Deflation ... which IMO are NOT the causal indicators in a modern, Credit-based financial system, but always rather the "results" of Credit machinations. 6 - Economic Actors ... Just want to establish a category for analysis of Economic Actors. Such Actors are best defined in a role-based manner. Initially, I would define the following: (i) Consumers, who are also (ii) Workers, (iii) Enterprises or Firms, (iv) Gov't - who levies Taxes and spends as a matter of Fiscal Policy, (v) the Banking and Credit System. The above does not taken into account the Actors or complexity of an International Monetary system/regime. Perhaps that can be for a later post. I think I'll wrap this post up with the above. It's purpose has been to summarize analytical categories, with a minimal fleshing out of the relationship of such categories to one another. Some of that has been done in previous posts on this thread. Others yet to come. I would appreciate any comments, adjustments, suggested modifications, additions, or deletions from/to the above categories. Regards, Glenn