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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: shades who wrote (35795)	8/24/2005 4:03:47 PM
From: gpowell	Read Replies (1) \| Respond to of 116555

The demand for money I was referring to was the demand for real cash balances; the point being that as agents increase cash balances the monetary authority must issue more currency (to support any given level of transactions) to maintain a given price level. If they do not, the price level must fall or the level of output must fall. For Keynes, because agents suffer from money illusion, the most likely outcome was a fall in output. The fact that since WWII, monetary authorities have preferred an inflation rate of 2% to 3% is tacit acceptance of Keynes’s money illusion assertion. The points to remember about Keynes are: 1. The demand for real cash balances is subject to sudden and large changes and, because of sticky prices, these changes will affect output. 2. Savings does not equal investment because interest rates are determined in the money markets and so cannot serve to equate savings with investment 3. No real scarcities exist. As for the linked article, this guy seems unaware that a common definition of hyperinflation is inflation greater than 50% per month. The characteristic feature of hyperinflations is the demand for real balances (the demand to hold money) drops to zero as agents anticipate an accelerating rate of inflation. The impetus is a monetary authority that attempts to finance public expenditures by creating currency ahead of agents expectations. But agents can adapt their expectations faster than the monetary authorities can issue currency – so prices rise faster than money – until eventually agents abandon currency altogether. The important point is that in all causes of hyperinflation the monetary authority has attempted to use currency creation as a means of finance. That isn’t the case in the US. In the US, financing of expenditures through money creation is incidental to the primary aim of the fed which is to follow a Keynesian prescription of countercyclical policy (using monetarist’s theory, as opposed to fiscal expenditures), while simultaneously promoting a stable rate of inflation – keeping in mind that agents prefer a reduction in their real wage (when needed) through inflation rather than nominal wage cuts. In any case, the article is very poorly written. Not only is it repetitive, but there are numerous outright mistakes - too many to list here - and an obvious lack of economic/finance education. Given the author is a lobbyist, its a good bet that he is simply playing to an audience in exchange for funding. However, I will point out that the author confuses cause and effect in regards to hyperinflation. Consider, he claims hyperinflation is the death knell of a currency, when in reality hyperinflation is the result of agents progressively abandoning a currency. Further, he claims fiat currencies must inflate or die. On what basis does he make this claim? None whatsoever, actually. Theoretically, only fiat currencies have the potential to maintain a fixed money stock – commodity based monies cannot make that claim. The author is confusing policy decisions to inflate with inherent properties.