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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: mishedlo who wrote (50690)	1/25/2006 2:28:41 PM
From: gpowell	Respond to of 110194

The chart is consistent with nothing (at least from my point of view). It is a measure of CPI or prices not money supply. It’s not a measure of CPI; it’s a measure of the implied inflation rate as the chart indicates. And it is consistent with exactly what I said it is consistent with and that is monetary reserve growth. Here is another chart showing reserve growth since 1959. i10.photobucket.com It should be clear from all the charts I have presented that there is ample evidence to support a disinflation argument resulting from Greenspan holding reserves relatively constant. I think you will find, if you re-read my comments here or anywhere else on SI, that I don't ever mention CPI except to say that I don't use it. Nevertheless, measured CPI is consistent with the preceding story, but it should be clear by now that it is not the basis for the argument. Given that my belief that inflation = increase in money 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 fd up. He did not regard the rapid expanse of credit as infaltion since it primarily affected stock prices not the CPI. You are free to define inflation as an increase in money and credit. However, you eventually go beyond a mere definition and assert a causal connection between increases in the money supply and price level inflation. There is also the matter of your lack of differentiation between high-powered money (reserves), currency, and demand deposits, which can be grouped into exogenous and endonegenous forms of money (credit forms of money fall into the endonegenous group) - they are not economically equivalent. And that was the point of my original comment. It may be that you really do believe in a direct and causal connection between increases in the “money supply” and the price level and therefore you perceive no ambiguity. But, there are few, in any, economists today that would agree that such a direct relationship exists. That no such direct and causal relationship exists is a consequence of individual decisions made by both suppliers of money and holders of money, as reflected in the cash balance approach to price level determination. Briefly, given the cash holding preferences of individuals, we should recognize that there is no unique price level that obtains from a given money stock outside of the preferences that individual assert through their actions. Prices and the price level are able to translate through to new “equilibrium” positions without any change in the money stock and it is for this reason that measuring such things as the CPI and the “money supply” are not a binding determinant of what the price level will be tomorrow, and as such what portfolio mix is optimal. This is well-treaded territory for monetary economists, and thus for you to assert that Greenspan f’ed up because he couldn’t connect asset appreciation with money “leaking” is absurd. 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. I’d love to see a link to his comments. What should be quite evident form the chart above is the generally flat position of reserves – exactly what one should expect from a commodity standard. In fact, notwithstanding the desire by central bankers for some inflation, the preceding 20 years could be characterized as emulating a fractional reserve system with a commodity standard, not a hard money system. This fact goes a long-way into explaining why the last 20 years have been marked by disinflation and a reduction in monetary instability. One should view the last 30+ years as a learning process for all market participants, government, central bank, and the public, in operating within a fiat money standard. The remarkable convergence of inflation rates of the nations making up the G3 is ample evidence of this learning process. Money supply can AND DID find its way into asset prices including stocks not reflected in the CPI.* Well, if the desired portfolio mix shifts to assets such as stocks and real estate then money has to find its way into those assets. That doesn’t imply that high-powered money creation initiated this move. If you look at this chart of aggregate house prices over the last 50+ years you will find that the house prices today are near to their long turn trend. i10.photobucket.com BTW, even though you claim not to care about prices, as measured by the CPI or otherwise, you base many of your conclusions on the behavior of prices. 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. To be blunt you need to do a lot more research into hyperinflations in general, and the German experience in particular – that is, if you care to be accurate. Analyses of the Weimar hyperinflation, by Hahn, Bortkiewicz, and Mises, reveal that price increases led the printing of money. Although there is no doubt that Germany’s fiscal position vis-à-vis reparations set up the conditions that led to the hyperinflation episode, the massive printing of money came after the collapse of cash balances. Mises, in particular noted that the expected time path of the money supply exerted a considerable influence on the price level, over and above that of the stock of money. And that was precisely why I gave you the hyperinflation example – it illustrates that individual preference for cash balances (the demand for money) are an important determinant of the price level. You may find it ironic, that once confidence returned and a new Mark issued, the printing presses had a tough time keeping up with currency demand. For instance, during the period February to April 1923, the money stock doubled, but prices remained roughly constant and the currency appreciated.

To: mishedlo who wrote (50690)	1/25/2006 2:57:43 PM
From: gpowell	Respond to of 110194

OT I am indeed a hard money advocate. Sure. Rothbard is the ultimate source for this view and I have studied Rothbard extensively. In fact, a few of my Professors were students of Rothbard’s. I’m not a huge fan, although I think his work in economic history pre- Adam Smith is excellent. While there are many reasons why a hard money system may seem desirable, and certainly preferable to an unbounded fiat system, the market evolved a commodity standard with factional reserve system. When left to operate without government interference, these systems worked quite well - producing an elastic currency supply that met the seasonal needs of commerce with few bank failures and no inflation. Ultimately that is the problem with a hard money system, a reduced ability to meet seasonal demand for currency. I should say that there is no doubt that all changes in the money supply are distortionary. No one could deny this. But, one should also recognize that every unanticipated action by individuals is distortionary - that is simply the nature of our condition. Let’s also recognize that a rigidly fixed supply of money is potentially as equally distortionary, given seasonal variations in the demand for currency in the short run and increases in productivity in the long run. Societies have, and had, a choice of adopting the optimal mix of signals used to communicate changes in preferences and productivity/knowledge and evidently most of the world adopted a combination of monetary and price shifts. Thus, I view it a critical point to understand that changes in the money supply, when initiated by individuals provide signals that the structure of production must change to fit a new pattern of consumption/investment preference, while those initiated by policy are simply discoordinating without providing a corresponding equilibrating affect. It’s not clear from your writing if you view all increases in the money supply as necessarily bad because you think all changes in the money supply are policy induced, or is it because you prefer a world in static equilibrium, or is that you prefer all changes in capitalist production should be communicated via price shifts. That is something you should clear up in the future. 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. A free market in money means that the production of money is left up to individual entrepreneurs just as are most other commodities. The system to garner greatest market share would likely be commodity based fractional reserve system with a central clearinghouse and risk based deposit insurance, although I am sure that a hard money option would exist as well. Lawrence H. White and George Selgin are good sources to review: terry.uga.edu umsl.edu Selgin, White, and others provide historical examples and the theoretical underpinning for the so-called free banking school. The bottom line is that when there is no interference by government, there is no failure in the market’s ability to provide money. Market failures arise from non-internalized externalities created as a by-product of the production of goods and services (in this case money). A careful analysis reveals that no such failure exist in the production of money and therefore one would expect the market to produce money up to the point where marginal cost equals marginal demand and the market rate of interest for loans would always equal the natural rate. The former also implies the inflation rate would be zero. Gold is there and it is real. It is either there or it is not there. You’re forgetting that the price of gold can change, sometimes suddenly; therefore, the price level will change as well. Is that a desirable, or inconsequential result according to your view? It might surprise you that if you wanted a fixed supply of money then it is better to base money on something that has no value outside of it’s monetary use, and that means a fiat currency. Interesting turn of events isn’t it. But realistically most advocate a commodity standard for two reasons: one it precludes discretionary policy, and two they link the appropriateness of a medium of exchange with a commodity value. It also appears here that your views reflect a 19th century view of value, that value is inherent in the object itself, i.e. “gold is there and it is real.” But gold only has value because it is useful, and it has a price because not all demand for it is satiated, but it is no more “real” than fiat money. So when one considers the value of gold as an asset and the value of a fiat currency held as an asset, what is the difference? Both of their values depend on an implied promise of future services, as do all assets. 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. No. This is a view that interest rates and the supply of money are inversely proportional, which comes from the impression that the rate of interest is determined solely by the quantity of money and liquidity preference. Further, interest rate differentials are not needed to explain gold shifts under a world commodity standard. The essential point of the specie-flow mechanism is that the purchasing power of money (ppm) in every country remains constant relative to each other. Thus, as the terms of trade shifts, gold supplies shift such that local and world prices of gold are maintained in equilibrium. That implies that gold never becomes relatively “scarce” or “abundant” between regular trading partners.