Political Crossfire Forums

[Free Thinkr]

LeopardPM wrote: Free Thinkr wrote: gavnook wrote: RueTheDay wrote: LeopardPM wrote: RueTheDay wrote: There is also the issue of liquidity preferences and the desire of people to hold money during times of uncertainty.
why is this an issue? So what if people value money more during times of uncertainty? I bet they value a commodity money more than fiat money during such uncertain times, never can tell just when hyper-inflation may kick in with the good ol' fiat, something that a commodity money just can't do, right?

When people suddenly increase their desire to hold money rather than goods, this causes a chain of events to unfold - consumption drops which causes business investment to drop which causes employment to drop, which then reinforces the circle by causing consumption to drop further.

Now why would people suddenly increase their desire to hold money? Large groups of people do not suddenly change their behavior in concert for no reason.
:bang:
care to add anything or explain - or just taking up space here?
Well, in light of the fact that the discussion was centered around deflation, the above-quoted portion is simply bang-head-worthy.

[LeopardPM]

Free Thinkr wrote: LeopardPM wrote: Free Thinkr wrote: gavnook wrote: RueTheDay wrote: LeopardPM wrote: RueTheDay wrote: There is also the issue of liquidity preferences and the desire of people to hold money during times of uncertainty.
why is this an issue? So what if people value money more during times of uncertainty? I bet they value a commodity money more than fiat money during such uncertain times, never can tell just when hyper-inflation may kick in with the good ol' fiat, something that a commodity money just can't do, right?

When people suddenly increase their desire to hold money rather than goods, this causes a chain of events to unfold - consumption drops which causes business investment to drop which causes employment to drop, which then reinforces the circle by causing consumption to drop further.

Now why would people suddenly increase their desire to hold money? Large groups of people do not suddenly change their behavior in concert for no reason.
:bang:
care to add anything or explain - or just taking up space here?
Well, in light of the fact that the discussion was centered around deflation, the above-quoted portion is simply bang-head-worthy.
yeah, I guess so - I think he missed a step while reading along.... gavnook, we were discussing how deflation (the continual increase in the value of money) affects things, so, it can be assumed if the value of money increases, then the desire to hang on to money will increase as well, right?

[gavnook]

LeopardPM wrote: Free Thinkr wrote: LeopardPM wrote: Free Thinkr wrote: gavnook wrote: RueTheDay wrote: When people suddenly increase their desire to hold money rather than goods, this causes a chain of events to unfold - consumption drops which causes business investment to drop which causes employment to drop, which then reinforces the circle by causing consumption to drop further.

Now why would people suddenly increase their desire to hold money? Large groups of people do not suddenly change their behavior in concert for no reason.
:bang:
care to add anything or explain - or just taking up space here?
Well, in light of the fact that the discussion was centered around deflation, the above-quoted portion is simply bang-head-worthy.
yeah, I guess so - I think he missed a step while reading along.... gavnook, we were discussing how deflation (the continual increase in the value of money) affects things, so, it can be assumed if the value of money increases, then the desire to hang on to money will increase as well, right?

What I said is not bang-head-worthy. I did not miss a step. Please read what I was responding to paying special attention to the word in bold. People do not suddenly increase their desire to hold money simply because the value of money increases due to increased production of all other goods. This type of price deflation is not something that happens suddenly, as increases in production do not happen suddenly. To get the kind of sudden widespread change in behavior, people have to have some impression that the value of money is going to increase faster than they had previously expected. We are talking about the type of price deflation that occurs today in high-tech consumer goods happening on much wider scale. The prices of individual goods may drop suddenly, but the aggregate price of all other goods will not. Further, if such price deflation could cause a decrease in consumption, in turn causing a decrease in production, the value of money would start to fall (or even just slow down), and the problem evaporates.

[RueTheDay]

LeopardPM wrote: RueTheDay wrote: LeopardPM wrote: RueTheDay wrote: LeopardPM wrote: Rue wrote: Deflation is rarely a good thing.
Deflation, as an increase in total goods vs less of an increase in total money, is a good thing for all, equally.

Not really. Money serves as a lubricant for the gears of the economy. If the money supply does not increase on par with the level of output, frictional problems will stymie economic growth.
what 'frictional' problems? The 'economy' is not a machine, and needs no 'lubricant', so why not just tell me exactly what these problems are? No need for fancy talk.
There's nothing "fancy" about it; it happens to be a good analogy. Contrast a monetary economy with a barter economy. Having to carry around physical goods with which to trade for other goods with other people is not a mere inconvenience; it severely impedes trade. Likewise, a company that has to barter produced goods for machines and plants will find production to be nearly impossible. And let's not forget the fact that goods deteriorate over time and require resources to simply store them. This is what I mean when I say that money is the lubricant for the economy. It allows production, exchange, and distribution to take place far more efficiently than would be the case without it.
I never implied that indirect exchange (the use of money) wasn't a good thing - yes, of course it makes trade much more efficient - but equating it with lubricant along with the implication the the 'more' of it means the better 'lubricated' and thereby efficient the economy will run - THAT is the fallacy and why using 'lubricant' as a term referring to money, and NOT its function, is.

The only logical fallacy here is your strawman. I never stated that "more" money is ALWAYS better, just as more lubricant is not always better. The point of the analogy is that any economy with too LITTLE money will seize up, just as a machine with too little lubricant.

Quote:
Quote: I'm pretty sure that we've had this discussion before and that you are of the opinion that money is no different than any other commodity. So long as you believe such obviously false things, every conclusion that you come up with will likewise be faulty.
first of all - money IS no different from any other commodity, witness the fact that other commodities have all functioned as money. The use of a commodity as money confers added value to such commodity, the value of the ability to take advantage of indirect exchange and all the benefits thereof. This added value is true for commodity-based money as well as fiat money - and BOTH function just as well as the other in this function depending upon the physical characteristics of the commodity used. For instance, using gold, not gold certificates, but only the actual metal, as a money has the same indirect exchange benefits as fiat, but fiat has an added benefit (as seen from the users of it) of being easier to carry around and divide. So, if all other things were equal between the two, fiat would be more desirable. The problem is that the MAIN characteristic, and the entire reason fiat exists at all, is that fiat money confers special benefit so those who control its production since production costs are so low and the quantity of production is also arbitrary.

To claim that money is no different than any other commodity is equivalent to claiming that a monetary economy is no different than a barter economy.

Quote:
Quote: Quote: Quote: That is why monetarists supported a monetary growth rule that allowed the money supply to increase more or less at the same rate as GDP growth.
what monetarists? Only those ones who have fallen for this weird 'lubricant' argument without a second glance.
Milton Friedman. Pretty much every other monetarist as well. I'm not aware of any monetarist proposal that has ever called for the money supply to be held constant or to decrease. They pretty much all call for the money supply to increase based upon some rule which is usually tied to the growth of the real economy.
no one would ever call for some nominal decrease in the money supply, that would be impossible because who would want to be destroying their own wealth? Though the effect on all the remaining money would be the desirable 'deflation', those who actually did destroy their money would be the ones 'taking it in the shorts', so to speak. This is why I do not advocate any sort of planned decrease in the money supply, instead, I say let people choose their money of choice (which would probably be some sort of precious metal, or, my personal favorite, a basket of commodities) and since one of the traits historically (and logically) desired in a money is small or no quantity increase (stablility), then the positive effects of deflation would be spread evenly to all who hold money. (remember, the deflation effect I am talking about stems from the natural increase in the quantity of total goods and services, which is usually and historically far greater than the desired increase in money supply).

That passage is just unsupported assertion after unsupported assertion.

For example, why should the natural increase in the quantity of goods and services be "far greater" than the desired increase in the money supply.

MV=PQ

You have stated that you favor stable prices, so let's hold P constant. V tends to fluctuate both randomly and in step with the business cycle (something that frustrates monetarists), but there is no secular trend, thus we can treat it as a constant over long periods of time. Thus we are left with M=Q, or growth in the money supply equal to growth in output. Your claim is therefore shown to be false.

Quote:
Quote: When people suddenly increase their desire to hold money rather than goods, this causes a chain of events to unfold - consumption drops which causes business investment to drop which causes employment to drop, which then reinforces the circle by causing consumption to drop further.
but there is no such thing as a 'deflationary spiral' or 'hyper-deflation' which means that there is found a level of which ALL of these things you seem to hold so important (level of consumption, level of business investment, etc) will fluctuate around which is as the market finally desires and settles on.

That is largely due to the mathematical fact that prices cannot go below zero while there is no upper limit on prices.

Deflation can, however, still spiral out of control quickly - witness the Great Depression or Japan for much of the 1990's up until a couple of years ago.

Quote:
Quote: You seem to have the misconception that price levels automatically and instantaneously adjust to reflect changes in the ratio of the money supply to real goods. They do not.
I have no misconception regarding the speed at which information is distributed in the market or throughout a society - and there is no reason to need to assume that price levels MUST instantaneously adjust to derive benefits. So what if imperfect information exists - this is a part of being human, once again, and no government or central planning can make it work any better, only worse.

Imperfect information? That was not the subject of discussion here (though the reader wouldn't know because you snipped out all of the context).

You made the claim that a decrease in the quantity of money relative to the amount of goods is no big deal because the value of each unit of money will simply increase to the point where the previous ratio held. I demonstrated the error of such reasoning - that the adjustment will take a lot of time and many other things will change during that adjustment period such that the adjustment will not take place. You then posted the above non-response.

Quote:
Quote: This is somewhat ironic since Austrians often (correctly) point out that increases in the money supply do not affect everyone equally or at the same time, because the government gets the money first, then the big banks, then businesses, then finally the consumer, and that the price level generally does not fully adjust until towards the end of that process, so that those who get the money earlier win out and those who get it later lose out. This is one of their key arguments against inflation.
exactly right - but immaterial, you are building a strawman here... lets see it in your conclusion...
Quote: Yet when the discussion turns to decreases in the money supply, we are supposed to ignore this chain of events for some reason.
...and here it is: I am not talking about DECREASING THE MONEY SUPPLY! I am talking about the money supply being tied to the natural world, and thus much less subject to human political whims and whatnot, and then benefitting from the bounty that is created through production of goods and spread out among holders of money (instantaneously, or near to) through wonderful relative deflation.

And I demonstrated the logical errors of such reasoning. You are treating money as a veil over the real economy. I am pointing out that money is required for transactions to take place, for production to take place, etc. If the amount of money in existence is insufficient for that to happen, then production and exchange will be impeded.

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My guess (as I haven't poured much mental energy into tracing the time effect as with inflation) the benefits of deflation are greater the closer to the production of goods one gets, but I am unsure of this theory.

Gibberish.

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Quote: Quote:
Quote: And of course, deflation also causes consumers to defer purchases, since the goods will be cheaper in the future, which has a negative feedback loop effect on the economy.
people cannot eat money, it doesn't provide very good shelter, and really isn't fashionable to wear so, in short, people do not want money for money itself, but rather for what they can buy with it. This 'negative' feedback has a definite limit, the point which people decide that a pile of money is rather worthless without buying needed or desired goods, and then they start spending.

And what is happening in the meantime? See above.
what do you mean?

Production and investment are ultimately driven by consumer demand. What happens to them when people are deferring purchases because they no the value of their money will be higher tomorrow?

Quote:
Quote: Quote:
Yes, everyone will tend to hold an increased amount of money, called savings, which will in turn be used as investment/capital thus promoting production, but whatever level people generally decide to be comfortable with is no better or worse than any other level, except that the people have chosen this particular level, and so in that vein, it is the 'best' because people are 'happiest' and most comfortable at that level.

You have it backwards. Savings does not drive investment. Investment drives savings.
um, one cannot invest without first saving, right? One cannot invest more than one has savings, right?

False. Investment and savings (as defined within economics) are always equal. What we are discussing here are savings and investment ex ante vs ex post (planned versus actual after the fact). An increase in ex ante savings will often lead to a decrease in ex post savings because the decreased consumption will lead to less economic production which will leave less national income available for savings.

[quote]
Quote:
Quote: Quote:
Quote: So deflation is never a good thing.
ha! just another example of a stinted thought process - try really working it through, you are way smarter than this. Deflation caused by an increase in goods vs a money supply which is not increasing at the same rate is a great thing. Inflation never is.

See a few lines above where I identify the logical contradiction in your faulty "deflation good, inflation bad" reasoning.
lets try it again...

Yes, please try again.

[RueTheDay]

gavnook wrote: RueTheDay wrote: LeopardPM wrote: RueTheDay wrote: There is also the issue of liquidity preferences and the desire of people to hold money during times of uncertainty.
why is this an issue? So what if people value money more during times of uncertainty? I bet they value a commodity money more than fiat money during such uncertain times, never can tell just when hyper-inflation may kick in with the good ol' fiat, something that a commodity money just can't do, right?

When people suddenly increase their desire to hold money rather than goods, this causes a chain of events to unfold - consumption drops which causes business investment to drop which causes employment to drop, which then reinforces the circle by causing consumption to drop further.

Now why would people suddenly increase their desire to hold money? Large groups of people do not suddenly change their behavior in concert for no reason. Determining what would cause such a thing is where the analysis needs to begin. It sounds like people are adjusting to previous miscalculations, and when people do this, it's something that needs to be done. Dumping fiat paper into the mix only causes further miscalculations and prolongs the adjustment.

For consumers - uncertainty about the future, particularly with regard to their job security due to overall economic conditions.

For firms - uncertainty about future demand for their products due to overall economic conditions.

This is the lynchpin of the business cycle.

Quote:
RueTheDay wrote:
You seem to have the misconception that price levels automatically and instantaneously adjust to reflect changes in the ratio of the money supply to real goods. They do not.

This is somewhat ironic since Austrians often (correctly) point out that increases in the money supply do not affect everyone equally or at the same time, because the government gets the money first, then the big banks, then businesses, then finally the consumer, and that the price level generally does not fully adjust until towards the end of that process, so that those who get the money earlier win out and those who get it later lose out. This is one of their key arguments against inflation.

I don't see LPM as being under such a misconception. And that story is interesting, but it's a flawed analogy for a fixed money supply because the purchasing power of the money was also fixed. It is a better analogy for price-fixing.

It was a simplification that Krugman came up with for a general audience.

Here's a slightly more technical version:

http://www.pkarchive.org/theory/MINIMAC.html

Quote:
I find it interesting that you find this argument to be correct, yet still favor monetary inflation, especially considering your distaste of unfairness. I guess you probably favor a very different means of dumping cash into the economy. Does it involve the use of helicopters? I think that was actually done in Iraq.

Where do I say I favor inflation? I favor a stable monetary system which sometimes does require intervention. I do not favor inflation.

Quote:
RueTheDay wrote:
Yet when the discussion turns to decreases in the money supply, we are supposed to ignore this chain of events for some reason.


Nobody is talking about decreases in the money supply. A fixed money supply may decrease in relative terms to all other goods, but there can be no winners or losers here as you've explained there are when there nominal sum of money is increased (or decreased). Similarly, a decrease in the purchasing power of a fixed money supply would have no such winners or losers, although it would suck.

A fixed money supply in the face of expanding output is still a decrease in the relative money supply with the same inherent frictional problems likely to surface.

Quote:
RueTheDay wrote:
Quote:
Quote: And of course, deflation also causes consumers to defer purchases, since the goods will be cheaper in the future, which has a negative feedback loop effect on the economy.
people cannot eat money, it doesn't provide very good shelter, and really isn't fashionable to wear so, in short, people do not want money for money itself, but rather for what they can buy with it. This 'negative' feedback has a definite limit, the point which people decide that a pile of money is rather worthless without buying needed or desired goods, and then they start spending.

And what is happening in the meantime? See above.


When consumers are adjusting to economic changes, so must producers. Remembering that everyone's a consumer out of necessity, what horrible thing can happen to producers if (other) consumers aren't consuming enough? Will they starve to death? In a dramatic economic shift, it necessarily takes time for people to adjust their own values as consumers and figure out how to adjust for this changing consumer demand as producers.

And?

Quote:
RueTheDay wrote:
Quote:
Yes, everyone will tend to hold an increased amount of money, called savings, which will in turn be used as investment/capital thus promoting production, but whatever level people generally decide to be comfortable with is no better or worse than any other level, except that the people have chosen this particular level, and so in that vein, it is the 'best' because people are 'happiest' and most comfortable at that level.

You have it backwards. Savings does not drive investment. Investment drives savings.

Explain that. If nobody saved anything, there could be no investment.

If everyone saved everything, there would be no production of consumption goods and hence no investment.

[Brooklyn]

Quote: V tends to fluctuate both randomly and in step with the business cycle (something that frustrates monetarists),

I feel their pain. Its been frustrating me ever since the earlier parts of this discussion.

[gavnook]

RueTheDay wrote: gavnook wrote: RueTheDay wrote: LeopardPM wrote: RueTheDay wrote: There is also the issue of liquidity preferences and the desire of people to hold money during times of uncertainty.
why is this an issue? So what if people value money more during times of uncertainty? I bet they value a commodity money more than fiat money during such uncertain times, never can tell just when hyper-inflation may kick in with the good ol' fiat, something that a commodity money just can't do, right?

When people suddenly increase their desire to hold money rather than goods, this causes a chain of events to unfold - consumption drops which causes business investment to drop which causes employment to drop, which then reinforces the circle by causing consumption to drop further.

Now why would people suddenly increase their desire to hold money? Large groups of people do not suddenly change their behavior in concert for no reason. Determining what would cause such a thing is where the analysis needs to begin. It sounds like people are adjusting to previous miscalculations, and when people do this, it's something that needs to be done. Dumping fiat paper into the mix only causes further miscalculations and prolongs the adjustment.

For consumers - uncertainty about the future, particularly with regard to their job security due to overall economic conditions.

For firms - uncertainty about future demand for their products due to overall economic conditions.

This is the lynchpin of the business cycle.

People desire to hold money because they are uncertain. That is clear. People suddenly increase their desire to hold money they are more uncertain that previously, and I still want to know why.

RueTheDay wrote:
Quote:
RueTheDay wrote:
You seem to have the misconception that price levels automatically and instantaneously adjust to reflect changes in the ratio of the money supply to real goods. They do not.

This is somewhat ironic since Austrians often (correctly) point out that increases in the money supply do not affect everyone equally or at the same time, because the government gets the money first, then the big banks, then businesses, then finally the consumer, and that the price level generally does not fully adjust until towards the end of that process, so that those who get the money earlier win out and those who get it later lose out. This is one of their key arguments against inflation.

I don't see LPM as being under such a misconception. And that story is interesting, but it's a flawed analogy for a fixed money supply because the purchasing power of the money was also fixed. It is a better analogy for price-fixing.

It was a simplification that Krugman came up with for a general audience.

Here's a slightly more technical version:

http://www.pkarchive.org/theory/MINIMAC.html


Voodoo.

RueTheDay wrote:
Quote:
I find it interesting that you find this argument to be correct, yet still favor monetary inflation, especially considering your distaste of unfairness. I guess you probably favor a very different means of dumping cash into the economy. Does it involve the use of helicopters? I think that was actually done in Iraq.

Where do I say I favor inflation? I favor a stable monetary system which sometimes does require intervention. I do not favor inflation.

When you said "If the money supply does not increase on par with the level of output, frictional problems will stymie economic growth. That is why monetarists supported a monetary growth rule that allowed the money supply to increase more or less at the same rate as GDP growth.", I got the impression that you support increasing the money supply. Do not bother arguing the definition of inflation. I clearly specified monetary inflation for the sake of clarity.


RueTheDay wrote:
Quote:
RueTheDay wrote:
Yet when the discussion turns to decreases in the money supply, we are supposed to ignore this chain of events for some reason.


Nobody is talking about decreases in the money supply. A fixed money supply may decrease in relative terms to all other goods, but there can be no winners or losers here as you've explained there are when there nominal sum of money is increased (or decreased). Similarly, a decrease in the purchasing power of a fixed money supply would have no such winners or losers, although it would suck.

A fixed money supply in the face of expanding output is still a decrease in the relative money supply with the same inherent frictional problems likely to surface.


You are now making a different argument.

RueTheDay wrote:
Quote:
RueTheDay wrote:
Quote:
Quote: And of course, deflation also causes consumers to defer purchases, since the goods will be cheaper in the future, which has a negative feedback loop effect on the economy.
people cannot eat money, it doesn't provide very good shelter, and really isn't fashionable to wear so, in short, people do not want money for money itself, but rather for what they can buy with it. This 'negative' feedback has a definite limit, the point which people decide that a pile of money is rather worthless without buying needed or desired goods, and then they start spending.

And what is happening in the meantime? See above.


When consumers are adjusting to economic changes, so must producers. Remembering that everyone's a consumer out of necessity, what horrible thing can happen to producers if (other) consumers aren't consuming enough? Will they starve to death? In a dramatic economic shift, it necessarily takes time for people to adjust their own values as consumers and figure out how to adjust for this changing consumer demand as producers.

And? That's what happens in the meantime.

RueTheDay wrote:
Quote:
RueTheDay wrote:
Quote:
Yes, everyone will tend to hold an increased amount of money, called savings, which will in turn be used as investment/capital thus promoting production, but whatever level people generally decide to be comfortable with is no better or worse than any other level, except that the people have chosen this particular level, and so in that vein, it is the 'best' because people are 'happiest' and most comfortable at that level.

You have it backwards. Savings does not drive investment. Investment drives savings.

Explain that. If nobody saved anything, there could be no investment.

If everyone saved everything, there would be no production of consumption goods and hence no investment. That hardly explains it. How does investment drive savings?

[RueTheDay]

gavnook wrote: RueTheDay wrote: gavnook wrote: RueTheDay wrote: LeopardPM wrote: RueTheDay wrote: There is also the issue of liquidity preferences and the desire of people to hold money during times of uncertainty.
why is this an issue? So what if people value money more during times of uncertainty? I bet they value a commodity money more than fiat money during such uncertain times, never can tell just when hyper-inflation may kick in with the good ol' fiat, something that a commodity money just can't do, right?

When people suddenly increase their desire to hold money rather than goods, this causes a chain of events to unfold - consumption drops which causes business investment to drop which causes employment to drop, which then reinforces the circle by causing consumption to drop further.

Now why would people suddenly increase their desire to hold money? Large groups of people do not suddenly change their behavior in concert for no reason. Determining what would cause such a thing is where the analysis needs to begin. It sounds like people are adjusting to previous miscalculations, and when people do this, it's something that needs to be done. Dumping fiat paper into the mix only causes further miscalculations and prolongs the adjustment.

For consumers - uncertainty about the future, particularly with regard to their job security due to overall economic conditions.

For firms - uncertainty about future demand for their products due to overall economic conditions.

This is the lynchpin of the business cycle.

People desire to hold money because they are uncertain. That is clear. People suddenly increase their desire to hold money they are more uncertain that previously, and I still want to know why.

The answer is right above your post.

Consumers increase their desire to hold money when they fear that economic conditions may put them out of a job. Businesses (their owners/managers) increase their desire to hold money when they fear that consumer demand may not be sufficient to justify continuing investment in productive capacity.

Quote:
RueTheDay wrote:
Quote:
RueTheDay wrote:
You seem to have the misconception that price levels automatically and instantaneously adjust to reflect changes in the ratio of the money supply to real goods. They do not.

This is somewhat ironic since Austrians often (correctly) point out that increases in the money supply do not affect everyone equally or at the same time, because the government gets the money first, then the big banks, then businesses, then finally the consumer, and that the price level generally does not fully adjust until towards the end of that process, so that those who get the money earlier win out and those who get it later lose out. This is one of their key arguments against inflation.

I don't see LPM as being under such a misconception. And that story is interesting, but it's a flawed analogy for a fixed money supply because the purchasing power of the money was also fixed. It is a better analogy for price-fixing.

It was a simplification that Krugman came up with for a general audience.

Here's a slightly more technical version:

http://www.pkarchive.org/theory/MINIMAC.html


Voodoo.

What's voodoo about it? Or are you just unthinkingly adhering to the Austrian crank view that all of mainstream economics is "voodoo"?

Quote:
RueTheDay wrote:
Quote:
I find it interesting that you find this argument to be correct, yet still favor monetary inflation, especially considering your distaste of unfairness. I guess you probably favor a very different means of dumping cash into the economy. Does it involve the use of helicopters? I think that was actually done in Iraq.

Where do I say I favor inflation? I favor a stable monetary system which sometimes does require intervention. I do not favor inflation.

When you said "If the money supply does not increase on par with the level of output, frictional problems will stymie economic growth. That is why monetarists supported a monetary growth rule that allowed the money supply to increase more or less at the same rate as GDP growth.", I got the impression that you support increasing the money supply. Do not bother arguing the definition of inflation. I clearly specified monetary inflation for the sake of clarity.

Increasing the money supply at the same rate as economic output increases is not inflation.

Quote:
RueTheDay wrote:
Quote:
RueTheDay wrote:
Yet when the discussion turns to decreases in the money supply, we are supposed to ignore this chain of events for some reason.


Nobody is talking about decreases in the money supply. A fixed money supply may decrease in relative terms to all other goods, but there can be no winners or losers here as you've explained there are when there nominal sum of money is increased (or decreased). Similarly, a decrease in the purchasing power of a fixed money supply would have no such winners or losers, although it would suck.

A fixed money supply in the face of expanding output is still a decrease in the relative money supply with the same inherent frictional problems likely to surface.


You are now making a different argument.

No, I'm not.

Quote:
RueTheDay wrote:
Quote:
RueTheDay wrote:
Quote:
Quote: And of course, deflation also causes consumers to defer purchases, since the goods will be cheaper in the future, which has a negative feedback loop effect on the economy.
people cannot eat money, it doesn't provide very good shelter, and really isn't fashionable to wear so, in short, people do not want money for money itself, but rather for what they can buy with it. This 'negative' feedback has a definite limit, the point which people decide that a pile of money is rather worthless without buying needed or desired goods, and then they start spending.

And what is happening in the meantime? See above.


When consumers are adjusting to economic changes, so must producers. Remembering that everyone's a consumer out of necessity, what horrible thing can happen to producers if (other) consumers aren't consuming enough? Will they starve to death? In a dramatic economic shift, it necessarily takes time for people to adjust their own values as consumers and figure out how to adjust for this changing consumer demand as producers.

And? That's what happens in the meantime.

Huh?

Quote:
RueTheDay wrote:
Quote:
RueTheDay wrote:
Quote:
Yes, everyone will tend to hold an increased amount of money, called savings, which will in turn be used as investment/capital thus promoting production, but whatever level people generally decide to be comfortable with is no better or worse than any other level, except that the people have chosen this particular level, and so in that vein, it is the 'best' because people are 'happiest' and most comfortable at that level.

You have it backwards. Savings does not drive investment. Investment drives savings.

Explain that. If nobody saved anything, there could be no investment.

If everyone saved everything, there would be no production of consumption goods and hence no investment. That hardly explains it. How does investment drive savings?

Increasing investment increases national output. There is then "more" available to save.

Increasing savings (ex ante) decreases consumption, which decreases the amount businesses invest to meet that consumption, which decreases national output. There is then "less" available to save.

This is standard macroeconomics that you would learn in any principles or intermediate econ course.

[gavnook]

RueTheDay wrote: The answer is right above your post.

Consumers increase their desire to hold money when they fear that economic conditions may put them out of a job. Businesses (their owners/managers) increase their desire to hold money when they fear that consumer demand may not be sufficient to justify continuing investment in productive capacity.

I sense a pattern.

RueTheDay wrote:
Quote:
RueTheDay wrote:
Here's a slightly more technical version:

http://www.pkarchive.org/theory/MINIMAC.html


Voodoo.

What's voodoo about it? Or are you just unthinkingly adhering to the Austrian crank view that all of mainstream economics is "voodoo"?

Maybe gabage-in/garbage-out is a better desription. It's sillines. It assumes far too much to mean anything. In fact, it even assumes fixed prices like the baby-sitting example, if I'm looking at it right. It's about as meaningful as this:



RueTheDay wrote:
Quote:
RueTheDay wrote: Where do I say I favor inflation? I favor a stable monetary system which sometimes does require intervention. I do not favor inflation.

When you said "If the money supply does not increase on par with the level of output, frictional problems will stymie economic growth. That is why monetarists supported a monetary growth rule that allowed the money supply to increase more or less at the same rate as GDP growth.", I got the impression that you support increasing the money supply. Do not bother arguing the definition of inflation. I clearly specified monetary inflation for the sake of clarity.

Increasing the money supply at the same rate as economic output increases is not inflation.

I don't care to argue the definition of 'inflation' here. You do favor adding paper currency to the money supply, and this is what the Austrian argument you presented is against. Imagining that the Fed could and would correctly increase the money supply matching economic output, the problem that some get the new cash first and some get it last is still a problem. So I was wondering how you think it should be done.

Also, do you favor shrinking the money supply when there is negative growth?

RueTheDay wrote:
Quote:
RueTheDay wrote:
Quote:
RueTheDay wrote:
Yet when the discussion turns to decreases in the money supply, we are supposed to ignore this chain of events for some reason.


Nobody is talking about decreases in the money supply. A fixed money supply may decrease in relative terms to all other goods, but there can be no winners or losers here as you've explained there are when there nominal sum of money is increased (or decreased). Similarly, a decrease in the purchasing power of a fixed money supply would have no such winners or losers, although it would suck.

A fixed money supply in the face of expanding output is still a decrease in the relative money supply with the same inherent frictional problems likely to surface.


You are now making a different argument.

No, I'm not.

Fine, who loses and who wins when the purchasing power of money increases?

RueTheDay wrote:
Huh?

Nevermind.

RueTheDay wrote: t;]
Increasing investment increases national output. There is then "more" available to save.

Silliness. You might as well say investment drives investment.

RueTheDay wrote:
Increasing savings (ex ante) decreases consumption, which decreases the amount businesses invest to meet that consumption, which decreases national output. There is then "less" available to save.

This is standard macroeconomics that you would learn in any principles or intermediate econ course.
If you say so. Does that make it true?

[RueTheDay]

gavnook wrote: RueTheDay wrote: The answer is right above your post.

Consumers increase their desire to hold money when they fear that economic conditions may put them out of a job. Businesses (their owners/managers) increase their desire to hold money when they fear that consumer demand may not be sufficient to justify continuing investment in productive capacity.

I sense a pattern.

What pattern is that? The pattern that I identify facts for you and you ignore them when they do not fit your worldview?

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RueTheDay wrote:
Quote:
RueTheDay wrote:
Here's a slightly more technical version:

http://www.pkarchive.org/theory/MINIMAC.html


Voodoo.

What's voodoo about it? Or are you just unthinkingly adhering to the Austrian crank view that all of mainstream economics is "voodoo"?

Maybe gabage-in/garbage-out is a better desription. It's sillines. It assumes far too much to mean anything. In fact, it even assumes fixed prices like the baby-sitting example, if I'm looking at it right. It's about as meaningful as this:

It's a simplified model. I'll summarize it for you even further - in the real world, prices are "sticky", meaning that they do not adjust instantaneously. Thus, all of your claims that the quantity of money is irrelevant to the functioning of the economy and that whenever the quantity of money is changed, the value of money will simply change to reflect it, are simply wrong.

Quote:


All I see is a red X.


Quote:
RueTheDay wrote:
Quote:
RueTheDay wrote: Where do I say I favor inflation? I favor a stable monetary system which sometimes does require intervention. I do not favor inflation.

When you said "If the money supply does not increase on par with the level of output, frictional problems will stymie economic growth. That is why monetarists supported a monetary growth rule that allowed the money supply to increase more or less at the same rate as GDP growth.", I got the impression that you support increasing the money supply. Do not bother arguing the definition of inflation. I clearly specified monetary inflation for the sake of clarity.

Increasing the money supply at the same rate as economic output increases is not inflation.

I don't care to argue the definition of 'inflation' here. You do favor adding paper currency to the money supply, and this is what the Austrian argument you presented is against. Imagining that the Fed could and would correctly increase the money supply matching economic output, the problem that some get the new cash first and some get it last is still a problem. So I was wondering how you think it should be done.

I don't favor the sort of "growth rule" approach to the money supply such as those proposed by monetarists like Milton Friedman for precisely the reasons that you mention (along with the fact that the velocity of money is most unstable around the turning points of business cycles). Interest rate targeting has proven far more effective in smoothing out the bumps in the economy.

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Also, do you favor shrinking the money supply when there is negative growth?

No.

Quote:
RueTheDay wrote:
Quote:
RueTheDay wrote:
Quote:
RueTheDay wrote:
Yet when the discussion turns to decreases in the money supply, we are supposed to ignore this chain of events for some reason.


Nobody is talking about decreases in the money supply. A fixed money supply may decrease in relative terms to all other goods, but there can be no winners or losers here as you've explained there are when there nominal sum of money is increased (or decreased). Similarly, a decrease in the purchasing power of a fixed money supply would have no such winners or losers, although it would suck.

A fixed money supply in the face of expanding output is still a decrease in the relative money supply with the same inherent frictional problems likely to surface.


You are now making a different argument.

No, I'm not.

Fine, who loses and who wins when the purchasing power of money increases?

Borrowers tend to win and savers and lenders tend to lose, but in reality it's far more complex than that.

Quote:
RueTheDay wrote:
Huh?

Nevermind.

RueTheDay wrote: t;]
Increasing investment increases national output. There is then "more" available to save.

Silliness. You might as well say investment drives investment.

Huh? That's neither what I said nor could it be interpreted from what I wrote.

Investment drives production. Unless you've produced something, there's nothing to save. Hence, investment drives savings.

Quote:
RueTheDay wrote:
Increasing savings (ex ante) decreases consumption, which decreases the amount businesses invest to meet that consumption, which decreases national output. There is then "less" available to save.

This is standard macroeconomics that you would learn in any principles or intermediate econ course.
If you say so. Does that make it true?

The fact that the theory is internally logically consistent AND that it is supported by the empirical evidence leads me to believe it is true, or at least more true than the alternatives I've seen.

I'm really starting to think that it's a waste of time to argue economics with people that have no training in the subject, no desire to actually read and learn something of the subject, and who can't do anything more than regurgitate what they've seen on some Austrian propaganda site.

[LeopardPM]

Brooklyn wrote: Quote: V tends to fluctuate both randomly and in step with the business cycle (something that frustrates monetarists),

I feel their pain. Its been frustrating me ever since the earlier parts of this discussion.

V and the business cycle are related, in addition to V and inflation in general and this is especially seen when there is hyper-inflation: V flies out the door - kinda the definition of hyper-inflationary response.

The velocity of money (how many times it is exchanged in a given period) is rather hard to guage (if not impossible) and its efects are meaningless: what does it mean exactly if V increases? People are holding onto their money for shorter periods of time? gee... so what?

[LeopardPM]

RueTheDay wrote:
The only logical fallacy here is your strawman. I never stated that "more" money is ALWAYS better, just as more lubricant is not always better. The point of the analogy is that any economy with too LITTLE money will seize up, just as a machine with too little lubricant.
are you stating that there is a certain quantity of money ther makes a given size of economy work most efficienty? So, you actually think there is a difference between an economy which in total produces 100 chairs and 100 lightbulbs using $1000 are the currency, and an economy which has the exact same production (100 chairs, etc), but uses $100 in total currency? BOTH economies will operate at the exact same efficient level as the relative purchasing power of the currency will be indirectly porportional to the amount of currency available (this is, of course, assuming a point of time at which the currency and market has stablized from a shift of either)


Quote: To claim that money is no different than any other commodity is equivalent to claiming that a monetary economy is no different than a barter economy.
you are misunderstanding - whatever commodity that is used as money is still a commodity like any other - that is a fact. The 'difference' lies in the fact that it is used as currency and has a portion (perhaps significant portion, as in the case of fiat) of its value derived from its use as money itself! Sure, the liquidity of ANY commodity affects its value in the eyes of consumers, but this is true for all commodities, not just the one used as money.

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no one would ever call for some nominal decrease in the money supply, that would be impossible because who would want to be destroying their own wealth? Though the effect on all the remaining money would be the desirable 'deflation', those who actually did destroy their money would be the ones 'taking it in the shorts', so to speak. This is why I do not advocate any sort of planned decrease in the money supply, instead, I say let people choose their money of choice (which would probably be some sort of precious metal, or, my personal favorite, a basket of commodities) and since one of the traits historically (and logically) desired in a money is small or no quantity increase (stablility), then the positive effects of deflation would be spread evenly to all who hold money. (remember, the deflation effect I am talking about stems from the natural increase in the quantity of total goods and services, which is usually and historically far greater than the desired increase in money supply).

That passage is just unsupported assertion after unsupported assertion.
apparently you just can't refute the obviousness of the passage. Let's see what you got when you do attempt:

Quote: For example, why should the natural increase in the quantity of goods and services be "far greater" than the desired increase in the money supply.
based on the logical desires of people, based on the historic record of commodities chosen as money throughout history since its inception. It makes since that people want a money supply which is not very subject to political whims, or other large swings in quantity (either increase or decrease).

Quote: MV=PQ

You have stated that you favor stable prices, so let's hold P constant. V tends to fluctuate both randomly and in step with the business cycle (something that frustrates monetarists), but there is no secular trend, thus we can treat it as a constant over long periods of time. Thus we are left with M=Q, or growth in the money supply equal to growth in output. Your claim is therefore shown to be false.
and you apparently have a problem arguing without creating your own strawman to argue against - I never stated that people favor 'stable prices', they favor a stable money, but, in terms of the prices of all other commodities, people tend to love seeing decreasing prices... don't you? So, please don't try to hold 'P' as a constant, its made of straw.
V is not random at all, it is based on people's desire to hold money! Your conclusion of desiring M=Q is obviously defunct due to your intial error of assuming P should remain constant? Why should people remain constant, I don't want it constant, and most people don't either - we love walmart!

Quote: Quote:
Quote: When people suddenly increase their desire to hold money rather than goods, this causes a chain of events to unfold - consumption drops which causes business investment to drop which causes employment to drop, which then reinforces the circle by causing consumption to drop further.
but there is no such thing as a 'deflationary spiral' or 'hyper-deflation' which means that there is found a level of which ALL of these things you seem to hold so important (level of consumption, level of business investment, etc) will fluctuate around which is as the market finally desires and settles on.

That is largely due to the mathematical fact that prices cannot go below zero while there is no upper limit on prices.

Deflation can, however, still spiral out of control quickly - witness the Great Depression or Japan for much of the 1990's up until a couple of years ago.
a 'mathematical fact', huh? I have PAID to have my car towed away - the value, and therefore price, of my vehicle became 'negative' when it was worth more to have it removed than it was to continue to own it and I was willing to pay for the service. Now, I agree that this is an exceptional situation and most certainly not the rule at all - but, I don't think you should be holding up your opinion as some absolute 'fact' when it is obviously not.

I just love how you keep throwing in the word 'control', as in 'spiral out of control', as if the economy and prices are just random events which need to be forced and controlled in some manner - propoganda talk.


Quote: Quote:
Quote: You seem to have the misconception that price levels automatically and instantaneously adjust to reflect changes in the ratio of the money supply to real goods. They do not.
I have no misconception regarding the speed at which information is distributed in the market or throughout a society - and there is no reason to need to assume that price levels MUST instantaneously adjust to derive benefits. So what if imperfect information exists - this is a part of being human, once again, and no government or central planning can make it work any better, only worse.

Imperfect information? That was not the subject of discussion here (though the reader wouldn't know because you snipped out all of the context).
I didn't 'snip' - I quoted the part of your post to which my response was pertaining to - you said that I assume that price levels automatically and instantly adjust - which alludes to the 'imperfect information' argument, which is void because I embrace the FACT that humans have imperfect information - the economy could not work otherwise, if we all knew everything. No need for speculators or entrepenuers, or possibilty for much of anything to happen.


Quote: You made the claim that a decrease in the quantity of money relative to the amount of goods is no big deal because the value of each unit of money will simply increase to the point where the previous ratio held. I demonstrated the error of such reasoning - that the adjustment will take a lot of time and many other things will change during that adjustment period such that the adjustment will not take place. You then posted the above non-response.
the adjusted WILL take place, no matter how much time it takes - the only unknown is what exactly the effects will be as this adjustment goes through the market: where does it hit first (I assume it affects the end good producers first since they are the ones which are creating new goods which are directly sold to the public), where it goes from there I have yet to understand and have not seen much research in this area. Your point in this regard is a good one, but, it is easy to see that the effect definitely will not be along the lines of how the opposite effect does indeed introduce vast distortions as during inflation.

Quote: And I demonstrated the logical errors of such reasoning. You are treating money as a veil over the real economy. I am pointing out that money is required for transactions to take place, for production to take place, etc. If the amount of money in existence is insufficient for that to happen, then production and exchange will be impeded.
The use of money IS barter - I trade a commodity (money) for another commodity (a good), this is barter. The fact that it is more effcient and beneficial to use some commodities which have particular properties (fungible, hard to duplicate(create, counterfeit), are easily divisible, easy to carry, easy to store, etc) to barter with and create a system of indirect exchange based around the most popular commodity to be traded (historically gold, precious metals and gems as well) is no veil, it is what is actually occuring - NOT some abstraction where the misconceptions like "Money is the root of all evil", or, "Greed is bad", or, "Money can't buy love", etc all stem from. Money has been abstracted beyond the comprehension of ordinairy people and they do not even understand what they are trading anymore.

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My guess (as I haven't poured much mental energy into tracing the time effect as with inflation) the benefits of deflation are greater the closer to the production of goods one gets, but I am unsure of this theory.

Gibberish.
your reply is plain lazy - I expect better from you. My statement was an honest, yet quick, attempt to pointing out a basis for a possible theory, and you were too lazy to even try and conceive of tracing the flow of Deflationary Effects which Stem from a Continuous increase in the supply of goods versus a relatively stagnant money supply (great thesis paper title, by the way)


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Quote: And of course, deflation also causes consumers to defer purchases, since the goods will be cheaper in the future, which has a negative feedback loop effect on the economy.
people cannot eat money, it doesn't provide very good shelter, and really isn't fashionable to wear so, in short, people do not want money for money itself, but rather for what they can buy with it. This 'negative' feedback has a definite limit, the point which people decide that a pile of money is rather worthless without buying needed or desired goods, and then they start spending.

And what is happening in the meantime? See above.
what do you mean?

Production and investment are ultimately driven by consumer demand. What happens to them when people are deferring purchases because they no the value of their money will be higher tomorrow?
if people choose to defer their purchases for whatever reason, they influence the value of money itself - money becomes more valuable (here is your circular spiral..yet....). UNTIL the point where the 'new' value of money is reached and price levels stabilize around this new value. No matter what, people cannot eat their money, cannot shelter themselves, and cannot fly to see their family members without SPENDING it... so, such a level will ALWAYS be reached, simple because we ultimately value GOODS more than money.

Quote: False. Investment and savings (as defined within economics) are always equal. What we are discussing here are savings and investment ex ante vs ex post (planned versus actual after the fact). An increase in ex ante savings will often lead to a decrease in ex post savings because the decreased consumption will lead to less economic production which will leave less national income available for savings.
see above - the spiral does not continue on ad infinitum, as we humans require goods to survive, not money.

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Quote: So deflation is never a good thing.

ha! just another example of a stinted thought process - try really working it through, you are way smarter than this. Deflation caused by an increase in goods vs a money supply which is not increasing at the same rate is a great thing. Inflation never is.


See a few lines above where I identify the logical contradiction in your faulty "deflation good, inflation bad" reasoning.

lets try it again...

Yes, please try again.

I keep trying to help you wrap your mind around the difference between the spread of Deflationary Effects and the spread of Inflationary Effects throughout an economy, you really must try harder instead of just deciding to be a contrarian (which can be fun too, I understand, but it sure gets old amongst friends)

[LeopardPM]

RueTheDay wrote: gavnook wrote:
When you said "If the money supply does not increase on par with the level of output, frictional problems will stymie economic growth. That is why monetarists supported a monetary growth rule that allowed the money supply to increase more or less at the same rate as GDP growth.", I got the impression that you support increasing the money supply. Do not bother arguing the definition of inflation. I clearly specified monetary inflation for the sake of clarity.

Increasing the money supply at the same rate as economic output increases is not inflation.
It obviously IS. Inflation is not 'the general increase in the prices of goods and services', those are possible and probable EFFECTS, but not the CAUSE.

RueTheDay wrote:
A fixed money supply in the face of expanding output is still a decrease in the relative money supply with the same inherent frictional problems likely to surface.

not at all. The 'frictional problems' you allude to are non-existent. ANY amount of 'money' will 'lubricate' the economy just fine - its is when CHANGES (either up or down, with more effect occurring with the greater the change) in the money supply occur which induce your so-called 'frictional problems'.


RueTheDay wrote:
Quote:
How does investment drive savings?

Increasing investment increases national output. There is then "more" available to save.
why inject 'national' here - it is unnecessary. Simply, your statement, to be completely correct, would be: "Increasing investment tends to increase productivity, of which a possible and probable outcome might be increased output."

Quote: Increasing savings (ex ante) decreases consumption, which decreases the amount businesses invest to meet that consumption, which decreases national output. There is then "less" available to save.

This is standard macroeconomics that you would learn in any principles or intermediate econ course.
and it totally ignores the feedback loop portion, lets build at the end of your statement:
There is then "less" available to save. Which tends to decrease the value of the currency, making goods more valuable and thus providing opposite pressure to 'save' (to not save). It is around this point of value of money versus value of goods which savings will fluctuate.
The decrease in consumption (as a result from savings increase)....

and to conclude, the ultimate level of savings at any given time in a market may indeed be different from any other time, and yet, as long as is determined by the market, is the 'best' level, as best as humans at the time are able to determine and put forth by their actions.

How would you propose to set an interest rate or a savings rate for any particular point in time? Can you not help but inject your own subjectivity into your answer UNLESS you rely upon the market and free choice? Unless, of course, you are not talking about a society in general, and rather are talking strictly about your own rate of savings and so forth. In such a case, I would agree that your decision for your own property is probably best, and in any case, is none of my business.

[Brooklyn]

Quote: The velocity of money is rather hard to guage (if not impossible) and its efects are meaningless: what does it mean exactly if V increases? People are holding onto their money for shorter periods of time? gee... so what?

I don't think it is wise to shrug off certain issues because they are "hard to guage". It makes little sense to make the claim anything is "meaningless" when it isn't fully understood. It would seem some economic schools of thought would rather not deal with issues it cannot explain.

Quote: If you say so. Does that make it true?

Rue's point is coming straight from an intro economics textbook. Its the paradox of thrift.

[LeopardPM]

Brooklyn wrote: Quote: The velocity of money is rather hard to guage (if not impossible) and its efects are meaningless: what does it mean exactly if V increases? People are holding onto their money for shorter periods of time? gee... so what?

I don't think it is wise to shrug off certain issues because they are "hard to guage". It makes little sense to make the claim anything is "meaningless" when it isn't fully understood. It would seem some economic schools of thought would rather not deal with issues it cannot explain.
explain? what is there to explain? I wouldn't hold up mathematical formulae as being absolutes in the world of human action. If the Velocity of money is such a 'random' factor (according to Rue) then how can it be accounted for? Fact is, so what if people continually change their preference to hold money for differing time periods? It makes total sense and it is within their rights to do with their property as they please... are we going to now start legislating the spending of money - force people to spend money on slow economic days, and hold back when the economy becomes 'overheated'? Remember President Bush telling everyone to shop and spend after 9/11? OMG!
I am not saying that Velocity doesn't have a place in economic calculations - the problem is that it adds yet another layer of abstraction which has leads people to believe that it is possible to man-handle this crazy and wild ride called the 'economy' into some tame beast which will take us where we (or more specifically, a 'select' we) want to go... it is neither a beast nor wild - it is just a term used to describe all the voluntary transactions occurring, for whatever reason or whim, between humans within a group.


Quote: Rue's point is coming straight from an intro economics textbook. Its the paradox of thrift.
Exactly! Reading '2 + 2 = 4' in a textbook is one thing, reading opinion and revised historic record is quite another... do you have so much faith in the 'goodness' of others that you couldn't possibly believe that textbooks can reflect the bias of the authors, the publishers, or even the school system itself? Question: What was the stated reason that 'educators' lobbied for a public schooling system? Here is a hint: It had absolutely nothing to do with 'education' or learning.

Now, don't get me wrong. in general I am willing to give benefit of the doubt to 'experts', to textbooks, etc.... but sometimes a lie is repeated so many times that it just seems obviously true, even if it isn't the truth. So, I will question things, not take opinions as gospel, and try my best to figure out the truth. I know alot of what I read in textbooks was very heavily tainted, regarding the causes of the civil war, segregation, wwII, the great depression, and a myriad of other topics. Math? Sure, I will give over my complete trust to a textbook - its 'verifiable' and 'repeatable', same with chemistry or physics... economics, history, literature, etc simply are not the same and must be viewed in a different manner to be understood.

[RueTheDay]

LeopardPM wrote: Brooklyn wrote: Quote: V tends to fluctuate both randomly and in step with the business cycle (something that frustrates monetarists),

I feel their pain. Its been frustrating me ever since the earlier parts of this discussion.

V and the business cycle are related, in addition to V and inflation in general and this is especially seen when there is hyper-inflation: V flies out the door - kinda the definition of hyper-inflationary response.

The velocity of money (how many times it is exchanged in a given period) is rather hard to guage (if not impossible) and its efects are meaningless: what does it mean exactly if V increases? People are holding onto their money for shorter periods of time? gee... so what?

So what? It means that attmepts to tie the price level to the quantity of money all fail. If V is variable, then you can't say that increasing the money supply by 30% will increase the overall price level by 30%, you can't even say that the price level will necessarily increase as a result of the increased money supply - it could well remain constant or even decrease as a result of the increased money supply.

[RueTheDay]

LeopardPM wrote: RueTheDay wrote:
The only logical fallacy here is your strawman. I never stated that "more" money is ALWAYS better, just as more lubricant is not always better. The point of the analogy is that any economy with too LITTLE money will seize up, just as a machine with too little lubricant.
are you stating that there is a certain quantity of money ther makes a given size of economy work most efficienty? So, you actually think there is a difference between an economy which in total produces 100 chairs and 100 lightbulbs using $1000 are the currency, and an economy which has the exact same production (100 chairs, etc), but uses $100 in total currency? BOTH economies will operate at the exact same efficient level as the relative purchasing power of the currency will be indirectly porportional to the amount of currency available (this is, of course, assuming a point of time at which the currency and market has stablized from a shift of either)

Your last sentence is the only relevant point. It's not the absolute quantity of money that matters - it's the quantity of money relative to the demand for money at a given point in time that matters. It is entirely possible for an economy to be functioning poorly at a point in time because of insufficient money relative to demand for money.

Quote:
Quote: To claim that money is no different than any other commodity is equivalent to claiming that a monetary economy is no different than a barter economy.
you are misunderstanding - whatever commodity that is used as money is still a commodity like any other - that is a fact.

No, that is not a fact. We've been through this already. Money is a unit of account, a medium of exchange, and a store of value. That's what makes it money. No other commodity out there fulfills all three functions. You cannot go to the local Wal Mart and pay for DVDs with coconuts. The price of automobiles is not denominated in coconuts. Your bank account balance is not expressed as the number of coconuts that can be bought.

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no one would ever call for some nominal decrease in the money supply, that would be impossible because who would want to be destroying their own wealth? Though the effect on all the remaining money would be the desirable 'deflation', those who actually did destroy their money would be the ones 'taking it in the shorts', so to speak. This is why I do not advocate any sort of planned decrease in the money supply, instead, I say let people choose their money of choice (which would probably be some sort of precious metal, or, my personal favorite, a basket of commodities) and since one of the traits historically (and logically) desired in a money is small or no quantity increase (stablility), then the positive effects of deflation would be spread evenly to all who hold money. (remember, the deflation effect I am talking about stems from the natural increase in the quantity of total goods and services, which is usually and historically far greater than the desired increase in money supply).

That passage is just unsupported assertion after unsupported assertion.
apparently you just can't refute the obviousness of the passage. Let's see what you got when you do attempt:

Quote: For example, why should the natural increase in the quantity of goods and services be "far greater" than the desired increase in the money supply.
based on the logical desires of people, based on the historic record of commodities chosen as money throughout history since its inception. It makes since that people want a money supply which is not very subject to political whims, or other large swings in quantity (either increase or decrease).

The historic record? For much of the past 200 or so years, economic output has increased at roughly 3% year. This is not "far greater" than the increase in the money supply, whether under a gold standard or fiat money.

Once again, the facts contradict your assertions.

Quote:
Quote: MV=PQ

You have stated that you favor stable prices, so let's hold P constant. V tends to fluctuate both randomly and in step with the business cycle (something that frustrates monetarists), but there is no secular trend, thus we can treat it as a constant over long periods of time. Thus we are left with M=Q, or growth in the money supply equal to growth in output. Your claim is therefore shown to be false.
and you apparently have a problem arguing without creating your own strawman to argue against - I never stated that people favor 'stable prices', they favor a stable money,

Most people could care less about the money supply (if they even know what it is). Prices, on the other hand, are something that they care about.

Quote:
but, in terms of the prices of all other commodities, people tend to love seeing decreasing prices... don't you?

Define "love". In most places that have experienced deflatione (e.g. 1990's Japan) people respond to falling prices by deferring purchases (because they will cost less in the future). I don't call that "loving" something.

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So, please don't try to hold 'P' as a constant, its made of straw.

Do you not understand a conditional statement?

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V is not random at all, it is based on people's desire to hold money!

You can't measure "people's desire to hold money".

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Your conclusion of desiring M=Q is obviously defunct due to your intial error of assuming P should remain constant?

I never said that P SHOULD remain constant, I said that IF P remains constant, the following will be true...

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Why should people remain constant, I don't want it constant, and most people don't either - we love walmart!

Walmart? The f*ck are are you talking about?

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Quote: Quote:
Quote: When people suddenly increase their desire to hold money rather than goods, this causes a chain of events to unfold - consumption drops which causes business investment to drop which causes employment to drop, which then reinforces the circle by causing consumption to drop further.
but there is no such thing as a 'deflationary spiral' or 'hyper-deflation' which means that there is found a level of which ALL of these things you seem to hold so important (level of consumption, level of business investment, etc) will fluctuate around which is as the market finally desires and settles on.

That is largely due to the mathematical fact that prices cannot go below zero while there is no upper limit on prices.

Deflation can, however, still spiral out of control quickly - witness the Great Depression or Japan for much of the 1990's up until a couple of years ago.
a 'mathematical fact', huh? I have PAID to have my car towed away - the value, and therefore price, of my vehicle became 'negative' when it was worth more to have it removed than it was to continue to own it and I was willing to pay for the service.

You paid for a service - the service of a car being towed. That does not make the price of your car negative.

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Now, I agree that this is an exceptional situation and most certainly not the rule at all - but, I don't think you should be holding up your opinion as some absolute 'fact' when it is obviously not.

Actually, it was a fact. Not to mention the other fact which is that we are talking about overall price levels rather than the price of a single commodity when we talk about inflationary and deflationary spirals.

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I just love how you keep throwing in the word 'control', as in 'spiral out of control', as if the economy and prices are just random events which need to be forced and controlled in some manner - propoganda talk.

Strawman. Nowhere do I say that prices need to be controlled.

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Quote: You seem to have the misconception that price levels automatically and instantaneously adjust to reflect changes in the ratio of the money supply to real goods. They do not.
I have no misconception regarding the speed at which information is distributed in the market or throughout a society - and there is no reason to need to assume that price levels MUST instantaneously adjust to derive benefits. So what if imperfect information exists - this is a part of being human, once again, and no government or central planning can make it work any better, only worse.

Imperfect information? That was not the subject of discussion here (though the reader wouldn't know because you snipped out all of the context).
I didn't 'snip' - I quoted the part of your post to which my response was pertaining to - you said that I assume that price levels automatically and instantly adjust - which alludes to the 'imperfect information' argument, which is void because I embrace the FACT that humans have imperfect information - the economy could not work otherwise, if we all knew everything. No need for speculators or entrepenuers, or possibilty for much of anything to happen.

The imperfect information argument concerns the efficiency of a market, not the speed at which prices adjust to changing money supplies. Two separate topics.

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Quote: You made the claim that a decrease in the quantity of money relative to the amount of goods is no big deal because the value of each unit of money will simply increase to the point where the previous ratio held. I demonstrated the error of such reasoning - that the adjustment will take a lot of time and many other things will change during that adjustment period such that the adjustment will not take place. You then posted the above non-response.
the adjusted WILL take place, no matter how much time it takes -

Only if V returns to its initial value.

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the only unknown is what exactly the effects will be as this adjustment goes through the market: where does it hit first (I assume it affects the end good producers first since they are the ones which are creating new goods which are directly sold to the public), where it goes from there I have yet to understand and have not seen much research in this area.

It will affect banks first. Then producers in the order that they can borrow the new funds. Then households depending upon the industry in which they are employed.

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Your point in this regard is a good one, but, it is easy to see that the effect definitely will not be along the lines of how the opposite effect does indeed introduce vast distortions as during inflation.

That's just an opinion, and one that is shown to be incorrect by the evidence. I've already demonstrated the distortional effect imposed by deflation during the Great Depression and the Japanese post-bubble economy and explained the mechanism by which it works.

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Quote: And I demonstrated the logical errors of such reasoning. You are treating money as a veil over the real economy. I am pointing out that money is required for transactions to take place, for production to take place, etc. If the amount of money in existence is insufficient for that to happen, then production and exchange will be impeded.
The use of money IS barter - I trade a commodity (money) for another commodity (a good), this is barter. The fact that it is more effcient and beneficial to use some commodities which have particular properties (fungible, hard to duplicate(create, counterfeit), are easily divisible, easy to carry, easy to store, etc) to barter with and create a system of indirect exchange based around the most popular commodity to be traded (historically gold, precious metals and gems as well) is no veil, it is what is actually occuring - NOT some abstraction where the misconceptions like "Money is the root of all evil", or, "Greed is bad", or, "Money can't buy love", etc all stem from. Money has been abstracted beyond the comprehension of ordinairy people and they do not even understand what they are trading anymore.

Do you think that repeating the same falsehood over and over will make it true?

Do you think that introducing emotive strawmen like " you think money is the root of all evil" bolsters your argument?

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My guess (as I haven't poured much mental energy into tracing the time effect as with inflation) the benefits of deflation are greater the closer to the production of goods one gets, but I am unsure of this theory.

Gibberish.
your reply is plain lazy - I expect better from you. My statement was an honest, yet quick, attempt to pointing out a basis for a possible theory, and you were too lazy to even try and conceive of tracing the flow of Deflationary Effects which Stem from a Continuous increase in the supply of goods versus a relatively stagnant money supply (great thesis paper title, by the way)

Why would the "benefits of deflation" (an oxymoron) be greater the closer one is to the production of goods?

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Quote: And of course, deflation also causes consumers to defer purchases, since the goods will be cheaper in the future, which has a negative feedback loop effect on the economy.
people cannot eat money, it doesn't provide very good shelter, and really isn't fashionable to wear so, in short, people do not want money for money itself, but rather for what they can buy with it. This 'negative' feedback has a definite limit, the point which people decide that a pile of money is rather worthless without buying needed or desired goods, and then they start spending.

And what is happening in the meantime? See above.
what do you mean?

Production and investment are ultimately driven by consumer demand. What happens to them when people are deferring purchases because they no the value of their money will be higher tomorrow?
if people choose to defer their purchases for whatever reason, they influence the value of money itself - money becomes more valuable (here is your circular spiral..yet....).

No, it doesn't. Value is realized when an exchange takes place, here no exchange is taking place.

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UNTIL the point where the 'new' value of money is reached and price levels stabilize around this new value. No matter what, people cannot eat their money, cannot shelter themselves, and cannot fly to see their family members without SPENDING it... so, such a level will ALWAYS be reached, simple because we ultimately value GOODS more than money.

People are not holding onto money because they value it more, they are holding onto it because they are uncertain of the future.

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Quote: False. Investment and savings (as defined within economics) are always equal. What we are discussing here are savings and investment ex ante vs ex post (planned versus actual after the fact). An increase in ex ante savings will often lead to a decrease in ex post savings because the decreased consumption will lead to less economic production which will leave less national income available for savings.
see above - the spiral does not continue on ad infinitum, as we humans require goods to survive, not money.

Did I say it continue on "ad infinitum"? No. It doesn't have to. As Keynes said, "in the long run, we're all dead".

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Quote: So deflation is never a good thing.

ha! just another example of a stinted thought process - try really working it through, you are way smarter than this. Deflation caused by an increase in goods vs a money supply which is not increasing at the same rate is a great thing. Inflation never is.


See a few lines above where I identify the logical contradiction in your faulty "deflation good, inflation bad" reasoning.

lets try it again...

Yes, please try again.

I keep trying to help you wrap your mind around the difference between the spread of Deflationary Effects and the spread of Inflationary Effects throughout an economy, you really must try harder instead of just deciding to be a contrarian (which can be fun too, I understand, but it sure gets old amongst friends)

Please don't misunderstand and think that I am advocating inflation while condemning deflation. I'm not. I'm simply saying that doth are bad. Producers and consumers cannot make sound production and consumption decisions in the face of rapid changes in the overall price level IN EITHER DIRECTION.

[RueTheDay]

LeopardPM wrote: RueTheDay wrote: gavnook wrote:
When you said "If the money supply does not increase on par with the level of output, frictional problems will stymie economic growth. That is why monetarists supported a monetary growth rule that allowed the money supply to increase more or less at the same rate as GDP growth.", I got the impression that you support increasing the money supply. Do not bother arguing the definition of inflation. I clearly specified monetary inflation for the sake of clarity.

Increasing the money supply at the same rate as economic output increases is not inflation.
It obviously IS. Inflation is not 'the general increase in the prices of goods and services', those are possible and probable EFFECTS, but not the CAUSE.

A "general increase in the prices of goods and services" most certainly IS the definition of inflation, according to any dictionary or economics textbook. Sorry, but mises.org does not get to redefine inflation to their liking.

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RueTheDay wrote:
A fixed money supply in the face of expanding output is still a decrease in the relative money supply with the same inherent frictional problems likely to surface.

not at all. The 'frictional problems' you allude to are non-existent. ANY amount of 'money' will 'lubricate' the economy just fine - its is when CHANGES (either up or down, with more effect occurring with the greater the change) in the money supply occur which induce your so-called 'frictional problems'.

I actually don't disagree with that. My claim is not that there is some "optimal quantity of money" that exists independent of circumstances.

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How does investment drive savings?

Increasing investment increases national output. There is then "more" available to save.
why inject 'national' here - it is unnecessary. Simply, your statement, to be completely correct, would be: "Increasing investment tends to increase productivity, of which a possible and probable outcome might be increased output."

The word "national" is important. "Aggregate" would work as well. The point is that the effect of an individual attempting to increase his saving on that individual is very different from the effect of many individuals all trying to increase their savings on the overall economy.

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Quote: Increasing savings (ex ante) decreases consumption, which decreases the amount businesses invest to meet that consumption, which decreases national output. There is then "less" available to save.

This is standard macroeconomics that you would learn in any principles or intermediate econ course.
and it totally ignores the feedback loop portion, lets build at the end of your statement:
There is then "less" available to save. Which tends to decrease the value of the currency, making goods more valuable and thus providing opposite pressure to 'save' (to not save).

People don't base their consumption decisions solely on the quantity of goods relative to the quantity of money.

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It is around this point of value of money versus value of goods which savings will fluctuate.
The decrease in consumption (as a result from savings increase)....

And what happens if instead they try to increase their savings some more (perhaps because they are out of a job because of the decreased demand for goods)?

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and to conclude, the ultimate level of savings at any given time in a market may indeed be different from any other time, and yet, as long as is determined by the market, is the 'best' level, as best as humans at the time are able to determine and put forth by their actions.

Best? Now you're introducing normative value judgements into the equation.

You are also ignoring the fact that people may want to save more, yet it is that very attempt that, in the aggregate, is preventing them from doing so.

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How would you propose to set an interest rate or a savings rate for any particular point in time? Can you not help but inject your own subjectivity into your answer UNLESS you rely upon the market and free choice? Unless, of course, you are not talking about a society in general, and rather are talking strictly about your own rate of savings and so forth. In such a case, I would agree that your decision for your own property is probably best, and in any case, is none of my business.

I just want to point out that you have totally left the realm of economics and now are trying to make a moral case based upon the (IMO erroneous) belief in the absolute right of private property.

[RueTheDay]

Brooklyn wrote: Quote: The velocity of money is rather hard to guage (if not impossible) and its efects are meaningless: what does it mean exactly if V increases? People are holding onto their money for shorter periods of time? gee... so what?

I don't think it is wise to shrug off certain issues because they are "hard to guage". It makes little sense to make the claim anything is "meaningless" when it isn't fully understood. It would seem some economic schools of thought would rather not deal with issues it cannot explain.

That last statement pretty much defines the Austrian school.

Externalities? Just ignore them. Mathematics as a tool for describing complex relationships? Who needs it.

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Quote: If you say so. Does that make it true?

Rue's point is coming straight from an intro economics textbook. Its the paradox of thrift.

Right. Sometimes I feel like arguing economics with internet Austrians is like arguing evolution with young earth creationists. No amount of facts and logic will dissuade them from beliefs that they "just know" are true.

[LeopardPM]

RueTheDay wrote: Brooklyn wrote: Quote: The velocity of money is rather hard to guage (if not impossible) and its efects are meaningless: what does it mean exactly if V increases? People are holding onto their money for shorter periods of time? gee... so what?

I don't think it is wise to shrug off certain issues because they are "hard to guage". It makes little sense to make the claim anything is "meaningless" when it isn't fully understood. It would seem some economic schools of thought would rather not deal with issues it cannot explain.

That last statement pretty much defines the Austrian school.
hardly! I have never seen or heard of an Austrian not deal with or attempt to deal with any issue

Quote: Externalities? Just ignore them.
I guess this is just a flat out lie - you know that Austria