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Inflation versus price increase

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May 18, 2008 – Comments (17)

I like how this article explains inflation..

I don't think we are seeing inflations so much right now, but price increases due to the existing supply of money.  Cost of living is definitely going up very quickly, but that isn't inflation, that is prices catching up to the money supply.   

17 Comments – Post Your Own

#1) On May 18, 2008 at 1:25 AM, LordZ wrote:

Hey Dwot do you have a custom pic on your profile

If so how were you able to upload it ???

 

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#2) On May 18, 2008 at 1:43 AM, Tastylunch (29.54) wrote:

LordZ contact TMFJake. Only certain players are allowed to have cutotm avatars (select all stars). I believe he has to appove and upload your custom avatar

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#3) On May 18, 2008 at 4:37 AM, camistocks (< 20) wrote:

Today, only Austrian economists or nerds use monetary expansion as a measure for inflation. In todays world people use the word "inflation" to describe a rise in prices of goods.

There are many schools of economists however and so everybody can pick their favorite. 

In today's world: CPI minus GDP equals real inflation.

Today's food inflation for example has absolutely nothing to do with a growing money supply. It's a simple supply and demand thing. It has also to do with main exporting countries forbidding exports, like India, Thailand in the case of rice, thus reducing supply. Wheat and corn? Ask the USA for using a growing part for ethanol ad so shrinking supply.

 It has also got to do with speculators driving up commodities prices.

BTW, oil has risen about 15% since the US dollar has bottomed in mid March, and this, while the dollar is even rising since then. So, is it really only the falling dollar effect?

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#4) On May 18, 2008 at 5:38 AM, dwot (97.03) wrote:

LordZ, TMFJake does it for players with a score of 99% or better.

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#5) On May 18, 2008 at 9:20 AM, mandrake66 (96.39) wrote:

Today, only Austrian economists or nerds use monetary expansion as a measure for inflation. In todays world people use the word "inflation" to describe a rise in prices of goods.

Perhaps, but the word in that sense is entirely meaningless in any useful way. Meteorologists don't use 'humidity' to mean how icky it feels outside, it has a precise definition. It's only in a monetary sense that inflation has any meaning. CPI is completely useless, and GDP is nearly so.

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#6) On May 18, 2008 at 11:16 AM, EScroogeJr (< 20) wrote:

"In today's world: CPI minus GDP equals real inflation."

theoretically, this is a good first approximation, but unfortunately, you have to adjust both terms in this expression because the official statistics "attenuates" the CPI and then divides the nominal output by this attenuated CPI to report the GDP. 

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#7) On May 18, 2008 at 1:18 PM, ATWDLimited (< 20) wrote:

Hey, I ain't a nerd. nor am I an austrian economist. I just wrote about Inflation and the M3 supply change, which was 20% this quarter, so don't cast a blind eye toward the true problem.

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#8) On May 18, 2008 at 1:39 PM, camistocks (< 20) wrote:

I completely forgot to mention: MZM is rising so fast, because people are selling (risky) assets and are putting the money into bank accounts, which are measured by MZM. It's just a statistical definition. That's what Bernanke said anyway.

Bernanke in reply to Ron Paul on "money printing" on Nov 8 2007: 

BERNANKE: Well, Congressman, first, just a small technical point. On the growth in money, money growth has been pretty moderate over the last few years. The increase in MZM is probably related to the financial turmoil. People have been taking their savings out of, you know, risky assets, putting them into the bank, and that makes the money data show faster growth.

So I’m not sure that’s indicative of policy, necessarily.

 

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#9) On May 18, 2008 at 3:21 PM, mandrake66 (96.39) wrote:

Inflation is also not just money supply, it is money plus credit. Credit to my understanding has been falling faster than money has been growing. This is why some people still insist that we're actually in a deflationary environment. As to whether prices reflect this, it depends entirely on the basket of goods and assets you construct. A basket of homes and securities surely shows deflation. The trouble is, there is no representative basket of goods meaningful to everyone, which is why I think the CPI is useless or worse.

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#10) On May 18, 2008 at 7:08 PM, EScroogeJr (< 20) wrote:

"People have been taking their savings out of, you know, risky assets, putting them into the bank, and that makes the money data show faster growth."

If it were that simple: take the money out of a risky asset as if it were a mattress. For every seller, there has to be a buyer, so in order for you to generate some sales proceeds to put in the bank, someone else to take the same amount of money out the bank, either in the form of cash, or as credit. Credit has been contracting, if you believe Bernanke's complaints about the "liquidity crunch", so the buyers of those securities had to remove cash from the bank at least at the same rate as the rate at which sellers were deposing their cash proceeds. So these transactions cannot explain the growth of M3. Bernanke was able to get away with this bulls.t because he was making his speach before congressmen, so there were no retarded ten-year-old children among his audience to laugh him out of the room.

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#11) On May 18, 2008 at 9:30 PM, dwot (97.03) wrote:

Interesting discussion going here...

 

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#12) On May 18, 2008 at 11:28 PM, EScroogeJr (< 20) wrote:

And the original article concurs with my opinion:

 "Now since MZM includes money-market funds, stock-market performance does affect it too. So some analysts argue that this staggering MZM growth is largely the result of market turbulence. This thesis is problematic though. Whenever stocks change hands, so does cash. Buyers' money is transferred to sellers' accounts where it is still, amazingly enough, money. Unless cash is routed into time deposits like CDs, stock buying and selling shouldn't affect MZM all that much. This same logic applies to bonds."

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#13) On May 19, 2008 at 12:03 AM, Hezakiah (93.67) wrote:

I sort of agree with Camistocks on this issue.  Australian economics argues that inflation is growth in the supply of (money + credit) and that price changes are only the necessary result of inflation.  This would make perfect sense if the American economy was completely isolated (i.e. the money supply of U.S. $$$ was all that was chasing goods and services).  As I see it, the two major areas that are showing "price inflation" are food and energy.  But the price of oil can change completely independently of the American money supply.  Demand from China, India, etc... they do not have to buy oil in dollars. 

Prices can change due to an increase in the money supply, or due to an increase in such external demand (not to mention changes in the supply of goods and services).  Tackling the money supply source of inflation is a worthy goal, but it cannot fully eliminate the problem.  If I have this wrong, someone please correct me.

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#14) On May 19, 2008 at 12:32 AM, camistocks (< 20) wrote:

mandrake, very good point with the basket to measure inflation. I don't know how it is put together, but they change it all the time. So, it is in fact not very telling.

A measure I find useful is long term treasuries. Because it reflects the collective intelligence of bond buyers (who are regarded smarter than stock market participants.) Why would anybody buy long term treasuries at current rates, if they feared long term inflation. They would lose money.

Hezakaiah, Austrian, not Australian... :-) Du Deppata! ;-)

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#15) On May 19, 2008 at 12:04 PM, dwot (97.03) wrote:

Hezakiah, I have never thought of Austrian economics working independent of supply and demand. 

One only needs to look at the M3 money supply and shudder at how much consumer prices have not kept up.  You could have a contraction that cuts the money supply in half and I doubt that consumer prices will have kept up with the increase.

Through credit expansion those idiots were taking us to gross levels of inflation, however, credit expansions are prone to contract when the inability to pay the money back becomes apparent.  There are several years that price increases fell far below money expansion and now that is correcting.

Supply and demand is at play, but prices are going several standard deviations above historical levels where the demand is high.  Without the gross levels of credit expansion that would have never been able to happen.  Yes, prices would go up, but they would have been within reason of the fundamentals.  The increased money supply showed up where demand was strongest, but many of these prices are up hundreds of percents above what they were, very much in line with the relative increase in money supply.

Copper is still in the range of 500% of its low this decade.  I tend to think without a contraction all prices would increase in that range...  But then, I believe a contraction is already happening.

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#16) On May 19, 2008 at 12:23 PM, Hezakiah (93.67) wrote:

No, I was referring to the little studied area of Australian economics... whoops. 

I understand your argument dwot, but I still don't fully buy it.  I just don't think current price increases are a result of past monetary expansion.  In my opinion, increasing the money supply would lead to increased demand across the board, not just in food and energy (you did say this would happen eventually, barring a contraction).  If anything, I would guess that the demand would be concentrated in discretionary items.  The fact that price increases are in food and energy instead suggest to me that true increases in global demand (and maybe some speculation) are what is to blame for the price increases.  Increases in global demand that involve transactions lying outside of the U.S. dollar regime will change prices completely independently of U.S. monetary supply.

 I would look at the huge increase in monetary supply that did occur and say that maybe housing absorbed almost all of that inflation.

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#17) On May 19, 2008 at 12:55 PM, mandrake66 (96.39) wrote:

Demand from China, India, etc... they do not have to buy oil in dollars.

They don't? Everyone buys oil (and a significant number of other commodities) in dollars, though Iran and Venezuela keep making noise about trying to change this. 

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