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What's with the US dollar?!

  • #121
  • Apr 3, 2011 6:30am Apr 3, 2011 6:30am
Quoting CindyXXXX
Don't give me that confused face and a lame picture man




Of course printing money will lead to inflation for the supply side of the equation I wrote above but the fact is INFLATION is a MEASURE of how much price's have risen

Inflation isn't the cause of rising prices... So although a side effect of supply is inflation its not the supply that's the cause its the demand the supply MAY create...
Yes, inflation isn't the cause of rising prices - inflation IS rising prices, it is the same.
Well, from my understanding, supply and demand are equally interlinked. So, it is difficult to say that price will only inflate due to demand.
For example: let's keep the demand for oil equal. If now the OPEC pumped more oil out of the earth, they would increase supply, and then prices for oil would fall. If they decreased the supply, prices would rise.
So it really depends. Demand and supply are equally important.
  • #122
  • Apr 3, 2011 6:32am Apr 3, 2011 6:32am
Quoting CindyXXXX
Inflation isn't the cause of rising prices...
I disagree. Inflation, just as deflation, comes in self-reinforcing cycles, and is naturally unstable by itself. Expectation of inflation causes inflation, just as the expectation of deflation causes deflation.
The nail that sticks out gets hammered back in
  • #123
  • Apr 3, 2011 6:33am Apr 3, 2011 6:33am
I actually really enjoy this discussion. Not a lot of fundamental threads here on ff. So it's great that we started that discussion.
  • #124
  • Apr 3, 2011 6:36am Apr 3, 2011 6:36am
Quoting Noloqy
I disagree. Inflation, just as deflation, comes in self-reinforcing cycles, and is naturally unstable by itself. Expectation of inflation causes inflation, just as the expectation of deflation causes deflation.
I see what you're saying but wouldn't an expectation of inflation be the same as an expectation of higher prices meaning an expectation of greater demand ? Same thing?
Time hides Nothing
  • #125
  • Apr 3, 2011 6:41am Apr 3, 2011 6:41am
OMG. Inflation CAUSES prices to rise.

Let's have a very simple economy at work. You have a world with 100 doughnuts and 100 dollars. 1 dollar buys you 1 doughnut. Every night you go to bed and put 1 dollar on your night stand and when you wake up you go to the doughnut shop and get your favorite doughnut.

One day you go do to bed and while you were asleep another 100 dollars were printed and put in the money supply. Now you have 200 dollars chasing 100 doughnuts making the price 2 dollars per doughnut.

You wakeup in the morning and go to the doughnut shop with your 1 dollar and to your surprise, doughnuts now cost 2 dollars and you can cant' buy one today.

Overly simplistic example? True, but it gets the point across.

Inflation causes prices to rise because inflation is an increase in the money supply.
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #126
  • Apr 3, 2011 6:42am Apr 3, 2011 6:42am
Quoting nanningbob
The US dropped the gold standard for the simple basic reason that there was not enough gold to back the currency.
Not quite so. The Nixon administration was using more money than was being backed up by the gold reserves.

Quote
Nations were taking our dollars in open trade and then asking for payment in gold.

Because people knew that the US was printing money to fund the Vietnam war.

Quote
We were going to lose all our gold if we didnt drop the gold standard. It is not prudent to use gold or silver to back any currency because there simply is not enough to go around.

You don't need a lot of gold to back up a currency. The maths is simple. Take the money supply measured in dollars and divide by the Fed's gold reserves measured in ounces. The result is that if the US were to back the dollar with gold today, the gold price would be above $6000...
  • #127
  • Apr 3, 2011 6:44am Apr 3, 2011 6:44am
Quoting LasVahGoose
OMG....
no it is not: "In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time." (taken from wikipedia)
increase of money supply causes inflation / increase of prices.
  • #128
  • Apr 3, 2011 6:47am Apr 3, 2011 6:47am
Quoting Custos
no it is not: "In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time." (taken from wikipedia)
increase of money supply causes inflation / increase of prices.
Yours is the Keynesian definition of inflation and mine is the Austrian definition. Since we know Keynesianism is a proven fraud of a theory, why not stick with how the world really works? Austrian all the way, baby!
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #129
  • Apr 3, 2011 6:50am Apr 3, 2011 6:50am
Quoting LasVahGoose
Yours is the Keynesian definition of inflation and mine is the Austrian definition. Since we know Keynesianism is a proven fraud of a theory, why not stick with how the world really works? Austrian all the way, baby!
yes, you are right, I just found it. I didn't know that in austrian economics theory, inflation has a different definition.

Thanks for enlightening me.
  • #130
  • Edited 7:09am Apr 3, 2011 6:52am | Edited 7:09am
Quoting LasVahGoose
Yours is the Keynesian definition of inflation and mine is the Austrian definition. Since we know Keynesianism is a proven fraud of a theory, why not stick with how the world really works? Austrian all the way, baby!
In your explanation the price magically became $2... Why?

(in my thinking)
Because as incomes rose the man at the donuts shop woke to find not 1 person but 2 people at his shop front wanting donuts.. Seeing as he only supplied 1 donuts a day he needs to somehow decide which person to give the donuts to... So he has an auction between the 2 people and the magical mechanism of a competitive market raises the equilibrium price to 2 dollars

The donuts price rose through the natural function of supply and demand, in this case the extra demand created through extra incomes has driven the price up from $1 to $2

(going back to your example)
How does the guy at the donut shop know that the money supply has doubled? Does his price tag magically detect this and change over night?

I'm with the fraud
Time hides Nothing
  • #131
  • Apr 3, 2011 7:07am Apr 3, 2011 7:07am
Quoting medici
Not quite so. The Nixon administration was using more money than was being backed up by the gold reserves.



Because people knew that the US was printing money to fund the Vietnam war.



You don't need a lot of gold to back up a currency. The maths is simple. Take the money supply measured in dollars and divide by the Fed's gold reserves measured in ounces. The result is that if the US were to back the dollar with gold today, the gold price would be above $6000...
You cant place this on the Vietnam War even thought it is a cause, the cause would have happened anyway. In other words if you didnt have the Vietnam War there just would have been another cause. Gold is in limited supply but you have increase in population (and other causes like increases in economic activity) and therefore a need for more currency to be put into play. If you set the price at 6000 per ounce then you would still have the same problem. Nations would demand payment in gold for your currency eventually drying up your gold reserves. The problem doesn't go away. You cannot back something that is constantly exchanging hands with something that is finite. It would never work. Backing your currency with something that also grows (commodities, etc.) was the only answer. If we did not drop the gold standard we faced three problems:
1. The loss of all our gold.
2. Refusing to pay for the currency because we have no more gold, in other words we have all the paper but not the gold, we exchanged it all out.
3. The lack of sufficient currency to meet the needs of growing populations and growing economic activity. We would have faced another major depression.
  • #132
  • Apr 3, 2011 7:10am Apr 3, 2011 7:10am
Quoting LasVahGoose
Yours is the Keynesian definition of inflation and mine is the Austrian definition. Since we know Keynesianism is a proven fraud of a theory, why not stick with how the world really works? Austrian all the way, baby!
Ah, now many of your comments fall into place. Pretty hard having a discussion with different people employing different definitions So lets just talk about inflation as measured by CPI, as this is what ultimately affects our purchasing power.

Then the underlying mechanisms that drive inflation, whether an increase in the money supply, as argued by Austrian economists; the interaction between supply and demand; or the rational expectations theory, can be argued upon.
The nail that sticks out gets hammered back in
  • #133
  • Apr 3, 2011 7:12am Apr 3, 2011 7:12am
Quoting CindyXXXX
I'm with the fraud
That's exactly it, it's fraud. Was there anything natural about the extra $100 appearing? Who prints it, who receives the extra dollar first and why? They will buy the doughnut at 1 dollar and have a dollar leftover BEFORE the price rises, and all the shmucks with only 1 dollar are out of the loop and out of doughnuts. So overnight it takes them twice as long to earn a doughnut as it did before and those doing the printing get it twice as fast. Those with $1 dollar end up eventually working for those with $2 dollars. When the price of a doughnut finally reaches $2 dollars, you can bet your bottom dollar that another $100 will appear from the same source and be distributed to the same folks who received the first extra hundred, and the dupes that had 1 are now given 2, and they are sooooooo joyful and happy that they can afford a doughnut again, so their needs are met, they are content, and some stop working for the printers, but before they know it, that doughnut costs $3!!! Back into the flock the sheep go.

It's not about money, never has been, it's all about POWER and CONTROL.

  • #134
  • Edited 7:30am Apr 3, 2011 7:14am | Edited 7:30am
Quoting CindyXXXX
In your explanation the price magically became $2... Why?

Because as incomes rose the man at the donuts shop woke to find not 1 person but 2 people at his shop front wanting donuts.. Seeing as he only supplied 1 donuts a day he needs to somehow decide which person to give the donuts to... So he has an auction between the 2 people and the magical mechanism of a competitive market raises the equilibrium price to 2 dollars

The donuts price rose through the natural function of supply and demand, in this case the extra demand created through extra...
Like I said a very simple example. It's dollars per doughnut, so you divide. If you have 100 dollars and 100 doughnuts, then 100/100 = 1. That is 1 dollar per doughnut. If you have 200 dollars the 100 doughnuts, then 200/100 = 2. Now you have 2 dollars per doughnut.

My example is a supply and demand example too. The money supply increased and therefor increased the price of the doughnut.

EDIT: Your example is valid as well, now that I think of it, the increase in price would not be the result of inflation, it would be normal supply and demand. The price is justified, but your example isn't one of increase the money supply and keeping everything else equal, where mine is. (in order for wages to increase there would have to be an increase in the money supply).

A better example for what you are trying to describe would be this. 100 dollars = 100 doughnuts. You wake up and go to the store and the doughnut maker's oven broke and he only made 50 doughnuts. So now you have 100 dollars chasing 50 doughnuts. The doughnut makers knows he normally sells 100 each day to make 100 dollars, but for him to make 100 today he'll need to increase the price to 2 dollars. This would be a normal function of supply and demand and not inflation.

EDIT: Ultimately there is difference between the price of something increase because of true supply vs demand and prices increase because of inflation. They are two very different things.
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #135
  • Apr 3, 2011 7:15am Apr 3, 2011 7:15am
Quoting CindyXXXX
In your explanation the price magically became $2... Why?

Because as incomes rose the man at the donuts shop woke to find not 1 person but 2 people at his shop front wanting donuts.. Seeing as he only supplied 1 donuts a day he needs to somehow decide which person to give the donuts to... So he has an auction between the 2 people and the magical mechanism of a competitive market raises the equilibrium price to 2 dollars

The donuts price rose through the natural function of supply and demand, in this case the extra demand created through extra...
You also need to point out that the donuts were eaten and the man ran out of donuts. The demand for donuts would make the market value rise but the amount of money remain static. Suddenly you have inflation on donuts and high demand. Another person sees he can make a financial killing on donuts so he makes some and sells them for 10 dollars. Others see this and begin to sell donuts and then there is an over supply and the market collapses and donuts can be bought for 10 cents. During the 1800's this was a common occurance in the marketplace and prices fluctuated into several boom and bust periods. The gold arguers often ignore history and there are centuries of history when it comes to the use of gold and silver.
  • #136
  • Apr 3, 2011 7:22am Apr 3, 2011 7:22am
Quoting nanningbob
You also need to point out that the donuts were eaten and the man ran out of donuts. The demand for donuts would make the market value rise but the amount of money remain static. Suddenly you have inflation on donuts and high demand. Another person sees he can make a financial killing on donuts so he makes some and sells them for 10 dollars. Others see this and begin to sell donuts and then there is an over supply and the market collapses and donuts can be bought for 10 cents. During the 1800's this was a common occurance in the marketplace and...
LOL, no it was fiat currency and central bank manipulation.
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #137
  • Apr 3, 2011 7:23am Apr 3, 2011 7:23am
Quoting SerpentDove
That's exactly it, it's fraud. Was there anything natural about the extra $100 appearing? Who prints it, who receives the extra dollar first and why?
Oh man you and your conspiracies

Well I won't argue the point I will study up on this it seems maybe m macro book may be a little dated perhaps...

What I described makes perfect sense to me and is how I've come to understand it... I'll keep an open mind however and do some study on it. Thanks

I'm glad we had this chat!
Time hides Nothing
  • #138
  • Apr 3, 2011 7:26am Apr 3, 2011 7:26am
Quoting CindyXXXX

I'm glad we had this chat!
I gotta ditch this monitor tan and get some actual sun, It's the reason I live in this country to begin with.
  • #139
  • Apr 3, 2011 7:28am Apr 3, 2011 7:28am
Quoting SerpentDove
I gotta ditch this monitor tan and get some actual sun, It's the reason I live in this country to begin with.
LOL. I was supposed to go to sleep a few hours ago, exit stage left.
Don't wish it were easier, wish you were better. ~ Jim Rohn
  • #140
  • Apr 3, 2011 7:30am Apr 3, 2011 7:30am
It makes sense that the more of something there is the less valuable it will be (less scarce) i.e more money less value it has - higher prices or more of it needed to convert to good or services..

But to go from A - B as in more supply to higher prices can only be through the natural market mechanisms and at the crux of it the driving demand created by more money pushes prices up..

Ok I'll shut up now but in summary that is where I'm at with this and I 'm thinking we're both right but maybe I will learn otherwise with some study on it.
Time hides Nothing
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