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  • #121
  • Aug 11, 2011 8:29am Aug 11, 2011 8:29am
Quoting Leonlorenzo
Quantity of money (Q), Velocity (V)

Q x V = X
2Q x 1/2V = X

I'm not exactly sure what 'X' is. But I guess the above shows an increase in Q doesn't have to have any effect as long as V decreases enough too. Saying that, this is probably the equivalent of 'bar napkin calculations'. :/
By definition X = nominal GDP. Though the equation is usually expressed as X / Q = V because there is no way to measure V directly.

In any event, this really misses the point. All the "money supply causes inflation" arguements are predicated on an assumption that Q+ / P = D+ = I. In other words, when you increase the quantity of money (Q), the amount available for each member of the population (P) is increased. When each P has more money, they are able to demand (D) more of all the resources in an economy. That in turn reduces available supply and produces inflation (I).

The problem with this arguement is that those who advocate it can't explain how the increased Q gets into the hands of P. Last time I checked, there were no helicopters dropping suitcases full of money into the streets...

Once you start trying to explain the intermediation mechanism, you realize that the amount of Q in the system is irrelivant. I'm not going to go into all the details of the process, but the long and short is, the fed can't "create" money. It can only exchange assets. For every dollar it prints, it destroys $1 worth of other assets, so the net impact is zero.

In the real world the money supply is nothing more then a lubricant greasing the wheels of commerce. No matter how much (or how little) of it there is, the variable rate at which it changes hands (velocity) ensures there is precisely enough for the economy to function.
  • #122
  • Aug 11, 2011 8:54am Aug 11, 2011 8:54am
Quoting eurotrash
Indeed - can someone who denies the influence of the money supply affecting inflation explain Germany's hyperinflation? I don't know much about economics so don't have firm opinions one way or another but would be interested in the explanation.
The German hyperinflation event occured because people lost faith. After WWI German had crushing economic sanctions placed against it. It was forced to pay exorbinent reparations to the countries it invaded. And its economy was devistated from the ravages of war. All these things conspired to instill a sense of hopelessness and despair in the German people. They lost faith in their country, their government and, by proxy, the currency that it issued.

When you have no faith in a currency, you demand a risk premium for accepting it. That risk premium increase the cost of goods. As the cost of goods increases, you need to demand a higher risk premium. Which increase the cost of goods again... this starts off a viscious cycle and hyperinflation is the result.

***

As a side note, I'm not arguing that inflation doesn't occur. It most certainly does. All I'm trying to point out is that the rate of inflation has little (if anything) to do with the money supply.
  • #123
  • Aug 11, 2011 10:54am Aug 11, 2011 10:54am
Quoting Darkstar
The German hyperinflation event occured because people lost faith. After WWI German had crushing economic sanctions placed against it. It was forced to pay exorbinent reparations to the countries it invaded. And its economy was devistated from the ravages of war. All these things conspired to instill a sense of hopelessness and despair in the German people. They lost faith in their country, their government and, by proxy, the currency that it issued.

When you have no faith in a currency, you demand a risk premium for accepting it. That risk premium increase the cost of goods. As the cost of goods increases, you need to demand a higher risk premium. Which increase the cost of goods again... this starts off a viscious cycle and hyperinflation is the result.

***

As a side note, I'm not arguing that inflation doesn't occur. It most certainly does. All I'm trying to point out is that the rate of inflation has little (if anything) to do with the money supply.
Can that explanation be backed up by data/proof/whatever better than the money supply explanation? Did they lose faith in their currency and demand a risk premium because money was being constantly printed, and therefore the money supply affected inflation expectations which resulted in actions to raise price? Also, even if a risk premium were demanded but the money supply not increased, surely it would have to stop at some point because you can't keep raising price thousands of percent if people don't have wheelbarrows full of money to pay for it. That is, without printing money, hyperinflation cannot exist because raising price excessively will simply price everyone out of the products (since they don't have any more money than before to pay for the higher prices), and those who raised prices will be forced to lower them in order to sell. At least that's how I see it.
  • #124
  • Aug 11, 2011 10:56am Aug 11, 2011 10:56am
Quoting Darkstar
As a side note, I'm not arguing that inflation doesn't occur. It most certainly does. All I'm trying to point out is that the rate of inflation has little (if anything) to do with the money supply.
In a healthy economy, printing money will almost certainly increase inflation. It's only when the economy breaks down that velocity slows, and deflation becomes a risk - printing money in this case prevents deflation. Still, if you print too much, you'll get inflation. It's a balancing act. But, add to the equation globalisation and reserve currency status, it's just as possible that inflation is exported to other countries rather than the US.
  • #125
  • Aug 11, 2011 11:57am Aug 11, 2011 11:57am
Like Ronnie said , Government IS the Problem...

This guy makes some pretty important points about the expansion of gov.


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  • #126
  • Aug 11, 2011 7:37pm Aug 11, 2011 7:37pm
Quoting eurotrash
Can that explanation be backed up by data/proof/whatever better than the money supply explanation? Did they lose faith in their currency and demand a risk premium because money was being constantly printed, and therefore the money supply affected inflation expectations which resulted in actions to raise price?
Yes, but I just finished writing a book and have little desire to hammer one out here on the forum. What I can do is direct you to the work of "Ladislaus von Bortkiewicz" who was instrumental in ending the german hyperinflation event. There are several books/papers written about his analysis floating around the internet (his original papers were all written in German) but this one does a decent enough job without getting too technical.

If your really interested in this subject, buy the book. Otherwise just read the available portion of that chapter...



Quote
Also, even if a risk premium were demanded but the money supply not increased, surely it would have to stop at some point because you can't keep raising price thousands of percent if people don't have wheelbarrows full of money to pay for it.

As long as wages don't rise, you are 100% correct. But wages always rise in a hyperinflation event. They have to or there could be no hyperinflation.

Quote
That is, without printing money, hyperinflation cannot exist because raising price excessively will simply price everyone out of the products (since they don't have any more money than before to pay for the higher prices), and those who raised prices will be forced to lower them in order to sell. At least that's how I see it.

Hyperinflation most certainly CAN exist without increasing the money supply... the money just has to change hands faster and faster. In other words, the "velocity" has to increase. This is addressed in detail in the link.

Hope it helps clear things up
  • #127
  • Aug 11, 2011 8:05pm Aug 11, 2011 8:05pm
I haven't seen any "soothsayers" who have soothed anything by what they said.

Soothsayers and those who write financial predictions are "alarmists". Otherwise they wouldn't be able to sell their writings.

Just my opinion but think about people like Carlos Slim or Warren Buffet (even George Soros). Were they selling books or "doing the do"?

Addendum; that doesn't mean that a lot of valuable information can't be found in a book. I'm just not into predictions. It's VERY LIKELY that anyone could find some valuable information in DarkStar's book.
  • #128
  • Aug 11, 2011 8:12pm Aug 11, 2011 8:12pm
Quoting Darkstar
Yes, but I just finished writing a book and have little desire to hammer one out here on the forum. What I can do is direct you to the work of "[font=Times-Roman]Ladislaus von Bortkiewicz" who was instrumental in ending the german hyperinflation event. There are several books/papers written about his analysis floating around the internet (his original papers were all written in German) but [url="http://books.google.com/books?id=Scb8hFfh7YcC&pg=PA139&lpg=PA139&dq=Ladislaus+von+Bortkiewicz+hyperinflation&source=bl&ots=H8LsbHEXbg&sig=bcVWJtEemwxBvxnw9-iXvfJRDl4&hl=en&ei=KW1ETsuvPMiatwf6-6HeBQ&sa=X&oi=book_result&ct=result&resnum=7&ved=0CEoQ6AEwBg#v=onepage&q=Ladislaus%20von%20Bortkiewicz%20hyperinflation&f=false"]this...
Thanks DS, and I'll check out the book as I like to have a thorough understanding of these things.
  • #129
  • Aug 11, 2011 8:39pm Aug 11, 2011 8:39pm
Quoting eurotrash
Thanks DS, and I'll check out the book as I like to have a thorough understanding of these things.
...remember: better to have a complete understanding of one thing than a little understanding of many.
Living the adventure in my head.
  • #130
  • Aug 12, 2011 6:17am Aug 12, 2011 6:17am
Quoting Leonlorenzo
...remember: better to have a complete understanding of one thing than a little understanding of many.
I agree but I suppose it depends what your end goal is. For example I am currently educating myself in a number of different economic and market subjects, in order to get a more "holistic" understanding of global capital flows and be able to understand and determine the implications of the many changes or events that happen in economies, policies, markets, etc. I'm not particularly interested in getting an expert understanding in a lot of them (for the moment), so long as I am conversant enough in the subject to use it soundly in analysis and have all my questions answered and it's no longer a mystery. But I've found that reading lengthy, excessively detailed (for my purposes) books is the best way I learn. Stigum's Money Market is coming up next.:nerd:
  • #131
  • Aug 12, 2011 7:24am Aug 12, 2011 7:24am
Quoting eurotrash
But I've found that reading lengthy, excessively detailed (for my purposes) books is the best way I learn.
Then you'll love this book. Probably the most interesting book on real world macro-economics I've ever read.
  • #132
  • Aug 12, 2011 9:30am Aug 12, 2011 9:30am
Quoting Darkstar
Then you'll love this book. Probably the most interesting book on real world macro-economics I've ever read.
Mucho gracias!
  • #133
  • Last Post: Aug 12, 2011 7:23pm Aug 12, 2011 7:23pm
Quoting Darkstar
Then you'll love this book. Probably the most interesting book on real world macro-economics I've ever read.
Thanks, always interested in a good macro book.
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