<DrumBeat: April 12, 2007 The Oil Drum Jeremy Gilbert's Comments on TOD Saudi Analysis>

248 comments on The Case for Inflation from a Plateauing Supply

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kjmclark on April 12, 2007 - 12:33pm Permalink | Subthread | Parent | Comments top

Wait! Before everyone goes off on the Austrian School vs. everyone else definition of "inflation", you should all realize that you're talking about two different definitions! This ALWAYS happens when folks discuss inflation. In the Austrian economic school definition, inflation is an increase in the money supply. In everyone else's definition, inflation is an increase in general price levels. I wish Jeff had made this clear in his post so that we could avoid this kind of arguing.

Greyzone is using the Austrian school definition of inflation. SF is using the generally accepted definition of inflation. It always pisses off Austrian school followers that everyone else calls price increases inflation, but that's what most people think of as inflation. Then the Austrian folks say "what you are calling inflation is not inflation", and everyone else thinks they're nuts.

Please indicate whether you are using the Austrian school definition of inflation or the common definition of inflation!

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dVincent on April 12, 2007 - 3:01pm Permalink | Subthread | Parent | Comments top

Thanks To Jeff for an interesting topic for discussion.
Austrian theory is simple, why confuse the issue?
Greyzone is simply saying that a price rise doesn't = inflation. It may be a symptom.
Why do people call rising home prices "appreciation" and rising oil prices "inflation". Misleading and unnecessary.
Follow the money supply.
Interestingly, the stat in the news today is that China's M2 is up over 17% year/year. That is due to their monster U.S. trade surplus, and has built them $1.2 trillion in reserves.
What China does with these reserves will tell us a lot about what to expect from commodity prices and interest rates. As Japan industrialized, their currency rose several times vs U.S. dollar. If China decides a strong Yuan is in their best interests and they allow it to double or triple vs the U.S. dollar then they they will be paying that much less for oil relative to the U.S.

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kjmclark on April 12, 2007 - 5:04pm Permalink | Subthread | Parent | Comments top

The Austrian School version isn't quite as simple as it appears (are you sure the measures of the money supply aren't manipulated?), and the vast majority of people have never heard of it. The standard definition of inflation is a general increase in the cost of goods. The Austrian School was a break-away from that standard definition, which the Austrians found wanting. The other problem with the inflation = increase in money supply definition is that people can't see it. From most people's perspective, there hasn't been that much inflation until recently, though by the Austrian School definition we've had inflation for over a decade now:


(from Economagic )

I tend to think of the Austrian definition as more predictive, and the standard definition as more descriptive.

People call rising housing prices "appreciation" because of real estate agent double speak (the same double speak that made you write "home" prices.) That's the Iron Triangle at work.

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dVincent on April 12, 2007 - 8:37pm Permalink | Subthread | Parent | Comments top

I tend to think of the Austrian definition as more predictive, and the standard definition as more descriptive.

Well said.

The M2 chart you provided shows rapid M2 acceleration from 1997 to present. That lines up with the bubbles showing up in the stock market, real estate market, and unfortunately for most consumers- now the commodity market.

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mgv on April 12, 2007 - 6:31pm Permalink | Subthread | Parent | Comments top

Greyzone is using the Austrian school definition of inflation. SF is using the generally accepted definition of inflation. It always pisses off Austrian school followers that everyone else calls price increases inflation, but that's what most people think of as inflation. Then the Austrian folks say "what you are calling inflation is not inflation", and everyone else thinks they're nuts.

The question is really whether or not price inflation can lead to changes in the money supply.

As I read it, whilst oil price rises cannot in themselves increase the money supply in the Austrian sense, it can have one of two effects:

1. You spend your money elsewhere (no inflation occurs). Less oil is purchased. More of other goods are purchased.
2. You buy the same amount of oil, but have much less money for anything else. Total spending goes down. The velocity of money goes down. The money supply goes down. Deflation follows on from this.

I've never really understood the velocity of money side of things, but this is what I would be concerned about.

Michael

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248 comments on The Case for Inflation from a Plateauing Supply

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