![]() | A Public Transport And Green City Manifesto For The Federal Election | The Oil Drum | Oilwatch Monthly - November 2007 | ![]() |
244 comments on DrumBeat: November 16, 2007
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244 comments on DrumBeat: November 16, 2007
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GAIA Host Collective
Hi Stoneleigh - what do you call price changes then?
Price changes are simply price changes, and are often the result of underlying changes in the money supply. For instance, if the money supply doubled with nothing else changing, you would expect nominal prices eventually to double as well (keeping prices the same in real terms).
However, nominal prices can fall as the money supply expands, as has been the case with cheap goods from China due to globalization. A larger money supply did not ignite a wage-price spiral as downward pressure was maintained on wages by foreign competition willing to work for less. Cheap labour, cheap energy and foreign competition has meant cheap goods. When prices fall in nominal terms while the money supply expands, then prices are falling very steeply in real terms.
Prices tend to fall in a deflation as the money supply contracts rapidly, but one can envisage circumstances where that would not be the case, or would be the case only temporarily. For instance, the price of oil should fall in nominal terms, at least temporarily, in a deflation, but the resulting disruption could then reduce supply by as much as deflation had reduced demand, or more so. In that case, oil could rise in nominal terms even while the money supply was falling, which would mean oil going through the roof in real terms. This is in fact what I'm expecting to happen over the next few years, in other words except for the terminology I agree with Westexas.
I have often wondered about how a strict money supply based definition of inflation/price increases handles the normally accepted law of supply and demand - that is, price changes to reflect supply and demand.
In other words, I don't think the price of grain is rising merely because of money supply issues - I think even if the money supply had remained completely static, the price of grain would have risen as the amount available on the world market declined - Ukraine's forbidding exports, for example, or Australian drought, or lowest stockpiles for several decades, or increasing imports from nations such as China and India.
I think 'inflation' as a money based concept is an attempt to hide reality, and not reality itself.
I think 'inflation' as a money based concept is an attempt to hide reality, and not reality itself.
Inflation as a money concept is far older than the present 'problems'. The Austrian school of economics and how the US used to run things before the 1970's, if my memory is correct.