Re: Rolling bubbles

From: William F Hummel (wfhummel_at_comcast.net)
Date: 06/27/04 

Date: Sun, 27 Jun 2004 18:42:18 GMT

On 25 Jun 2004 19:51:58 -0700, mikevilkin@mail.com (Michael Vilkin)
wrote:
>
>William, thank you for coming to this thread.
>I respect your knowledge of the banking system, and I hope to learn
>from you a thing ot two - or more.
>
>If I have an empty bank and empty pockets, but a credit line on my
>credit card, by using my credit card I borrow money. When millions of
>people spend money they don't have, by borrowing money from a bank
>they increase aggregate demand.
>
>Here is my logic.
>Suppose, there was original aggregate demand, original aggregate
>supply and equilibrium price.
>Suppose now, millions of people were approved for credit cards, and
>their purchasing power increased.
>When they started to charge their puchases on their credit cards, it
>increased aggregate demand.
>As you know, increase in aggregate demand will increase the
>equilibrium price.
>
>Why do we need to quantify M? It should be enough to demonstrate the
>general relationship between general level of prices, aggregate demand
>and aggregate supply.

We don't need to quantify M if we don't try to argue that MV = PT
proves that P is a function of M. But that's exactly what you have
been doing.

>Increase in money supply as a result of using credit cards
>will increase aggregate demand in the economy,
>and it will increase general level of prices.
>Increase in aggregate supply will reduce general level of prices.

There is currently about a trillion dollars of credit not actually
used in credit cards in the US. That doesn't mean there is a trillion
dollars worth of aggregate demand. Aggregate demand refers to the
decision to buy, not the means to pay.

For example, Japan has suffered from low aggregate demand for over a
decade in spite of the availability of credit at almost zero interest
rate. The government has been unable to stimulate much spending there
in spite of flooding consumers with money.

During the Great Depression, people hoarded currency out of fear of
the future. There was a sharp increase in currency relative to bank
deposits, but aggregate demand suffered badly.
>
>My point is that to fight inflation, we should increase aggregate
>supply,
>not interest rates.

Do you see any shortage of goods and services in the US? Most store
shelves are bulging with merchandise. We have not had a shortage of
supply in goods and services since perhaps World War II.

Price inflation is seldom caused by inadequate supply. Shortages on
specific items can drive up their prices, but that is not what we mean
by inflation. And usually those shortages don't last long.

> What is your opinion about interest rates?
>Do we need higher interest rates?
>Increase in interest rates will discourage production, reduce
>aggregate supply, and in the long run will result in inflation caused
>by shortage of goods.

We need somewhat higher interest rates, mainly to slow the rate of
increase in asset prices, particularly real estate prices.
>
>First, let's discuss if we agree about the direction of equilibrium
>price when there is a shift in either aggregate demand or aggregate
>demand.

Yes, but not aggregate demand as you are using that term.

>Then if we agree that new purchasing power created by increased line
>of credit will increase aggregate demand.

Increasing the line of credit will not have much effect on aggregate
demand. As noted above, there is an enormous unused line of credit in
people's wallets today.

>After that we can discuss if "In fact the money supply as usually
>defined grows as a function of prices rather than vice versa."

See my article http://wfhummel.cnchost.com/inflation.html

Relevant Pages

  • Re: Rolling bubbles
    ... >>Increase in money supply as a result of using credit cards ... >>Increase in aggregate supply will reduce general level of prices. ... > There is currently about a trillion dollars of credit not actually ... > dollars worth of aggregate demand. ...
    (sci.econ)
  • Re: Rolling bubbles
    ... >>let's investigate what causes a general level of prices to rise. ... >>and amount of goods chasing money. ... Suppose, there was original aggregate demand, original aggregate ...
    (sci.econ)
  • Re: Rolling bubbles
    ... >> M varies from day to day and week to week, yet prices remain pretty ... > Suppose, there was original aggregate demand, original aggregate ... > When they started to charge their puchases on their credit cards, ... > and it will increase general level of prices. ...
    (sci.econ)
  • Re: HUO Fish Tales w/ NOS plastic set--$3000
    ... coin drop out of any pinball machine on location when it was new, ... slump, since some of the potential buyers are not playing pinball, or ... the prices see an upswing. ... aggregate demand may shift as the buyers' age increase. ...
    (rec.games.pinball)