Re: Money and Inflation
From: The Trucker (mikcob_at_verizon.net)
Date: 07/13/04
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Date: Mon, 12 Jul 2004 19:35:34 -0700
William F Hummel wrote:
> Money and Inflation
>
> Price inflation is commonly thought to be caused by "too much money
> chasing too few goods." The general price level is indeed correlated
> with the money supply, but _correlation_ should not be confused with
> _causation_. The causes of inflation are many and varied. In a modern
> economy, prices are seldom driven by an excess of money. More often,
> an increase in the money supply is caused by an increase in prices.
If there is no more money then increases in the price of one thing are
offset by decreases in the price of other things. It may be that the
economic output of the USA would suffer for this but the point remains.
Increases in the money supply are normally needed to offset the
undesirable effects of the more anal retentive players in the
system. Whether this increase is or is not inflationary, or whether
inflation is necessarily some great evil is a different matter.
> Credit Money versus Commodity Money
>
> It's easy to understand how the money supply drives prices when a
> commodity like gold is used as money. In the gold rush days,
> California was basically on a barter system in which gold traded for
> goods and services. Gold was an asset for the holder and a liability
> for no one.
Not strictly true but very close: Those that held gold were obligated
to see to its protection. The protection of this gold was an
obligation.
> As more gold was mined by private enterprise, monetary
> wealth in the California increased. Indeed it increased much faster
> than the available supply of goods and services, so prices in terms of
> gold naturally rose.
Yep. Too much money chasing too few goods.
> In a modern fiat money system, the _net_ monetary wealth of the
> private sector is due to government spending.
The money that is created by government and spent in the course of
governing and not yet taxed back out of the economy is the Base Money
of the nation. As our illustrious borrow and spend Bush Regime
refuses to tax, the amount of money grows and grows. I define
T-bills and other government backed bonds as money. All of these
are a liability of our government and taxation is the only method
be which that liability can be discharged.
> Currency issued by the
> government has replaced gold as the monetary base. Base money derives
> its value from the fact that it is required in the payment of taxes.
There was a time when I believed this. I still do, but tribute also
plays a major part. The value is forced. If the oil sheiks understand
that they will be sheik no more unless they take dollars for oil, then
they will be taking dollars for oil. Our Republican government will
manufacture whatever Devils it might need to replace those who do not
participate in this scheme to preserve the international value of
dollars.
> However currency is a minor part of the money supply. Most of the
> money we use is credit money borrowed from the banking system, and
> exists only as bank deposits. Bank deposits retain value because the
> government requires them to be converted into currency on demand.
Most people pay their taxes with a check. Any discussion of reserve
notes and such is just a distraction. I've never understood why you
insist on this obfuscatory stuff about paper notes.
> A bank loan creates both an asset and a liability, and therefore does
> not result in net monetary wealth.
The very term "monetary wealth" is misleading. Money is the means by
which transactions are accounted and the means by which we keep track
of how much labor or fruits of labor is/are owed to one another.
> The borrower receives a deposit he
> can use as money, but he owes the bank the principal as well as
> interest payments. Thus credit money behaves differently from base
> money, whether currency or gold. The growth of credit money depends
> on the demand for bank credit and the willingness of banks to lend.
> There is no practical limit to the supply of credit, but all credit
> comes at a price. To understand the relation between money and
> inflation today, we must therefore determine what creates demand for
> credit.
Aside from the need to pay the bookkeepers there is no real reason
to charge anything at all for establishing and servicing a loan. We
basically have an agreement between a buyer and a seller. The
seller is accounted the dollar value of that which he is selling
by a government backed financial intermediary (the bank). The
seller can use this accounted value in any transactions he may
wish to conduct. The buyer agrees to devote a certain amount of
his future production (the fruits of his labor) to the account of
the financial intermediary. Why you would think there should be
some "control" over the number and amount of free market agreements
is to me, a real mystery.
http://GreaterVoice.org/econ/credit.php
> Effects Related to the Price of Credit
>
> The amount of money created is a function of many economic variables,
> including the price of credit which the central bank controls. The
> central bank can easily increase the price of credit enough to make
> borrowing unprofitable, stifle growth of the money supply, and even
> reduce total economic output. That would result in increased
> unemployment and possibly price deflation.
If the bank must stomp all over the economy to stop inflation while
fiscal policy could be used instead in such a way as to preserve a
functioning economy then the central bank should insist on the
fiscal solution by refusing to tighten up on credit. As I have
said: There should not be any limit to amount of agreements between
buyers and sellers in a free market. The idea that the holders of
money should benefit from these agreements is ridiculous. If we
wish to support the value of the dollar then fiscal policy is
the proper tool. Simply stated: government must spend less or tax
more.
> Conversely the central bank can easily reduce the price of credit, but
> the results are not symmetric. When the economy is operating well
> below capacity, cheaper credit will normally increase output and
> employment. The resulting growth must be supported by an increasing
> amount of credit over which the central bank has no direct control.
It is quite proper that the bank should not have control over the
amount of credit in the economy. The "price" of money should be
derisory at best and the value of money should be held constant or
gradually decreasing (2% per annum service charge for protecting
people's savings) by fiscal policies. Please recall that it is
taxation that gives money its value. Screwing around with the
"price of credit" is simply harmful to the economy.
> Other factors may discourage borrowing in spite of the availability of
> cheap credit. However when economic growth is achieved, it normally
> occurs without significant price inflation up to the point of nearly
> full employment. Thereafter the effects of cheap credit will
> generally lead to higher prices, due largely to the increasing cost of
> labor near full employment.
This is somewhat true but overstated. If full employment causes
higher prices then we should have higher prices. If we wish to
prevent higher prices then we should raise taxes on privilege
(land ownership , IP rights, spectrum leases, etc) and burn the
money in a furnace.
> Demand for Credit and its Effects
>
> The demand for credit arises mainly out of the desire to finance (1)
> new enterprise, (2) consumer spending, or (3) speculative investment.
> Let's briefly examine how each of these affects the money supply and
> prices.
>
> (1) A new enterprise, or an existing enterprise planning to expand
> production, requires funds well ahead of the expected return from
> sales. It is often financed with credit money, and the whole process
> has little or no effect on current prices. As the economy grows,
> however, the amount of credit must grow in support. Indeed if credit
> were curtailed, the economy would stagnate for lack of adequate
> liquidity.
This is not necessarily the case. There is currently more than adequate
money (T-Bills and such are a form of money), or liquidity in the
monetary system of the USA. That people would use this money to
address new enterprises or to expand current enterprises is merely
a matter of stopping interest payments to people for putting their
money in a government backed piggy bank.
> (2) Money borrowed for consumer purchases implies the availability of
> existing products whose prices have already been set by the sellers.
> Such borrowing increases the money supply without affecting prices.
> However where supply falls short of demand, prices on those consumer
> goods will generally rise, at least temporarily. But the shortages
> tend to occur in isolated cases and are usually short-lived. They
> seldom have a lasting effect on the general price level.
This is correct. There should be no "price of money" in these
transactions. There is only a bookkeeping and enforcement fee.
> (3) Money borrowed for speculative purposes mainly affects asset
> prices, particularly stocks and real estate. If the borrowing cost is
> set too low for an extended period, asset prices could become
> inflated. This creates a money illusion that can lead to a relaxed
> attitude by consumers toward prices, and result in a general increase
> in the price level.
Here again, this should be done out of existing money and new money
need only be created if the holders of money are exacting too much
of a toll.
> Effects of Government Spending
>
> Government deficit spending means borrowing from the private sector.
> Such borrowing and spending has no direct effect on the amount of base
> money, though it does increase the net financial wealth of the private
> sector in the form of Treasury securities. However, contrary to
> conventional wisdom, there is no significant correlation between
> government deficit spending and price inflation.
This is absolutely incorrect as a matter of objective reality and
as a matter of your forgoing statement concerning taxation as that
which gives money its value. And "the private sector" turns out to
be the banks. The banks create the new money that the government
needs and then the government does not reclaim the money via taxation.
The money is "sterilized" by the sale of government securities thus
holding prices at bay while dramatically increasing wealth disparity
in this country. Essentially: Those who got the tax breaks are the
purchasers of the T-Bills. Instead of taxing these beneficiaries of
government services (the owners of the means of production), our
Republican government creates a debt owed to these beneficiaries
which must be paid by the productive citizens in the USA (those
who do not own the means of production).
> If a government is unable to recapture its spending through taxes and
> bond sales, the base money supply will increase. In severe cases,
> which usually occur only as a result of insurrection, corruption, or
> war, governments have resorted to printing money to spend. If
> continued long enough, that can become a hyperinflation. Such
> pathological cases are quite different in origin and character from
> the low level inflation that exists in most fiat money systems today.
The difference between what the Bush Regime is currently doing (using
the banks to print money) and just printing the money directly is that
the created money is not considered to be part of "base money". In
actual fact, of course, the T-Bills are a non liquid part of "base
money".
> A Case History - Inflation in the 1970s
>
> During the 1970s, the U.S. experienced a significant inflation in
> which the consumer price index rose at an annualized rate of 7.5%.
> However M1 rose at an annualized rate of only 6.5%. Clearly something
> besides an excess of transaction money drove that inflation.
>
> A major factor was the roughly ten-fold increase in the price of oil
> resulting from two oil embargoes by OPEC. That led to a sharp
> increase in material costs in several important industries that had to
> be passed on as higher consumer prices. However that was not the only
> important cause of the inflation during the period.
>
> Key industries were dominated by powerful corporations, some of which
> had the clout to set prices. This in turn enabled strong unions to
> gain generous wage contracts, sometimes well above the growth in labor
> productivity. COLAs in the contracts added a positive feedback effect
> on wage growth. The benefits achieved by unions were mainly in the
> manufacturing sector, but gradually spread to the service sector.
>
> With labor the main cost in most consumer items, the result was a
> cost-push inflation that became a serious wage-price spiral.
> Increasing wages enabled consumers to absorb the rising prices imposed
> by producers. These factors, together with the demands for expanding
> production, required a larger money supply to support it. As
> profit-seeking enterprises, banks were more than happy to lend to
> creditworthy borrowers, and so the money supply grew.
>
> In summary, there are numerous forces that apply upward pressure to
> prices which are not driven by money supply growth. Global
> competition now limits the power of many domestic producers to set
> prices. But less competitive sectors remain and contribute to a long
> term upward bias in prices. As prices rise, the money supply growth
> must necessarily keep pace.
>
> William F Hummel
This last part is actually not bad. We forgot to mention the squandering
of real output on the Vietnam war and the abandonment of the gold
standard but, all in all, not a lie. I think it important to understand
that the central bank is not to be screwing around with the currency but
to "smooth out" the effects of real world price gouging and the like.
That prices would rise due to the rise in the price of oil and that
dollars would become less valuable is reasonable and proper. This
devaluation of saved up money is needed to balance the ill effects
visited on the society as a whole by the real world increase in the
price of oil. Labor and money holders will both lose to the oil
sheiks and the proper conduct of monetary policy is to insure even
handedness.
-- http://GreaterVoice.org (a work in progress)
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