Re: Do I understand (the basics of) inflation correctly?
From: Bill (xxx_at_yy.zz)
Date: 02/09/05
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Date: Wed, 09 Feb 2005 02:19:17 GMT
"The Trucker" <mikcob@verizon.net> wrote in message
news:cubovs018sc@news1.newsguy.com...
> Bill wrote:
>
>>
>> <xyzer@hotmail.com> wrote in message
>> news:1107823142.865537.213970@c13g2000cwb.googlegroups.com...
>>> Ok, here's the way I was taught to think about inflation in
>>> macroeconomics class. Tell me if I basically understand things
>>> correctly:
>>>
>>> Inflation is a monetary phenomenon caused by increases in money supply
>>> growth -- period. This does not mean average prices cannot rise for
>>> other reasons. Thus, just because average price levels rise, this does
>>> not necessarily mean the increasing prices were caused by an increase
>>> in money growth and thus inflation.
>>>
>>
>> That's not normally the definiton used for inflation. It is typically the
>> level of prices.
>>
>
> The money growth thang is more correct than the price rise thang. See
> below.
>
It is hard to argue with a definition. You are arguing that the definition
should be different.
>>> Second, I was taught inflation in and of itself is actually, and all
>>> else equal, not generally a "problem" on a macro scale. That is, in
>>> general, wherever you can find someone who's hurt by
>>> higher-than-expected inflation, there will also be someone in that
>>> exact case you find who will have been helped by it. The classic
>>> example is the person paying on a fixed mortgage. If you assume that
>>> higher-than-expected inflation benefits the person paying on the
>>> mortgage, since he gets to use dollars of increasingly lesser value to
>>> pay it off, then you also assume the person receiving the money of
>>> lesser and lesser value is worse off. Of course, a nominal interest
>>> rate can be approxmiated by adding the real interest rate plus the
>>> expected rate of inflation (plus other things), so that generally
>>> speaking people try to protect themselves from losing because of
>>> inflation. But some people do lose and some people win when inflation
>>> rises more than expected. It's just that on a macro scale it all evens
>>> out. It becomes I guess sort of like a zero-sum phenomenon. That is,
>>> when you sum the benefits and the losses of the people of the world, it
>>> ends up being zero. Of course, if you consider the places where there
>>> is incredibly rapid inflation or changes in inflation, where people
>>> constantly have to spend significants amount of time to keep up with
>>> the changes, then this would be a cost to society to consider. But
>>> this kind of cost is really something besides inflation in itself, and
>>> generally not significant in most countries. Of course, inflation can
>>> be seen to go along with many economic troubles in the world, but
>>> inflation generally is not the root cause of the problems, even where
>>> it might appear to be.
>>>
>>
>> I would think in an economy with run away inflation every one is hurt just
>> because it disrupts the economy - not that you can't keep up but you can't
>> do business. On a country wide scale, I'm pretty sure it is not true
>> either. Take the the example of gas prices rising due to arabs increasing
>> the price of oil. They win, we lose.
>>
>> Bill
>
> 1. Gas is not actually tied to oil as closely as you seem to think.
>
> 2. An increase in the price of either one is not necessarily
> a _cause_ of or a sign of inflation. (this is why rising prices
> are _not_ synonymous with inflation and why inflation is not
> just rising prices)
>
> 3. If more money is not supplied to the economy then the prices
> will remain constant overall and those things that use the most
> oil will cost more and those that don't will get cheaper or they
> will disapear.
>
Could you explain that. Why would, say, something like logs used for heating
get cheaper if oil prices go up? Or water?
Bill
> It is appropriate to add more money thus balancing the rising
> prices between established money and labor. The prices rise
> and wages rise somewhat. The holders of money lose a little
> and the workers lose a little and the rentier (the oil "owner")
> does not win as much as he otherwise would have. The price
> of oil is higher in dollars but the dollars are slightly less
> "valuable" than they were.
>
> http://GreaterVoice.org./econ/glossary/inflation.php
>
>>> Would most people agree with this in general or pretty much call this
>>> analysis way too general (or completely flawed) to apply to the real
>>> world? Do most economists think this way in general?
>>>
>
> --
> "I know no safe depository of the ultimate powers of society but
> the people themselves; and if we think them not enlightened enough
> to exercise their control with a wholesome discretion, the remedy
> is not to take it from them, but to inform their discretion by
> education." - Thomas Jefferson. http://GreaterVoice.org
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