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"full capacity" causing "inflation"

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airborne

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One of my current subjects is "financial market economics" - anyway, there are so many things in this subject which just seem... wrong.

So if you guys could help me out, it would be much appreciated.

...

"4. If the economy is already operating close to full capacity (as indicated by tight capacity utilization measures and a very low unemployment rate), the acceleration in domestic demand will put upward pressure on the prices of factors of production, or wages in general"

OK. Now my first problem with this is "full capacity", what exactly is "full capacity". Is this implying that human capital has a "full capacity" to its productivity?

"5. Unless demand growth is restrained by policymakers, the inflationary pressures could spill over into actual wage and price increases - that is, to inflation in general."

Whoa, now this is quite a jump. So this demand growth can never be met? and inflation will last forever?

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This is just standard Keynesianism. It only makes sense if you believe that perception determines reality.

OK. Now my first problem with this is "full capacity", what exactly is "full capacity". Is this implying that human capital has a "full capacity" to its productivity?

It's referring to full employment. The whole idea is absurd because there is no such thing as permanent unemployment in a free market. It is created by various forms of interventionism. "Tight capacity" is caused by the government's manipulation of the interest rates to force investment beyond what the savings rate can sustain. (See Austrian Business Cycle Theory)

So this demand growth can never be met? and inflation will last forever?

This is ridiculous of course. Inflation is the rate at which the growth in the money supply exceeds the increase in economic output.

Edited by softwareNerd
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there is no such thing as permanent unemployment in a free market. It is created by various forms of interventionism.

So this concept of permanent unemployment is possible in a mixed economy? and I still don't get why this matters. Even IF everyone is employed aren't new ideas developed?

I'm just learning my texts and getting more and more confused. Why do they insist on calling all price increase inflation and then doing something about it through reserve bank policymakers!?

Also I noticed printing money out of thin air is called "injecting liquidity", apart from making everything more expensive what does this actually achieve?

Edited by airborne
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As I said, Keynesian economics only makes sense if you presume that perception determines reality. The theory is too convoluted to explain or refute on an Internet forum.

So this concept of permanent unemployment is possible in a mixed economy?

Only in a mixed economy do you get perpetual business cycles. Keynes would like you to believe the opposite - that without interventionism, the market is inherently unstable.

Why do they insist on calling all price increase inflation and then doing something about it through reserve bank policymakers!?

So they can obscure the fact that central banks are the only entities capably of causing inflation.

Also I noticed printing money out of thin air is called "injecting liquidity", apart from making everything more expensive what does this actually achieve?

It creates a bubble in the short term, and business cycles in the long run.

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Inflation is the rate at which the growth in the money supply exceeds the increase in economic output.

That is not quite correct. Inflation is growth in the money supply, either period as some hold, or (as I hold) by means other than through an increase in the quantity of the objective real value that is physically used as the medium of exchange (ie other than through more silver and gold coins being put into circulation). The amount of economic output has nothing to do with the meaning of inflation, even though growth in that economic output can mask or mitigate some of the price increases and other harms caused by inflation.

It is entirely possible for prices to fall as a result of growth in economic output exceeding growth of the quantity of money, and yet the whole of that monetary growth still be inflationary, because the money supply in this case consists of and is being further pumped up with nothing of real value (through more creation of fiat notes and coins, or relaxation of reserve fractions). Similarly, it is possible for monetary growth to exceed general economic growth and prices rise as a result, yet the monetary growth not be inflation, because the money supply in this case consists of and is being further added to with real value. The first case is theft in various ways, while what's happening in this second case is just a rearrangement of the objective value relationships between all that is tradable in the markets where one of those tradable things is whatever also serves as money. Inflation implies filling with worthless filler (fiat currency) and not the addition of real value (silver and gold).

JJM

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So this concept of permanent unemployment is possible in a mixed economy?

Yes. The actions of government lend themselves to minimum prices that must be paid for labour. There are many ways, such as direct wage controls, giving improper powers to unions and other labour organisations (eg the AMA), controls over profession licencing and numbers of holders, and so on. However a particular minimum price comes about, when the proper market price for that labour is below that minimum then those potential employees who can't provide enough value for money simply wont be employed. This unemployment will persist for so long as that proper market price for labour is below the minimum price. Since price controls and improper powers etc are permanent features of the mixed economy, so too is at least some unemployment.

and I still don't get why this matters.

Because they (governments, unions, agitators et al) want to pretend that intervention can still achieve positive outcomes and not the enormous negative outcomes that people like us point out. They are misanthropic control freaks and can't stand the idea of people being free, so lie about the effects of the lack of freedom in order to stay in power and keep on attempting to enact social engineering.

Even IF everyone is employed aren't new ideas developed?

I am assuming you mean people being made redundant through technological developments (eg new ideas on efficient ways to run factories). No, this does not create permanent unemployment. If the price of labour is free to move up and down then the market prices of each type of labour - and hence both the supply of and demand for labours along with it - will adjust until everyone is employed again to the extent they want (and since new ideas usually means better value for money, people will be better off after a short while). Under laissez-faire it is a temporary thing, a few weeks or so at most - these are the rainy days that people properly ought be keeping some money aside for. The attacks on technology and new ideas that make people redundant are a cover for not facing up to the impracticality of the immorality that is intervention.

Also I noticed printing money out of thin air is called "injecting liquidity", apart from making everything more expensive what does this actually achieve?

At the end of each day, normal banks must settle up with each other all the issuances and deposits of cheques etc for that day. To do this they hold accounts at a clearing house, who tallies up who owes what to whom. The normal banks then pay or receive their net differences with each other through transactions using those accounts. It is into or out of these accounts with the clearing houses that central banks - who are often the operators of those clearing houses - will inject or withdraw liquidity (ie money, as a book entry). How it is done today is open market operations - the purchase (for injection of liquidity) or sale (for withdrawal) of government securities. The action of the central bank in influencing the amount of money that the normal banks have in those accounts then influences what the banks do in the marketplace the next day.

The central banks' intended aims through manipulation of the normal banks depends on the mandate set for the central bank by its government. Some central banks are focussed primarily on interest rates (primarily the rate that the normal banks lend to and borrow from to each other overnight when they don't have enough in their clearing accounts to settle up as above), other central banks want to influence prices indices that are passed off as measures of inflation (mainly the Consumer Price Index), and others still things like trying to maintain full employment (by both credit creation and deliberately using inflation to lower the real cost of labour). In many instances a central bank will have multiple mandates, not just one. Since central banking theory is really all nonsense, what it actually achieves is just what David said it does.

As a technical point, note that "injection of money" today doesn't mean the printing of money, it means the crediting of those accounts by the central bank. It is, of course, still out of thin air - cyberspace, actually, as the central banks just fiddle with digits on the computers holding the details of those clearing house accounts. The printing of notes doesn't happen until some time later, by which time the actual inflation has already occurred through that electronic fiddling. While in the old days the inflation was the printing stage, nowadays the printing is just the conversion of the newly inflated money from electronic form to physical form.

JJM

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I think what your teacher and the theorists he champions are trying to say is that full employment leads to higher demand for goods and services, thereby driving up prices. However, what this leaves out is that by working, those employees are creating more goods and services, thereby driving down prices. And in a capitalist economy, better and better means of production occur as techniques of production improve, so prices, in general, will come down as supply increases more steadily than the demand. Computers are one very good example of this. Mr. Dell, for instance, creates more and more and better and better computers -- even though he hires quite a few workers as he expands -- and yet the prices continue to come down and one gets better performance out of the computers.

That is, the Keynesian's and others like him, have no conception of production and what it means. Those people going to work are not just taking their portion from a static pie, they are creating pies. And the pie is increasing as more and more people got to work and earn their wages by producing products and services. And if one just looks at services, as more and more people are out there producing services, the prices of those services are going to come down due to competition.

So, those economists are basically saying that wealth, goods and services are static, rather than created -- literally created, because they wouldn't exist without people going to work and making them.

On a more personal level, he is saying that you get your paycheck without creating anything in return for it, that you are not earning it, which is bogus.

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  • 1 month later...

so basically what is happening is that during the 90's the dollar was strong. Therefore when the money supply was increased, the money stayed in the stock market and led to an increase in production which nulified the increase in the quantity of money. This led policymakers to conclude that monetary inflation had nothing to do with price increases. However now that the dollar is weak, the newly printed money isn't staying in places that increase productivity and instead going into hard assets. As a result the govt is increasing the money supply thinking their will be no price inflationary consequesces. So monetary inflaton has different consequences depending on the context of the currency's perceived strength or reputation. This is why gold went down in the 90's but is now going up, even though the govt was increasing the money supply the whole time. Is this correct?

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  • 3 weeks later...

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