brightsparkey

Your argument with each other is a distraction. The point you are arguing about is the behaviour of people in particular, but my OP is about the overall situation averaged at a country level. Try to stick to the topic, please. M4 isnt just $$ in cash - its all monetary instruments. If you look at 'real estate' (property) prices, they track GDP growth/ M4 growth rather well, demonstrating that the 'value' of property is largely fixed in 'real' terms by that ratio, at least in the UK. As I see it the concept is rather simple. if GDP increases so there is more stuff created/purchased/used , and if no money is 'printed', then then prices must fall to accommodate the 'purchase' of the extra product. For money to represent 'value', then the money supply must expand to cover the increased GDP so each $ or £ can buy the same amount of stuff. When balanced there is no inflation as the value stays fixed. Governments who operate the banking system's supply of money try to manage the supply to keep a fixed inflationary pressure as its to their advantage. They do this by 'printing' more money than required by GDP growth. The result is an 8 fold decrease in 'value' (in the UK) of the currency since about 1984. The key thing is that Value isn't Price. Government inflation figures demonstrate this admirably where the 'basket' contains things that are getting cheaper, mostly due to technological reasons. But the real value of money is reflected in the more broad cost of living (including housing) and of doing business.

I recently read an interesting article about the true measure of inflation, and given that the official government CPI and RPI figures always seem so unreliable, what with gerrymandering of the basket etc. finding a more fundamental concept of inflation was interesting. The formula was basically: GDP growth - M4 growth = inflation on the basis that money supply and GDP should go hand in hand if money is to maintain its value and that any deviation in the money supply would result in inflation. The supposition is that prices as such are irrelevant as they are set by what people will pay,and that the value of money as a medium of exchange is what's of interest. Its simple and there is some rationale behind it and the resulting figures tally well with my perception of past prices etc. over a long span. but is it a reasonable concept - how legitimate is the theory behind it? Now I know that this is at odds with traditional measures of inflation invariable based on a 'basket' of goods - it seem to me that this is leaving out whole swathes of the economy such as property, investments and paper instruments. This subtractive approach seems to be more in line with aims of politics than measuring the value of money. thanks for any thoughts.