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moralist
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Am I wrong to assert that inflation or hyper- inflation results from consumer goods(capital translated into goods brought to market to realize profit) become scarcer due to liquidating inventories and general slow down in production as a whole, and the nominal costs of those goods per unit of "purchasing power" see a general rise as assumed purchasing power decreases?

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Am I wrong to assert that inflation or hyper-inflation results from consumer goods(capital translated into goods brought to market to realize profit) become scarcer due to liquidating inventories and general slow down in production as a whole, and the nominal costs of those goods per unit of "purchasing power" see a general rise as assumed purchasing power decreases?
Severe shortages across the board *can* cause prices of all goods to rise. One sees this during war-time, but governments usually respond by rationing goods to slash "demand". More typically, prices rise because of an increase in the supply of money, money-substitutes and credit outpacing both the supply of real goods and the demand to hold money as a store of value. ("Hyper" inflation is more than just very high price-rise. It signifies a major political event: the crossing of some point, where people actually lose faith in a fiat currency: as in Weimar Germany or Zimbabwe.)

The major reasons price-rises have been very tame in the U.S. is that the explosion of government-credit has been countered by a reduction in private credit. Meanwhile, the post-bust caution has meant an increased demand to hold money and money-substitutes. So: fairly tame growth in supply of money and money-like aggregates have been coupled with an increased demand for the same.

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Severe shortages across the board *can* cause prices of all goods to rise. One sees this during war-time, but governments usually respond by rationing goods to slash "demand". More typically, prices rise because of an increase in the supply of money, money-substitutes and credit outpacing both the supply of real goods and the demand to hold money as a store of value. ("Hyper" inflation is more than just very high price-rise. It signifies a major political event: the crossing of some point, where people actually lose faith in a fiat currency: as in Weimar Germany or Zimbabwe.)

The major reasons price-rises have been very tame in the U.S. is that the explosion of government-credit has been countered by a reduction in private credit. Meanwhile, the post-bust caution has meant an increased demand to hold money and money-substitutes. So: fairly tame growth in supply of money and money-like aggregates have been coupled with an increased demand for the same.

Do you agree that the potential for hyperinflation (or just high inflation) still exists? What if the banks unleash the hordes of cash they are sitting on or the government prints excessive money to cover debts?

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Do you agree that the potential for hyperinflation (or just high inflation) still exists? What if the banks unleash the hordes of cash they are sitting on or the government prints excessive money to cover debts?
"Potential" sure exists in the sense that people end up doing all sorts of stupid things. This "trillion dollar" coin is an idea that almost nobody takes seriously (even Krugman wants to use it only as a political tool). Yet, there is a small minority of economists who are discussing the pros and cons. History shows that people can roll themselves into all sorts of stupidity.

It's likely that the U.S. will monetize a big part of its debt some day in the future, but there is no sign of it on the horizon. As for banks, what do mean by "unleashing" the cash? People aren't really queuing up for loans. Instead, they're trying to pay them back as much as they can.

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Severe shortages across the board *can* cause prices of all goods to rise. One sees this during war-time, but governments usually respond by rationing goods to slash "demand". More typically, prices rise because of an increase in the supply of money, money-substitutes and credit outpacing both the supply of real goods and the demand to hold money as a store of value. ("Hyper" inflation is more than just very high price-rise. It signifies a major political event: the crossing of some point, where people actually lose faith in a fiat currency: as in Weimar Germany or Zimbabwe.)

The major reasons price-rises have been very tame in the U.S. is that the explosion of government-credit has been countered by a reduction in private credit. Meanwhile, the post-bust caution has meant an increased demand to hold money and money-substitutes. So: fairly tame growth in supply of money and money-like aggregates have been coupled with an increased demand for the same.

So market forces(the total economic activity between individuals in a given 'economy') respond to government interventions(or dictates of individual power brokers) to bring about an almost artificial change in pricing? And these changes have been shown to vary in intensity given different specific historical events?

Or do you mean that economic theory can accurately predict when and to what extent such changes in pricing will occur? The variables in pricing are somehow under a predetermined schematic(of economic activity?)

Edited by tadmjones
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Crow, that's the best analysis I've read on here. I'm interested in why you think PK's analysis is wrong in the long run? ie. All QE and trillion dollar coins etc can be destroyed if necessary once we exit the liquidity trap. And debt incurred for stimulus will shrink as a proportion of GDP once the economy is growing healthily again.

Well, PK is wrong in a couple of ways.

First, he's a socialist, which means he's just wrong :-). He takes the fact that the government has a right to take money from citizens as unquestioned. Note how this is the underpinning of all stimulus-based economics.

As for economics specifically, I think that in the long run, we'd end up privately building structures which played similar roles as massive government stimulus. The liquidity trap is something which could be gamed by smart people with a whole lot (a whole hell of a lot) of money. The long-term certainly necessary to store that much capital for such an occurrence would take a pretty big sea change though.

And to be sure, long term PK (and/or his academic equivalents) is right if things don't change and we have a mixed economy forever. PK and his ilk are essentially "mixed economy optimizers". Insofar as we have a mixed economy, they will be "right" about their predictions, or certainly more right than Austrian dreamers.

(Oh, and I agree with sNerd that--even with what little I know about macro--that the coin and QE and debt are all very different things and have different implications).

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So market forces(the total economic activity between individuals in a given 'economy') respond to government interventions(or dictates of individual power brokers) to bring about an almost artificial change in pricing?
People respond to the facts around them, including to government intervention. A huge inflow of South American precious metals into Europe once meant the value of such metals (which were used as money) fell, and money-prices of most other things rose. If the changes are something being enforced by government -- something that freely-acting people would not otherwise do, then one could term them "artificial".

Or do you mean that economic theory can accurately predict when and to what extent such changes in pricing will occur?
Economics is about human behavior. So, it is impossible to predict with precision. Ten years ago, one might have said that Egyptians would one day tire of their government, and throw it out to establish something different. However, there is no way one could be certain that this would happen in one's lifetime. Also, there's no way one could be certain what the replacement would be: a replacement secular dictator, an Iranian-style Islamic one, or some type of democracy with all sorts of mixed elements.

When it comes to money, it seems that slightly better predictions ought to be possible, for two reasons: firstly, because we're talking about an area where privately people broadly act with a degree of rationality; secondly, because the data are often measured numerically. We know, however, that people can often act on unjustified hopes and fears and with a short-term bias for years. So, even in a free-market, things are tough to predict. A mixed economy makes it more difficult: a mixed-economy means that decisions are not being made based on self-interest. So, now we're talking about historical prediction: will a particular regulator be appointed to a particular post? What motivations play on Mr. Bernanke? Will the U.S. voter decide he wants to do something to lower the debt he leaves to his kids? it is impossible to predict those things with any degree of certainty.

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Will the U.S. voter decide he wants to do something to lower the debt he leaves to his kids?

That statement taken to a micro level... most parents are leaving their own personal debts to their kids.

it is impossible to predict those things with any degree of certainty.

I agree. Which makes living by the fiscally sound principles of Capitalism the best way to consistently prosper regardless of any political or economic cycle.

Edited by moralist
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There are a whole lot of economists, ranging from Austrian, Libertarian, Monetarist, and Keynesian who have been right about the U.S. (and the world) going through a period of deflation. This is not something that Krugman came up with: the analysis has been around for many decades. Further, many of these economist who have been right about deflation were right about the housing bubble bursting too, far before Krugman brought himself to accept it.

I would like to see some links to Austrian, Libertarian, and Monetarist economists who were predicting in 2008-9 (in the midst of bailouts and printed money) that we would have low and stable inflation as a result.

Also, even if you can provide such links (which I doubt), it matters why they predicted low inflation. ie in a Keynesian liquidity trap model low inflation is predicted as a result of the model. But it is difficult to see how an Austrian model could predict low inflation after bailouts and QE. Anyone can predict anything, what matters is that a person has a working model that makes predictions that can be tested against reality.

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Hint: The reason such large increases in the base do not mean hyperinflation is because the economy is in a liquidity trap: http://en.wikipedia.org/wiki/Liquidity_trap Anyone worth listening to on economics has adjusted their models to incorporate this theory.

There is no other way to hold the above graph and the current inflation rate of 1.8% simultaneously in your mind. Ie to not acknowledge a liquidity trap is to engage in massive cognitive dissonance. So do the smart thing and adjust your thinking to reality!

PS: If anyone questions that the CPI is being miscalculated or manipulated to hide hyperinflation then that really does take the dumb award of the day, so don't even bother.

This is just not true and I do think the CPI is false. Government calculations are kept low on purpose because they don't want people to know prices are rising. Why? because if people saw the inflation (and most people do see inflation because they can buy significantly less with their dollar), the government wouldn't be able to continue QE and stimulating the economy. So when economists point out that QE will cause inflation, Bernanke and the liberals (and republicans) will point to the CPI and make them look stupid to people unfamiliar with economics.

QE is the inflation. The fact that inflation isn't showing up as high as it should be (as Austrians would normally predict) is because of other factors like the fact that foreign countries are investing all of their dollars in buying our debt. That is where the inflation is showing up - in the bond market. But if they were to ever cash those bonds in and a large inflow of US dollars came back into the country, we will see significant inflation. This will happen eventually as countries lose belief in the strength of the dollar and the us's credit rating drops even lower.

By the way, making an argument from intimidation - I.e. "you are dumb if you think this so don't bother " - is hardly an effective way to have a debate.

Edited by thenelli01
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This is just not true and I do think the CPI is false. Government calculations are kept low on purpose because they don't want people to know prices are rising. Why? because if people saw the inflation (and most people do see inflation because they can buy significantly less with their dollar), the government wouldn't be able to continue QE and stimulating the economy. So when economists point out that QE will cause inflation, Bernanke and the liberals (and republicans) will point to the CPI and make them look stupid to people unfamiliar with economics.

QE is the inflation. The fact that inflation isn't showing up as high as it should be (as Austrians would normally predict) is because of other factors like the fact that foreign countries are investing all of their dollars in buying our debt. That is where the inflation is showing up - in the bond market. But if they were to ever cash those bonds in and a large inflow of US dollars came back into the country, we will see significant inflation. This will happen eventually as countries lose belief in the strength of the dollar and the us's credit rating drops even lower.

By the way, making an argument from intimidation - I.e. "you are dumb if you think this so don't bother " - is hardly an effective way to have a debate.

There are so many things that you have wrong here, but you seem like a good guy. Just to focus on one of your comments regarding the accuracy of CPI - all independent measures of inflation (such as The Billion Prices Project - http://bpp.mit.edu/usa/) match CPI nicely. If you can point to a well made alternative measure of prices I am all ears, but if you only have a conspiracy theory then I can't take your comment seriously.

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But if they were to ever cash those bonds in and a large inflow of US dollars came back into the country, we will see significant inflation.

When foreigners sell US bonds and then repatriate their money, that is an outflow of US dollars not an inflow.

QE is the inflation.

Inflation is a general rise in the level of prices. QE is the creation of new money by the central bank which is sold in exchange for financial assets. If we are to have a meaningful discussion words have meanings that are distinct. What you meant to say was that QE causes inflation? Well in my model that depends on the economic conditions. With today's conditions QE does not cause inflation, and any model that says otherwise has been proved wrong. This is the importance of having reasons behind your predictions, ie a model that can be tested against reality.

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Inflation is a general rise in the level of prices. QE is the creation of new money by the central bank which is sold in exchange for financial assets.

What do you mean by 'new money'? A different kind, or adding more and if so how does someone add money without creating wealth?

Edited by tadmjones
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You say: "Inflation is a general rise in the level of prices." What causes the general rise in the level of prices? Inflation? You state that the cause of inflation is not QE. What causes inflation?

Does gasoline cause fire? Yes. No. Depends.

I've had a tank of gas sitting in my garage for years. There has been no fire there.

QE can cause inflation if there is sufficient aggregate demand. If there is not, then there will be no inflation.

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Does gasoline cause fire? Yes. No. Depends.

I've had a tank of gas sitting in my garage for years. There has been no fire there.

QE can cause inflation if there is sufficient aggregate demand. If there is not, then there will be no inflation.

What are the factors within an economic system that would cause lower demand going forward? And if lower demand is experienced would not prices fall? Are we currently experiencing lower levels of demand with at least consisitent or slightly higher prices , isn't that in indication of an inflationary influence?

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Kate87, you say: "Inflation is a general rise in the level of prices." What causes the general rise in the level of prices? Inflation? You state that the cause of inflation is not QE. What causes inflation?

Does gasoline cause fire? Yes. No. Depends.

I've had a tank of gas sitting in my garage for years. There has been no fire there.

QE can cause inflation if there is sufficient aggregate demand. If there is not, then there will be no inflation.

I should have specifed to whom the question was directed.

The loaded guns I've kept around my house have not discharged within my home either.

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What are the factors within an economic system that would cause lower demand going forward? And if lower demand is experienced would not prices fall? Are we currently experiencing lower levels of demand with at least consisitent or slightly higher prices , isn't that in indication of an inflationary influence?

Absolutely. The "natural" state of things would be a pretty good clip of DEflation against commodities like gold and silver, modulo speculation on any particular instrument, modulo the scarcity and practical usefulness of those commodities changing the supply and demand curve for them.

As for what factors cause lower demand across the board, well, it could be a million things. Clearly in this case a certain set of dynamics e.g. the housing bubble set off a down turn. I don't think there's any more abstract answer to that though, any more than the answer to, "what causes a business to fail".

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Absolutely. The "natural" state of things would be a pretty good clip of DEflation against commodities like gold and silver, modulo speculation on any particular instrument, modulo the scarcity and practical usefulness of those commodities changing the supply and demand curve for them.

As for what factors cause lower demand across the board, well, it could be a million things. Clearly in this case a certain set of dynamics e.g. the housing bubble set off a down turn. I don't think there's any more abstract answer to that though, any more than the answer to, "what causes a business to fail".

Are you buttressing Kate's points about economic theory proving null effects of inflationary fiscal/monetary policy, or equating the rampant degree of governemnt intervention in the economy with what keeps a mom'n'pop in the black, or both?

Edited by tadmjones
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When foreigners sell US bonds and then repatriate their money, that is an outflow of US dollars not an inflow.

No. There is a trade deficit - we are transporting dollars overseas for cheap goods and foreigners are taking that money and buying our debt. When they sell their bonds (which will happen when people lose confidence in the dollar and our credit rating goes down further), they will want to spend their dollars to get actual goods. Americans will be competing with the foreigners to buy goods and prices will rise. It is an inflow. This is similar with the QE - once the extra money actually enters the hands of the consumers, we will see the inflation.

Edited by thenelli01
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Are you buttressing Kate's points about economic theory proving null effects of inflationary fiscal/monetary policy, or equating the rampant degree of governemnt intervention in the economy with what keeps a mom'n'pop in the black, or both?

I'm not exactly sure what you mean by the first part of that question--and I have absolutely no clue about what you were asking in the second part.

I don't think our current downturn had that much to do with monetary policy, if that's what you are asking. It played a part, yes, but it certainly wasn't the biggest driver.

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Kate87, you say: "Inflation is a general rise in the level of prices." What causes the general rise in the level of prices? Inflation? You state that the cause of inflation is not QE. What causes inflation?

Demand pull inflation, cost push inflation, etc it's all in an economics textbook. Ultimately though, inflation is targeted by the central bank. So they use monetary policy operations to cause low and stable inflation. QE is one of those policy tools. Interest rates cannot go below zero so without QE we'd probably have deflation at the moment, so QE is causing enough inflation for CPI to be modestly positive at 1.8%. As soon as that number starts to rise significantly, the Fed will reverse QE and/or raise interest rates.

What do you mean by 'new money'? A different kind, or adding more and if so how does someone add money without creating wealth?

This is probably a revelation to you, but all banks including private banks, create new money out of thin air. When a bank makes a loan that money does not come out of other people's savings which is a common misconception. Also, when you repay your loan, the bank deletes the money. Only the profit on the loan is retained. Now there are capital ratio requirements to prevent banks from infinitely creating money. The Fed though can create money without reference to it's capital.

No. There is a trade deficit - we are transporting dollars overseas for cheap goods and foreigners are taking that money and buying our debt. When they sell their bonds (which will happen when people lose confidence in the dollar and our credit rating goes down further), they will want to spend their dollars to get actual goods. Americans will be competing with the foreigners to buy goods and prices will rise. It is an inflow. This is similar with the QE - once the extra money actually enters the hands of the consumers, we will see the inflation.

OK, yes I sort of agree, but not with the details. When Germans sell their bonds, they get US dollars which they sell to buy Euros. This puts downward pressure on the EUR/USD exchange rate which is inflationary for the US as it causes the price of imported goods to rise.

With regards to your last sentence above, once the money enters the hands of consumers and starts to cause above target inflation, the Fed will take the financial assets bought with the proceeds of QE and sell them. These proceeds are then deleted. QE will be fully reversed if necessary.

Edited by Kate87
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OK, yes I sort of agree, but not with the details. When Germans sell their bonds, they get US dollars which they sell to buy Euros. This puts downward pressure on the EUR/USD exchange rate which is inflationary for the US as it causes the price of imported goods to rise.

And what will the people that exchange the currency do with all those dollars. Remember I am talking about a scenario when people lose confidence in the dollar and it loses status as the world's reserve currency.

With regards to your last sentence above, once the money enters the hands of consumers and starts to cause above target inflation, the Fed will take the financial assets bought with the proceeds of QE and sell them. These proceeds are then deleted. QE will be fully reversed if necessary.

And once they reverse QE, it will cause rates to rise and cause an economic crash. I'm not so sure the Fed will be willing to do so. Plus, this wouldn't necessarily save the dollar, there are many reasons we are headed for a currency crisis.

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