# Should the goverment keep promoting inflation ?



## lonewolf (Jun 12, 2012)

With capitalism producing more efficiency should prices be falling or rising ? There is something wrong when over time it takes workers less time & energy to produce X amount of goods & services & the price paid for them is often headed higher. Why does the government want to go against the natural forces in the economy & try to promote inflation ? Perhaps it is the type of money being used ?


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## andrewf (Mar 1, 2010)

Rising. Bad things happen in deflationary environments, as people hold off spending since goods become cheaper over time. 

Keep in mind that what matters is spending power in real terms. Low stable positive inflation is the least bad regime.


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## fatcat (Nov 11, 2009)

andrewf said:


> Rising. Bad things happen in deflationary environments, as people hold off spending since goods become cheaper over time.
> 
> Keep in mind that what matters is spending power in real terms. Low stable positive inflation is the least bad regime.


+1 from me


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## Feruk (Aug 15, 2012)

andrewf said:


> Rising. Bad things happen in deflationary environments, as people hold off spending since goods become cheaper over time.


Care to elaborate? Besides countries being in trouble for debt repayment.


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## HaroldCrump (Jun 10, 2009)

lonewolf, you have hit upon one of the biggest holes and deficiencies in how modern banking, fiscal and monetary policy is run.
Every major government's primary monetary policy is inflation.

Every central bank has an inflation "target", which is usually 2% (for the BOC, Fed, and ECB) and higher in some emerging economies (3.5% in China & 5% in India, for instance).

Because of the way CPI is measured in the US & Canada (or WPI in India, RPI in the UK, etc.) that 2% turns out to be more like 8% or 10% or even more for the average consumer/household on the street.
In other words, massive inflation in the price of necessities (food, energy, housing, taxation, basic services, etc.) while a modest deflation in the price of discretionary and luxury consumption (such as electronics, vehicles, luxury consumer goods like handbags, shoes, etc.).

You are correct that the _natural tendency _in capitalism is a _slow but steady _fall in nominal prices due to better productivity, efficiency, mechanization, labor arbitrage, etc.
*THAT *was the original design, or modus operandi, of capitalism.
The money supply should ideally grow with increase in aggregate demand, and decrease with a decrease in aggregate demand.

However, that natural, steady fall in the nominal price of goods and services has been labeled _deflation_ and given evil, negative connotations.

If the natural progression of inflation is not supposed to become hyperinflation, then the natural progression of deflation should not become a deflationary spiral, either.
Similarly, if deflation is supposed to become hyper-deflation, well then, inflation should also become hyperinflation (which is precisely the case).

Why are governments actively encouraging it?
There are several reasons, all of which are highly convenient for the powers that be.

Inflation increases nominal tax receipts, and causes bracket creep in taxation.
Inflation makes borrowing cheaper in real terms, over time.
This is especially important these days with massive amounts of govt. borrowing, and ZIRP + Q/E.

Inflation makes it easier to make political promises for future liabilities, such as public pensions, social welfare, etc. which will be "repaid" with ever increasing inflation (and thus lower real dollars).

Inflation also creates a constant "treadmill" and "mice on a spinning wheel" type of effect for the working middle classes (the proletariat).
There is a constant process of competitive currency devaluation being played by all major governments, which creates even more inflation for the consumers.

To answer your other question, it is only topically related to the type of money being used (i.e. flexible, printable money vs. fixed money like gold-based).
A fixed money supply does not allow for inflation.
However, that is not the root cause of inflation (or deflation).


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## Pluto (Sep 12, 2013)

It's better to have prices in general rising a small amount. For instance, it is better for ones mortgage debt to devalue, and the property inflate. If land values deflate, it can become worth less than the debt to buy it. that's bad.


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## Pluto (Sep 12, 2013)

HaroldCrump said:


> Inflation makes it easier to make political promises for future liabilities, such as public pensions, social welfare, etc. which will be "repaid" with ever increasing inflation (and thus lower real dollars).
> 
> .


If future liabilities are indexed to inflation, eg public pensions, I don't get this part.


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## HaroldCrump (Jun 10, 2009)

Pluto said:


> If future liabilities are indexed to inflation, eg public pensions, I don't get this part.


Pensions, social welfare, etc. are indexed to the CPI.
CPI does not reflect the true rate of increase in prices, esp. the cost of necessities like food, energy, and housing.
For the vast majority of pensioners, the pension is the primary source of income in retirement.
Therefore, indexing it to the CPI is massively short changing them.


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## Pluto (Sep 12, 2013)

HaroldCrump said:


> Inflation also creates a constant "treadmill" and "mice on a spinning wheel" type of effect for the working middle classes (the proletariat).


Please explain this in more detail. I don't get what you mean here.


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## Pluto (Sep 12, 2013)

HaroldCrump said:


> Pensions, social welfare, etc. are indexed to the CPI.
> CPI does not reflect the true rate of increase in prices, esp. the cost of necessities like food, energy, and housing.
> For the vast majority of pensioners, the pension is the primary source of income in retirement.
> Therefore, indexing it to the CPI is massively short changing them.


Apparently around 1870 oil was about 70 per barrel (in 2010 dollars). And in 2010 it was about 70 per barrel. Apparently not much inflation in oil over those years. For most of the time between 1870 and 2010 the price was far below 70.


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## Nemo2 (Mar 1, 2012)

Pluto said:


> Please explain this in more detail. I don't get what you mean here.


You have to go faster and faster to stay where you are?


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## HaroldCrump (Jun 10, 2009)

Pluto said:


> Apparently around 1870 oil was about 70 per barrel (in 2010 dollars). And in 2010 it was about 70 per barrel. Apparently not much inflation in oil over those years. For most of the time between 1870 and 2010 the price was far below 70.


That doesn't prove anything at all...if the price of crude oil were the primary, determining factor in inflation then would you say the prices of all necessities are the same 100 years later?


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## Beaver101 (Nov 14, 2011)

Is that table accurate? Amazing that potatoes (3,819%) have risen more than steak (avg. 2,300%)


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## HaroldCrump (Jun 10, 2009)

Beaver101 said:


> Is that table accurate? Amazing that potatoes (3,819%) have risen more than steak (avg. 2,300%)


The table is directly from the U.S. Bureau of Labor Statistics.
If you believe their data, then yes, this is accurate.
Note that 1913 was the first year they started tracking prices of essential goods.

Regarding the price of potatoes, the explanation provided by inflationdata.com website is as follows:

_In 1913 potatoes were considered a staple of everyday life and were the cheapest item on a per pound basis (costing less than 2 cents per pound) followed in close second by flour at just over 3 cents a pound and sugar at 5.8 cents a pound. 
Today flour is the cheapest on a per pound basis followed by potatoes (despite the massive percentage increase) and sugar_


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## HaroldCrump (Jun 10, 2009)

I should clarify that 100+ year comparisons are not very useful in the current context.
I did not paste that table chart above to "prove" inflation - it was merely in response to Pluto's crude oil price quote from 1870.
Inflation data from 1870 or early 1900 is meaningless in today's context for a whole variety of reasons.

The CPI calculation methodology has changed several times.
1900s was the gold backed currency days.
Does not account for increases in productivity
Does not account for the leisure time trade off i.e. trading off better productivity for more leisure time instead of lower prices
Does not account for massive differences in demand for certain commodities (such as the demand for crude oil was a miniscule fraction of what it is today, the demand for sugar was a lot less, etc.)


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## andrewf (Mar 1, 2010)

For context, 2% inflation is 624% over 100 years. Flour has inflated at 2.8%, according to the chart. Of course, nominal incomes have risen far faster than this, so the % of income a consumer might spend on flour has fallen steady over the century.

Feruk, to answer your question, deflation raises the opportunity cost of spending money now vs saving it and spending it later. If that opportunity cost becomes too high, it becomes a major drag on current consumption. It also can lead to deflationary depressions, where deflation causes less economic activity which causes more deflation. This is because holding cash will give a 0% nominal return. With 10% deflation, you could keep cash in a safe and earn 10% real return. Why would anyone spend money when you can get such a great return? This increases the demand to hold money and decreases the demand for goods.

And while we're worrying about the prols, keep in mind that deflation is not limited to goods, but can also apply to wages. Wage cuts are difficult, and would tend to lead instead to layoffs and rehiring new employees at lower wages. I think we've already seen a lot of that happening. Inflation helps to naturally eat away at too-high wages without requiring absolute wage cuts. 

Then there is the issue of debt. Lenders are unlikely to offer loans at <=0% interest in nominal terms, since they could always just hold their case instead with less risk of repayment. With 10% deflation, you would need to get a real return of >10% to justify the cost of borrowing. Same goes for investment. Businesses would tend not to invest unless they could earn a very high real return.

Here are a couple of links that might help to explain why deflation is not desirable:

http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/?_php=true&_type=blogs&_r=0


http://en.wikipedia.org/wiki/Deflation#Deflationary_spiral


> Deflationary spiral
> Main article: Debt deflation
> 
> A deflationary spiral is a situation where decreases in price lead to lower production, which in turn leads to lower wages and demand, which leads to further decreases in price.[25] Since reductions in general price level are called deflation, a deflationary spiral is when reductions in price lead to a vicious circle, where a problem exacerbates its own cause. The Great Depression was regarded by some as a deflationary spiral.[26] A deflationary spiral is the modern macroeconomic version of the general glut controversy of the 19th century. Another related idea is Irving Fisher's theory that excess debt can cause a continuing deflation. Whether deflationary spirals can actually occur is controversial, with its possibility being disputed by freshwater economists (including the Chicago school of economics) and Austrian School economists.


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## lonewolf (Jun 12, 2012)

I think in the future the new money that is most used will be digital such as the Bitcoin. The question will be weather the government controls it or the private sector. If such a form of money is used instead of the norm being mostly of trending inflation. If the money supply stayed constant the new norm I think would be deflation which would make it better for those entering retirement because their saved money would go farther as time passed. I think deflation would be better then inflation for everyone. I think the problem is with the money system.


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## gt_23 (Jan 18, 2014)

lonewolf said:


> With capitalism producing more efficiency should prices be falling or rising ? There is something wrong when over time it takes workers less time & energy to produce X amount of goods & services & the price paid for them is often headed higher. Why does the government want to go against the natural forces in the economy & try to promote inflation ? Perhaps it is the type of money being used ?


I'm not sure what you mean by the Government "promoting inflation." You seem to imply some active role by the Gov't to increase the rate of inflation. I think most would argue (Gov't included) that moderate inflation is good and a sign of a healthy economy and tends to correlate with economic growth.

You also seem to imply that industrial efficiency gains should drive prices lower and that perhaps the Gov't has an active role in preventing them from going lower. The fact is that inflation attempts to measure not only price levels but also the value (or utility) one gets from a particular good or service. So it is likely that the efficiency gains you refer to have been offset by enhancements (or additional value) to the product that you buy. Computers are a good example. Even if their prices had not dropped, the inflation of computer prices would be negative since you get so much more value in the modern computer.

This is likely why the posted inflation rates are probably over-estimating the true rate of inflation, contrary to the popular belief that inflation is much higher than stated, since the value component is more difficult to measure.

Gov't services are another story...lower value and higher prices y/y....LOL


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## lonewolf (Jun 12, 2012)

gt23

minimum wage,

student loans, CHMC, all promote inflation more money available for schooling & housing.

I just listened to a podcast (financial survival network I think it was recorded today) that in the United States government wants the banks to lend more so the rules are about to change on how credit ratings are done so the masses with bad credit can borrow more. More money to push prices higher. ( kinda reminds me of NINJA loans in the USA a few years back )


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## andrewf (Mar 1, 2010)

lonewolf said:


> If the money supply stayed constant the new norm I think would be deflation which would make it better for those entering retirement because their saved money would go farther as time passed. I think deflation would be better then inflation for everyone. I think the problem is with the money system.


Why is deflation better for everyone? How would you address the problem of deflationary spirals, where deflation causes more deflation, and depressed demand as people increasingly prefer to save and make purchases later when goods & services are cheaper?

You have not articulated why you think it is better. You've expressed the intuition that it might be better for retirees, but I think you are not considering all the effects. For instance, why have deflationary periods in the past been associated with increased human misery, as in the 1930s?


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## james4beach (Nov 15, 2012)

When considering inflation/deflation over the years, I've increasingly used the "follow the money" strategy... look at who has what to gain from the inflation vs deflation scenario.

Basically, both government and the financial industry like having mild to moderate inflation. So the Federal Reserve, Bank of Canada, ECB, etc all will all pursue pro-inflation strategies and probably under-report it.

Benefits for government:
* if you under-report inflation you come out ahead by screwing parties getting cost of living increases, pension and benefit payouts, etc
* you get to screw those idiots who bought your bonds
* inflation dilutes your debts and lets you repay debt with currency worth less in the future... a great deal

Benefits for banking industry:
* you get to screw those idiots who bought your bonds
* scares people into high-risk investment (e.g. "you can't earn enough in GICs!")
* inflation will inflate your balance sheet... a huge benefit
* inflation generally comes with transaction activity, which you skim of course
* inflation lets you take a cut of money flows even if there's little real economic activity (think: QE)
* inflation tends to stimulate activities such as trades and M&A
* customers like seeing numbers that go up... makes people feel rich and happy

The central banks serve the interests of the financial industry above all else. With so many pro-inflation motivations for pro-inflation, I'm convinced that central banks are heavily slanted towards causing inflation.


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## andrewf (Mar 1, 2010)

Yabbut, is there a more socially optimal regime than low stable inflation? If the BoC were not to target 2% inflation, what else should they target? -2%? -5%? -10%? -50%? We can talk about the merits of alternatives. But deflation causes a lot of problems that many people do not seem to understand on the surface.


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## HaroldCrump (Jun 10, 2009)

andrewf said:


> If the BoC were not to target 2% inflation, what else should they target? -2%? -5%? -10%? -50%?


None of the above.
The BOC (or the Fed, or the ECB) should not be targeting inflation.
They should not be setting overnight lending rates, either.
The money center banks and major institutions should be using market mechanisms to determine overnight rates, pricing in current market conditions, and counter-party risk.
Central bank rate setting, forward guidance, inflation targeting, etc. are all euphemisms for jawboning - no different than the old boys club that rigged LIBOR.

As far as money supply is concerned, when governments need money, they need to issue bonds and the bond market will determine the yield.
Central banks should not be allowed to perform LSAP, OPO, QE, Twist, Disco, Salsa, Samba, Flamingo, etc.

Over time, the issuance and cancelation of bonds by governments will balance out the money supply, and determine inflation.
If the volume of bonds issued is non-commensurate with the organic expansion of the real economy, the yields will rise automatically and there will be inflation.
However, in such a case, there will be clear inflation and all economic valuations, metrics, and measures will adjust to it.
For instance, pension liabilities will rise, employers will have to pay higher raises, etc. but it will be a self-correcting problem.

On the other hand, if the issuance of sovereign debt is less than the organic expansion of the economy, there will be tightness in the money supply.
Businesses will not be able to borrow, there will be capital account deficits.
It will be a self-correcting problem.

This is what a normal business cycle is.
This is consistent with the Quantity Theory of Money.

Central banks are increasing meddling with business cycles and preventing the normal functioning of business cycle.
The motivation is primarily political, give or take.

If central bank doctoring of business cycles were effective, we would not have had numerous recessions (and 2 serious depressions) under their watch.


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## HaroldCrump (Jun 10, 2009)

Here is a brief article from a layman perspective about inflation/deflation, and the way CPI is measured.
It is a bit dated, and does not explain all the deficiencies of CPI/WPI/RPI measurement, but does provide high level coverage:

Note, it's a PDF that should open directly in the browser window:
http://www.mj-economics.com/docs/Inflation_Deflation_Loiselle.pdf

The author does not address the issue of money velocity, which is important (probably for the sake of brevity and to keep it non technical).
However, one of the better recent coverage around money velocity is in the book _Code Red_ by John Mauldin, and Jonathan Tepper.


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## andrewf (Mar 1, 2010)

Harold, am I correct in thinking that you are advocating volatile inflation? 

And substituting government borrowing (fiscal policy) for monetary policy via the central bank does not make managing the money supply any less artificial, and imposes other undesirable effects.

Price levels are not stable/self correcting. Else we would not see hyperinflations and deflationary depressions.

The goal of monetary policy (at least in Canada) is not to prevent recessions. It is to maintain low, stable inflation. No one regime has been able to eliminate the business cycle, and it's doubtful it is even possible. What you propose won't achieve it either, so I fail to see the relevance.


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## andrewf (Mar 1, 2010)

Also, regarding the paper you linked to, when we change the definition of 'inflation' to be 'growth of the money supply', you are changing the goal posts. When we say that low, positive inflation is desirable (such as the BoC's mandate) we are referring to rate of change in the price level. When you change the question to be should the government keep promoting growth of the money supply, the answer is different. The central bank may in the future allow the money supply to shrink if velocity increases, in order to achieve its 'rate of price level increase' target.


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## gt_23 (Jan 18, 2014)

lonewolf said:


> gt23
> 
> minimum wage,
> 
> ...


LOL really? Instead of student loans and CMHC, don't you mean the cost of education and real estate, respectively, since it is increasing prices of the latter pair that drive higher inflation. I'm not sure how you think either student loans or CMHC have anything to do with inflation, or better yet, how the Gov't actively uses them as levers to create inflation. Even if the Gov't weren't involved in underwriting student loans or insuring home loans, private capital would still lend to both segments.

Very few people in Canada (and even less if you exclude highschool students) earn the minimum wage, so this is hardly a factor leading to higher inflation. Moreover, increases to the minimum wage tend to lag inflation rather than precede it.

Finally, I'm also confused how you can equate a loosening in U.S. credit markets to NINJA loans. Lending standards in the U.S. are probably too conservative and any change to these does not automatically mean subprime.


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## gt_23 (Jan 18, 2014)

HaroldCrump said:


> None of the above.
> The BOC (or the Fed, or the ECB) should not be targeting inflation.


That's easy to say when you haven't had to deal with serious inflation in a few decades. You should read some financial history to learn how destructive high inflation can be.

Low and predictable inflation is a social good and probably benefits our society in far greater proportion than the extent it distorts financial markets.


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## HaroldCrump (Jun 10, 2009)

gt_23 said:


> You should read some financial history to learn how destructive high inflation can be


As it happens, I _have_ read the history.
Granted, not experienced it in-person - I may presume you have (the late 1970s one, obviously, not the pre WW-II Germany)?

Incidentally, the way the back of inflation was broken at that time was by raising interest rates to punitive levels, which was precisely the right thing to do; in fact, perhaps the _only_ thing effective enough.
Sadly, that response is not being considered these days, and will not be considered.
Not until the reality of true inflation is admitted by the powers that be, or the populace force the govt's hand in accepting the reality of inflation and do something about it.

Also, speaking of history, the roots of the causes of the late 1970s hyperinflation lay in the massive devaluation of the USD by "closing the gold window".
That was effectively a default on the part of the Nixon administration, but is not admitted as such.

Secondly, although full due credit goes to Federal Reserve Chairman Volcker and President Reagan (for having the b*s to pursue the high interest rate policy), let us not forget that the stabilization of the USD had other political factors too, such as the establishment of the _*petro-dollar*_ as well as the final end of the Vietnam involvement.



> Low and predictable inflation is a social good and probably benefits our society in far greater proportion than the extent it distorts financial markets.


We have neither low nor predictable inflation.
We have never had, in fact.
Show me which period of inflation was accurately predicted by any economic forecast or central bank policy.
What we have these days is a guaranteed ZIRP policy, not a guaranteed low inflation policy.


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## HaroldCrump (Jun 10, 2009)

gt_23 said:


> since it is increasing prices of the latter pair that drive higher inflation.


No, gt_23, you are confused - lonewolf is right (even though he may not be articulating his thoughts correctly).
Increase in housing costs are not driving inflation - it is the _result_ of inflation.

Incidentally, the massive increases in Canadian housing prices does not show up in the CPI (thank the bizarre way in which housing costs are accounted for).

Even the massive US housing bubble did not show up in the US CPI between 2004 and 2007.
That obfuscation is what enabled Greenspan (and then later Bernanke) to keep reducing interest rates, keep them lower, and keep denying there was a housing bubble - right up until the morning Countrywide went bankrupt, and Lehman collapsed after another 3 months.



> how the Gov't actively uses them as levers to create inflation.


By increasing the availability of credit, and liquidity of the corresponding loans (via implicit CMHC guarantees).



> Even if the Gov't weren't involved in underwriting student loans or insuring home loans, private capital would still lend to both segments


Sure, but not with the full guarantee and backing of the federal govt.

Do you seriously believe that the CMHC has no role to play in the housing prices in Canada, or are you just being flippant?



> Finally, I'm also confused how you can equate a loosening in U.S. credit markets to NINJA loans. Lending standards in the U.S. are probably too conservative and any change to these does not automatically mean subprime.


You must be joking.
Loosening the lending standards (via acts of Congress) is precisely what enabled banks to create NINJA loans, and then re-package them into CDOs, RMBSs, etc.
That and the repeal of the Glass-Steagall Act.

Sub-prime loans was an explicit mandate for Freddie Mac and Fannie Mae.
Congress passed acts mandating lenders to issue mortgages to lower-income, irregular income, part-time income, and unverifiable income borrowers.
Banks were to be penalized if they did not meet the minimum lending requirements to these sections of society.

It was called the Community Reinvestment Act or some such bullshit.

Without getting into the history of the US housing crisis, suffice to say that lending standards in the U.S. were most definitely responsible for subprime crisis.


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## HaroldCrump (Jun 10, 2009)

andrewf said:


> Also, regarding the paper you linked to, when we change the definition of 'inflation' to be 'growth of the money supply', you are changing the goal posts.


Not really. The stock of money (money supply) should expand and contract with organic growth.
Interest rates represent the cost of that money and should therefore follow the usual rules of demand and supply (i.e. higher rates when demand is high, such as right now; and lower rates when demand is low).

Price should (will) rise when the rate of growth of the stock of money goes out of sync. with the rate of organic growth i.e. stock of money is not growing fast enough to foster growth.
The normal market response in this case will be rapidly rising bond yields (as the suppliers of money demand higher and higher rates, assuming credit worthiness of the borrowers remain unchanged).
That will lead to more issuance of money by the govt. and households with savings (in search of the increasing yields).
Therefore, supply will increase to meet demand, and equilibrium will be restored.

I do not see why you consider the goal post changing.
Set aside the rise/fall in prices of goods and services for a moment, and think in terms of stock of money and organic growth (I also include increases in efficiency and productivity as organic growth, since those lead to increased demand for money as well).
Prices of goods and services are the tail that wag the dog of the stock of money.
Don't let the tail direct the dog.

Without doctoring of interest rates by central banks via Q/E, ZIRP, LSAP, OMO, Twist, etc. money will follow demand and supply and will expand/contract accordingly.

I am not suggesting that this is a smooth process at all.
And it is not an immediate, overnight process.
The economy is not a high school chemistry lab.
These changes take time and there are several lagging indicators, such as wages, prices, currency valuations, balance of payments, etc.

But it is not violent as you suggest i.e. doesn't have to be.

What makes this process violent is intervention.
Inflation gets exported from the borrowers to the savers, from the currencies with BOP deficits to the countries with BOP surpluses, from the reserve currency countries to the emerging currency countries i.e. from the developed world to the developing world.
It creates massive inflation in the developing countries such as India, Indonesia, MENA, etc.
It creates civil unrest, revolt, food riots, etc.

Don't you see how this is all related i.e. inflationary policies in the US, UK, Canada, EU, etc. and massive inflation and shortages in the 3rd world?

THAT is what makes all this violent.


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## protomok (Jul 9, 2012)

HaroldCrump said:


> Inflation gets exported from the borrowers to the savers, from the currencies with BOP deficits to the countries with BOP surpluses, from the reserve currency countries to the emerging currency countries i.e. from the developed world to the developing world.


+1

Right, the fed, BOC, and friends have injected unprecedented amounts of cash into the money supply, but until the money "exports" or "leaks" into the economy most folks will remain relatively clueless about our current state of inflation. For now the money remains safely stored in assets...real estate, stock market, etc.

Eventually there is going to be a pin prick...maybe a Canadian housing correction, Chinese shadow banking explosion, etc. that is going to cause the money from the fed to leak, and when that happens we will IMHO see massive inflation, rapidly rising interest rates and other fun 

I'm just trying to determine how to best protect myself from when the money starts leaking. Do I sell my equities? If so where do I put it? Cash gets clobbered, bonds are not promising right now, gold...maybe?


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## andrewf (Mar 1, 2010)

HaroldCrump said:


> Don't you see how this is all related i.e. inflationary policies in the US, UK, Canada, EU, etc. and massive inflation and shortages in the 3rd world?
> 
> THAT is what makes all this violent.


That is more due to poor monetary policy in the developing world. China has capital controls and pegs the yuan to the dollar, in effect forming a currency bloc with the US akin to the Eurozone. (China are playing the role of the Germans, the US that of Spain). India and Brazil's inflation problems are more due to poor domestic regulations, helped by capital controls.

The US and EU have appropriate monetary policies for their current situation. The developing world, less so. Their currencies should be appreciating and interest rates rising. More liberal regulations would result in lower equilibrium interest rates to maintain stable inflation.


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## HaroldCrump (Jun 10, 2009)

andrewf said:


> That is more due to poor monetary policy in the developing world. China has capital controls and pegs the yuan to the dollar, in effect forming a currency bloc with the US akin to the Eurozone. (China are playing the role of the Germans, the US that of Spain). India and Brazil's inflation problems are more due to poor domestic regulations, helped by capital controls.


You are blaming the victim.
These countries have _no choice but _to structure their monetary policy in this manner.

Due to the reserve currency status of the USD, every other major currency is implicitly pegged to the USD.
China explicitly pegs it, but every other major currency is in one way or another "pegged" to the USD by the respective government, depending on their BOP situations, domestic tolerance to inflation, and other factors.

The same effect can be witnessed at a smaller degree in the CHF vs. EUR "peg".
Ever since the ECB started their version of Q/E (Draghi's "whatever it takes" policy) the Swiss central bank has had to print large amounts of CHF just to keep their economy competitive.

Going back to the pre Bretton Woods days, the GBP enjoyed the reserve status (along with gold).
One of the main reason the UK was able to avoid massive inflation during the period between the two wars, and during WW-II, was the global reserve status of the GBP and the worldwide demand for the gilt.

All that changed post Bretton Woods.
Since then the USD has enjoyed that status.

The US is thus able to "export" its inflation.



> The US and EU have appropriate monetary policies for their current situation.


Their policy serves the interest of their central bank and ruling governments alone, no one else, not even their populace.



> Their currencies should be appreciating and interest rates rising.


And that is where the system breaks.
They _have_ been raising rates but their currency does not appreciate.

Have you followed the progress of hyperinflation in India in the last 5 years, all culminating in the recent elections where the grand old Congress party (their version of the GOP) was thrown out of power after almost 10 years.

That govt. was led by a brilliant internationally renown ex-IMF economist, who promised to reduce inflation every 3 months.
They kept raising rates, but simply couldn't.

They even imposed controls on the import of gold by private individuals but that has not helped.

The system is badly broken.

Central banks and ruling governments _want_ inflation.
They are _creating _inflation.

And it is not due to a fear of deflation (although that is the chosen bogeyman).
It has more to do with maintaining the debt/deficit fueled spending, reducing the massive deferred liabilities, and creating an illusion of wealth.


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## andrewf (Mar 1, 2010)

I have to disagree. The blame does lie largely with the developing markets who have not allowed their currencies to appreciate, or who have implemented domestic policies that lead to high inflation. India is notorious for this. China is serious about containing inflation and is generally better governed, but they have been using financial repression to fund their investment binge, and effectively exporting deflation to the US.

I think it's a bit patronizing to absolve developing countries of any responsibility for their own monetary policy.


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## HaroldCrump (Jun 10, 2009)

Regarding capital controls, it's case of the pot calling the kettle black.
We are certainly catching up to the BRIC countries' capital control "standards", given our recent policy on telecom, energy, materials (potash, etc.).

I am not denying the effect of poor fiscal & monetary policy in the emerging markets (let's not also forget corruption, which is a massive productivity leak in both India & China).

China is not "exporting" deflation, it is importing "inflation" from the US.
The emerging countries cannot drastically alter their monetary policy in the present circumstances, at least not until they decouple themselves from US dollar reliance.
Ref. the recent creation of the BRICS bank as a step in that direction.
Also the recent energy deal between China & Russia.

The populace in these countries are fed up with hyperinflation, and the political leaders (as corrupt & ignorant as they might be), are taking notice.
No govt. in South Asia and MENA can afford to let hyperinflation take hold, as India, Egypt, and other MENA countries have recently found out.

If the USD is no longer the reserve currency and the next 3 major currencies are no longer part of the SDRs, the G-7 countries will experience hyperinflation.
It will require Paul Volcker & Reagan v. 2.0 to raise interest rates back up to 18% to counter that.


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## Rusty O'Toole (Feb 1, 2012)

lonewolf said:


> With capitalism producing more efficiency should prices be falling or rising ? There is something wrong when over time it takes workers less time & energy to produce X amount of goods & services & the price paid for them is often headed higher. Why does the government want to go against the natural forces in the economy & try to promote inflation ? Perhaps it is the type of money being used ?


All the gains of science, technology and capitalism are eaten up by government, and more besides.The rest they siphon off to their billionaire friends.


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