Economics Questions

Re: Predicted Hyperinflation

meambobbo — Thu, 20 Nov 2008 07:06:29 GMT

freewheeler:

ktibuk:
Because there is another side of the equation which is "the demand". Once the genereal prices start to increase and people notice, their demand to hold cash decreases because they would know the cash would be worth less in time.

And would it not also follow that in light of this expected inflation, not only will demand increase for real goods as people look to unload dollars, but suppliers may raise prices to account for future inflation as well? Or would this be a force that would keep the increased demand in check (at least in part)?

There are several factors at work here. Higher prices actually mean that people would require larger cash balances. Otherwise, they simply wouldn't have enough money to make the same purchases. This is different from inflationary expectations, which was described in that cash balances are spent more quickly. If monetary inflation and price inflation are the same, increasing relative cash balances has no further inflationary effects - the same % of the money supply is being withheld from circulation per duration of time. Yet, expectations of future inflation lead to quicker expenditure of cash. Finally, as monetary inflation artificially lowers the rate of interest, the savings rate will fall relative to its natural level, thereby increasing consumer demand (although this demand would otherwise be spent on capital, investments, etc. which would eventually mix with consumption sectors). Nevertheless, increasing consumer prices most directly impacts inflationary expectations.

And yes, prices can increase either in anticipation of greater future demand or in response to greater past demand. Hyperinflation necessarily makes all prices in the inflated currency anticipatory and thus more volatile. There are also costs to business to maintain current prices. Thus, they abandon the currency, if not completely at least in calculation, quoting prices in more stable stores of value. Any time one acquires currency, they immediately seek to sell it.

Re: Predicted Hyperinflation

freewheeler — Wed, 19 Nov 2008 17:10:28 GMT

ktibuk:
Because there is another side of the equation which is "the demand". Once the genereal prices start to increase and people notice, their demand to hold cash decreases because they would know the cash would be worth less in time.

And would it not also follow that in light of this expected inflation, not only will demand increase for real goods as people look to unload dollars, but suppliers may raise prices to account for future inflation as well? Or would this be a force that would keep the increased demand in check (at least in part)?

Re: Predicted Hyperinflation

ktibuk — Wed, 19 Nov 2008 14:38:34 GMT

There are a couple of reasons.

1. No one really follows Keynes all the way to its logical conclusions. Everyone knows deep down that creating money is not creating wealth. Keynesianis is just an excuse to meddle with the economy abit so the people can be fooled to not to save.

2. In many countries in the west the money trickles down through many levels since government doesn't usully own businesses and especially banks. The money can get stuck in the pipelines. For example in the last year or so the FED pumped money to the banks but banks didn't pass out the loans but hoarded the money. In effect, banks stopped the inflation reaching to the public.

In third world countries CBs can literally put money in peoples pockets through government banks and corporations. So effects of the inflation is quicker. No pesky private banks and corp to hold out.

3. Inflations effects on prices are always uncertain. The money supply might increase but prices might stay the same for a while, but when and if the price inflation starts it may come more than the actual money supply increase. It is like rolling down a snow ball. At first you dont notice it picking up snow and growing but once it gets rolling no one can control it.

Because there is another side of the equation which is "the demand". Once the genereal prices start to increase and people notice, their demand to hold cash decreases because they would know the cash would be worth less in time. So they wouldn't want to keep holding cash and they would want to replace it with real goods as soon as possible. And when this happens demand for these real goods increase more than normal since these goods start to act as a store of value.

Lets say you get paid 1000 dollars for the week which will lose 10% of its value in one month or you think this will happen. You would normally spend 200 for food. But in this case you would rather buy an extra 300 hundred dollars worth of canned goods and keep them rather than the money. So your normal food demand would increase and some of your food purchases would be for storing value rather than immediate consumption.

Re: Predicted Hyperinflation

Austroglide — Tue, 18 Nov 2008 05:00:53 GMT

liberty student:
Yes, the Austrian viewpoint is very damaging. Which is why we must carry it to the people. Shine some light, and hope we can reach enough people who are not feelers but rather thinkers.

Indeed my friend.

Re: Predicted Hyperinflation

liberty student — Tue, 18 Nov 2008 03:25:29 GMT

I like you.

Yes, the Austrian viewpoint is very damaging. Which is why we must carry it to the people. Shine some light, and hope we can reach enough people who are not feelers but rather thinkers.

Re: Predicted Hyperinflation

Austroglide — Tue, 18 Nov 2008 03:07:07 GMT

Ha ha. I DO know enough about the Austrian program to NOT venture down this slippery slope.

Re: Predicted Hyperinflation

liberty student — Mon, 17 Nov 2008 23:56:29 GMT

Oh. I thought you actually wanted me to predict the future. I can barely beat back the anklebiters on this forum, my prescient abilities are sadly lacking.

Re: Predicted Hyperinflation

Austroglide — Mon, 17 Nov 2008 23:37:23 GMT

liberty student:
Austroglide:
But if you define "socialism" more broadly the question remains...How likely is it that Europe and the US are fated for the totalitarian outcome (were current trends to continue) ?

liberty student:
I'll have to get back to you on that. I'm currently trying to figure out who wins Super Bowl XLV.

My larger point is this: Even IF the West were unlikely to slide into totalitarianism and its attendant catastrophes, this in no way can be claimed a victory for Keynes and his admirers. The Austrian critique nevertheless remains highly damaging.

Re: Predicted Hyperinflation

liberty student — Mon, 17 Nov 2008 22:50:46 GMT

Austroglide:
But if you define "socialism" more broadly the question remains...How likely is it that Europe and the US are fated for the totalitarian outcome (were current trends to continue) ?

I'll have to get back to you on that. I'm currently trying to figure out who wins Super Bowl XLV.

Re: Predicted Hyperinflation

Austroglide — Mon, 17 Nov 2008 22:48:33 GMT

meambobbo:
The normal way to pay down debt is to earn the currency you will use to pay down your debt from the market, and transfer it to your creditor. This means producing more than you consume....

Sweet. Thanks for the info.

What about paying back debt with further debt, i.e. borrowing from A to pay back B? Isn't this what the US is doing?

Re: Predicted Hyperinflation

Austroglide — Mon, 17 Nov 2008 22:41:09 GMT

To state the obvious, it depends on how one defines "socialism". I would venture to guess that many European countries would qualify as socialist under some definitions, indeed the US as well.

If you define "socialism" more strictly, as something akin to Soviet or Maoist or Nazi totalitarianism, then the answer to your "better question" is NONE.

But if you define "socialism" more broadly the question remains...How likely is it that Europe and the US are fated for the totalitarian outcome (were current trends to continue) ?

Re: Predicted Hyperinflation

liberty student — Mon, 17 Nov 2008 22:29:24 GMT

Austroglide:
How many historical examples do we actually have of this? Too small a sample to be of a high degree of predictive use?

A better question to ask is, how many examples of socialism do we have that have not turned oppressive and violent?

Re: Predicted Hyperinflation

meambobbo — Mon, 17 Nov 2008 22:26:59 GMT

Austroglide:
I don't understand the mechanics of paying down debt.

The normal way to pay down debt is to earn the currency you will use to pay down your debt from the market, and transfer it to your creditor. This means producing more than you consume.

Trying to use a printing press to pay off debt can easily lead to hyperinflation like Germany did post WWI. No one wants to hold onto a currency as a store of value when its supply is rapidly expanding and its market value is consistently declining. The money will end up in the only place where it is valuable - the source country, who makes it valuable artificially by making it legal tender, or the sole tender for tax collection. In other words, those who are paid back with inflated paper money will quickly cash out their money for real goods of that country. Creditors will refuse to make loans denominated in that currency.

Trying to "cheat" a loan by expanding the money supply can cause a new crisis with runaway inflation.

This is similar to balances of trade among nations on the gold standard. If there is a balance of trade favoring one nation (greater exports than imports), it will accumulate a larger and larger money supply (more gold entering the nation than leaving). This causes prices in that nation to rise, while prices in other nations decrease. The nation's exports will become too expensive for the rest of the world to buy, while imports may become cheaper than domestic goods. Thus, the balance of exports over imports reverses and there are more imports than exports.

The above situation applies equally to floating exchange rates between numerous fiat currencies, only it will require more labor to accurately find prices. No nation can avoid the requirement of increasing production while decreasing consumption to pay back debt without suffering a subsequent crisis, all of which are the result of attempting to "bend" the laws of economics.

Re: Predicted Hyperinflation

Austroglide — Mon, 17 Nov 2008 22:14:34 GMT

liberty student:
That is what history shows us. Like hyper inflation, it can be stopped. But I am beginning to think that the social planners are pretty smart when they can brainwash millions of people.

How many historical examples do we actually have of this? Too small a sample to be of a high degree of predictive use?

Re: Predicted Hyperinflation

liberty student — Mon, 17 Nov 2008 21:04:03 GMT

Austroglide:
Yes, indeed, these are far worse than hyperinflation. Do you really think the current and progressing "lurch toward socialism" necessarily leads to these outcomes?

That is what history shows us. Like hyper inflation, it can be stopped. But I am beginning to think that the social planners are pretty smart when they can brainwash millions of people.