Inflation: The Basics

Both of these arguments can be true: These positions are not mutually exclusive. Inflation can be both "good" and decrease the real value of money. Sure, that sounds bad, but hardly anybody is sitting on big piles of money. Primarily, people are using their money to buy things, or else they're loaning it to people who are using it to buy things.More demand for goods and services is an indisputable good thing. Seriously, there just can't be any dispute about the merits of demand, can there? Therefore to the extent that inflation represents an increase in demand for goods and services - which it almost always does - it's a "good thing", to at least the first order of approximation.

No, you've misunderstood me. What I meant was that

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Inflation decreases the real value of money, and this is bad because anyone today holding money from yesterday has something with less value.

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and

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a. Inflation increases the price of goods, and this is indicative of an increase in the value of those goods.
b. Inflation is a representation of an increase in demand, which drives up production and economic growth.

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aren't mutually exclusive or contradictory. It can be a good thing that the value of sitting on piles of money decreases. I think you'll find that poor people aren't sitting on any piles of money. (This is an example on your part of how many people who talk about economics don't seem to evince any understanding of how things actually work in the real world. See: all the economists who can't understand why people stand on escalators and mount staircases.) What the poor are sitting on, primarily, is the value of their labor - which increases during inflation, because the poor disproportionately have jobs making things and providing services, the value of which increases during inflation - and a fair bit of debt, which inflation also effectively decreases (they don't adjust the principle of your mortgage or car loan for inflation.) In a recession? All the people who are currently out of work. All the goods currently languishing unsold in warehouses. All the shuttered factories. Inflation is good when you're experiencing a shortfall in demand, because more money chasing the same amount of goods creates demand for more goods. See: US economy, 2008-present. Hardly any more naive than saying "inflation is bad", which, as you'll recall, was the conclusion of the post of yours I replied to. Is the truth more complicated? Obviously there's an extreme of inflation that is no good at all. But healthy economies are recognized by their possession of a certain degree of inflation. Indeed, if it weren't for inflation, the natural growth of population would leave us all bankrupt and starving, as more and more people had to compete for less and less money. Inflation is how we introduce extra money for all the new people to have.So, for the most part, it simply can't be argued that some inflation is a good thing. That is why, universally, economists recognize good economies by a good rate of inflation and bad ones by a rate that is either too low or way too high. Even the economists you like, Jon.

Out of work everywhere. No economy has full employment. Factories everywhere. No economy is perfectly efficient. Demand from all the people with more money, obviously. The labor of people who make goods and provide services, obviously. The questions above are stupid, predicated on your failure to understand how things work in the real world. Money is precisely how we measure value, just as "units of length" is precisely how we measure distance. You can no more pretend that they're completely unrelated things than you can pretend that your height is unrelated to the number of inches between your feet and your head.

Oh, I see. You just don't understand the concept of "supply and demand." Why didn't you just say so? I've told you, already. I told you before you even asked. The jobs that are growing are the jobs making things and providing services, because that is what the increase in money has increased the demand for. People use money to buy goods and services. You understand that, right? When you throw money to people from helicopters they don't tend to bury it in their backyards; they either spend it, or loan it to people who spend it (via their banks.) But it's not incorrect. Units of length, like inches or miles, are how we measure distance. When we want to know the distance between two points, we determine how many units of length are between them.Jon, you'd be a lot more convincing on this subject if you didn't stubbornly refuse to know anything about how things work in the real world. When you find yourself backed into a corner, forced to attack the notion that we measure distance with units of length, isn't it time to face the possibility that your ideas about economics obscure rather than illuminate? Damouse was saying that. I was trying to wrap his ideas up into my post as well. And if you understand that price and value are related - that something's price, in fact, is a reflection of its value - then you're forced to accept that increases in the price level indicate that the value of goods and services is rising, just as an increase in the "units of distance" between two points indicates that the distance between them is growing.

Right, just like "inches" is a symbol. But, regardless, units of length is how we measure distance, and when the number of inches in between two points steadily increases, that's not evidence that inches are getting smaller, that's evidence that the two points are growing more distant.Even if everything seems to be getting more distant from everything else - say, due to the expansion of the universe - we don't conclude that our rulers are somehow shrinking. Maybe there would! It would depend on why prices and wages doubled. If prices doubled because there was a doubling of demand for goods and services, that would certainly indicate an increase in the value of goods and services.

No, your questions are completely divorced from reality. I don't understand. Do you want me to literally list every single seller of goods and services in the United States? That's just stupid. Do you see what I mean? I'm trying to tell you that increasing the money supply increases the demand for goods and services, which is obviously true - that's what people do with money, buy goods and services - and you're asking me "but, which goods and services?"All of them, Jon, that's the point. All goods, all services. I've provided ample meaningful answers. You've yet to ask even a single meaningful question, because you've allowed conservative pseudo-economic nonsense to completely blind you to how reality actually operates. In fact, "inflation" is exactly the name given to the phenomenon where everything in the universe observable from Earth is receding away from everything else. Just one more thing you're completely wrong about. But that's not what I'm saying at all. The increase in your TV's value is a result of the increased demand for TV's. The increase in TV prices is a result of that increased demand - not the cause of it. But an increase in the demand for goods and services is a good thing if you own goods and provide services, which nearly everybody does. If you have no job, no assets, and the only thing you own is a giant Scrooge McDuck Money Pit that you swim around in, inflation is very very bad for you. But we want things to be bad for currency hoarders. We want people to spend and save and invest, not hoard currency.Not only are you arguing against common sense, you're arguing against a complete strawman. It's exactly because they're related - positively related, which we know by logic and experience; valuable items have higher prices - that we can conclude that an increase in one means an increase in the other. An increase to the exact same degree? No, we don't know that. But to a first order of approximation we know that an increase in the price of something happens because it has become more valuable. If you accept that they are related, then you must accept that an increase delta-P in the price of an object necessarily implies an increase delta-V in the value of that object. (But delta-P does not have to equal delta-V.) You must; to deny that is to deny that there's a relationship between value and price, which is completely stupid.

If they're not buying more stuff, then there's no inflation. If they're only eating 14,000 Hungry Mans at week both before and after the influx then the price of TV dinners won't go up. Why would it? Demand for TV dinners hasn't increased at all.If the government gives everybody a big bag of money to bury in their backyard, the only thing that goes up is the price of a shovel. If you double the money supply but everybody just hoards it, there's no inflation. That's because currency-hoarding is inherently deflationary. But deflation is bad, because it lowers the value of goods and services. And far more people are involved in the business of providing some good or service than are in the business of hoarding currency. Demand clearly did not increase; as a result, inflation did not occur.

If there's no greater demand for the TV dinners than before, the price won't go up. Supply and demand, remember? Things aren't priced as a function of what a dollar is worth; they're priced as a function of demand vs. supply. The grocery store doesn't call up everybody in the world to see how much money they have, they just raise the price of the TV dinners until less people buy them, at which point they've found the optimum price given a level of supply and demand.And if the prices do go up, because of increased demand for TV dinners, that creates an incentive to put people to work creating TV dinners. Of course, if a bunch of old unsold TV dinners are sitting around frozen in warehouses, that unused supply can be brought to market, rectifying an inefficiency and preventing a Swanson's plant from closing.If prices of the materials to make TV dinners go up but demand for TV dinners doesn't, then they'll just make less TV dinners until the rarity of a TV dinner raises the price back to profitability. But the problem our economy has right now is the exact opposite - a 1.5 trillion dollar shortfall in demand for goods and services. Service providers are being furloughed. Goods are languishing in warehouses. Dropping money from helicopters for people to spend creates demand for goods and services to get those people back to work and get goods moving out of warehouses.When people get more money, they buy more stuff. More different stuff and more of the same stuff. That's true to the first order of approximation, at least.

Except for the fact that they're absolutely nothing alike. One of the most effective ways was what Obama did in 2009 as part of the stimulus; lower everybody's taxes, but not really tell them about it.It's saved about 3 million jobs, by the estimates of most economists. Another really effective way would be to work with the banks and have a couple hundred dollars just show up in people's bank accounts (not fair to people who don't bank, of course.) Your opinion is demonstratively wrong. Objectively Obama's stimulus efforts have been much more effective than Bush-era tax cuts for the rich and one-off tax rebates. The bailouts made money. How about that? Not only did they save the corporate paper process - meaning thousands of American corporations were able to continue to access the short-term credit they need to make payroll every two weeks - but they actually made money on the repayment terms. Agreed. The best thing we could do would be to extend unemployment benefits and invest in infrastructure. Both of those things put money in "at the bottom." Why do you say that? Bills to accomplish all of the above - my ideas (not mine specifically, I'm just cribbing) and yours - passed the House months ago, and have the support of majorities in the Senate.There's just this little problem where the Senate doesn't pass legislation by majority rule anymore. It's not for a lack of anybody's initiative, it's that 41 Senators have decided that the Senate will do absolutely no business at all.So what do we do? Put more Democrats in the Senate. It's pretty simple. The Senate was passing things, after all, when it had 60 Democrats.

Completely wrong. I've addressed all of your points; you've failed to respond in any substantive way, preferring to simply repeat absurd questions that you know I've answered.Clearly my points are so self-evident and compelling that you have no reply. I'm perfectly willing to participate, and will continue to do so. You're the one who's declining to participate with me. The debate will continue at such time as you're prepared to hold up your end. It's too bad you began a thread before you were ready to do so.Edited by crashfrog, : No reason given.

Well, they can't make more TV dinners, because they can't sell more TV dinners because demand is the same. Making the same amount of TV dinners simply nets a lot less profit. Since it means less profit to be in the TV dinner business we should expect some businesses to get out of the business altogether, which presumably means less TV dinner production.We were using "TV dinners" as a synonym for "widget", but if we want to talk specifically about TV dinners what they're most likely going to do is put less food in a TV dinner and conceal the difference with marketing. You may have noticed the same thing happen to other items in your grocery store; Consumerist.com calls it the "grocery shrink ray", the propensity for items at the grocery store to contain less product but look and cost the same. Frequently voids or indentations are introduced in the packaging, so you wind up with less peanut butter (for instance) in a jar that looks just as big as before.

I don't see how the math works out on that. Well, there's capital costs. Keeping the lights on in the factory has a fixed cost no matter how few TV dinners they make. Their workers get paid by the hour, not by the dinner. Eventually they're selling so few TV dinners that they're not getting enough in net to pay for the factory and the labor. That's when it makes more sense to get out of the business altogether than to make six TV dinners a day, or whatever. Less can actually be worse than none because of fixed costs that don't scale down by just making less dinners. Well, there's more people, and they have to eat. That's an increase in demand for food. Doesn't that indicate the rising value of food?If you measure the distance between New York and London, you find that it increases at a rate of about a half-inch per year.Does that indicate that our rulers are all shrinking, or that the plates are moving? Don't be so quick to assume that measurements are changing because the things we use to measure them are changing. More often we measure change because the things we're measuring really are changing.

I'm not saying that the value of the dollar is static; I'm cautioning you against assuming that the value of the dollar is the only value that is fluid.