Inflation: The Basics

I like your intent here, but I'm afraid your complex style and in media res dealie-o are going to throw some people off and potentially murk things up for you.So I'm going to start with an even gayer fake economy and walk through the repercussions. I don't know if this will really help much, but whatever, my heart is in the right place?So imagine an island economy, with coconuts for goods and something for money. We can imagine them as shells that the chief has signed, but for convenience I will call them dollars. We begin with a hundred coconuts and a hundred dollars. Thus, each coconut is now worth about one dollar, subject to minor variations around the island due to free trade.The merchant Mbonga however, learns to make coconut pies. These pies are delicious and desirable and popular, they are worth more to the buyer than a coconut. Let's say Mbonga is charging two dollars a pie, and can make two pies from one coconut. Thus far he has made 5 pies for sale, and also eaten one as a nice publicity stunt. *licks lips*At this point he has invested 3 dollars and stands to make about 10, he is making a profit based on the value he has added through his work, and the economy is growing where he is due to increased productivity. But with the money supply at a fixed amount, any such growth must be reflected by an equal amount of shrinkage. When Mbonga goes to buy more coconuts to make even more pies, they will only cost about ninety cents each, and their price will continue to decrease as new productivity creates new desirable goods. Perhaps Phil will invent coconut wine, perhaps Natalia will develop a market for stained coconut masks. As long as the market remains free and the money supply remains fixed, all new production will decrease the price of existing goods.At this point, wise old Rosenfelt and his cronies notice, that the actual buying power of the money is increasing. Instead of doing work to improve goods to make a profit, all they need to do is hoard money! At this point the cash represents a better investment, what could buy you two coconuts today is likely to be able to buy you 4 tomorrow, just be patient.This has the effect of taking money out of circulation, which only increases the problem. The less money is available, the more desperate the sellers become. These coconuts dont last forever, you know. The people who might be taking care of the trees and doing the bottom level work of production are starving off, and the economy is collapsing. The great depression has arrived, and while a dollar is worth a lot, no one has a dollar.The obvious solution is for the chief to sign more shells and get them moving in the economy. More dollars means the buying power of the individual dollar goes down again and it is no longer advantageous to hoard them. This is what is called inflation, and far from being a bad thing, it is the only thing that keeps a large interconnected economy from collapsing in on itself.The main problem with just printing money though, especially once the economy is already collapsed, is that the new money is quickly considered worthless. So a couple of witch doctors are called upon to do various "find the pea" and "three card monte" tricks to get the money into circulation without undermining public confidence. Generally they pretend to loan it back and forth to one another a few times in order to establish a fiat value for it. Their names are Federal and Reserve.

I'm sorry, I may not be understanding correctly. You seem to be saying that there are circumstances in which what you are calling "deflation" (an overall increase in the buying power of existing currency) could ever be good. This would be incorrect, for reasons I have already tried to demonstrate.This "deflation" is self-perpetuating, it becomes depression, and the normal 19th century fix, large-scale war, is no longer considered a viable solution since the develop of chemical and nuclear weapons. Inflation, on the other hand, is self-correcting. This doesn't mean recessions are good, by any means. But recessions will eventually go away on their own, they don't require an economic reboot (read: martial law, authoritarian measures, rapid population reduction) the way that depressions do.The reason we don't try to keep inflation as close to zero as we can is because normal market fluctuations could drop it below zero and from that point forward the economony would essentially become unrecoverable. The reason it is going so badly now is because the circulation of money has increased drastically in the past few years. Essentially, in free market terms, prices need to double. But because of the low and "fixed" income victims you are concerned for, governments have found it necessary to intervene and slow down these rising prices, generally still through indirect means in the west however.Regardless of means though, this protectionism has the effect of impeding the free market, which is represented as a decrease in normal productivity. As a result, businesses are holding their breath, unemployment is rising, and various monopolies are begging the question for a living as a way of blocking up legislative processes.

I do see part of the conflict here. The money is just a symbol system though. If prices doubled, and wages also doubled, then their would be no reeeeal increase in "value", would there.This is why I have tried to use more specific terms, like price, buying power, and wages. "Value" is a confusing and nebulous term with emotional connotations that are unwarranted in this case. This does not mean that we can just reduce the whole mess to barter terms though; because barter systems don't have the potential for circulation that symbolic currency does. If you trade sheep for shennanigans, those items may be consumed on the spot, held onto for a while, or traded on a few jumps. But they are not likely to make the appears-to-be-at-least-ten-places-at-once motion that kept modern banking working.

Inches are one kind of symbol though, a fixed standard. Money is a different kind of symbol, a marker used to facilitate double-entry bookkeeping. A dollar represents dozens of things at once, and the relative worth of those things changes over time. Genuine supply and demand, which I think is where you are locating "value", are not the only factors involved in these changes.I'm uncertain how much of this is just semantics. You seem to be saying that throwing more money into the economy increases the "value" (price) of goods by increasing demand for them. Yet in such a case, we may examine the details and determine that the same thousand people are buying the same 14,000 tv dinners a week that they were before the inflationary influx. So in what sense will "demand" have increased?

I see where I wasn't following you now, thanks Sure there was an increase in real demand at the beginning of the process. Not necessarily for tv dinners, of course, those are just a sample of goods and services. Considering the top-down way we are doing these things, it's probably for whisky and hookers. But as the cost and/or supply of those sort of goods and services skyrockets, the demand for cocaine increases and the supply of ethanol decreases and so on, the waves spread and the shit happens and the jump in prices and wages trickles down.And when it gets to my thousand Hungry Men, it's already balanced. Their wages have doubled, but so have the cost of their supplies. And this is optimistic, we know the likelihood is that their wages have not yet caught up with the grocery store's prices, which have reflected the fact that the pricier hookers had a positive impact on pricing and a negative impact in your boss's budget.There's no greater demand for this particular good from Swanson than there ever was; yet the much greater demand for and/or lower supply of other items has been reflected in it's pricing.

Yep that's it; we agree. And here's how it happens. These two things are functionally equivalent at the bottom level of the economy.But I'm more interested in this now that I'm sure you aren't just deluded. How do we do this? I mean, what will be the most effective way? The W's "extra" tax rebates was, not too far from your helicopters. It was definitely effective, but certainly not enough to solve the problem. The new guy's bailouts and buyups and so forth have been even worse, in my opinion, thus far. So I think we want to try to get some of the money starting closer to the bottom than the top. If I had my druthers, we would print a shitload of new cash into infrastructure development as well as a good chunk in welfare/unemployment/dividends of some kind.But the US government in particular doesn't seem to have anyone with the intitiative to accomplish that, so, what do we do?

Of course! But only in the context there, of a better way of distributing than simply dropping it from helicopters, and a better way of fixing the current malaise than introducing a Great Deflation.You seem to be objecting to my reference to printing it rather than the current ruse of raising or lowering interest rates by the central bank. That's fine, I fully expect we would have to come up with a similar bit of jibber-jabber.Now, seriously yourself, if you are genuinely championing a negative number where we calculate inflation: how do you propose to prevent this from collapsing the economy outright? In what sense can a depression be a good thing?