Topic: Inflation and Deflation of Price and Money Supply - page 43. (Read 1457336 times)

The velocity of money is a consumer spends his money, the money makes it's way through the production structure, and comes back to the consumer as salary. It does not have much, if anything,  to do with the actual time to perform a transaction in the payment system. The velocity, together with the volume of money in the system, is supposed to be a measure of consumption per unit of time, similar to the gross national product. It is hard to measure.

No, in fact.  Of course, a high velocity REQUIRES fast payments.  The velocity cannot be higher than one over the time it takes to make a payment evidently.  If it takes 20 minutes to complete a single transaction, then the velocity can never be larger than 1 year / 20 minutes.

But in the velocity of money, it is not the speed of a single transaction that counts, but the NUMBER of transactions in a given period (say, a year).  As such, it is a decision of the consumer to do so, and not inherent in the payment protocol.

After all, with cash, it takes what, 5 or 10 seconds (the time to take the bills out of your wallet, count them, and hand them over).  But it is not because you got the cash in 5 or 10 seconds, that you will spend the money every 5 or 10 seconds, right !

If you get cash for something you did (say, your labor), and you get that cash in 10 seconds, you're not going to spend it immediately.  You're going to spread your spendings over the time it takes to your next salary.  So the transaction time doesn't intervene much in the velocity of money.

You would indeed cause inflation if you (and everybody else) decided to get rid of your money sooner.  To buy up everything you need for the next month right away when you receive it, and when the store holder where you buy wants to get rid of the money you give him also immediately, and so on.  THEN you would get inflation: when you do not want to HOLD the money any more.
In extreme cases, this is hyperinflation: you've lost all faith in the money and you want to get rid of it as soon as you can.  Weimar Reichsmark for instance.

In fact, in your link, you mention something which is rather interesting.  If fast payment methods are used to liquidate a DEBT, then it was the DEBT that caused the inflation, and not the fast liquidation of it !

Credit card companies create money because they allow debt.   If you spend $50 with a credit card, you didn't receive those $50 yet.  The merchant accepts the $50 PROMISE because he has confidence in Visa or Mastercard that he will be able to spend that promise.  So it is the merchant, accepting your credit card payment, where he accepts not real dollars, but a promise from Visa to give him $50, that creates money: the PROMISE from Visa turned into money, as if it were really $50, because the merchant accepted that (because he knows that his bank will accept it too).

Now, Visa wanted to make that promise to the merchant, because Visa ultimately made you promise that you owe them now $50.  So ultimately it is YOUR promise to pay $50 that allowed visa to promise $50 to the merchant: visa was just an intermediary because of confidence.  A merchant will have more confidence in visa than in you, and will accept $50 promises as "money" from visa, but not from you.  Visa, on their side, are willing to accept a promise from you.

So all these PROMISES to pay $50 have turned into money as if it were actual dollars, and it is this generalized acceptance of promises for dollars as dollars that increase the money supply.

When people accept promises (debt certificates) as money, the money supply increases of course.

Of course, one day you will pay off your debt to visa.  At that moment, money is destroyed.  Each time a debt is reimbursed, money is destroyed.  But ON AVERAGE, Visa has many outstanding debts, and that is money creation.  Not that they print dollars, no.  The money creation comes from the fact that people accept promises from Visa as money.

So I see a director of the Ugandan Central Bank says that
- http://www.independent.co.ug/business/business-news/9760-mobile-cash-dash

It would make sense to me that fast payments (e.g., bitcoin or mobile payments) cause a higher velocity of the same money supply and that would mean that price inflation is the result.  I have a Quora question asking if this is true:

Are PayPal, Dwolla, M-Pesa, and Bitcoin responsible for inflation?
 - http://www.quora.com/Are-PayPal-Dwolla-M-Pesa-and-Bitcoin-responsible-for-inflation

I didn't read the 25 pages of this thread, so if velocity increases from instant settlement payment networks is something already addressed here please share a link.

Yes, that is right.  "price stability" means that financial products expressed in currency have the same goods-and-services-basket-overall purchase power.

But why should holders of financial products expressed in currency get an advantage over all other stock holders ?

What price stability actually means (as you explain further on), is that upon more demand for store of value, there is also more production of store of value (more M printed, say).  In other words, the "store of value in currency" becomes an infinitely elastic asset at "constant buying power".  Its market signal is entirely wiped out.  Now, you are right that that is beneficial for those holding currency-expressed assets, because it eliminates a risk for them (the volatility of the holding).

But if you are holding houses, oil, cars, production capital, .... then you have to take ALL of the fluctuation ; but not when you are holding financial products.  That makes that holding financial products gets an advantage over holding everything else.  All the rest can float according to the market forces.  If you are holding oil, and there is more demand for oil, then you will make a benefit, and if there is less demand (or more offer) for oil, you will loose.  But if you are lending out, whether there is more or less demand for money as storage of value, you are protected from fluctuations by the FED's printing.

That makes that we encourage people not to invest in capital, but in financial-all products.  This stimulates the existence of financial institutions.

If on top of that, the FED doesn't impose PRICE stability, but rather INFLATION-stability, all money-storage looses value, which makes it more interesting to hold debt than to hold value.  This, again, stimulates the existence of financial institutions, which, moreover, have to grind out interest to compensate for the inflation loss.  They can obtain this interest from the seigniorage which is inevitably generated with the constant printing to compensate not only for economic growth but also to provoke (constant) inflation.  As such, these financial institutions are the natural beneficiaries of the seigniorage.

You can hardly speak about price stability when prices have increased by a factor of 23 or so in a century.

Store of value over 100 years doesn't work in FED-based money.  With a sound money system, you can store value over 100 years, and you get even as interest the economic growth over that period without any intervention of a financial institution which can take part of it.



People having exactly the same problem when their house is half of the value or twice the value due to fluctuations in the housing market.  I don't see why holders of financial products should be "free of volatility" while all others have to undergo the market fluctuations.

BTW, (idiot) people living in the Euro zone who have contracted loans in Swiss Frank have the same problem.


Bitcoin is very volatile because it is not a currency yet, and because price is not determined by the demand for usage of BTC for buying stuff and labor, but purely as speculative device.  Its market is very shallow, and has almost no inertia.  If bitcoin would be used like the USD, it would show much much less volatility.

And if BTC were used like the USD for 100 years, it wouldn't indicate a value loss of a factor of 23.

You have to stop a bit a think about stability. You can not have it, neither in money value nor prices. If you somehow manage to do the impossible despite its impossibility, you make the system static and no progress is possible, and you also eradicate all risk. The wiping out of risk, by itself changes the system. So it is doubly impossible.

It is like fishballs in white sauce. If you press one down, another pops up. The best (and as stable as you get) is to just leave everything floating.

I'm not a strict Austrian.  I find a lot of good ideas in Austrian thinking, but I'm not religious and I didn't sell my soul to them.



Now, I don't know if TOTAL price stability is any good.  Not more than whether keeping P constant, is any good (which is your basic axiom).

So when you say:

I tell you the same thing: Why is constant P beneficial ?

After all, Q is made up of different contributions.  We have Q1, which is, say, services, and Q2 which is, say, goods.

We have P Q = P1 Q1 + P2 Q2.

Now, if you require P to be constant, and for some reason, P1 rises, it means that P2 has to fall.  Why should an increase in price for services imply a drop of the general price level for goods ?  I don't see why this is anything beneficial either.

So this is why I wanted to make the analogy.

We have P Q on one hand, and "store of value" (1/V) on the other.

If store of value rises, then P lowers.  In what way is that any different then when P1 rises, P2 drops ?

If it is beneficial that when P1 rises, then P2 has to drop (that's YOUR axiom, by wanting P to be constant), then why isn't it beneficial that when (1/V) rises, that P drops ?

If there is a good reason for the first statement, then why doesn't that apply to the second ?
And if there is a problem with the second, then why doesn't that apply to the first ?


My point was namely that P Q is only part of the economy, in the same way as P1 Q1 is only part of the economy. 

Wanting a part of the economy to have stable prices, and hence make the complementary part absorb all the fluctuations, why is that beneficial ?

You've got it. 

It seems that now I understand why you expanded the meaning of this pretty narrowly defined economic term to such a broad scope. From the Merriam-Webster dictionary:


Sounds similar, hah?

Bitcoin represents a political/economic policy that is not subjective.  There is a fixed supply, known in advance, with no mechanism to ever create more.  Anything else will be abused.

You need to understand this.  It is very important.  Most of us do not want a money system that can be manipulated.  We do not care how well intentioned the manipulator is.  We do not care how hard the manipulator pretends that he is being objective.  We do not want the tyranny of the well intentioned any more than we want the tyranny of the evil.


Economic transactions are not fish in a lake.  You can't cast your net and collect a bunch of them at random.  You get the ones you go looking for, which is not how you collect a sample.  The only way out is to get them all, which is not possible.

You're entitled to that opinion, of course, but I find the definition of speculation as "betting on the future economic behaviour of others to value the acquisition of an asset" rather concentrated on its essential notion.  It distinguishes that part of the value estimation from the "usage" value estimation which is the core of all economic activity: creating value (that is, obtaining satisfaction).

To me, acquiring stuff based upon betting on selling a produced product to future customers, or betting on selling an asset to future buyers, has this speculative aspect in common, and is fundamentally different from buying stuff to consume (now or later) or to produce for yourself to consume (later).  Both aspects contribute in the value estimation of an asset.

The important concept, to me, is "betting on other people's economic behaviour in the future".  I find that it is the core idea in "speculation", and it contains the fundamental notion of "economic risk" (as compared to all other types of risk, such as a natural disaster, an accident, a engineering risk such as a production process not working out ...).

It is important to point out that that type of risk is also present in production (for selling).  If you produce for yourself, there is no economic risk, but you are still open to all other kinds of risks.  But you do not depend on the whims of the customer, competition and all that - which is the economic risk.

Whether you buy gold, dollars, Euros, swaps, futures, or whatever other financial product, or whether you are investing in a production of a new type of electronic device, or whether you are investing in a bakery, all these activities have one thing in common: betting on the future behaviour of buyers, with the idea to make a benefit between the cost of the acquisition today, and the sales you will make in the future.  It is that inherent taking economic risk, that betting, which I want to give a name, and I call it speculation.  Because in all these activities, all your acquisitions have a sole reason: that is selling stuff in the future.  Whether you sell the assets you bought, or whether you transform them before selling them.
Your acquisitions have no value to you apart from this betting on those future sales.
The only value comes from price differences.  Whether they are the price differences between your acquisition today, and the selling of it tomorrow (of a financial product), or whether it comes from the price of production factors today and the sales of the product tomorrow.

That's totally different when you buy chocolate or an apple to eat it, today, or tomorrow, or whether you buy tools and construction material to change something to your house to make it more comfortable to live in.  The value doesn't come from any price difference.  The value comes from your subjective value estimation, minus the price you had to pay for its acquisition.

In speculation, the only value comes from price differences.  In consumption (which is the alternative), the value comes from the difference between subjective value and the acquisition price.

Combinations can exist, such as buying a house (acquisition price), living in it (subjective value) and selling the house (sales price).

In speculation, the sales price is the important quantity.  In consumption, the subjective value is the important quantity.

Not necessarily. It just shouldn't change too fast overall. The benefit of apples changes depending on season (availability of substitutes), but the demand is usually high enough to make growing apples profitable on the whole.


You needn't have written all this, I'm fairly well acquainted with the subjective theory of value.


As I said before, your definition of speculation is marginal at best. Its main drawback is that it doesn't make things more understandable or throws a new light but only washes out the notion thus further complicating things. The best you can do is think up a new term.

I always had difficulties with the concept of economic growth.  The only growth that makes sense is the growth in satisfaction (in value), and that is not globally definable, because you cannot add value of different subjects (you cannot even compare value to different subjects at different times: value is an ordinal for an individual at a given time).


The problem with the infinitesimal approach you indicate is that economic interaction is discrete.  It consists of a finite set of trades.  Suppose a toy economy where the first year, people grow apples and carrots.  The next year, they grow grain and they produce eggs with chicken.  How do even define growth in such a case ?
Of course, maybe the first year there are SOME eggs and some grain.  But the price of those eggs and that grain, which is a small market at that moment, doesn't indicate the value of eggs and grain versus apples and carrots in totally different proportions.  It is not because when an egg is rare, it has a high price (in carrots), that the next year, when eggs are abundant and carrots are rare, that you can do anything with that.  The basket with an egg and an apple is meaningless.
And there is no "infinitesimal change".  There was one harvest with apples and carrots, and the next year, there is one harvest of grain and a continuous production of eggs.  There is no "a bit less apples, and a bit more grain"  and "still a bit less apples, and a bit more grain".  And even if there were, because of the non-static (by definition) situation, the market is out of equilibrium, so the prices are not "static and stable" exchange prices, but dynamic quantities.

In this toy economy, there's no way of saying whether changing from apples and carrots to grain and eggs was an improvement in satisfaction (= economic growth) or something imposed by external conditions which worsened the level of individual satisfaction (= economic reduction).

Other considerations are:
maybe walking in the forest gives higher satisfaction than working in a factory, gaining money and buying big macs.  In that case, less employment means more satisfaction and hence economic growth.  This will not be measurable with the basket-GDP-and-inflation trick.

But what is that notion of price stability ?

After all, if we include in the price basket, everything that is bought with money, including "store of value", then with a constant amount of money, by definition we have price stability.  You only get price fluctuations with "sound money" if you leave out part of what is bought with it.

The price stability of a regulated money is only the stability of a certain basket, putting all the fluctuations in the complementary basket (usually speculative products, and store of value).

If you take the monetary formula,  P x Q = V x M, then all the price fluctuation comes from the fluctuation of V with sound money (M constant).

The point is that Q is only part of the economy: the other part is "store of value".  Now let V be precisely the "inverse of store of value": the higher V, the lower the demand for store of value (the lower the price of store of value).

So if you take the TOTAL economy, namely Q AND "store of value" then the price of that basket will only depend on M.

This is why sound money gives total price stability, and that the "price fluctuations" you observe are nothing else but price fluctuations between sub baskets, because they are related to changing offer and demand, which is exactly the price signal.

It is because one excludes the "store of value" aspect of the economy, that it seems that prices fluctuate.  By wanting to keep the price of a part constant, you increase the fluctuations in th "store of value aspect (also called "blowing speculative bubbles").  We have seen that with the dot-com bubble, with the housing bubble, and with the banking bubble.

THAT is the result of your "price stability".  You blow bubbles in the part that is not in your basket.

EDIT: let me illustrate that with a toy example.

Suppose that there is 100 credits in circulation and that at a certain point, the velocity is 2.
That means that in general, there has been bought for 200 credits, and that the demand for store of value is 50 credit-years (on average, the 100 credits are held half a year).

Now, suppose that the next year, the velocity is 1.  That means that there has been bought only for 100 credits (deflation!!).  If Q is constant, we have a deflation of a factor of 2 !  Help ! Price instability !!
But no.  In the mean time, it means that the demand for store of value has increased from 50 credit-years to 100 credit-years.

So although in the Q-basket, the price has lowered by a factor of two, the demand for store of value has doubled.  People have preferred to buy "store of value" instead of goods and services.  If you would have included the demand for store of value in the calculation of ALL the demand, then both balance out.  The economy is not just Q.  It is also "store of value".  That's part of people's demand, but doesn't show up anywhere (only in V).  So the basket simply shifted, from more Q and less store of value, to less Q and more store of value.  The price for Q and the amount of store of value are the signals indicating this change in aggregate demand.

If you want to keep P constant (which is the sub basket containing only the aggregate demand for goods and services, excluding the demand for store of value), then you screw up the market signals for "store of value", which is typically where a central bank fucks up.

Keynesianism is exactly based upon that notion: that we have to screw up the market for "store of value", because for Keynesians, storing value is a Bad Thing.  However, it is part of people's aspirations, of their demand, of what they value.  Keynesians start from the (correct) observation that the demand for store of value fluctuates and that this would lead, if unhampered, to price fluctuations of the aggregate demand (goods and services).  As Keynesians want people only to want goods and services, and deny them their right to want to store value (or to change their demand for store of value) they try to play with the store of value so as to counter act the people's demand fluctuations: if there is a lot of demand for store of value, which would lower V, lower prices, and increase interest rates, Keynesians devaluate money by printing some, to make the store of value in money unattractive, lower interest rates, and cause inflation.
On the other hand (although rarely done in practice) if people want to lower their stores of value, and spend the money, strict Keynesians would destroy money, make store of money more attractive, and increase interest rates.

As, however, nobody is stronger than the market, people try to find other ways to store value, which gives rise to a huge financial sector, which mainly exists to try to counter act the market distortion imposed by Keynesian denial of the fluctuating demand for store of value, and the doctrine of constant prices of goods and services.

This puts in place the machinery to blow speculative bubbles.

The hypothesis you need to make for that to hold, namely that value would be constant and immutable, can then also be extended to production. 

Indeed, if people value a car exactly the same as they value labor, oil and iron ore, then making a car is also not "creating economic value".  It is because some people value more a car at certain moments, than labor, oil and iron ore, that "making a car" creates value (that is, creates satisfaction).  If people wouldn't be any more satisfied by a car than by oil, labor and iron ore, making cars would do exactly what you describe as "value extraction": namely the car producer would be an intermediary between the digging up of ore and oil, and the production of labor, to the car owner, and would just "extract" value from extraction to consumption, like me with my apple.

It is because some people value a car MORE than the ore and oil in the ground, and the labor, that there is value creation when they acquire a car.  Two months later, maybe they would have preferred the oil and the iron ore and the labor, who knows.

It is by getting the iron ore, the labor and the oil *in the specific form of a car* *at the specific moment* *in the right hands of people valuing it* that there is value creation (that is: satisfaction). 

It is not the production of the car itself.  As I said, the car producer has strictly no use for his 2000th car.  It only takes room, it costs him to store it.  For him, it were better to have the ore and the oil and the labor (for instance, to clean his house or cook him a meal) rather than to transform ore and oil in a to him totally useless car.

It is the act of getting that car in the hands of someone who values that car, that creates the value (the satisfaction).

But he's betting on the fact that someone is going to value a car.

The day that we all have teletransporters style Star Trek, a car is a piece of rubbish.  Except maybe for a museum or so.

What I mean is that betting on finding someone valuing a car more than oil, ore and labor is just as well a bet on someone's economic wishes than betting on finding someone who will be valuing a bitcoin more later than now.

I do not deny that production is a particular form of speculation, where asset transformation takes place, while speculation in restricted sense doesn't do an asset transformation, but only an asset translation in time or space.  But there can be value creation in all of them.

The point being that purely speculative assets which have no other use than to be resold are the funny assets where their value is equal to their price projection of the future.  THAT gives you a zero-sum game on the short term, of course.  The only reason to value bitcoins, gold, or dollar bills, is their price projection in the future a part from some meta-aspects like being proud to have bitcoins or so which give them subjective value over the price.  But it doesn't even give you a zero sum game in the long run: if there is economic growth (whatever that precisely may mean), then you may obtain more useful assets in the future than today if the assets are collectibles, even though their price (expressed in other collectibles) didn't increase: collectibles in a growing economy can buy more satisfaction (value) because of the natural deflation.

On the other hand, inflationary assets like dollars loose value in a growing economy, if the inflation is larger than the growth (again, difficult to determine in a changing economy).  Even if dollars keep of course their value expressed in dollars and keeping dollars or dollar-expressed assets looks like a zero sum game.

So, in short: production is nothing else but a transformation of assets and labor with the bet that the new organisation of those things will be valued more to some than their original form (will a car be valued more than oil and iron ore ?).  It only creates value from the moment that it generates satisfaction with the consumer (because value is satisfaction). 
As satisfaction changes over time (in an essentially unpredictable way on the long term) just having assets changing hands by exchange is a way of continuously getting things in the hands of those appreciating those things most, which is just as well creating value (satisfaction).

If I appreciate a car today, and you appreciate a violin today, exchanging my violin for your car creates value today.
If tomorrow, I appreciate a violin more, and you appreciate a car more, exchanging AGAIN your (now) violin for my (now) car creates AGAIN value.

Because each time, we are more satisfied after the deal than before.

Now, if we proceed to our original question, i.e. about speculation, you can easily discern between speculation and, say, investment. As I said before, in speculation you don't create new economic value, but, as my thought experiment has shown, could actually take some part of. Investment, on the contrary, is tightly connected with creation of new economic value, e.g. you buy land and grow apples.

If I'm an intermediate and all values of the apple are static, then of course I get part of the value creation.

But you can also see this differently.

Suppose that yesterday, I really wanted to possess an apple.  I bought an apple for 6 eggs, and I valued it 10 eggs.  So I had a value creation of 4 eggs for that.

However, today I realize that I don't like having an apple any more.  I value the apple today only 2 eggs.   I now sell that apple to you for 6 eggs.  I have AGAIN a value creation today of 4 eggs by this act.

If you have valued an apple all the time 8 eggs, then you could have bought it directly yesterday for 6 eggs (market price) and gained 2 eggs of value.  When you buy the apple from me you also pay 6 eggs, and you gain 2 eggs of value.

So if you directly buy the apple, you win 2 eggs and I, nothing.  "total gain 2 eggs"

If I buy the apple, and then sell it to you, I win 4 eggs yesterday, 4 eggs today, and you win 2 eggs in value.  "total gain 10 eggs".

You can say: yes, but your change in mood made you LOOSE 8 eggs.  No.  Value is only instantaneously and subjective.  I cannot compare value to me yesterday, with value to me today.  I can only say, at each instant, what I value and what I don't value.

Appreciation changes.  Subjective value changes.

The value creation is the benefit of the apple MINUS what you had to give up for it, right.  If you give up less, you have more value creation.

No, not always.  Now and then.  It is not a bad thing to kill even relatively good businesses.  That allows for change.  A good business is maybe hindering a better business to emerge.  A recession now and then "mixes the stuff" and allows change.

That doesn't mean that we want recessions ALL THE TIME.  But a recession every 5 - 10 years is maybe not a bad thing, to mix the cards, to overthrow habits, to allow renewal, and thinking things anew.


Sure. But even if good trees burn, it will make place for new species and new trees.  That's what I mean.


Growth is an artificial number.  It has no meaning.  There's no way to determine economic growth in a changing economy.  The only thing you can do is to compare to baskets (to compute the inflation, from which you can determine a number you call "growth" based upon a monetary expressed GDP)  But in a changing economy, the baskets of yesterday have maybe no meaning any more today.  
And if you take the entire economy as a basket, you cannot distinguish inflation from growth any more.

If the "price of the whole economy" was X yesterday, and 1.2 X today, then I should conclude that the inflation was 20%.  Or was it growth that was 20% ?

The only way to find out "inflation" is to define a sub basket of the economy (say, 3 loafs of bread, a car, an appartment rent and 20 carrots).  But what is the economic value of that basket this year as compared to last year ?  Prices can fluctuate.  Maybe the price of bread, cars and carrots has plumbed because people now eat spaghetti, and take the train.  

This means that you actually extract economic value from apples when you resell them! Do you now get it?

Strictly speaking, you are wrong even here, since the benefit of an apple would remain the same to me even if I bought it cheaper. But I leave it to you to think over why it is so.

There is more value creation for you (and none for me in this case) when you can buy your apple cheaper from the guy who sold it cheaper directly to you, because you value the apple the same (I suppose) and you have to give up less for it.  So the value creation for you is bigger.
The value creation for the guy selling it is the same (if he sells it at the same price he would have sold it to me, we can assume that his increase in satisfaction is the same).

The one not gaining any satisfaction is me, while I gained satisfaction in the first story where I was the intermediate apple owner.

But the thing gets more complicated, as our appreciations of value change over time.

If I buy the apple from the guy at t0, I may value an apple differently, then when I sell it to you at time t1.
When you buy the apple at t0, you may value it differently then when you buy it from me at t1.

So the two situations are only equivalent under the hypothesis that our respective valuations of possessing an apple do not change between t0 and t1.