Topic: Inflation and Deflation of Price and Money Supply - page 59. (Read 1273048 times)

It is not population shrinking that actually matters here but rather age distribution skewing, i.e. more elders and less young productive hands. So things become yet more complicated, and to keep their standard of living, they have to increase productivity that would possibly lead to GDP growth (since Japan's population is not that much shrinking as it is aging)...

Falling prices will lead to greater efficiency instead of wasting scarce resources.  See Japan.  Stagnant GDP but super clean cities, machinery not needing replacement for 15 years, wonderful food, low unemployment.  Deflation is ok. If their population levels weren't declining I think their GDP might even be slightly growing.  Now they've got Abenomics to screw things up by trying to create GDP growth.  Growth in what? Speculative assets?  Why is growth necessary for a shrinking population?  No wonder Abe's popularity is falling.  Since, Abenomics, Japan's current account deficit has only been getting wider. Imports growth is outstripping exports growth.

The long term viability of bitcoin as currency interests me, because ultimately, it is this quality that will sustain or derail it after all the speculation has moved on to more interesting pastures.

The theory of money, therefore, is an important one to contemplate for those interested in the long game.

Money theory can be complicated... and controversial.

Let's add this thought to the mix:

"Enter, bitcoin, a cryptography-based currency and technology developed by someone with the pseudonym Satoshi Nakamoto. It has been designed to have a limited rate of growth in the total quantity of currency, up to a predefined cap. There can never be more than 21M bitcoins. The Quantity Theory says that this will make prices of goods measured in bitcoins stable.

One problem with this theory is that the real costs in terms of land, capital, and labor to produce things is steadily falling. Every productive enterprise is constantly seeking to drive cost out of production. If a currency had a constant value, then prices in terms of this currency would be falling.

As we shall see below, the value of bitcoin will be anything but constant. Without a mechanism for responding to increased market demand by creating more currency, there is a fatal flaw."


excerpt from:  http://monetary-metals.com/bitcoin-gold-and-the-quantity-of-mone/

Eloquent post.

The velocity of money is decreasing because the Fed is intentionally decreasing it to dampen inflation. They are doing this by paying risk free interest to member bank deposits, effectively paying banks not to lend out their bail-out money. The bail-outs were intentionally designed to re-capitalize zombie banks without causing inflation from the fractional reserve money multiplier. It worked, and all they had to do was counterfeit  a trillion dollars and give it to the very people who failed at their one and only job: lend money to people who will pay it back.

This was a patch job to a badly failing system that is still failing, but it was a brilliant patch. The most brilliant thing about it is that they managed to get away with it with no more consequence than some hippies occupying a park.

The body of the economy needs the protein of capital formation, but doesn't get it because of zero interest rates. So like the Grateful Dead song, it keeps truckin; livin' on reds, vitamic C, and cocaine. Meanwhile, the muscles (industries) atrophy. This is not a fixable problem The patient is dying, too weak for the surgery (correction/bust/depression) that would save it by re-allocating capital to the places it could be used it most productively.

Yes, interesting case. Yet it would not be fully representative of the current (fiat) monetary systems. By observing the system, you change the system (hint at quantum properties (i.e. wave-particle duality)).

Won't it be interesting when cryptocurrencies have a big enough economy to warrant serious analysis? There will be literally billions of data points. While the numbers won't be everything, comparing the data year over year will lead to some significant economic insight, I think.

pillo sitio

Japan or China or Europe. China is experiencing issues in their shadow financing sector. One of the investment trusts sold via ICBC (world's largest bank) has lost money to a coal company. Payment deadline to investors is end of jan. Many more trust products in the sidelines just waiting to blow up.

Europe hangs on by a thread. Greece government run by ex Goldman partner has a majority by a margin of three out of three hundred seats. We'll see how long things continue before Merkel is forced to reveal to Germany that their loans to Greece are not actually safe. Also, the whole area is falling into deflation, which is the correction they need. But of course crushing debt levels make this option unpalatable.

Agree on this point. I'm expecting a deflationary collapse sometime within the next 2-3 years but I don't think that the crash will come from the US but rather from Japan and we'll see investors rush to the dollar and possibly gold and bitcoins too.

I get that. But, how are they calculating velocity? They are using the quantity theory of money equation. There's no way to calculate it otherwise.


How does this prove Fisher or Friedman wrong? I don't get it. Seems to me you're still implying that if a change in M doesn't affect P*Q, it's because V declined. I agree and I think they would too. I mean by even discussing V, we're assuming the quantity theory or equation of exchange is correct. The reason is the V variable is computed from the equation itself. Anyway, when V picks up, it will primarily hit P. Which is the other point of the equation.


I agree that all this will blow up. And I also agree the expansion of credit isn't working.

The ideal gas law for 1 mole of gas is PV = RT.  Compare to the quantity theory, PQ = MV.  The form is identical.   The analogy is very strong.  The ideal gas law is a perfect description within its domain.  When applied to actual masses of gas, it is an approximation.  The ideal gas law derives its inevitability from the statistical behaviour of the ensemble.  The quantity theory is a perfect description within its domain.  When applied to actual exchange economies, it is in approximation.  The quantity theory derives its inevitability from the statistical behaviour of the ensemble.

Unless there is present a reasoned argument or substantive evidence that the ideal gas law is a useful approximation in a given circumstance, it would be folly to think that it was not.  Likewise, the quantity theory.  Within the realms of practical experience both have proven reliable, and both have compelling principled explanations.  Indeed one could say that both are obviously true, if anything were ever obvious.

On the other hand, one could say that the ideal gas law is a definition of R.  One could say that the quantity theory is a definition of M.  The value of Boltzmann's constant can be read from PV/T, empirical observables.  The value of a unit of currency can be read from PQ/V, empirical observables.   In this sense, the ideal gas law is useful if R holds true in other circumstances.   Likewise the quantity theory is useful if the value computed enables arbitrage with other currencies.  In fact, it does.

Velocity crashing due to QE. http://www.zerohedge.com/news/2013-10-21/qes-gross-misallocation-capital

So the fed pumps money in, expecting velocity to stay constant, but it doesn't. Fisher was wrong. There at times when even near zero rates will not cause credit growth to increase.

So what do they do? Force feed credit gavage style to students, automobile loans, corporate debt to fund buy backs, REO to buy property, property refinancings, margin debt and of course government debt.

Sure they are going to succeed for awhile. Then it's going to blow up in their faces all over again.

nice post! very interesting 

Hello, the answer to point 2 is contained within the answer for point 1

1. The economy is something of a feedback loop, so while you're correct that prices are sticky/rigid, this is a time-sensitive scenario. It takes time for actors to adjust to new realities, and some times, they refuse to do so - but that's their own problem.

2. Inflation is an increase in the money supply relative to the goods and services it is chasing; so, ceteris paribus, this would lead to an increase in prices. But like I said above, the economy is a bit of a feedback loop, and signals take, again, time to move into all sectors. And some sectors are more sensitive to inflation that others: the stock market is going up at unprecedented levels right now, the housing market is 'recovering' etc etc.

1. Company X invents a new product, new sgement and all other prices of unrelated products will fall at once so X can make more money? Yea right, dream on. Most prices are rigid.
2. If you read anything in those 20 years, please post a link where we can find your fabricated definition of inflation. Wikipedia - no, Investopedia - no, any economics scholbook - no ...

1. Utter nonsense, if the business has something the consumer want, they will buy. Growth can be done using Say's Law, reducing price to increase demand. No need to print money out of thin air - inflation.

2. Inflation is when the money supplies expand. Simply as that. Inflation leads to prices going up. Simple as that. Don't tell me to read as i already knew 20 years ago.

Q is quantity of product, price is a separate variabale ... ah what's the point. Go ahead, ignore all theory and blindly believe that almighty Bitcoin will save us all.

Curious about your "1965 velocity level" point. Haven't heard that. I guess that seems plausible, but I would like to see the data on that. I mean, velocity, as I'm sure you know, isn't really possible to capture (this is actually the beauty of bitcoin, it can be captured there).... velocity is often thought to remain pretty stable. If it's being calculated from the equation via other variables, there's problems there too, since inflation, gdp and even MS are all calculated differently then they once were (in 65). Yet, it should also be pointed out, if your using the variables and the equation to calculate velocity, your clearly saying the equation matters.

As for QE - I agree it's an experiment. But, it's not an experiment for the sake of experimenting. I do agree it won't end well. But, why it's happening? I think I have a theory. The Fed knew we were in a shit storm in 2008/09. They utilized every tool they had in the aftermath, and still in a shit storm. Their sole hope with QE is to buy time because they know everything is being held up by a thread. I do not think, for one second, those on the Fed don't know the severity of damage that QE most likely will cause. I think they simply think in terms of immediate gratification (or in the short run). They didn't care about the long run consequences. The irony here is that's exactly how Greenspan and the former Fed administration thought about the 01' recession and 9/11.... 'let's just heal the world now' (as if they could)... that sort of logic may hold things up temporarily, but as we all know, those actions led to the housing bubble, which burst and caused worse problems. Point being, problems will continue to erupt and the tools are growing less and less, as the severity grows. It will end in devastation and most likely a world war because as the US goes down, the world will too. Desperation will get bad.... real bad and poor choices will be made so that countries can eat and survive.

Bitcoin provides a new hope to this chain of events because it could help the world deleverage, which is the primary problem. Bitcoin, or something like it, not the Fed's policy, could help save the world.  It's always that way. Technology is what lifts economies... not government (or psuedo-gov'ts in this case).