InvisibleBlack
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quote:
ORIGINAL: MrRodgers
Two things:
One is that an economics professor at a nearby univ. once told me that M1,2,3, through M5 is a different description of capital designed to fit his particular thesis. Take what economists say with a big grain of salt.
The actual measured amount of money in the economy is one of those statistics that it's impossible to get right. All of the money supply estimates (M1 - M3) are inexact. However, the fact that the statistical measure of the money supply may be inaccurate doesn't invalidate the theory behind the amount of currency in the system and the inflation rate or the perceived values of the equities market. I don't believe that anything I posted above is controversial and everything there would likely be covered in Economics 101. As I said in the first post, a lot of it was simplified in order to illustrate a point.
quote:
ORIGINAL: MrRodgers
Two, Friedman and too many others referred to today are post Keynesians and post Fed and believe in a monetary system as the ultimate market determiner or 'self-regulator' and combined with Friedman's postulation that 'capitalism IS freedom' fiasco, renders there advice specious at best.
Most of the more recent (say 1950+) work in monetary theory is based upon Friedman's work. A great deal of Keynes' theories dealt more with fiscal (taxes and spending) theory than it did with monetary theory. It was Friedman and Schwartz' work that sort of 'opened the door' to the power of playing games with the money supply. Sadly, just as with Keynes, most of Friedman's work isn't really understood or followed. His conclusion was that monetary policy was too unstable and too unpredictable to be a good tool for government policy and that the best thing the Fed could do was estimate the growth rate of GDP, average it over something like ten years and then just set the growth of the money supply equal to whatever the result was (say if you estimate that GDP would grow by 3% per year, you'd inflate the money supply by 3% per year) and leave it alone. He also said the best thing they could do was fix the Fed's lending rate at a set number (say 2 or 3%) and not play with it. He believed it was more important to provide stability and predictability to the system than try and manipulate the economy via monetary policy.
Of course, they accepted his theories and threw out his conclusions.
Both Keynes and Friedman were brilliant men. The sad fact is that economics, while no longer in its infancy, is still not a mature science. It's probably pre-adolescent. A lot of things are still unknown. A lot of mistakes will still be made. I definitely wouldn't take any economist's unvarnished word for anything that affected real people in the real world and I tend to be rather skeptical of any political views espoused as 'science'.
quote:
ORIGINAL: MrRodgers
Much of your examples are taken in a vacumm as if there are no other mitigating factors. Because pizza is not a rare or in-demand commodity, its price is meaningless as with any 'stuff' that has little or no universal demand say for example like gas, oil, coal. It is the inconsistency of the demand or supply due to weather...that is whole rationale for farm subsidies and would only have a very minuscule effect on pizza dough prices.
In my experience, when teaching a principle, the best course is to provide as simple a model as possible. In physics they use concepts like the "point mass" or claim that "the distance is effectively infinite" in order to simplify the problem to illustrate the point - even though we known that all masses have some volume and that distances while vast are still measureable.
It is much easier to show the effect of money on a one commodity economy than it is to list out the items included in the Consumer Price Index (CPI) and then try and justify price changes in a wide basket of goods. While there is no "one commodity economy" anywhere in the real world, the principle itself - that changes in the suply of money affect prices - is valid.
I suppose I could have used another good instead of pizza. If I ever end up teaching a course, I likely will as it seems to confuse things. However, food is one of the core components of the CPI and foodstuffs are universally in demand as they're vital for life.
quote:
ORIGINAL: MrRodgers
Currency...i.e., paper money has only a perception of value individually and an assessment of the value of what labor or added value (any finished goods) that one will obtain in exchange for it. Otherwise the value of any currency is ONLY in reference to...another currency.
If you're saying that the assessed value of paper money is the value of whatever finished goods it will purchase - then we are in agreement.
Since this is true of all currencies, then no currency has any unique value to itself. Saying that $100 is equal to 61 pounds sterling is only saying that 100 dollars will buy you the same amount of stuff in the United States that 61 pounds will buy you in Great Britain. It has to be this way since if there was any inequality in the system, exchange rates would alter to correct for this or wealth would start flowing out of one country and into another.
quote:
ORIGINAL: MrRodgers
Yes, you print up more dollars, later, one causes inflation and usually of the creeping kind and that's because every newly printed dollar isn't immediately sent into the marketplace. If one prints up money and saves it ALL, the cost of capital comes down...higher supply and it isn't until after most of that hits the market at large representing demand in all goods...do we see any uptick in inflation.
There is a certain 'stickiness' (to use the term the textbooks use) to prices and wages. They do not adjust immediately but alter over time. I don't actually know what the timeframe is for adjustments to inflation - although it's definitely related to the velocity of money - but it's at most a year or possibly two and likely much quicker. I didn't discuss a rise in investment and changes in the capital markets since that wasn't really germane to the question of currency devaluation and the stock market - a rise in inflation due to the government printing more money solely to invest in the capital markets is a different scenario from the government devaluing the currency and how the stock market would be affected, all other things being equal.
quote:
ORIGINAL: MrRodgers
Inflation has been defined as the increase in hours worked to purchase the same thing and has almost no relationship to wages. Wages are a by-product of the supply and demand in the labor market...NOT the capital markets and are only has high as what that marketplace demands and in no ways follows or leads prices. Investors are never forced by either the laws of man or the marketplace to pay anymore than the minimum necessary to fill any given position.
I have never actually heard this. I'm pretty sure that inflation is generally defined as "a rise in the general level of prices of goods and services in an economy over a period of time".
http://en.wikipedia.org/wiki/Inflation
The number of hours worked to obtain any specific good doesn't enter into the definition as far as I'm aware. I'm not sure if that measurement is even tracked. I do think that it should be - as it's a great measurement of actual quality of life or standard of living - and very little attention is paid to those matters.
Wages are simply the price of labor and yes, they are set by the forces of supply and demand. While the "real" value of wages is determined by supply and demand, the "nominal" value of wages is greatly affected by inflation (or deflation as the case may be). Wages tend to be 'stickier' than prices (since prices are adjusted daily or continuously in some cases while wages are usually adjusted once a year (raise or review time)) which means prices generally adjust fairly quickly and then wages have to catch up.
quote:
ORIGINAL: MrRodgers
Let's be realistic now and thus pizza is not in ANY of our measurements of inflation as we report that number. Most inflation is caused by two main vehicles...low interest rates which increases debt, increasing demand. This is what happens in bubbles like oil (speculation through futures) and real estate (and printing more money) two different things. AND speculation in commodities or things.
Actually, foods & beverages make up someting like 17 or 18% of the Consumer Price Index and while I'm not certain whether or not the price of pizza is in there, I'm sure other equivalent foodstuffs are (I think they use the price of a hamburger as one of the determinants). As I said previously, it doesn't matter what particular good or service you use in the example - the point is that changes in the quantity of money in the system change prices.
You are correct that rather than printing money, the government can create the same effect by altering the prime rate (actually, it's the federal funds lending rate) and so change interest rates - but trying to explain reserves ratios and the fractional-reserve banking system is an essay in and of itself and the question wasn't about changes in the fed funds rate, it was about devaluing the currency. I agree that an inordinately low funds rate will result in unwarranted investment and speculation. (I'm italicizing terms that can be easily googled if anyone has an interest.)
Since money can be created by the fractional-reserve banking system (this is called the multiplier effect), jiggering the system by lowering the federal funds rate is another method of devaluing the currency. As an aside, the Federal Reserve can also do this via open market operations such as buying government bonds. While each of these methods has its own weird little side-effects, at the end of the day, the net effect for the average citizen is the same - inflation. (Right now, actually the government is doing all of the above, so pretty much every lever is thrown all the way over to "inflate".)
quote:
ORIGINAL: MrRodgers
Capital gains and its immoral tax benefit leads the way to inflation in oil, gold etc. (see oil futures 2008) and is almost never because any structural change in supply or demand. Capital gains and the buying of selling paper and things takes only a year and may be the largest single influence on inflation as measured in the CPI and other govt. figures on commodities.
If you call a rise in the price of a commodity (such as gold or oil) inflation, then changes in the capital gains rate will have an effect - however that's confusing the rise of a single price with the inflation of all prices across an economy. I do not believe that changes in the capital gains tax are a major component of inflation. I'm also fairly sure that the price of oil is not included in the U. S. government's measures of inflation as it's considered too volatile and would tend to distort the statistics.
However, I agree with you tha changes in the capital gains rate have a direct effect on the amount of investment and the amount of pure speculation in the economy. Lowering the capital gains rate should increase the amount of investment in the system (and I believe this is the stated reason for why they did it) but it also makes speculative ventures much more profitable and doubtless did contribute to the bubbles that occurred. I don't think that it was the major component, however. I, personally, blame the legalization of securitization (there's a phrase for you) in 1999 - but securitization and the nightmare that was spawned from allowing it is another huge topic.
_____________________________
Consider the daffodil. And while you're doing that, I'll be over here, looking through your stuff.
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RE: Money, Inflation, the Market & Risk - 
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