View previous topic | View next topic

Inflation, what's it for?

Page 1 of 2
Goto page 1, 2  Next

djgordy
750280.  Fri Oct 08, 2010 10:37 am Reply with quote

HarryAlffa wrote:
gruff5 wrote:
Inflation in the modern era ...

Note the bit that says "modern era". It clearly doesn't mean inflation didn't exist waaaay before then.


Over at Emporio Uggi..."yes Mrs. Ergg, I'm sure that your mother did buy a sabre tooth tiger coat from us 12 winters ago for three shells and a woolly rhino horn but times change. You're going to have throw in 2 wheels and the secret of fire for the same thing nowadays."

 
gruff5
750452.  Sat Oct 09, 2010 6:45 am Reply with quote

Neotenic wrote:
I'm not sure how you'd really go about quantifying that - not least because there's not one uniform price for a suit.

Well, i did say it was difficult to quantify the "intrinsic value" and this is as good a measure as any. You might say a bushel of wheat today looks like a bushel of wheat from the middle ages - but that might be a worse price marker, given how the labour required to produce a bushel of wheat has plummeted (due mainly to finite oil-based agriculture)

Neotenic wrote:
It shows that the value of gold has gone from under $400 to over $1,000 per TO in the last ten years - have suits undergone the same level of price volatility?


No, i expect quality suits have stayed reasonably constant. But the value of gold bounces around a mean value over longer periods; the bouncing is often due to the global-events effect you mention. Whereas fiat currencies (ie those backed by nothing) inexorably inflate over time until they eventually combust in hyperinflation and become worthless.

I think the original poster asked how inflation contributes to growth? I've done no research on this, but isn't GDP measured in the national currency, and so if you have inflation, you inevitably have "growth" measured in that currency?

 
HarryAlffa
750535.  Sat Oct 09, 2010 11:44 am Reply with quote

Hi gruff5,
The "inflation gives growth" thing, was something said over dinner conversation. While most kind of thought they may have heard something of this before, no one could say how it did it (if this was the case).

I have a sneaking suspicion that its more to do with banks shaking the populace down ... somehow!

 
Neotenic
750636.  Sat Oct 09, 2010 6:28 pm Reply with quote

Quote:
Well, i did say it was difficult to quantify the "intrinsic value" and this is as good a measure as any.


It's difficult to measure the intrinsic value of some things - like companies. But gold is a commodity. Therefore, the intrinsic value is nothing more than what people are prepared to give you in return for it - be that money, goods or services.

Quote:
(due mainly to finite oil-based agriculture)


It's also worth pointing out that gold is an equally finite resource.

Quote:
Whereas fiat currencies (ie those backed by nothing) inexorably inflate over time until they eventually combust in hyperinflation and become worthless.


I don't think it's quite as inevitable as you may like to. And no, Zimbabwe would not be any form of evidence that it is. It's evidence that it is possible, yes, but you have to take some truly lunatic decisions to get there.

Quote:
I've done no research on this


Well that much is true.

Quote:
isn't GDP measured in the national currency, and so if you have inflation, you inevitably have "growth" measured in that currency?


It doesn't matter what unit of measurement you use. Water is not hotter if you measure it in Fahrenheit than it is if you measure it in Celsius, even if the numbers are higher.

Also, inflation is a measure of price. In fact, it is multiple measures of price. In the UK, we use two - RPI can CPI, and have used different measures in the past. Even the way RPI is calculated is altered periodically, as goods are added and removed from the 'basket' which is used to measure prices.

Inflation does not necessarily feed into an increase in the money supply, either - and would not be taken into account in the M3 calculation of money supply. If anything, it's the other way around.

And not only that, the size of the money supply does not form part of the calculation for GDP, which is a measure of economic activity.

Oh - finally - whilst GDP may well be reported in domestic currencies internally, they will be converted into a single currency (usually US$) for international comparison.

 
exnihilo
750990.  Mon Oct 11, 2010 2:57 am Reply with quote

A cursory glance at almost any history book will show that inflation has been a constant issue, I'm not sure I follow any of the arguments here which suggest otherwise. It's not some capricious invention of government.

 
Neotenic
750995.  Mon Oct 11, 2010 3:08 am Reply with quote

Quite - inflation is a measure of a phenomenon, not a tool in itself.

One does not boil water by manipulating a thermometer.

 
gruff5
751037.  Mon Oct 11, 2010 6:36 am Reply with quote

exnihilo wrote:
inflation ....is not some capricious invention of government.

Well, given that the central banks (eg the "Federal" Reserve of the USA and the Bank of England) are private banks, that is certainly true.

Printing money out of thin air and then loaning it at interest to us poor suckers - what a splendid wheeze!

 
Neotenic
751045.  Mon Oct 11, 2010 7:14 am Reply with quote

Quote:
The MPC’s decision to inject money directly into the
economy does not involve printing more banknotes.
Instead, the Bank buys assets from private sector
institutions – that could be insurance companies, pension
funds, banks or non-financial firms – and credits the seller’s
bank account. So the seller has more money in their bank
account, while their bank holds a corresponding claim
against the Bank of England (known as reserves). The end
result is more money out in the wider economy.


Quantitative Easing Explained

Oh, and the Bank of England was nationalised in 1946 - but what's half a century between friends?

The Fed is a rather more complicated beastie - but this explains it rather well. Calling it a 'private bank' is something of a misrepresentation, as it is absolutely nothing like, say, Coutts.

 
gruff5
751377.  Tue Oct 12, 2010 8:14 am Reply with quote

thanks for the info on Central banks.

I'm not the only one to use the phrase "printing money" as a graphic picture of what's going on with our currencies, however. Your quote says "the Bank buys assets" - with what, exactly?? Money it just created out of thin air - banknotes, or digits on a screen, it's the same thing ultimately.

Still, in our finite world it seems the only way to produce the infinite growth that our financial system is addicted to.

 
PDR
751382.  Tue Oct 12, 2010 8:32 am Reply with quote

Neotenic wrote:
One does not boil water by manipulating a thermometer.


[mode=pedent]
Not usually, but it can be done.
[/mode]

PDR

 
PDR
751384.  Tue Oct 12, 2010 8:33 am Reply with quote

HarryAlffa wrote:
I have a sneaking suspicion that its more to do with banks shaking the populace down ... somehow!


Now there's a surprise.

PDR

 
Neotenic
751403.  Tue Oct 12, 2010 9:40 am Reply with quote

Quote:
Money it just created out of thin air - banknotes, or digits on a screen, it's the same thing ultimately.


That is the case - but that money is used to purchase actual assets. Then, when those actual assets are eventually sold, the money used to purchase them is (or at least bloody should be) removed from the balance sheet of the bank again.

The important point, though, is on motivation - it is not done on a 'for profit' basis, but for the continuing function of the entire economy.

Quote:
Still, in our finite world it seems the only way to produce the infinite growth that our financial system is addicted to.


It's not just the financial system that is 'addicted' to growth - I think you'll probably find that you're quite keen on it too. Especially when it comes to the size of your pay packet, or your pension pot.

 
CB27
751432.  Tue Oct 12, 2010 11:04 am Reply with quote

When people say that the money comes from nothing they forget that the money in their pockets come from nothing as well.

Have a look at that paper money in your pocket and you'll see it says "I promise to pay the bearer", it basically means you're putting your trust in a promissory note from the Bank of England that it will pay you the money promised on the note if you ask for it.

That trust is usually based on assets, but even that's not enough, and if trust goes away then inflation creeps up and you might even face devaluation.

If you have a central bank as strong as the BoE is regarded, and an economy who's credit rating is as strong as the UK, the trust is there for the central bank to issue more money than their assets in the understanding that they are "borrowing" the asset that money is set against.

 
PDR
751440.  Tue Oct 12, 2010 12:13 pm Reply with quote

CB27 wrote:
If you have a central bank as strong as the BoE is regarded, and an economy who's credit rating is as strong as the UK, the trust is there for the central bank to issue more money than their assets in the understanding that they are "borrowing" the asset that money is set against.


That's part of it, certainly. Baut the major part is that if there ever is a situation where the BoE (fregsample) CAN'T repay the debt then their inability to do so will be the least of your worries - it's a "shared faith in our econonic society" concept which is rather well discussed (believe it or not) in Tom Clancy's "Debt of Honour"[1].

PDR

[1] It's mixed in with the boring pseudo-political manifesto in the boring first half of the book before he gets back to his normal forte of describing how F15s, F18s and and F22s kick the sh!t out of someone.

 
gruff5
751957.  Thu Oct 14, 2010 2:36 pm Reply with quote

Neotenic wrote:
Then, when those actual assets are eventually sold, the money used to purchase them is (or at least bloody should be) removed from the balance sheet of the bank again.

Does that ever actually happen (removal from balance sheet), though?

 

Page 1 of 2
Goto page 1, 2  Next

All times are GMT - 5 Hours


Display posts from previous:   

Search Search Forums

Powered by phpBB © 2001, 2002 phpBB Group