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Inflation, And The Shortcomings Of The Quantity Theory

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In this extract from The Grip of Death, Michael Rowbotham argues against the quantity theory as the primary cause of inflation, suggesting instead that inflation is not caused by "too much money chasing too few goods" but rather too much debt money.

"Inflation is not caused by too much money; it is caused by too much debt-money . Inflation is entirely due to the lack of a permanent stable money stock and our reliance upon bank credit to supply the majority of our money. The backlog of debt constantly feeds through into industrial costs, raising prices and depressing consumer spending power. It is this lack of spending power – the gap between prices and incomes – which is the driving force behind inflation. Inflation is nothing but the upward drift of prices and wages in an economy where industry is desperately trying to recoup outlay and cover all the financial costs of production, whilst the consumer is desperately trying to bridge the gap between their income and the price of goods. Inflation is the result of the two sides of the economy - consumers and producers, wages and prices – being set at odds by the perpetual lack of purchasing power, and it is quite endemic under a debt system of finance.

But inflation is attributed to the very opposite! Inflation is declared by most economists to be “too much money chasing too few goodsâ€. In an economy based 97% upon money that has been borrowed into existence, when the total of debt is in excess of the entire money stock, when everyone is competing for what money exists to avoid further debt, when the money in circulation is required both as a medium of exchange and also required to repay the debt that created it, when a booming economy has been financed on the back of consumer borrowing and industrial borrowing for investment, when our everyday experience is that there is never enough money and when there is a superabundance of goods and services of all descriptions - quite honestly, does “ too much money chasing too few goods†sound realistic? Quite honestly, which is the moor likely? That inflation is due to excess money or the backlog of debt? Turning their back on debt and completely ignoring one half of the spiralling money supply process, economists deem inflation to be caused by “too much moneyâ€. As if modern debt, the most blatant evidence of an unrealistic monetary system, were irrelevant to inflation, which is nonetheless an entirely monetary phenomenon.

The idea that inflation is due to debt and excessive banking is not a novel suggestion, indeed it is contained in the very word “inflation†which was originally applied to the expansion of money by banks beyond its true amount through the creation of additional credit. However, the suggestion that the action of banks in “inflating†the currency could lead to price-inflation has in recent years been completely swamped by a single theory on inflation – the Quantity Theory. This argues that if the quantity of money, or its speed of circulation, rises to the point where more money is available than is necessary for the purchase of goods currently available, then the price of those goods will rise to absorb this “excessâ€. Inflation is thus seen as an automatic and inevitable result of any increase in the money supply above that needed for the purchase of goods. This quantity theory of inflation, which disregards completely the nature of money and the impact of debt on prices and incomes, is contradicted by almost every piece of evidence we have, whilst the role of debt in causing inflation is confirmed."

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I've read the book and considered it rubbish.

A debt money system can work fine unless abused. Excess leverage and liar loans is an example of such abuse.

Japan had lots of debt under a debt-money system, Japan had deflation for 20 years => book is rubbish.

The book seems to not understand the concept that when a debt is repaid, the person that now has the money can repay their own debts (or issue profits to shareholders if they are a bank).

VMR.

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I've read the book and considered it rubbish.

A debt money system can work fine unless abused. Excess leverage and liar loans is an example of such abuse.

Japan had lots of debt under a debt-money system, Japan had deflation for 20 years => book is rubbish.

The book seems to not understand the concept that when a debt is repaid, the person that now has the money can repay their own debts (or issue profits to shareholders if they are a bank).

VMR.

What happens when one part holds all the money and aren't spending - and the other half hold all the corresponding debt?

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What happens when one part holds all the money and aren't spending - and the other half hold all the corresponding debt?

We make a new type of money and leave the others behind.

If we are allowed to of course.

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We make a new type of money and leave the others behind.

If we are allowed to of course.

I was thinking that we ask China for our ball-back-please, but that will do.

What's to stop you using your own money now?

Just change up a few bob when you did need to pay the numerous parking tickets you seem to get. The exchange rate would be stupendously in your favour - alledgedly

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I was thinking that we ask China for our ball-back-please, but that will do.

What's to stop you using your own money now

Nothing, really. Many banks have taken my money in the past. I and everyone else however do have to acquire statist paper tokens, which is bad money driving out good.

Just change up a few bob when you did need to pay the numerous parking tickets you seem to get. The exchange rate would be stupendously in your favour - alledgedly

I don't pay those anyway.

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Codswollop....

When spain extracted lots of Gold from South America the cost of stuff went up and they bankrupted themselves, money is money is money.... it cant quite clearly happen with stuff that isnt backed by gold. IMHO dollars are essentially Oil Backed if you want to blow things further out of the water.

One more Zimbabwe.... most of the money isnt debt backed it was just directly printed and handed out in wages, is the author saying that zimbabwean inflation isnt possible?

Edited by moosetea

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It's always been about ratios

income:debt

base money:credit

old people:young people

etc etc

The numbers don't matter.

As you say, the scale of calibration doesn't matter.

However, there is one qualitative characteristic of the money numbers, their sign, which often does matter!

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I've read the book and considered it rubbish.

A debt money system can work fine unless abused. Excess leverage and liar loans is an example of such abuse.

Japan had lots of debt under a debt-money system, Japan had deflation for 20 years => book is rubbish.

Japan had a massive inflationary boom followed by a deflationary bust. Debt was paid down reducing the growth of the money stock. Interest rates remained close to zero, new credit was exported and efficient production all combined to prolong deflation.

The book seems to not understand the concept that when a debt is repaid, the person that now has the money can repay their own debts (or issue profits to shareholders if they are a bank).

VMR.

Indeed, reducing the money stock unless new loans are created elsewhere.

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.

One more Zimbabwe.... most of the money isnt debt backed it was just directly printed and handed out in wages, is the author saying that zimbabwean inflation isnt possible?

No, they stopped believing it had value.

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No, they stopped believing it had value.
suggesting instead that inflation is not caused by "too much money chasing too few goods" but rather too much debt money

which makes this sentence nonsence

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As you say, the scale of calibration doesn't matter.

However, there is one qualitative characteristic of the money numbers, their sign, which often does matter!

Yes, maybe we should just have one symbol. ;)

Would free some space on the top row of the keyboard too.

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which makes this sentence nonsence

Different contexts. Zimbabwe is state failure. The article is referring to general inflation as experienced in "stable" countries.

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Different contexts. Zimbabwe is state failure. The article is referring to general inflation as experienced in "stable" countries.

Chicken and egg.

Did they inflate which caused state failure or did they print because the state was failing?

The BoE are printing because he state is failing, which will cause it to fail later, but worse for all concerned.

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Chicken and egg.

Did they inflate which caused state failure or did they print because the state was failing?

The BoE are printing because he state is failing, which will cause it to fail later, but worse for all concerned.

The BoE are printing to recapitalise the banks. The state is failing? Not so sure, more like our debt to GDP will compare with other developed nations.

The problem was the conduit for credit creation - unproductive assets.

Whatever.

If the banks relax credit and lower interest rates the housing market is affected significantly. This has a knock on effect in other related industries, and so on.

If, for example, I run a plant hire firm and see the opportunity to expand on the back of the credit boom, I borrow £250k for a new excavator. That machine must now be working flat-out to cover the cost of the loan and make a profit. But when I took out that loan I was pricing my work in the credit environment of the time, and because I'll be using a shiny new machine that also justifies a price increase as does the new driver I've taken on.

My new driver has recently moved to a bigger house, with a bigger mortgage, and he won't work for less, he has a new debt to service.

This is what the author is getting at. The situation is reflected everywhere. Prices are being bid up, although the money supply is increasing, so is the debt burden which we're all chasing the money to cover.

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Printing money is inflationary.

Lending money into existence is inflationary.

They essentially do the same thing - they put more "money" into the economy.

When borrowed money is repaid, it is deflationary.

When you burn printed money, it is deflationary.

They essentially do the same thing - they take more "money" out of the economy.

If you borrow progressively more and more without a plan to repay it (like government debt), you may as well be printing it and save some money on interest. Whether the government should be borrowing/printing on our behalf is another question. Perhaps there should be no borrowing (from the populations future productivity) by the government at all?

Alternatively, maybe the whole idea of government borrowing is the wrong way to think about the economy anyway. The government could create money into existence (monetary inflation), with the results being assessed through price indexes (CPI/RPI inflation). If an investment was bad, with genuine growth being created, it would just cause price index inflation. If an investment was good, it would cause genuine growth and price index deflation (ie. stuff would get cheaper due to previous, good, investments). This way, price index deflation (not monetary deflation - our money would go further) would always be preferred and would be a good way to measure government spending.

Fractional reserve banking probably couldn't live with the above, as credit would skew the money supply, causing inflationary/deflationary effects too. We would end up boxing inflation/deflation shadows again like we do now.

EDIT: removed typo word

Edited by Traktion

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Printing money is inflationary.

Lending money into existence is inflationary.

They essentially do the same thing - they put more "money" into the economy.

When borrowed money is repaid, it is deflationary.

When you burn printed money, it is deflationary.

They essentially do the same thing - they take more "money" out of the economy.

If you borrow progressively more and more without a plan to repay it (like government debt), you may as well be printing it and save some money on interest. Whether the government should be borrowing/printing on our behalf is another question. Perhaps there should be no borrowing (from the populations future productivity) by the government at all?

Alternatively, maybe the whole idea of government borrowing is the wrong way to think about the economy anyway. The government could create money into existence (monetary inflation), with the results being assessed through price indexes (CPI/RPI inflation). If an investment was bad, with know genuine growth being created, it would just cause price index inflation. If an investment was good, it would cause genuine growth and price index deflation (ie. stuff would get cheaper due to previous, good, investments). This way, price index deflation (not monetary deflation - our money would go further) would always be preferred and would be a good way to measure government spending.

Fractional reserve banking probably couldn't live with the above, as credit would skew the money supply, causing inflationary/deflationary effects too. We would end up boxing inflation/deflation shadows again like we do now.

Youi are quite right in all the above.

But.

Fractional reserve banking isn't lending.

It's putting on the appearance of lending in lieu of lending.

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Youi are quite right in all the above.

But.

Fractional reserve banking isn't lending.

It's putting on the appearance of lending in lieu of lending.

Yes, to be precise with the terminology, you have to have something in order to lend it.

I'm not sure if there is a more appropriate term, but the point is the money is created at the point when the "loan" being made, increasing the money supply.

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Yes, to be precise with the terminology, you have to have something in order to lend it.

I'm not sure if there is a more appropriate term, but the point is the money is created at the point when the "loan" being made, increasing the money supply.

Don't think so.

Nothing is created. They've just lied and recorded the fact that they have lied.

Afterwards some economic activity might result though!

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Don't think so.

Nothing is created. They've just lied and recorded the fact that they have lied.

Afterwards some economic activity might result though!

While everyone believes bank credit is worth the same as base money (foolish or otherwise), the dilution of spending power still occurs.

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While everyone believes bank credit is worth the same as base money (foolish or otherwise), the dilution of spending power still occurs.

That bit I disagree with.

I think the value of something is based around it's actual supply and demand in the real world. I think the value stays where it is but more activity occurs because of the lie.

In fact, I am convinced we are still on a gold standard, just incredibly diluted.

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That bit I disagree with.

I think the value of something is based around it's actual supply and demand in the real world. I think the value stays where it is but more activity occurs because of the lie.

In fact, I am convinced we are still on a gold standard, just incredibly diluted.

Interesting, you can dilute a gold standard as most people don't care about the price of Gold. What would happen if people did care about the price of money in relation to Gold? Will they ever care again? Has the link been broken?

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New credit is simply a means of increasing the velocity of money in existence.

It is only when money moves (i.e. has velocity) does it bid up prices. The more credit, the higher the velocity of base money, the more bids are made and the higher prices rise.

(a different way of looking at it courtsey of Timm)

Money moving... with velocity? Oh you mean when there is demand and people want to spend it on something right? :P

You can have banks offer all the credit in the world, but if there is no demand for it [to be taken on as debt] by people, without that signature on the dotted line, it means diddly.

Edited by roman holiday

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Interesting, you can dilute a gold standard as most people don't care about the price of Gold. What would happen if people did care about the price of money in relation to Gold? Will they ever care again? Has the link been broken?

I think it's because the current system is a derviative of the old gold standard.

So that would mean that it's inflation woudl be relative to gold (or at least relative to the original amount of gold they defaulted on.)

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