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kenclarkesshoes

The Money Supply And Inflation

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Just been reading a chapter of Friedman's book FREE TO CHOOSE (some great ideas and some nutty ones ) called the CURE FOR INFLATION.

He states quite clearly that the only cure for inflation is to reduce the rate at which the money supply increases this theory is known as MONETARISM.

eg if the money supply was growing at 20 % per year it should be reduced to a 10% per year growth and then a 5 % per year growth,

he admits there are side effects of this policy such as reduced growth/output and higher unemployment and even a period of STAGFLATION (increasing unemployment and persisting inflation ) while the economy adjusts. The period of STAGFLATION is to be expected as unemployment will go up before inflation comes down (due to the time lag effect) so there is an overlapping period where they appear to be moving in contradictory directions. This has baffled many economic commentators.

He says policies should be put in place to mitigate the effects of curing inflation (he doesnt advocate welfare which is hardly surprising giving his neo-Darwinian political stance).

clearly this is 100 % on the money as that is what the MPC have been trying to do for the last year - reduce the rate of increase of the money supply.

Note that Friedman does not say that the money supply should be CUT only that it should grow more slowly to cure inflation.

I doubt it can work for BROWN as the inflation is just too great and the debt too large,

WRT Thatchers disastrous experiment with MONETARISM in 79-81 which lead to huge UNEMPLOYMENT and growth decline .

My question is :

Did the Tories actually CUT the money supply in the face of Friedman's advice to slow its rate of growth ?

Edited by kenclarkesshoes

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Did the Tories actually CUT the money supply in the face of Friedman's advice to slow its rate of growth ?

yes they did. you will actually find that labour practised monetarism in the last years of their reign as well. hence rising unemployment. results were as brutal as 79-81.

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yes they did. you will actually find that labour practised monetarism in the last years of their reign as well. hence rising unemployment. results were as brutal as 79-81.

does anyone have the actual money supply figures ?

if the Tories CUT the money supply when FREIDMAN was saying it should simply be slowed down gradually then they did it in a deliberate political attempt to create HUGE UNEMPLOYMENT which was what I always believed anyway,

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does anyone have the actual money supply figures ?

if the Tories CUT the money supply when FREIDMAN was saying it should simply be slowed down gradually then they did it in a deliberate political attempt to create HUGE UNEMPLOYMENT which was what I always believed anyway,

Right. Governments around the world wanted to shift the burden of responsibility away from themselves on to the private individual - monetarism certainly showed up serious failings in a state-run economy starved of cash - from this point of view it was worth going through for governments at the time.

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How do you stop the inflation? - Raise interest rates.

When Thatcher got in, inflation is at 19% and spiralling upwards. You simply don't have any chioce but to stop the printing of money by raising interest rates about real inflation! WHATEVER THE CONSEQUENCES.

Labours plans in 1983 were to increase spending to cure the unemployment - HYPERINFLATION.

The premise of monetarism is that ; the General Price level = Money stock x number of economic transactions.

The more money the higher the price level.

Where Friedman admits he was wrong was on focusing on the 'stable general price level' being affected soley by the stock of money, without taking into account other factors that would lower the price level. Technology and increased global trade (through the process of comparative advantage and specialisation) lowers the general price level. The trend away from full time employment towards self-employment/more hidden unemployment means Labour is greatly cheaper. Mass immigration also drastically lowers real wages. Changes in the way the general price level is measured - stripping out improvements in goods - different weightings mean growth is higher and inflation is lower.

These factors have been acting to lower the general price level even in the face of double digit printing of money which would normally have fed through to inflation quickly. Because the purchasing power of money is attached only to this measure of the price level, a lowering of the price level in real terms shows up by lost purchasing power in relation to Land and Capital. The harder and more flexible you work, the less of the UK your savings buy, but the purchasing power over goods(minus any improvements) stay the same!

If the money stock was fixed, the harder and more flexible you work, the more productive - prices would steadly drop(deflate), while amount of the UK your money savings would buy would not drop.

When central bankers go on about deflation, they are really talking about the CREDIT system being choked with bad debts - not productivty constantly dropping prices which thety call disflation. At which point they simply print more money to get out of it.

Thats is why we are certain to move towards a LANDLORD/RENTIER economy comprising of tenant workers and taxes.

This situation has only been around since 1973.

Edited by brainclamp

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You simply don't have any chioce but to stop the printing of money by raising interest rates about real inflation! WHATEVER THE CONSEQUENCES.

This approach is no longer seen as credible and has been disowned for several years now - more than 10 in UK/USA. A bizarre experiment that had disastrous consequences. A wonder that governments buoght into it - until that is, you realise their goal was to highlight the inefficiencies of the state-run economy. Literally, a deliberate ploy to bring the economy down.

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This approach is no longer seen as credible and has been disowned for several years now - more than 10 in UK/USA. A bizarre experiment that had disastrous consequences. A wonder that governments buoght into it - until that is, you realise their goal was to highlight the inefficiencies of the state-run economy. Literally, a deliberate ploy to bring the economy down.

Your reply doesn't make sense. In fact just the opposite - the inflationary horror of the 1970s was because they refused to cut borrowing and spending which lead to inflation. Higher REAL interest rates were not applied and the economy ran into the buffers. Unions grew in power as workers found the only way to keep ahead of the dimishing value of thier wages was to strike for higher pay settlements! The public sector was 1 in 4 of the workforce - just like today.

All of the strikes, fake jobs, inflation etc.. and later unemployment came from the central banks increasing the money stock.

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This approach is no longer seen as credible and has been disowned for several years now - more than 10 in UK/USA. A bizarre experiment that had disastrous consequences. A wonder that governments buoght into it - until that is, you realise their goal was to highlight the inefficiencies of the state-run economy. Literally, a deliberate ploy to bring the economy down.

Hi,

And that the shift toward inflation targeting monetary policy will also be discredited at some point in the near future as well, I am pretty sure. Consumer inflation targeting has actually caused runaway asset inflation, particularly in the English speaking economies. Shares,commodities, realestate, each in turn the new asset target. Any form of inflation becomes inflationary within the wider economy at some point. Forgetting whether this is mortgage interest or rents aka housing for a moment, as asset speculation increases, it has to feed into the general RPI or wage settlements at some point if an economy wishes to operate on a consumer-mass consumption basis. Otherwise it breaks down, people stop spending and correction ensues in the form of deflation. The usual consequence of inflationary damage to an economy. It is interesting to guess what the focus for new monetary policy will be after the infaltionary-targeting experiment has ended. In the worst case scenario, if a series of assest bubble boom and busts (check out Gold at the moment) crescendos, could we be seeing a lurch back to government intervention into the economy again?

Boomer

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When Thatcher got in, inflation is at 19% and spiralling upwards.

Could you tell us where you got this figure? Some idiotic government statistical source told me that in the 2nd Quarter of 1979 (when Thatcher took over) the rate was just 10.6% having crawled up from 9.5% some fifteen months earlier. They've obviously got it wrong because it's not 'spiralling out of control' as some people would say. Perhaps somone's got a little confused with the inflation figures between 1979 and 1980 when, according to this source, they really did 'spiral out of control' by more than doubling to 21.6%.

Funnily enough, some 11 years after taking power, i.e. in 1990, inflation is still over 10% - back to what they inherited! It can't be true, of course, because the Tories were the party of economic competence, weren't they?

Fancy the National Statistics Office publishing such inaccurate figures. They should be ashamed of themselves. :rolleyes:

p

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Your reply doesn't make sense. In fact just the opposite - the inflationary horror of the 1970s was because they refused to cut borrowing and spending which lead to inflation. Higher REAL interest rates were not applied and the economy ran into the buffers. Unions grew in power as workers found the only way to keep ahead of the dimishing value of thier wages was to strike for higher pay settlements! The public sector was 1 in 4 of the workforce - just like today.

All of the strikes, fake jobs, inflation etc.. and later unemployment came from the central banks increasing the money stock.

Check out the interest rates in the second half of the 70s and then tell me spending was not much tighter than it is today. I maintain that we were in a hardline moneterist environment from 1973-1980, of the type that you simply do not see today. What actually happened was that governments refused to continue to underwrite further massive overspends.

Today they will keep spending to keep the whole thing together, although they could return to a late 70's horror if they wished, i.e. giving the public the true rate of inflation rather than a fudged figure, and slashing public spending. They saw what happened in the 70s, and that's why they will try to avoid it.

Edited by Milkshock

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Check out the interest rates in the second half of the 70s and then tell me spending was not much tighter than it is today. I maintain that we were in a hardline moneterist environment from 1973-1980, of the type that you simply do not see today. What actually happened was that governments refused to continue to underwrite further massive overspends.

Today they will keep spending to keep the whole thing together, although they could return to a late 70's horror if they wished, i.e. giving the public the true rate of inflation rather than a fudged figure, and slashing public spending. They saw what happened in the 70s, and that's why they will try to avoid it.

When Thatcher got in, people where starting to flee the banking system and give up on fiat money off the gold standard for about 8 years in both the US and UK (for international settlement). We were in many ways facing a collapse in civilisation to a state run economy like Brazil.

Money was not tighter as the money stock (and inflation) was exploding during this period even though the nominal interest rate was higher than today. Inflation was spiralling upwards with larger and larger government debt accrued which meant more and more money printed.

The period from 1972 to 1979 was not a period of tight money and lead to the adoption of monetarism in the 80s. People were buying antiques etc.. to hold on to thier wealth.

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