Edgy And Heated On Hpc Forum

[Magpie]

Money is supplied to meet the economies demands for money. You cannot force people to take loans they do not want or have no use for.

The only way to force money into the economy is via deficit spending. Often a kind of misapplied Keynesian approach.

Extreme deficit spending is what brings about hyperinflation.

So as Blue Peter says... It cannot.

Now you guys are confusing inflation with hyperinflation again. And I specifically excluded hyperinflations because they will cause currency collapse and discontinuity. Eventually currencies will collapse, possibly at the same time as civilisation collapse, possibly sooner.

Meanwhile there's no theoretical reason why everything in the world can't become 5% more expensive every year, with the money supply increasing by 5% (that example would work best in a flat economy - the figures can be adjusted for the economy growing or shrinking). If you think there is a reason why this is impossible, do please try to explain it?

[Blue Peter]

That is how I would describe a venture. All ventures come with some risk.

Money is supplied to feed the demand for ventures. And the supplier charges interest for the risk. So the money supply will is unlikey to fall untill people realise there are not so many good ventures.

If people do not realise this and demand for money remains high, we will see more defaults. And interest rate spreads will rise as the suppliers of capital will be exposing themselves to more risk.

And, to bring this back to houses - which can presumably be seen as "enabling" a venture known as the occupier - the return provided by the occupier is unlikely to vary very greatly with the amount of money they spend on their house. Ergo, it's rather bizarre for lenders to lend huge amounts of money for people to buy houses with. They only get a return based on the sentiment of the market rather than fundamentally improving the occupier and so getting more out of them.

Peter.

[?...!]

And, to bring this back to houses - which can presumably be seen as "enabling" a venture known as the occupier - the return provided by the occupier is unlikely to vary very greatly with the amount of money they spend on their house. Ergo, it's rather bizarre for lenders to lend huge amounts of money for people to buy houses with. They only get a return based on the sentiment of the market rather than fundamentally improving the occupier and so getting more out of them.

Peter.

The banks weren't interested in houses, they were buying the income streams of homeowners. Foreclosure was supposed to be a threat to make people pay. Banks do not want houses.

[Guest DissipatedYouthIsValuable]

No.

A hedge fund produces nothing.

Hedge funds are designed to extort capital from market imbalances. In such a vast and complex global market, you would be surprised how easy it is to find such imbalances. The carry trade is an often quoted example.

Without Japans huge export imbalance the carry trade would not exist.

Last night I watched Lyndon Larouche's most recent lecture. Despite his vitriol/faux vitriol for the English, clear dislike of Dick Cheney, and obsession with a giant magnetic levitation train line around the world, his main points as I interpret them seem to be.

1) Avoid starting a war with Iran.

2) Let the hedge funds collapse. They serve no purpose other than to further remove money in the economy from real production for the needs of a population.

3) Allow those unable to service ridiculous mortgage debts to rent their housing at a lower rate.

4) Variable tax rates for truly productive ventures.

Have you got any other ideas?

Edited September 3, 2007 by DissipatedYouthIsValuable

[BENEFIT SPONGER]

The supply of money does not grow exponentially towards infinty, people who are planning/betting on the system collapsing after some kind of hyperbolic expansion of the money supply, are living in false hope.

I betting people also said that before the Hyperinflation in Argentina in 2oo1, before the country went into turmoil economically and socially, and their was also lots of runs on the banks at that time. it has happen loads of times throughout history and from what i read it will also happen again soon,without question it will come but when?

Thats why i have a nice wee parcel arriving in the morning of shiny yellow metal,that is real money,and can't be printed by some Banker/Government, will be recognised even out in some barren cess pit of a country

I'm in it for the long term.

[nigwell]

I predict that this week we will see a serious collapse in global equities.

One of you TEOTWAWKI's predicted this last week. You'll be right eventually - possibly!

Just watch out for Foxy Loxy.

ROFL

[Magpie]

Now you've done it! I think that you will be told in no uncertain terms that it it can't. And, empirically, we can see that it never happens. Zimbabwe will collapse at some point; Germany in the 20s finally sorted out their hyperinflation. It never goes on for more than a short period,

Peter.

The supply of money does not grow exponentially towards infinty, people who are planning/betting on the system collapsing after some kind of hyperbolic expansion of the money supply, are living in false hope.

Here is a diagram that may help to explain the point I want to make about exponential growth.

Exponential growth is not growth tending to infinity and should not be mistaken for 'hyperinflation', which is a very different thing (or to be more precise it is the same thing but at a much higher level).

These graphs show a hundred years of inflation at 5% with a notional 2007 in the middle (so say 1957-2057). The first shows the full hundred years. 2007 is in the middle, just before it all "accelerates away". The second shows the first fifty years. Now 2007 is at the end "Oh my god, look at how terrible things have become." Whereas in the third, 2007 is at the start, when the curve is very benign. Things now don't look so bad...

The point is that any graph of exponential growth is scary if you put 'now' at the end of it - it looks as though it is accelerating towards infinity.

The only way that the graph of money supply growth wouldn't look like this is if money supply growth was zero. Is that the only solution? Of course not. The alternative is just not to get you knickers in a twist about the appearance of exponential growth when it is about numbers, only when it is about real things like population growth and use of resources.

Edited September 3, 2007 by Magpie

[Goldfinger]

Here is a diagram that may help to explain the point I want to make about exponential growth. ...

Magpie, thanks for the educational charts. I hope you did not tell too many people anything new here. Yes, even only 2% inflation could look scary after 100 years. But I think the issue many are more concerned with is M3 and house price growth in the double digits. Then deflation in houses and stocks, but double digit growth in food and oil.

[Magpie]

Magpie, thanks for the educational charts. I hope you did not tell too many people anything new here. Yes, even only 2% inflation could look scary after 100 years. But I think the issue many are more concerned with is M3 and house price growth in the double digits. Then deflation in houses and stocks, but double digit growth in food and oil.

Goldfinger,

I agree that it is excessive short term money supply growth, the end of oil, consequences of possible asset deflation etc that are worth worrying about. But while my post maybe seems simplistic, there was a specific point:

?...! argued that

The supply of money does not grow exponentially towards infinty, people who are planning/betting on the system collapsing after some kind of hyperbolic expansion of the money supply, are living in false hope.

Then this led on to a discussion where various posters were asserting (in opposition to this idea of exponential growth to infinity), that the money supply must reach a peak and fall.

Now this is a false opposition. Money supply peaking and falling isn't the only alternative to 'growth to infinity. To me this shows that the idea of exponential growth is being seriously misunderstood. Exponential growth isn't growth 'towards infinity' that will therefore be forced to collapse and rebounce.

I have consistently seen an elision between 'high inflation' and 'hyperinflation' which also tends to imply that posters are assuming from looking at these kinds of exponential curves that high inflation inevitably becomes hyperinflation as the curve increases in gradient.

It is not an argument in favour of inflation to point out that steady inflation is sustainable over periods of time and does not inevitably turn into hyperinflation. Hyperinflation is of course one of the current dangers we face but it's silly to assume it is inevitable.

[meow]

Newcastle is worth a visit just for the Railway Station. Some years ago, I think I visited one of the bars that featured in the 60's film "Get Carter." And I visited the multi storey car park "Alf Roberts" was thrown off by Michael Caine!

The bar is now O'Neills, directly across from said railway station. Handy for post train guiness refreshment.

The car park is falling to bits and is being knocked down.

*click click* OI! In a thin GLAAARSSSSS!

[Leonard Hatred]

The car park is falling to bits and is being knocked down.

I'm amazed that it's survived this long, to be honest!

What in Christ's name's that? A bloody madman!

[Goldfinger]

...

Then this led on to a discussion where various posters were asserting (in opposition to this idea of exponential growth to infinity), that the money supply must reach a peak and fall.

Now this is a false opposition. Money supply peaking and falling isn't the only alternative to 'growth to infinity. To me this shows that the idea of exponential growth is being seriously misunderstood. Exponential growth isn't growth 'towards infinity' that will therefore be forced to collapse and rebounce.

I have consistently seen an elision between 'high inflation' and 'hyperinflation' which also tends to imply that posters are assuming from looking at these kinds of exponential curves that high inflation inevitably becomes hyperinflation as the curve increases in gradient.

It is not an argument in favour of inflation to point out that steady inflation is sustainable over periods of time and does not inevitably turn into hyperinflation. Hyperinflation is of course one of the current dangers we face but it's silly to assume it is inevitable.

I see your point. I think some posters like cgnao think hyperinflation it is inevitable for economic reasons -- which is a theory that could be right or not. ?...! advocates peak money supply. I am interested in this theory, but don't quite understand the arguments yet and need to do more research.

Mathematically, things are clearer. A catastrophic hyperinflation would (mathematically) resemble a singularity in the sense like a function like 1/(x-2) does have one at x=2. While growth according to a^x has no 'singularity', so, it goes on forever. OK, now back to economics.

[?...!]

I see your point. I think some posters like cgnao think hyperinflation it is inevitable for economic reasons -- which is a theory that could be right or not. ?...! advocates peak money supply. I am interested in this theory, but don't quite understand the arguments yet and need to do more research.

Mathematically, things are clearer. A catastrophic hyperinflation would (mathematically) resemble a singularity in the sense like a function like 1/(x-2) does have one at x=2. While growth according to a^x has no 'singularity', so, it goes on forever. OK, now back to economics.

Very good.

[Magpie]

I see your point. I think some posters like cgnao think hyperinflation it is inevitable for economic reasons -- which is a theory that could be right or not. ?...! advocates peak money supply. I am interested in this theory, but don't quite understand the arguments yet and need to do more research.

Mathematically, things are clearer. A catastrophic hyperinflation would (mathematically) resemble a singularity in the sense like a function like 1/(x-2) does have one at x=2. While growth according to a^x has no 'singularity', so, it goes on forever. OK, now back to economics.

Yes, well put. Of course hyperinflation is possible for economic reasons, but I think it is also always worth being on your guard against people reading too much significance into an exponential curve. I have seen people make statements such as 'every inflation ends in hyperinflation' which is plain wrong.

And yes, a hyperinflation, without being a singularity as such, is close enough to become such a sharp gradient that the currency collapses. The kinds of exponential curves I have posted wouldn't reach that stage, though economic factors may cause them to deviate into it.

I don't see that money supply can have any kind of theoretical peak, for mathematical reasons. For whatever peak money supply you posit, there is no reason why all the money in the world couldn't be replaced by money worth less per unit, increasing that nominal money supply. Of course there may be a peak 'real value' to all that money, but that's a different issue.

[meow]

I'm amazed that it's survived this long, to be honest!

What in Christ's name's that? A bloody madman!

Probably because there's still too many people around who can quote lines from the film who won't let gateshead city (Yes, it's a city!?!?!) council knock it down.

Well... until tesco came along; I heard tesco want to knock it down, build a tesco on the ground then build a car park where the current tesco is?

Now if you don't mind I have an appointment at the magical castle (before it get's knocked down), ah... here's the sunbeam alpine to take me there.

[the_austrian]

But doesn't this theory depend on several assumptions, including that a) peak production is identifiable, global production is fungible, and all capital has equal unfettered access to all global production, c) money supply is 'honest' or 'faithful' to the market, intended solely to act as a proxy for production, and free from political abuse?

Nice questions.

But you should subscribe to this philosophy.

The path of least resitance offers the greatest profit.

And to that extent the market is free and open and any hurdles that are put in place by government or otherwise are always circumvented by those seeking the most profitable outcome. Capital can move faster than any political entity, and therefore large well informed reserves will always be outside the sphere of political influence.

The money supply isn't going up because the market is "circumventing" the government, it is going up because of the government. If the central banks wanted to stop it they could but they like the inflation...

Peak production is not identifiable, and we may see multiple peaks. But you must take time to appreciate how money comes into circulation, it is basically a tool to allow somebody to pursue a venture. Beyond peak production the demand for ventures falls.

There is a theoretical maximum volume of money that can be supplied to the economy and that maximum is the volume of money required to facilitate every market action at peak production.

The money supply could keep going up and up forever. There will always be a demand for a commodity that is available at a price which is below the market rate. Interest rates are manipulated by central banks to be below the market rate and so there will always be a motivation to take out debt, no matter how much money there is in the world.

[?...!]

The money supply isn't going up because the market is "circumventing" the government, it is going up because of the government. If the central banks wanted to stop it they could but they like the inflation...

The money supply could keep going up and up forever. There will always be a demand for a commodity that is available at a price which is below the market rate. Interest rates are manipulated by central banks to be below the market rate and so there will always be a motivation to take out debt, no matter how much money there is in the world.

Not sure I understand?

Are you blaming the central bank or the government? Or are you claiming they are one and the same?

The money supply cannot keep going up forever, because one day we will all be dead. There are only finite resource, and finite tolerances to pollutants, we are currently operating an anaerobic economy.

[the_austrian]

Not sure I understand?

Are you blaming the central bank or the government? Or are you claiming they are one and the same?

I'm saying the central banks, under the direction of the government, encourage money supply growth by making interest rates low and allowing growth in bank credit.

The money supply cannot keep going up forever, because one day we will all be dead. There are only finite resource, and finite tolerances to pollutants, we are currently operating an anaerobic economy.

But when there are only two people left on earth, one has 4.236x10^47 dollars and the other has 3.869x10^47 dollars, if a central bank shows up and offers one of them an interest-free loan, they would still be motivated to take it.

[Magpie]

But when there are only two people left on earth, one has 4.236x10^47 dollars and the other has 3.869x10^47 dollars, if a central bank shows up and offers one of them an interest-free loan, they would still be motivated to take it.

Exactly. ?..." is still making the mistake of confusing physical limits (which prevent economies from indefinite exponential growth) with mathematical limits (which do not similarly restrict money supply growth).

[Blue Peter]

Exactly. ?..." is still making the mistake of confusing physical limits (which prevent economies from indefinite exponential growth) with mathematical limits (which do not similarly restrict money supply growth).

Though money is represented numerically, it isn't solely constrained (or not constrained) by numerical properties.

As you agree, economies cannot expand indefinitely, because of limited resources. But money is not simply numbers, it is numbers tied to the economy. If the economy doesn't keep expanding, but the money supply does, you get inflation and hyperinflation. But, empirically, this doesn't go on for ever; it stops and the money gets brought back in line with the economy. Since, as we all agree, economies can't go on expanding for ever, neither, then, can the money supply.

Peter.

[Magpie]

Though money is represented numerically, it isn't solely constrained (or not constrained) by numerical properties.

Sorry, but this is just wrong, for a number of reasons.

As you agree, economies cannot expand indefinitely, because of limited resources. But money is not simply numbers, it is numbers tied to the economy. If the economy doesn't keep expanding, but the money supply does, you get inflation and hyperinflation.

Please try to distinguish inflation from hyperinflation. Inflation can be a chronic (eg persistent) state, hyperinflation is basically currency collapse, and can't be sustained over long periods. You can have inflation without hyperinflation.

So what happens if the economy doesn't expand but the money supply does - you get inflation, correct. But...

But, empirically, this doesn't go on for ever; it stops and the money gets brought back in line with the economy. Since, as we all agree, economies can't go on expanding for ever, neither, then, can the money supply.

Peter.

This is where your argument goes wrong. You could have an absolutely static economy with constant inflation. What would the result be? Constantly growing money supply, rising prices, falling value of each unit of money. There is no mechanism that 'must' snap this back. As the Austrian points out, you could end up with two people left with a gazillion dollars each, and that would be technically more than the money supply now.

Imagine a country with a million people, each of whom has one dollar. Overnight the government devalues the dollar and replaces all the old dollar bills with 2 new dollars. All prices and salaries also double. The money supply has 'doubled', nothing else has changed. Must the money supply now fall by 50% to suit your theory?

In a sense this is just a theoretical discussion, but it is important because your failure to understand this is making you come up with all sorts of silly stuff about 'peak money supply'.

[?...!]

I think wires have been crossed somewhere. Nobodies fault, it is difficult to voice an opinion on a complex issue.

So what happens if the economy doesn't expand but the money supply does - you get inflation, correct. But...

This is where your argument goes wrong. You could have an absolutely static economy with constant inflation. What would the result be? Constantly growing money supply, rising prices, falling value of each unit of money. There is no mechanism that 'must' snap this back. As the Austrian points out, you could end up with two people left with a gazillion dollars each, and that would be technically more than the money supply now.

Depends on the velocity of money.

Firstly I feel you need to include monetary velocity (the avg. number of transactions of each currency unit) to explain money supply and inflation.

If supply is inflated, and velocity falls, prices can remain static or even deflate depending on the change in velocity.

money supply x monetary velocity = GDP x GDP deflator

Imagine a country with a million people, each of whom has one dollar. Overnight the government devalues the dollar and replaces all the old dollar bills with 2 new dollars. All prices and salaries also double. The money supply has 'doubled', nothing else has changed. Must the money supply now fall by 50% to suit your theory?

I wouldn't consider that inflation at all, I consider inflation to be the difference between the

1) value of the money in the system multiplied by the velocity of that money

2) and the value of the economy

Since the value of the economy is a dynamic value and almost impossible to know, it is the job of the central bank to supply enough money to the economy to facilitate trade without...

i) Providing too little, leading to liquidity problems, falling transaction rates and thus a recessing economy.

ii) Providing too much, leading to excess liquidity problems, rising prices and devaluing the currency.

Since i) leads to market disfunction, and hurts trade, central banks tend to walk on the providing slightly too much side.

In a sense this is just a theoretical discussion, but it is important because your failure to understand this is making you come up with all sorts of silly stuff about 'peak money supply'.

I think the disparity comes from everyones slightly different interpretation of the word 'inflation'.

[Blue Peter]

Though money is represented numerically, it isn't solely constrained (or not constrained) by numerical properties.

Sorry, but this is just wrong, for a number of reasons.

Could you give some examples?

So what happens if the economy doesn't expand but the money supply does - you get inflation, correct. But...

This is where your argument goes wrong. You could have an absolutely static economy with constant inflation. What would the result be? Constantly growing money supply, rising prices, falling value of each unit of money. There is no mechanism that 'must' snap this back. As the Austrian points out, you could end up with two people left with a gazillion dollars each, and that would be technically more than the money supply now.

But isn't this what we're seeing at the moment? Here I may be getting confused between money and credit and debt, but as I understand things, the consensus is that there's too much money sloshing around and it's led to asset prices (especially houses) getting too high. So, whilst the economy is not absolutely static, it's not increasing as fast as the amount of money is (though I appeciate that there may be something about the velocity of money in here too). This has been going on for a while, and it now appears that there is some sort of mechanism which is going to snap this back.

In a sense this is just a theoretical discussion, but it is important because your failure to understand this is making you come up with all sorts of silly stuff about 'peak money supply'.

I think that discussions like this are useful, since they allow people to clarify their understanding. Whenever I try to write down my "understanding" of things like this, I realize just how little I do understand. So, it's not "just theory", it's useful (and anyway, I like theory ),

Peter.

[Magpie]

I think wires have been crossed somewhere. Nobodies fault, it is difficult to voice an opinion on a complex issue.

Depends on the velocity of money.

Firstly I feel you need to include monetary velocity (the avg. number of transactions of each currency unit) to explain money supply and inflation.

....

I think the disparity comes from everyones slightly different interpretation of the word 'inflation'.

Velocity of money is important in other respects (because it affects how direct and immediate the link between money supply and inflation is) but it complicates this discussion needlessly. My original point is just that there is nothing at all to stop the nominal amount of money increasing indefinitely, in an exponential way. And that exponential does not mean 'tending to infinity' at all.

[Magpie]

Whenever I try to write down my "understanding" of things like this, I realize just how little I do understand. So, it's not "just theory", it's useful (and anyway, I like theory ),

Peter.

Agreed, I think this kind of thing is always valuable, even when it is theory based.

Could you give some examples?

The points below were meant as the examples.

But isn't this what we're seeing at the moment? Here I may be getting confused between money and credit and debt, but as I understand things, the consensus is that there's too much money sloshing around and it's led to asset prices (especially houses) getting too high. So, whilst the economy is not absolutely static, it's not increasing as fast as the amount of money is (though I appeciate that there may be something about the velocity of money in here too).

All true, and no need to worry about money velocity too much here.

This has been going on for a while, and it now appears that there is some sort of mechanism which is going to snap this back.

There is an imbalance. So, there are various things that might happen to correct this. The two main options:

1)The inflationary pressure that has built up and been reflected in asset prices may spread to goods and wages leading to much higher inflation, which would do nothing to reduce the nominal money supply (although it would reduce the value of a unit of money).

2) Alternatively, a huge amount of money may be destroyed through insolvency, in which case it is possible for nominal money supply to fall (in a deflationary scenario).

Scenario 1) might lead to hyperinflation, or not, depending. There is no logical necessity for inflation to lead to hyperinflation but it can happen.

So these mechanisms (and various intermediate options) do 'snap back' the imbalance, but not necessarily by reducing the money supply. One thing we have seen in the last fifty years is that banks and central governments seem to prefer inflation to risking deflation, so it may be that 1) is the more likely scenario.