The Giant Pool Of Money. Implications

Inflation isn't limited to currency systems not on the gold standard. After all, people continue to mine gold, which deflates the value of your gold-based wealth.Mining gold and printing money aren't fundamentally different and they're both inflationary if the increase in money supply - under any system - increases demand for goods ahead of supply.The notion that "more money = inflation" is simplistic and ignores several steps. After all, when you spend a dollar at the grocery store, nobody at the store is adding up all the dollars in the country to determine what percentage of them your single dollar represents; no, they're just giving you a dollar's-worth of goods. Increasing the money supply only causes inflation when it increases demand for goods ahead of supply.Currently, the inflation rate is next to zero despite significant deficit spending by the government. Why is that? Because supply so currently outstrips demand. In fact the American economy is missing an estimated 1.5 trillion in demand for goods and services. Until handing out dollar bills actually increases competition for the finite number of goods and services available, inflation is impossible and it's stupid to worry about it.

It's obviously true. Countries on the gold standard don't stop mining gold; their currencies inflate just the same as the others, only their economic growth winds up stifled because the government can't rectify demand inefficiencies by short-term monetary easing. Sure, but so what? Both are completely arbitrary mediums of exchange.Money is a game, Buz, gold standard or not. It's a game we all play where we abstract the value of goods on a single system. Instead of having to remember the value of (say) one iPod in terms of chickens, and in terms of goats, and in terms of hamburgers, and in terms of number of times you could get your lawn mowed, and so on, we simply remember it's value in terms of the number of "dollars" you could exchange for it. The money has no inherent value except that it can be exchanged for other things. And you can still buy gold with your money! We just let the market decide how much, now, instead of allowing the government to simply dictate how much. That's hardly a new thing, Buz. People were buying and selling with marks on paper in the time of Christ. What do you think the moneychangers in the temple were doing? No, it increases, because more backs are available to dig it up. It increases until we reach "peak gold", when we've extracted all the Earth's gold wealth that it's possible to cost-effectively get. Then you're really screwed because an increasing number of people are competing for the same limited amount of dollars, and then the value of investment plummets because of deflation. If there's one thing worse than inflation it's deflation. All of a sudden businesses are crippled because they can't get their hands on enough dollars to pay their employees, open factories, and make investments, because the best investment becomes "hoard your dollars and never spend them." Aka the liquidity trap. Not all commodities. Debts shrink as the value of the dollar goes down, because the value of your debt doesn't increase with inflation, but your paycheck does. And, again, you're skipping the important step of where increasing the money supply increases the demand for goods (because more people have the money to buy them.) Inflation only occurs when the prices of things increase because of that additional demand. But if demand has already fallen short - over a trillion dollars short, in our case - then additional demand doesn't raise the price of anything - there's already plenty of goods to go around, languishing in warehouses.As long as you're making up a shortfall in demand, you can print as much money as you like and throw it out from helicopters, and it won't be inflationary. It's very simple economics, Buz, it's the law of supply and demand. The price of commodities and services reflect their demand. Their prices don't increase - inflation doesn't happen - until the increased demand outstrips the supply. Your greengrocer isn't counting up all the nation's dollars before he prices his produce in the morning; he's counting up yesterday's demand for produce.

Right, but the value of precious metal is by fiat, too.Whether you're trading gold or trading paper dollars doesn't matter, Buz. Money is just an abstract representation of how valuable we consider goods and services, and how much demand for them there is. There's literally no difference between trading paper dollars that represent fiat values of precious metal, and trading paper dollars that are themselves a fiat value. So what's so great about silver, Buz? It was always a numerical entry, Buz, that's the point of money. It doesn't matter whether your money is fiat "silver certificates", or fiat paper dollars, or fiat giant stone wheels on the island of Yapp.

Right, and that's what I'm saying; gold has only consensus value. Right, and that's my point - gold has no intrinsic value, it has value only as an accounting fiction - as money. Of course, as money it's not very effective, it's incredibly heavy and also quite rare, which means you're limited as to the number of money tokens you can have in circulation with it. Since it's viewed as having intrinisic monetary value, golden currency is vulnerable to inflation by coin-shaving. Any gold-based currency moves almost immediately away from actual exchange of gold, and to articles of paper or base coinage that represent some amount of gold stored safely away.Gold has actually very little "intrinsic value" as money. Paper is a much better material to make money out of. No, quite the opposite. It's actually an immense disadvantage, because of the weight and inconvenience of gold. Also, gold has some industrial applications - it doesn't tarnish, it's an excellent conductor, it's very ductile and malleable, it alloys easily, it's highly desired as a material for jewelry - and tying up all your gold in coinage means less gold is available to industry.If you want to move large sums of money around, the most advantageous vehicle for doing so is to write a check. One piece of paper! What could be more advantageous than that? Sure it can. Governments print it.

Current rate of inflation in the US is about .2%.Why is that, Buz?

No "cooking of the books." According to everyone - government, universities, think tanks, NGO's, everybody - inflation is under .2%.Why is that, Buz? That's due to overfishing, Buz, not inflation. Sardines are more expensive because there's less of them.

Well, great. Let's have money inflation! I mean, if prices don't go up, where's the downside? If you have more dollars but stuff still costs the same - you're rich!When conservatives like you try to argue that economies aren't zero-sum, isn't this what you're talking about? Money inflation? In other words - the rising tide that lifts all boats?If you're arguing that money inflation isn't the same as price inflation, then you're proving the efficacy and wisdom of stimulus. But Ruff is wrong. If prices stay the same then nothing is being diluted, because the "value of a dollar" isn't in how many other dollars there are. The value of a dollar is what you can buy with it. Only price inflation reduces the value of a dollar. Nobody's checking the number of dollars there are before you buy something. The value of your dollars has nothing to do with how many other dollars there are, just as the value of a person has nothing to do with how many people there are on Earth.

Except that they're not. Commodities crashed in 2008, along with most everything else, because of the enormous 1.5 trillion dollar shortfall in demand.Here's the classic problem you always have, Buz. You don't know how to assess the credibility of a source. You could have looked up the commodities market yourself, and seen how they declined in 2008 due to the shortfall in demand, but in your mind the guy that by your own admission has been reliably wrong for decades is the guy to listen to, because he votes the same way as you. Obama lowered taxes, first thing he did, but you'd never know it to listen to conservatives. Some people!

Just printing new money doesn't mean that the currency is debased. Increasing the money supply is only inflationary when production is at its capacity.In an economy with 9% employment or more, factories lying idle, goods languishing in warehouses, printing money stimulates demand and puts people back to work. Inflation happens when there's more money to chase the same amount of goods and services. But when people are unemployed, you can increase the amount of goods and services and prevent inflation.Currently inflation is at less than 2%, despite several decades of deficit spending and three years of economic stimulus.

Sure, but you're not buying one, for the very simple reason that you don't have the money to spend on one right now. That, or you consider the future value of money to be greater than the present value of a vacuum cleaner, which is stupid, since here you are talking about how inflation is going to screw us all. I mean, you can't have it both ways - either inflation is going to kill us, in which case present goods are way more valuable than future dollars, or future dollars are more valuable than present goods, in which case what you're afraid of is deflation, and you should believe that the government should be printing money and giving it to people like you, so you can buy a vacuum cleaner.You'd benefit from owning one. The store that sold it to you would benefit from having sold it to you. The factory that made it would benefit, marginally, from having constructed it and sold it to the store. The workers and store owner, now with a little extra money in their pockets, might have frequented other businesses, including yours. Just about everybody in the supply chain would be better off if you spent your money on a vacuum, but you've not done so simply because you lack the scratch. All for the want of a horseshoe nail, indeed!Giving you some money to buy a vacuum seems like a good idea - a net benefit. And it's impossible for it to be inflationary during a demand-driven recession. Are vacuums useless? Are yoga lessons useless? Is it useless to eat out at a restaurant with your friends instead of cooking by yourself at home? "Useless junk" isn't a substantial or even noticeable part of the economy. Predominantly people are spending their money on things that improve the quality of their own lives. Is that useless? There's always inflation, and should always be; it's a necessary buffer against incredibly destructive deflation and the indicator of a growing economy. Recall that during the Reagan "Morning in America" inflation was over 5%. You seem dead-set in thinking that everybody who's not you is a gaping moron. (Never mind that you're the one who thinks vacuum cleaners are "useless junk.")Edited by crashfrog, : No reason given.

That's not inflation, that's actually an increase in the price of groceries and clothes primarily driven by the increasing demand for the same amount of oil.Inflation isn't when the price of something goes up. Inflation is when the price of everything goes up, and factoring in everything, inflation is only at 2%, less than half of what it was during the Reagan Revolution. Remember how we explained that metal-based currency was inherently inflationary because they're still mining silver? Right, which is proof that they're not considered a very good indicator of inflation due to price volatility and dependency on an underlying asset that is in high demand. If inflation is "really" at 10%, Buz, why aren't people's wages going up? Inflation should raise the price of everything, including labor. Are you making any more at your job than you were before?

Not only is inflation present during the period when the US was on a precious metals standard, it's higher then than at any subsequent point.

There's a zero-bound problem where central banks can't, obviously, loan money at negative interest, so a positive (but low) interest rate gives a central bank room to maneuver.

Inflation has the same effect at any level - prices and wages go up, the value of individual dollars goes down, savings denominated in dollars decline in value. The smaller the inflation, the more these effects are lessened, because "prices and wages go up, the value of individual dollars goes down, savings denominated in dollars decline in value" is what inflation is.But, inflation has some positive effects too. We want people to spend their money because that causes economic growth, and we have to print more dollars to keep up with a growing population and a growing domestic product - as people produce more goods and services to sell, the value of goods and services declines unless we deflate the value of a dollar to match. Every time someone invents a new cell phone, it decreases the value of goods and services (because there's one more good or service to sell.) Inflation allows our money to keep up with the increase in GDP.So, the "optimum" rate of inflation is the one where the positive effects on monetary policy outweigh the negative cost of price and wage increases and the decrease in the "real" interest rate of savings (the "real" rate is the APR minus the annual inflation rate, pretty simple), which are the downsides. What rate is that? In the US it's probably around 6% or so.Does that make sense? What you want, ideally, is for inflation to be high enough that the central bank has some freedom to discount interest rates without hitting the zero bound, but low enough that, say, your bank can still make money by lending you a 30-year mortgage.

Indeed - it's considerably more expensive, in both a nominal and real sense, to maintain a Federal Reserve of gold or silver to be released during a recession. It's a lot cheaper to simply print money.Fiat currencies are stabilizing because it's easier to use them to counteract the business cycle.