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Inflation, its nature and cause

 
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Richard Glover



Joined: 29 Sep 2008
Posts: 185
Location: Ealing, London, UK

PostPosted: Sun Nov 30, 2008 12:44 am    Post subject: Inflation, its nature and cause Reply with quote

Posts under the topic Land Value Taxation and Monetary Reform touched on the subject of inflation. This important subject seems to be enveloped in confusion with apparently conflicting theories as to its cause. A new topic has been started on this forum in the hope that efforts can be pooled to yield greater understanding of the nature and cause of inflation.

Inflation relates to increasing prices, alternatively seen as the falling value of money. In a barter economy, a poor harvest could lead to a change in the number of bushels of wheat for a pig. As a starter question (0): Do we all agree this is not inflationary? If so, are we agreed that inflation only relates to money?

A selection of stated causes of inflation:

Freidman (monetarist): Inflation is caused solely by changes in the money supply. it is only a monetary problem; too much money chasing too few goods.

Keynes: Real factors (eg increases in labour costs or in the cost of raw materials) were responsible for inflation. Money is transparent to the real forces in the economy.

Triangle Model (Robert J Gordon): Inflation has 3 causes:
    Demand-pull; increases in aggregate demand through private or government spending. Included in this is the over-supply of money (eg confederates during US civil war) sudden shortage of labour (eg through Black Death).

    Cost-push; drops in aggregate supply through increases in supply cost

    Built-in; wage demands exceed cost rises due to deadweight effect of taxation, leading to further cost rises.


Now to consider some examples of changes to an otherwise stable economy. Given the considerations of location benefit levy (LBL, or land value tax) elsewhere on this forum it is assuemd that LBL is not being collected by the community, but appropriated privately. Where the location benefit (LB) goes is considered for each example.

1) Oil price shock; constant demand
There will be a transitional period whilst the shock propagates through the whole system before settling to a new stable situation. Question 1: Is the only net effect a shift in LB towards the oil producing areas? Will the effective wages and prices be the same? Is it true to say that this is not inflation?

2) Oil reserves very gradually diminishing; constant demand
Question 2: Is this the same as Q1, in that LB will gradually shift towards the oil producing locations? Again, is it true that it will not be inflation?

3) Forgery (undetectable) of banknotes
Question 3: Can we all agree that this would be inflationary, with the value of money gradually decreasing? If the forgeries stopped, would inflation stop with prices remaining at a stable but higher level? Are there any other effects here?

4) Compound interest on production loan
The producer secures a bank loan, repays it in full with interest from production proceeds. Question 4: Is the interest merely a diversion of LB, and hence not inflationary?

5) Loan for land speculation
Speculator secures loan, buys land, holds it out of use until it's value rises, sells and repays loan. Question 5: Is this inflationary?

Some bonus questions: In the situation of constant demand with all labourers maintaining real living standards and where there is no banknote forgery, are we only left with inflation being caused by an increase in money supply? If so, then how does the money supply increase given a constant demand?[/b]
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Kevin Burns



Joined: 03 Jul 2007
Posts: 48
Location: Lewes, England

PostPosted: Sat Jan 17, 2009 10:15 am    Post subject: Hyper-inflation Reply with quote

Richard

I'm not really capable to answer most of these questions, but it seems to me that the money supply is an important issue that very few people are addressing. Last year we all became aware that govt figures on inflation were a carefully massaged fiction.

In this year the US Federal Reserve has increased the supply of dollars by a huge amount. Since it stopped reporting on itself in 2005 - it no longer tells us by how much it increases the M3 money supply - this has to worked out by economic detectives, but estimates I've seen range from 80% to 300% increase in dollars during the last 12 months.

This site tracks real US economic stats: http://www.shadowstats.com/

As Friedman says, with more dollars chasing the same assets (or as in a depression, fewer assets) the scene is set for massive inflation. Before that happens, of course, the money needs to be spent, and currently the Fed is pouring it down a black hole in bailing out the banks, who reasonably enough don't want to lend it out until they feel safe.

'Helicopter' Ben Bernanke is in charge, and he is convinced by the argument that the way to combat a depression is by throwing money at it.

When the banks start to lend again, will we see these chickens coming home to roost?

According to some commentators, the US is bankrupt. US national obligations are now at $65 tn (officially $11.3tn), and GDP is $13.5 tn, which means that if the US could get hold of all of its citizens' wealth just to offset its debt, it would take five years to pay it off. World GDP is $54tn, so in fact the total wealth of the world is less than the US national debt.

Here in the UK the Bank of England is contemplating the same thing - printing money to solve the problem. Plainly this is not going to make us richer, but for anyone holding sterling (savers, pensioners, all of us), we are eventually going to get a lot poorer if they employ 'quantitative easing' as a sticking plaster. Sterling will go down with the dollar.

Or have I got all that wrong?
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Simon Smith



Joined: 02 Feb 2009
Posts: 1
Location: West Midlands, England, UK

PostPosted: Tue Feb 03, 2009 12:19 am    Post subject: Reply with quote

Inflation is too much money chasing too few goods. This must be differentiated from "price rises" that are due to a commodity's scarcity or availability. Here is an interesting link from an eccentric character on the subject (I disagree with much of his stuff) :

http://www.abelard.org/inflation.php

Henry George was never able to understand the subject of credit in my opinion. A synthesis of his teaching and a correct understanding of the the banking system (which continues to elude me - and no doubt is intended to confuse the non initiated) are the key to a fairer (and concomitantly non boom and bust) economy/society.

I WHOLEHEARTEDLY RECOMMEND G EDWARD GRIFFIN'S "THE CREATURE FROM JEKYLL ISLAND". (This is my "New Testament" to Progress and Poverty's "Old Testament" , in my thinking Smile You can read a review of his work on Amazon)

Inflation is a tax that people are compelled to pay. Another tax that people have to pay is income tax. Income tax and our occult banking "system" are "one" Smile

I have read that Friedman (referred to earlier) has spoken highly of Henry George's Land Tax.
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Richard Glover



Joined: 29 Sep 2008
Posts: 185
Location: Ealing, London, UK

PostPosted: Thu May 21, 2009 7:46 am    Post subject: Threading a few beads of inflation... Reply with quote

Inflation does appear to have several causes. If we could distinguish various kinds of inflation, each may have a single cause and could then be treated accordingly. Here is another attempt to discern types of inflation. This list will need to grow and also critically examined.

1) Debasing currency:
Excess money can be introduced into the economy through government action (excess of either printing money or quantitative easing). An excess of apparaent money can be introduced through fraud or counterfeit. In either case, the value of money will fall, ie. inflation occurs.

2) Structural distortion:
If tax is levied on anything other than land-rent or land-value, prices will increase (Ricardo, George etc). This is inflation of a different kind, and there may well be price falls in some goods and services due to government expenditure on infrastructure lowering costs.

3) Diminishing resources:
If it becomes physically more difficult to extract natural resouurces due to depletion of easy pickings, then prices will rise. This will be countered to some extent by the availability of new technology and ingenuity. However, the long-term cost will rise for finite resources. This would appear to be a legitimate form of "inflation".

4) Excess Credit:
Excess "money" can also be put into the system through lending by commercial banks and the other financial institutions. As this "bank" money is linked to currency, this seems to be similar to the counterfeit and excess government money printing.

5) Exploitation:
In line with "diminishing resources", if access to resources was restricted through some form of restrictive practice, this would raise costs for those that have to pay for access. Simultaneously, it would lower costs for those applying restrictions. This normally occurs with property rights; these are backed by custom and law. It could be seen as another form of structural distortion.

6) Excess Interest and financial charges:
This could be an aspect of "exploitation" but as it is so close to the money supply system it may be worth distinction. It on balance a nation is in debt, interest charges have to come from somewhere. Some would argue that this leads to a perpetual need to growth GDP, and some would argue that it is directly inflationary.

Comments and continuation would be most welcome!
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Richard Glover



Joined: 29 Sep 2008
Posts: 185
Location: Ealing, London, UK

PostPosted: Sun Jul 04, 2010 9:30 pm    Post subject: A Disturbing Question? Reply with quote

Ronald Burgess (Public Revenue Without Taxation) states that taxation always raises prices and as such is inflationary. See post under "Ronald Burgess: What can he teach us now?".

The Money Reform Party (and others) claim that money can be effectively printed to increase the money supply when needed (cf. quantitative easing). However, at times it would be necessary to extract money through taxation so as to maintain the value of money; inflation was to be maintained at close to zero.

Printing money is usually associated with inflation. Here we have its balancing agent of taxation being used to reduce and even eliminate inflation.

So we appear to be faced with taxation being both a cause of inflation and a cause of deflation!

Can anyone pick up this thread to resolve this paradox?

Possible clues:
    Burgess's definition of tax
    Money Reform Party's not having considered the significance of taxation incidence
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Albert Scott



Joined: 27 May 2013
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PostPosted: Mon May 27, 2013 10:34 pm    Post subject: Reply with quote

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