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inflation
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31 / M / auckland
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Posted 5/29/09
What causes inflation? is inflation natural? if so how?

I define inflation as in that time when prices of things goes up. And the value of your money go down. Is this natural?

The way I see it the only way prices can go up can go by two things:

1) a sudden increase in demand and not enough supply of goods: like if oil production is shortened, less supply of oil, with the same demand to use oil in everyday life will guarantee that the prices of oil increases.

2) a sudden increase in the supply of.. Money: like what happen when someone counterfeit a currency. He buys goods with that money, adding supply of money in circulation and therefore devaluing it.

Or is there another way that inflation could happen besides those 2? and why do I keep hearing that inflation is actually the fault of people in the working class? normal average joe like you and me? They keep saying that we became a generation that borrows too much. We don't live within our means. Stuff like that.

But I can't see how that would affect the economy. Banks don't just give out credit to anybody. You got to have things like jobs and like.. assets and stuff to back up the money you own. And plus like.. if we ended up not being able to pay our loans, they can just confiscate our things and sell it. I know this connects but I just can't put my hands around it. Anybody that can help explain?

Oh and what's this stuff about fractional-reserve banking stuff? I keep hearing THAT's the real reason the money supply expands. Anybody? at all? lol i'm lost here
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76 / M / UK
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Posted 5/29/09
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M / Yo Mommas House
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Posted 5/29/09
Very informative websites many of that stuff I already had some idea on it.
Posted 5/29/09
Uhh...when the government prints out trillions of dollars for their own purposes?
The more there is of that currency circulating around the world, the less valuable one dollar of it will be.

^ Don't mind me, I'm stupid and know nothing of this stuff.
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23 / M / Singapore
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Posted 5/29/09 , edited 5/29/09
US Federal Reserve, wait its not federal its a private corporation. Thats why they drive both debt and inflation in US nuts. Congressman Ron Paul had warn about this many times, and guess what nobody is taking his advice. US will head for a another great depression if this continues, get rid of the damn fed and its all over.



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31 / M / auckland
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Posted 5/29/09
Oh one more thing guys...

If the US is deep on national debt.... Who's the creditor? hmmm...
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32 / M / Atlanta, GA
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Posted 5/29/09 , edited 5/30/09
Is inflation natural? Yes.

Why? Because people value things differently under different circumstances. If they have plenty of money but not enough "stuff" they'll always be willing to spend more to buy the stuff. Same with having "stuff." If you have lots of stuff but no money, you're wiling to part with it for less. Even money itself has a diminishing marginal utility.

Can inflation happen besides those two ways you listed with shortage in supply and central banks printing more? Yes again.

Say I'm a manufacturer and I need to keep people from leaving my business this next year because I'm going to be really busy and I don't want anyone to quit (for example, it costs a lot for me to train new workers on my machines, because new workers tend to waste my raw materials "practicing"). I decide to pay my experienced people a lot more to stay. But my competitors all decide the same thing to try to lure them away. What happens? Everyone has a ton more money to spend. Diminishing marginal utility of money applies again, and prices go up because we all want to buy a ton of stuff when we have more money. This is known as "price wage" spiral.

Notice that this is an example of a shortage as well. A shortage in skilled workers. Also note that labor unions can start the spiral by causing a shortage in skilled workers if their members go on strike. Be careful not to jump to conclusions on this one though. Labor unions developed in a time when a few people had a lot of stuff and no one had anything else. Furthermore, this was before the existence of central banks and printing more money. The only real way to get "inflation" was for money to move quicker through the economy.

(heh, looking at my post, I realize a lot of economics is better understood in terms of psychology, politics, and history than mathematical equations).


Keeping all of this in mind, please try not to buy into the Austrian BS posted all over the internet. The central banks exist for an important reason. Yes, printing more money does cause more inflation. But it's not the only cause, and we do indeed gain more value from having a central bank than not. People as a whole need a little bit of guidance, because it's clear people as a whole can often let things get out of control.
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Posted 5/29/09
Inflation's as natural as the economy is.

And I don't know if the large amounts of borrowing by the population is contributing to it, but the borrowing still isn't that great an idea
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M / Yo Mommas House
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Posted 5/29/09 , edited 5/29/09
I think I will stick to Austrain Economics. Economics was never really my strong point but when Ron paul breaks it down it started to open my eyes. The Fed is a private bank this is what people need to realize. People tend to think because it's name is Federal Reserve they work for the government but this is false. These people can do anything with our money and Congress cant do a damn thing. We cant even audit them or get any information about their secret meetings with other bankers around the world. These people can print trillions of dollars out of thin air if they want. We have inflation due to bailouts, just where the hell we get all that money from taxes alone? Hell no borrowing and devaluing our dollar by printing it up. Since we are off the gold standard there is no restriction for printing money. Hell we have no money to even fund our wars we so once again we print the shit up or borrow. This is an endless spiral that has to stop man and the only way is electing people who really are for change rather the corrupt politicians whose apple dont fall to far from the tree.

Ron Paul discusses Austrian vs Keynesian economics on Morning Joe
http://www.youtube.com/watch?v=W3cb50gTTAU
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31 / M / auckland
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Posted 5/30/09

crazykl45 wrote:


Keeping all of this in mind, please try not to buy into the Austrian BS posted all over the internet. The central banks exist for an important reason. Yes, printing more money does cause more inflation. But it's not the only cause, and we do indeed gain more value from having a central bank than not. People as a whole need a little bit of guidance, because it's clear people as a whole can often let things get out of control.


Ahh thanks for that.. oh i recognize this economic thoughts.. this is keynesian economic theory right?

i keep getting confused with keynesian theory on inflation though. I've heard about this wages stuff. And aggregate demands and supply stuff. I still don't understand it no matter how many times I read about it. I'm glad I have someone that can explain about these sort of stuff...

But anyways let's get to it... in your first point when you said..



Why? Because people value things differently under different circumstances. If they have plenty of money but not enough "stuff" they'll always be willing to spend more to buy the stuff. Same with having "stuff." If you have lots of stuff but no money, you're wiling to part with it for less. Even money itself has a marginal utility.


This is just referring to the money supply on the market right? if supply of "money" is plenty, then people will be willing to buy stuff with it more, causing the supply of "stuff" to fall. Therefore, driving prices of "stuff"... up. Or am i getting this wrong? I don't understand what marginal utility of money means.

Umm secondly... I need clarification on the example you written. So I'm an employer, I employ people.. and I pay them more because I don't want them to quit. My competitor do the same thing.

At this point i'm lost. Do you mean like.. my competitor offer my employee more money than I? or they offer their own employee higher wages because they don't want their employee to quit?

How will this cause everyone to have tons more money? oh right. lol. uhm let me get this right.. everyone - people who work for other people - will have more money because of this sudden burst of positive expectations from business owners. Am I correct?

And therefore, the community in general tends to suddenly have more supply of "money", causing them to buy "stuff" and driving the supply of "stuff" down. Thus, driving the price up. Thus, inflation.


But! I want to ask a few question about this. As you said yourself.. this is just a shortage in itself. A shortage of skilled workers to be specific at that.

So like this will just cause a short-term effect inflation won't it? because like any other commodity, it will face a price correction. Thus inflation caused by this sort of thing shouldn't be long term. Or could it? : S

And about your last point. Hmm.. So what IS the important reason for the central bank's existance? What kind of value do we gain from it? I'm curious too why the austrian didn't like it so much. I'd love to hear opposing arguments too. I mean like what they say makes sense. The central bank's purpose is to prevent economy crisis and make sure that the economy is stable right? Well considering they fail to do so for a lot of time since it comes to existence.. I fail to see the reason why we need them in the first place.
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32 / M / Atlanta, GA
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Posted 5/30/09 , edited 5/30/09

supermalv wrote:



Ahh thanks for that.. oh i recognize this economic thoughts.. this is keynesian economic theory right?

i keep getting confused with keynesian theory on inflation though. I've heard about this wages stuff. And aggregate demands and supply stuff. I still don't understand it no matter how many times I read about it. I'm glad I have someone that can explain about these sort of stuff...

But anyways let's get to it... in your first point when you said..



If you study in Britain or America, you pretty much learn two disciplines within economics called the "neoclassical synthesis." Neoclassical economics, which focuses heavily on ideas like marginality (ie calculus type stuff) in the micro-economic markets, and Keynesian economics, which is a general macro-economic theory. The two go hand in hand. Austrians don't necessarily have any kind of microeconomics though. Not really anything like what we have anyway.





That's exactly it. I meant to say money has a "diminishing marginal utility." As in, as you have more of it, it has less value to you. Hence the reason people blow through it all.


Umm secondly... I need clarification on the example you written. So I'm an employer, I employ people.. and I pay them more because I don't want them to quit. My competitor do the same thing.

At this point i'm lost. Do you mean like.. my competitor offer my employee more money than I? or they offer their own employee higher wages because they don't want their employee to quit?


All employers will raise their expectations of what's necessary to lower that rate of employee turnover to optimal levels. Hence, all employers raise wages.


How will this cause everyone to have tons more money? oh right. lol. uhm let me get this right.. everyone - people who work for other people - will have more money because of this sudden burst of positive expectations from business owners. Am I correct?

And therefore, the community in general tends to suddenly have more supply of "money", causing them to buy "stuff" and driving the supply of "stuff" down. Thus, driving the price up. Thus, inflation.

Yes. People have more disposable income and spend more. There isn't a "greater supply" per se, it's just money moves faster through the economy.

If you ever look at any macro-economic models, the basic equation for money demand looks like this.

MV = PY. Where M is the supply of money, V is the velocity, P is the general price level, and Y is your output, or GDP.

You might think "gee what good is this" but this last year, you would have been able to see deflation coming if you knew your stuff.



But! I want to ask a few question about this. As you said yourself.. this is just a shortage in itself. A shortage of skilled workers to be specific at that.

So like this will just cause a short-term effect inflation won't it? because like any other commodity, it will face a price correction. Thus inflation caused by this sort of thing shouldn't be long term. Or could it? : S


Inflation from the price wage spiral isn't short term. Why? Because of a principle known as sticky wages. Basically, wages don't go down in practice. Remember, people get angry and quit working when wages go down. That's the whole strategy behind a labor union.


And about your last point. Hmm.. So what IS the important reason for the central bank's existance? What kind of value do we gain from it? I'm curious too why the austrian didn't like it so much. I'd love to hear opposing arguments too. I mean like what they say makes sense. The central bank's purpose is to prevent economy crisis and make sure that the economy is stable right? Well considering they fail to do so for a lot of time since it comes to existence.. I fail to see the reason why we need them in the first place.

So, a panic occurs in markets central banks don't/can't regulate abd this means we don't need the feds in the first place?

Let's stop for a second with the greater theoretical stuff about management of an economy. The central bank is a lender of last resort for banks, and they require banks hold a certain level of cash reserves with them.

Banks have to invest your deposits to make any money. This means they don't hold the majority of the money people place on deposit with them, but they're still accountable for those deposits as a liability. This is known as asset liability mismatch. There are interesting methods and metrics in finance for balancing payments received from investments and payments due to creditors called "duration." These methods a part of a bigger field known as asset-liability managment. But they work under specific economic conditions which don't always apply. And if an unexpected level of people make withdrawals, the banks still need a way to make good on their liabilities. The first place to go is to the Fed's borrowing window and get a little extra short term financing. The second place to go is to dip into the cash reserves held at the fed.

This borrowing window is used all the time by a large number of banks. It's one of the first failstops in the economy, and just because a panic occurs, doesn't mean the window hasn't helped prevent some serious bank runs. I should point out there were some bank runs that occured because the borrowing window wasn't open to companies. You will notice that after Bear Sterns went belly-up the Federal reserve decided to open up the borrowing window to everyone. This wasn't an option available to Bear Sterns at the time.
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76 / M
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Posted 5/30/09

supermalv wrote:

Oh one more thing guys...

If the US is deep on national debt.... Who's the creditor? hmmm...


Mostly China.
Posted 5/30/09
I don't get why car companies have to manufacture a lot of cars per year.
Or cell phone companies manufacturing new stuff.... err... like every 3 months.

And those new stuffs are not inexpensive.


Are they expecting a lot of consumers purchase their stuffs because they are new?

As a consumer, it's logical to purchase a car that would last long at least 5 years. Same goes with cell.
I don't poop money, that's for sure.

I, as a consumer, purchase stuff not only to make things convenient for me but also to save money.

Owning a car is actually a luxury, even how ridiculously crap it is. Think about its insurance you have to pay, maintenance you have to pay, gas, etc.
So buying a new car is not easy to think about.
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31 / M / auckland
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Posted 5/30/09

crazykl45 wrote:

So, a panic occurs in markets central banks don't/can't regulate abd this means we don't need the feds in the first place?

Let's stop for a second with the greater theoretical stuff about management of an economy. The central bank is a lender of last resort for banks, and they require banks hold a certain level of cash reserves with them.

Banks have to invest your deposits to make any money. This means they don't hold the majority of the money people place on deposit with them, but they're still accountable for those deposits as a liability. This is known as asset liability mismatch. There are interesting methods and metrics in finance for balancing payments received from investments and payments due to creditors called "duration." These methods a part of a bigger field known as asset-liability managment. But they work under specific economic conditions which don't always apply. And if an unexpected level of people make withdrawals, the banks still need a way to make good on their liabilities. The first place to go is to the Fed's borrowing window and get a little extra short term financing. The second place to go is to dip into the cash reserves held at the fed.

This borrowing window is used all the time by a large number of banks. It's one of the first failstops in the economy, and just because a panic occurs, doesn't mean the window hasn't helped prevent some serious bank runs. I should point out there were some bank runs that occured because the borrowing window wasn't open to companies. You will notice that after Bear Sterns went belly-up the Federal reserve decided to open up the borrowing window to everyone. This wasn't an option available to Bear Sterns at the time.


Thank you again for clarifying. About the neo-classical theory of inflation.. So the whole thing boils down to sticky wage price then? I still don't understand this. Well.. I understand but still not 100% fully grasp the concept.. but uhh.. I think the other topic at hand is more important to discuss.. the central bank.

I read somewhere that since the existence of the central bank we actually have MORE recession than before it didn't. Whether it is true statistically or not I haven't confirm. Is it? I mean the fed was created in the 30s.. and since then we have.. great depression, the 1937 depression, 1945, 1953, 1960, 1961, 1969, etc etc. Providing that there hasn't been more recession than before it's existence.. Many recessions actually did occur.

So is it not fair to say that.. The central bank is ineffective at doing what they're doing?

And to your next point.. ah! this is something called the fractional-reserve banking isn't it. I just finished reading about it also. But anyway, yeah. From what you wrote.. The conclusion is that central bank have to exist because they act as lender of the last resort.. am I correct?

Well instead of creating central bank, why don't the government just illegalize banks from lending money they don't have? I mean that's what happens in fractional-reserve banking isn't it? Then the bank don't have to worry about bank runs because they have all the money people need for withdrawals.

I realize that this will mean bank will stop functioning as money-lending institutions. But surely there's other way to borrow money without fractional-reserve system right? People can just lend money they saved up. Or pool money together and make a lending business. Like the medicis in ancient italy.

Because the current process of the feds rescuing failing banks is just troublesome isn't it. They have to make all these bailouts with ridiculous amount of money (2 trillion last time i think?) at the expense of the tax payers. The tax payers have to pay for those bailouts.

Well if the bank doesn't practice fractional reserve system then there'll be no need for bail outs... right?

So that'll make an attractive options won't it? No more expensive bail outs, at the cost of decreased money-lending in society.

Yes, it will slow down economic growth. People need money for projects that will potentially increase productions of stuffs. But at least that slow growth will be stable.
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Posted 5/30/09

supermalv wrote:

Oh one more thing guys...

If the US is deep on national debt.... Who's the creditor? hmmm...


Well, national debt is a good thing (to an extent,) and most of ours is to China. It's private debt that causes inflation, unemployment and similar such problems.
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