Never say never

The term ‘excess’ is where I get myself in trouble, because it may be subjective and unquantifiable. Of course, so would “massive”, “unprecedented” or any other adjective. In any case, I feel much more comfortable using the word liquidity when I talk to my friends about what the Fed has done, and how that liquidity spreads through the economy to eventually cause prices to rise as too much liquidity chases after the same quantity of goods there were prior to the creation of that liquidity.

As a side note, yes, I realize I’m stealing a term which already has an economic meaning, but unless I just make up a new word like ‘snarvulfungis’ or import some Latin word, I’m going to be stuck redefining no matter what. And this word ‘liquidity’ has the added advantage of producing a mental image when I say “we’re all about to be drowned under a tidal wave of liquidity’ or ‘the third world economies are being swamped by a wall of liquidity emanating from the U.S.”

Sione

http://en.wikipedia.org/wiki/Equation_of_exchange

Either Rothbard or Mises did a paper on this equation which pretty much showed it to be of little use. As for money circulating, that’s also a bad analogy, money does not circulate like current in a wire. Money is at all times in someone’s possession. There is an instant where it exchanges hands, but that’s not like a flow. So trying to figure out prices based on the concept of velocity of circulation is a faulty theory.

For example, I’ve always wondered if I get change for a $20 if that get’s counted as velocity. Or suppose I’m playing cards and the money keeps exchanging hands, is that counted as velocity? And suppose we each have a store and first I buy something from you and then you turn right around and buy something from me of the same value. In essence, we made one exchange, but according to money velocity theory, there were 2 exchanges.

However, people do have a desire to hold a certain amount of cash (for unforeseen contingencies) which varies over time. Also, in periods of hyperinflation, people try to hold as little cash as possible and for as little time as they can. These circumstances can increase or decrease the demand for money. If demand for money is high, then it will increase in value -all other things being equal – and vice versa. In this way, both supply and demand affect the “price” of money just like supply and demand affect the price of anything else that is exchanged.

However, time also is involved, as mentioned in the article that estimates 36 months lag on average to see the effects of increases in money supply.

But sometimes simply the belief that supplies will increase can change prices. Today, for example, just as oil prices were at about $103 per b. Saudi Arabia announced it was going to put more oil up for sale, and the price of oil plummeted intra day.

Many things affect prices. However, when nearly everything is increasing in price, then since money is 1/2 of every exchange, it’s generally the case that it’s the supply of money that has increased, rather than shortages of everything else causing the increase in prices.

M2V http://research.stlouisfed.org/fred2/series/M1V?cid=32242

MZM http://research.stlouisfed.org/fred2/series/MZMV?cid=32242

Really hard to see any monetary inflation effects until these charts turn around isn’t it ?

After all, if that money isn’t circulating, how is it affecting the price ?

I believe the price increases we are seeing at this point are supply demand based.
Strangely enough lack of demand can in fact increase price temporarily. If I am a retailer and my bills are x I need to sell a certain number of sku’s @ 20% to service x if that volume drops I still need to make x for bills so less volume = more gross. Price rises.

I can predict economics easily, it will get worse if you try to fix them and it will get better if you leave them alone. It’s as simple as that.

Nevetheless the trends are visable.

Sione

http://futures.tradingcharts.com/chart/CT/M

It looks to me as if cotton prices have doubled since about 2009. And even with some sell-offs, it’s still pretty high.

In the latter part of the article he has adjusted, as should everyone, and only use the two word hyphenated terms, price-inflation and money-inflation. If everyone were to adjust to these terms and never say inflation alone it should defeat those that try to confuse the issue. In conversation, when one says inflation, I always ask if they mean price or money inflation.

It also helps to point out that prices go up or down and the term inflation is not a good analogy for rising prices.

Economics isn’t an instant effect. It takes time to see the results of actions.