Could this be the primary cause of inflation?

[eflatminor]

I would argue that the Fed influences interest rates to such a degree that the supply and demand in the market are effectively negated.

The Fed has lowered rates to (or near) all time lows and massively increased the monetary base - yet inflation is still low. So clearly you're wrong.

We see this in the inflation caused by the Fed, constant inflation that the market would not otherwise produce. Case in point: A widget that cost $100 in 1780 cost about $100 in 1912, meaning, some products/services saw inflation, others deflation with overall costs remaining about the same. However, a widget that cost $100 in 1913, when the Fed took control of interest rates, now costs $2,350, a cumulative rate of inflation of over 2,200%! Clearly, the Fed has produced constant inflation, something they could not have done without complete control over the price of money.

In 1780? LOL! A widget produced in 1780 isn't the same widget produced in 2013.

Periodically dipping into deflationary periods is one of the bad things the Fed helps us to avoid. Deflation makes it harder for debtors to pay their debts which leads to default. Did you happen to notice the massive credit crisis caused by falling home prices? Deflation is bad. It pushes businesses under which harms the economy. Rampant inflation of course is also bad, however with a few exception ( late 70's early 80's) the Fed has been able to prevent - or at least not cause - over-inflation.

Actually, a widget refers to a product or service that is in fact the same. An apple for instance was the same in 1780 as in 2013.

I would also argue that periodic deflation FOR A PARTICULAR PRODUCT OR SERVICE is a good thing. As one example, the price of computers has fallen over the years and isn't that a good thing for consumers and the market for computers? I'd say yes it was.

Regarding deflation in housing, you might ask young folks unable to buy their first home in what was a terribly overinflated market if a little deflation is bad. I suspect they'd disagree.

You are correct that the Fed has helped to stop hyper inflation...for the time being, but my point is that they'd done so by ENSURING inflation over time, which is not what a free market would produce. I say that's a bad thing, as are central price controls over any product or service.

 

[eflatminor]

The market does determine the price of money.

Well yea, that's the point. The price of money has been centrally controlled ever since the Federal Reserve began in 1913. Before the Fed of course, the market did in fact determine interest rates.

The market still determines interest rates.

The Fed determines the DIRECTION of interest rates, which is pretty much controlling those rates. They do this by having direct control of the discount rate and unmatched indirect influence over the federal funds rate. I'm not saying the market doesn't have any influence, but the Fed controls the show. Again, inflation figures pre and post Fed make this clear.

 

[TakeAStepBack]

Well yea, that's the point. The price of money has been centrally controlled ever since the Federal Reserve began in 1913. Before the Fed of course, the market did in fact determine interest rates.

The market still determines interest rates.

The Fed determines the DIRECTION of interest rates, which is pretty much controlling those rates. They do this by having direct control of the discount rate and unmatched indirect influence over the federal funds rate. I'm not saying the market doesn't have any influence, but the Fed controls the show. Again, inflation figures pre and post Fed make this clear.

It's not "pretty much". It IS control of the rates.

 

[OohPooPahDoo]

An apple for instance was the same in 1780 as in 2013.

No it isn't. Apples today are cosmetically far more appealing and tend to come to market with less rot. There is also far less variety of apple to choose from in 2013 as opposed to 1780.

I would also argue that periodic deflation FOR A PARTICULAR PRODUCT OR SERVICE is a good thing. As one example, the price of computers has fallen over the years and isn't that a good thing for consumers and the market for computers? I'd say yes it was.

The price of the same computer has dropped but the price of a brand new top of the line computer hasn't so much - which enables the computer manufactures to continue to profit so long as they continue to produce newer and better computers.

Regarding deflation in housing, you might ask young folks unable to buy their first home in what was a terribly overinflated market if a little deflation is bad. I suspect they'd disagree.

You might also ask them how easy it is to obtain financing now vs. 10 years ago. Then ask them if they'd like the value of their home to drop by 30% 5 years after they buy it.

You are correct that the Fed has helped to stop hyper inflation...for the time being, but my point is that they'd done so by ENSURING inflation over time, which is not what a free market would produce. I say that's a bad thing, as are central price controls over any product or service.

A "free market" is an idealized model conceived of for the purpose of making economic and finance theory tenable. It doesn't exist in reality.

Its quite clear to anyone who looks at history that the U.S. economy has grown far faster since 1913 than it did in the 100 years prior. Economic expansion is more possible in an environment of slight inflation. That's a fact. Would you prefer to hold fast to some non-existent idealized model of a 'free market' to the detriment of the millions of people across all economic strata whose lives have been vastly improved due to the unprecedented economic boom of the last 100 years?

 

[TakeAStepBack]

No it isn't. Apples today are cosmetically far more appealing and tend to come to market with less rot. There is also far less variety of apple to choose from in 2013 as opposed to 1780.

There are not less variety of apples today than in the past. In fact, variety makes it to consumer markets far better than in the 1700s. They are, thanks to technology, culled more throughly and the less desirables used for other purposes than the shelf. Still, you've missed his point regarding the item itself hasn't changed. The price, on the otherhand, has drastically changed...just in the last 40 years. And not to be more affordable either.

The price of the same computer has dropped but the price of a brand new top of the line computer hasn't so much - which enables the computer manufactures to continue to profit so long as they continue to produce newer and better computers.

Wrong. Both the technology has improved and the price has deflated. 5 years ago I built a computer that cost me $2,500. 3 months ago I bought a more powerful system for a $1,000. You're totally off on this.

You might also ask them how easy it is to obtain financing now vs. 10 years ago. Then ask them if they'd like the value of their home to drop by 30% 5 years after they buy it.

Lending is tighter now than it was ten years ago. And the system you're a proponent of is the same one that wiped out folks real estate equity. How you can speak out both sides of the mouth is beyond me. This central planning system destroys wealth and turns people into "borrow" serfs of the state. Instead of independent savers.

A "free market" is an idealized model conceived of for the purpose of making economic and finance theory tenable. It doesn't exist in reality.

Its quite clear to anyone who looks at history that the U.S. economy has grown far faster since 1913 than it did in the 100 years prior. Economic expansion is more possible in an environment of slight inflation. That's a fact. Would you prefer to hold fast to some non-existent idealized model of a 'free market' to the detriment of the millions of people across all economic strata whose lives have been vastly improved due to the unprecedented economic boom of the last 100 years?

My parents were able to afford 2 cars and 1 home on 1 income. Today, that it takes two incomes to barely afford one car and one rental goes against everything you said. I have no idea how you drew any of these conclusions.

 

[eflatminor]

An apple for instance was the same in 1780 as in 2013.

No it isn't. Apples today are cosmetically far more appealing and tend to come to market with less rot. There is also far less variety of apple to choose from in 2013 as opposed to 1780.

I would also argue that periodic deflation FOR A PARTICULAR PRODUCT OR SERVICE is a good thing. As one example, the price of computers has fallen over the years and isn't that a good thing for consumers and the market for computers? I'd say yes it was.

The price of the same computer has dropped but the price of a brand new top of the line computer hasn't so much - which enables the computer manufactures to continue to profit so long as they continue to produce newer and better computers.

Regarding deflation in housing, you might ask young folks unable to buy their first home in what was a terribly overinflated market if a little deflation is bad. I suspect they'd disagree.

You might also ask them how easy it is to obtain financing now vs. 10 years ago. Then ask them if they'd like the value of their home to drop by 30% 5 years after they buy it.

You are correct that the Fed has helped to stop hyper inflation...for the time being, but my point is that they'd done so by ENSURING inflation over time, which is not what a free market would produce. I say that's a bad thing, as are central price controls over any product or service.

A "free market" is an idealized model conceived of for the purpose of making economic and finance theory tenable. It doesn't exist in reality.

Its quite clear to anyone who looks at history that the U.S. economy has grown far faster since 1913 than it did in the 100 years prior. Economic expansion is more possible in an environment of slight inflation. That's a fact. Would you prefer to hold fast to some non-existent idealized model of a 'free market' to the detriment of the millions of people across all economic strata whose lives have been vastly improved due to the unprecedented economic boom of the last 100 years?

I do not believe people's lives have been improved by the Fed. Constant inflation and extended periods of economic boom/bust cycles caused by the Fed do not benefit regular people. Banks? Sure, but not the people. Nor do I believe a free market is detrimental to people, quite the opposite. Central planners, central price controls...history shows us such top-down oversight produces unintended and detrimental consequences for those of us subject to what is in effect a government monopoly on the price of money.

Your comments on the price of computers only proves my point. Government does not control the price of computers, yet we have a strong, thriving market with inflation not only in check, but a bit of deflation helping to keep the products affordable. In computers, the free market works. In could also work in the market for money.

And sorry, but you don't seem to grasp the idea of widget. It is by definition a product that is not different over time, whatever claim you want to make about the dramatic change in apples...

Tell me, if you favor central price controls over money, why not everything? Should government tell us what to pay for a car? How about a computer? Diapers? Houseplants?

 

[boedicca]

No. People earning money is not the cause of inflation.

The cause of inflation is fiat currency manipulated by a central bank for the benefit of big government and the banking system.

 

[Flopper]

Well yea, that's the point. The price of money has been centrally controlled ever since the Federal Reserve began in 1913. Before the Fed of course, the market did in fact determine interest rates.

The market does determine interest rates. The fed influences rates, but it is the demand for loans and willingness of lenders that actually control the rates. In the past, the fed has tried to stimulate or slow growth by changing the interest the banks charge and the market has resisted. If the fed is bucking a strong economic expansion or contraction, it may take the fed a a long time to push rates in the desired direction.

I would argue that the Fed influences interest rates to such a degree that the supply and demand in the market are effectively negated. We see this in the inflation caused by the Fed, constant inflation that the market would not otherwise produce. Case in point: A widget that cost $100 in 1780 cost about $100 in 1912, meaning, some products/services saw inflation, others deflation with overall costs remaining about the same. However, a widget that cost $100 in 1913, when the Fed took control of interest rates, now costs $2,350, a cumulative rate of inflation of over 2,200%! Clearly, the Fed has produced constant inflation, something they could not have done without complete control over the price of money.

We have had inflation long before the Fed was formed. In the 19th century, inflation and deflation alternated wildly. The fed didn't start any open market operations till 1920 but we know during the war years inflation reached the highest level every recorded in the US, 18% in 1918.

Monetary policy has two basic goals: to promote "maximum" sustainable output and employment and to promote "stable" prices. It is impossible to determine how successful the fed has been at reaching this goal because there are many other factors at work and there is no way of telling what would have happened if the fed did not take action. We do know that the wild swings in the economy, common in 19th century have been dampened creating a more stable business environment.

Arguing whether we should have a monetary policy is simply a waste of time. It's a fact of life. Every developed nation on earth has central banking which attempts to manage the economy and that's not going change.

 

[eflatminor]

The market does determine interest rates. The fed influences rates, but it is the demand for loans and willingness of lenders that actually control the rates. In the past, the fed has tried to stimulate or slow growth by changing the interest the banks charge and the market has resisted. If the fed is bucking a strong economic expansion or contraction, it may take the fed a a long time to push rates in the desired direction.

I would argue that the Fed influences interest rates to such a degree that the supply and demand in the market are effectively negated. We see this in the inflation caused by the Fed, constant inflation that the market would not otherwise produce. Case in point: A widget that cost $100 in 1780 cost about $100 in 1912, meaning, some products/services saw inflation, others deflation with overall costs remaining about the same. However, a widget that cost $100 in 1913, when the Fed took control of interest rates, now costs $2,350, a cumulative rate of inflation of over 2,200%! Clearly, the Fed has produced constant inflation, something they could not have done without complete control over the price of money.

We have had inflation long before the Fed was formed. In the 19th century, inflation and deflation alternated wildly.

Yes, we had inflation and deflation. Yet overall, prices remained flat, hardly something that can be called "wild". But the point is that the MARKET determined the products and services where demand outstripped supply (causing inflation) and the opposite as well.

The fed didn't start any open market operations till 1920 but we know during the war years inflation reached the highest level every recorded in the US, 18% in 1918.

And after the Fed started open market operations, we saw inflation each and every year, in opposition to the will of the people participating in markets with their dollars.

Monetary policy has two basic goals: to promote "maximum" sustainable output and employment and to promote "stable" prices.

According to the Fed, their goal is maximum employment. They're Keynesians, just like their buddies in Congress.

It is impossible to determine how successful the fed has been at reaching this goal because there are many other factors at work and there is no way of telling what would have happened if the fed did not take action. We do know that the wild swings in the economy, common in 19th century have been dampened creating a more stable business environment.

That would require overlooking the great depression, called "Great" for a reason, as well as our current unprecedented recession. Swings in the economy are made more extreme (booms and busts) by the Fed. Just one of the negative consequences of their central price controls.

Arguing whether we should have a monetary policy is simply a waste of time. It's a fact of life. Every developed nation on earth has central banking which attempts to manage the economy and that's not going change.

Nations like those currently teetering on bankruptcy? In any case, I'm sure folks felt lots of other topics were not worth arguing and were just a 'fact of life', like slavery, women's suffrage, civil rights, etc.

 

[The2ndAmendment]

The Fed has lowered rates to (or near) all time lows and massively increased the monetary base - yet inflation is still low. So clearly you're wrong.

Once foreign banks start sending our money back to us (that is where most of the money goes) as the dollar becomes worthless and is exchanged for another world currency, you're finally going to have that hyperinflation.

 

[oldfart]

You are correct that the Fed has helped to stop hyper inflation...for the time being, but my point is that they'd done so by ENSURING inflation over time, which is not what a free market would produce. I say that's a bad thing, as are central price controls over any product or service.

OK, I've wracked my brain, and I still can't come up with a monetary theory that predicts a central bank action that supresses inflation in the near term but promotes inflation in the longer term. I'd like to see the reasoning if there is one. If what you mean is that a certain central bank policy over time could result in short term lowering of inflation and higher long-term inflation, that could be analyzed and could be true. But it would have to make some really peculiar assumptions about central bank behavior in the future.

I have a problem in seeing how you measure what a free market (as opposed to what?) would produce in the way of inflation over time. The idea that inflation cannot exist in free markets is obviously false and has no foundation in either history or theory. In a total Soviet-style command economy, inflation does not exist; shortages exist. In such an economy the price mechanism does not serve as a vehicle for communicating information to market participants and is irrelevant. If your point is that free markets without central banks produce a different result than free markets with a central bank, I don't see any reason why. If the point is that a certain central bank policy produces a different result than other central bank policies; I think that is obvious. But the question is what are the policies; not wether or not there is a central bank.

 

[eflatminor]

You are correct that the Fed has helped to stop hyper inflation...for the time being, but my point is that they'd done so by ENSURING inflation over time, which is not what a free market would produce. I say that's a bad thing, as are central price controls over any product or service.

OK, I've wracked my brain, and I still can't come up with a monetary theory that predicts a central bank action that supresses inflation in the near term but promotes inflation in the longer term.

Nor could I, because that's not the theory the Fed follows. The Fed does not seek to suppress inflation at all, they seek to create inflation each and every year. True, if inflation where to get out of hand, they have measures to reign it in, but to be sure, the goal is to create inflation, not suppress it and in that regard, the Fed has done exactly that.

I'd like to see the reasoning if there is one. If what you mean is that a certain central bank policy over time could result in short term lowering of inflation and higher long-term inflation, that could be analyzed and could be true.

Again, there is no policy to lower inflation. There is a policy to produce inflation without letting it get too high. And it's worked! As was stated previously, inflation between the founding of the country up until the formation of the Fed was flat. Some markets saw inflation, others deflation, but overall, flat. Yet, after the formation of the Fed, inflation is up over 2000 percent.

Clearly, the Fed has resulted in constant inflation, which I would argue is the most regressive tax of all.

I have a problem in seeing how you measure what a free market (as opposed to what?) would produce in the way of inflation over time.

Easy, just look at the overall rate of inflation in America before the founding of the Fed. The measure demonstrates how a free market (meaning, no central price controls) will show inflation in some areas, deflation in others, all determined by the people voting with their dollars.

The idea that inflation cannot exist in free markets is obviously false and has no foundation in either history or theory.

No one ever said inflation cannot exist in a free market. It happens when demand outstrips supply. Simple. And as was stated previously, before the Fed, America experienced some inflation, some deflation. Overall, flat.

In a total Soviet-style command economy, inflation does not exist; shortages exist. In such an economy the price mechanism does not serve as a vehicle for communicating information to market participants and is irrelevant.

Agreed.

If your point is that free markets without central banks produce a different result than free markets with a central bank, I don't see any reason why.

First, one cannot have a free market with central price controls. The market for money (the interest rate) is centrally controlled, so no free market there. The point is that an economy produces market driven inflation or deflation without a central bank. With a central bank, all we get is inflation, as the history of the Fed makes clear.

If the point is that a certain central bank policy produces a different result than other central bank policies; I think that is obvious.

Not the point. We don't need a central bank. The market is perfectly capable of determining interest rates without central planners.

But the question is what are the policies; not wether or not there is a central bank.

No, the question is why have a central bank ensuring ongoing inflation when a free market is perfectly capable of determining interest rates.

 

[boedicca]

You are correct that the Fed has helped to stop hyper inflation...for the time being, but my point is that they'd done so by ENSURING inflation over time, which is not what a free market would produce. I say that's a bad thing, as are central price controls over any product or service.

OK, I've wracked my brain, and I still can't come up with a monetary theory that predicts a central bank action that supresses inflation in the near term but promotes inflation in the longer term. I'd like to see the reasoning if there is one. If what you mean is that a certain central bank policy over time could result in short term lowering of inflation and higher long-term inflation, that could be analyzed and could be true. But it would have to make some really peculiar assumptions about central bank behavior in the future.

I have a problem in seeing how you measure what a free market (as opposed to what?) would produce in the way of inflation over time. The idea that inflation cannot exist in free markets is obviously false and has no foundation in either history or theory. In a total Soviet-style command economy, inflation does not exist; shortages exist. In such an economy the price mechanism does not serve as a vehicle for communicating information to market participants and is irrelevant. If your point is that free markets without central banks produce a different result than free markets with a central bank, I don't see any reason why. If the point is that a certain central bank policy produces a different result than other central bank policies; I think that is obvious. But the question is what are the policies; not wether or not there is a central bank.

Factor in the government redefining the measure of inflation so that it significantly understates true inflation.

 

[Flopper]

I would argue that the Fed influences interest rates to such a degree that the supply and demand in the market are effectively negated. We see this in the inflation caused by the Fed, constant inflation that the market would not otherwise produce. Case in point: A widget that cost $100 in 1780 cost about $100 in 1912, meaning, some products/services saw inflation, others deflation with overall costs remaining about the same. However, a widget that cost $100 in 1913, when the Fed took control of interest rates, now costs $2,350, a cumulative rate of inflation of over 2,200%! Clearly, the Fed has produced constant inflation, something they could not have done without complete control over the price of money.

We have had inflation long before the Fed was formed. In the 19th century, inflation and deflation alternated wildly.

Yes, we had inflation and deflation. Yet overall, prices remained flat, hardly something that can be called "wild". But the point is that the MARKET determined the products and services where demand outstripped supply (causing inflation) and the opposite as well.



And after the Fed started open market operations, we saw inflation each and every year, in opposition to the will of the people participating in markets with their dollars.



According to the Fed, their goal is maximum employment. They're Keynesians, just like their buddies in Congress.

It is impossible to determine how successful the fed has been at reaching this goal because there are many other factors at work and there is no way of telling what would have happened if the fed did not take action. We do know that the wild swings in the economy, common in 19th century have been dampened creating a more stable business environment.

That would require overlooking the great depression, called "Great" for a reason, as well as our current unprecedented recession. Swings in the economy are made more extreme (booms and busts) by the Fed. Just one of the negative consequences of their central price controls.

Arguing whether we should have a monetary policy is simply a waste of time. It's a fact of life. Every developed nation on earth has central banking which attempts to manage the economy and that's not going change.

Nations like those currently teetering on bankruptcy? In any case, I'm sure folks felt lots of other topics were not worth arguing and were just a 'fact of life', like slavery, women's suffrage, civil rights, etc.

I think you should take a look at the boom and bust economy of the 19th century. This type of economy is bad for business as well as workers. I seriously doubt the country would want to return to that environment. Of course the fed is not always right and they have made some big mistakes but I think it's far better than having devastating economic contractions followed by wild expansions. No one benefits from this but market manipulators and speculators.

 

[eflatminor]

We have had inflation long before the Fed was formed. In the 19th century, inflation and deflation alternated wildly.

Yes, we had inflation and deflation. Yet overall, prices remained flat, hardly something that can be called "wild". But the point is that the MARKET determined the products and services where demand outstripped supply (causing inflation) and the opposite as well.



And after the Fed started open market operations, we saw inflation each and every year, in opposition to the will of the people participating in markets with their dollars.



According to the Fed, their goal is maximum employment. They're Keynesians, just like their buddies in Congress.



That would require overlooking the great depression, called "Great" for a reason, as well as our current unprecedented recession. Swings in the economy are made more extreme (booms and busts) by the Fed. Just one of the negative consequences of their central price controls.

Arguing whether we should have a monetary policy is simply a waste of time. It's a fact of life. Every developed nation on earth has central banking which attempts to manage the economy and that's not going change.

Nations like those currently teetering on bankruptcy? In any case, I'm sure folks felt lots of other topics were not worth arguing and were just a 'fact of life', like slavery, women's suffrage, civil rights, etc.

I think you should take a look at the boom and bust economy of the 19th century. This type of economy is bad for business as well as workers.

I have, in detail. There have always been and will always be boom/bust cycles. The problem post Fed is that the cycles are longer...the depressions greater, the economic bubbles larger, before they inevitably burst of course.

I seriously doubt the country would want to return to that environment.

We need not 'return' to anything, we need only remove the central price controls that are not eliminating the cycles, but in fact making them more severe. As constant inflation is the most regressive tax of them all, harming the poor WAY more than everyone else, I would think a sense of decency regarding our most vulnerable citizens might become a factor in evolving beyond central price controls.

Of course the fed is not always right and they have made some big mistakes

I disagree. They have achieved exactly what they set out to do: easy money so politicians don't have to actually pay for their wars and entitlement programs. The Fed has not made mistakes, the implementation of a central bank was the mistake.

but I think it's far better than having devastating economic contractions followed by wild expansions.

That's exactly what you're getting with the Fed. And crippling debt to boot.

No one benefits from this but market manipulators and speculators.

Ironically, it's the Fed that manipulates and speculates. I'll take an individual speculating, with his own money, on what might or might not happen in a free market over central planning speculating with taxpayer money.

 

[editec]

The root cause of inflation has been and will continue to be the manipulation of the money supply.

Feminisim didn't send women to work poverty did.

Velocity has nothing to do with inflation?

Now where did I say that?

If you want to debate a straw man of your own device, I'm not that guy.

Maybe you can explain how the massive increase in the money supply over the past several years has done very little to spark inflation - without considering the fact that the velocity has been reduced. I can't. I'd love to hear it though.

I didn't say that a massive increase in the money supply over the past several years occurred, lad.

But I can tell you that the velocity of money has probably slowed down. (incidently, inflation --which is massive under-reported-- is rearing its ugly head again)

Case in point of the velocity issue?

Banks typically kept about $4 billion in cash (call that their petty cash fund) until the debt crises.

In about 2010 they were collectively holding about $60 Billion. (haven't check that number in a while, so it may have changed. (I guess /hope that banks are lending more again)

You don't suppose THAT FEAR has anything to do with their decline in velocity, do you?

Our economy lives or dies based on CONFIDENCE. Velocity will increase with increased confidence

As to the manipulation of the money supply?

Do you doubt the veracity of the statement that we have a money supply that is being manipulated?

If you doubt that, then ask yourself where the Treasury and FED got the money to save the banksters.

As yourself where the government will get the money to guarantee the toxic assets they've taken off the books of their pals the banksters, too.