The real rate of inflation

[New Freshly]

For the past few years I have been concerned about inflation of the dollar. I suspected the money supply was increasing significantly, especially with Fed actions like quantitative easing. I wanted to know how much the money supply was changing, but I did not trust the official CPI numbers.

At some point, I realized the CPI does not actually measure the money supply. Because of this, it does not provide a measurement of the inflation rate of the dollar. It only provides a measurement of price inflation. To get to the real inflation rate of the dollar, the money supply needed to be measured directly.

I tried to find sources of money supply data. The M1, M2, M3....measures of money were all I could find. These helped to show what the Fed was doing to the money supply, but it lacked a huge component: fractional reserve money expansion that occurs from fractional reserve banking. Again discouraged.

Yesterday I just finished reading an intriguing book called Debt Inflation that an investing friend asked me to read so we could talk about it. In it a way to calculate the money supply, INCLUDING fractional reserve money expansion, is described. I've got to say it is pretty interesting. There is a website that goes with the book (Monetary inflation rate calculator that does not rely on CPI data and it has calculators on it. Supposedly the average inflation rate of the dollar over the years has been about 7%.

Anyone have thoughts on this? Anyone come across this idea yet?

 

[pinqy]

What exactly are you trying to measure and why? What is the point/purpose/use of measuring the change in the money supply to include fractional reserves?

 

[New Freshly]

What to measure? Trying measure the money supply directly: count how much money exists in the economy and how that amount changes over time.

Why measure? If we can measure the money supply, we can know the true inflation rate of the dollar.

Why include fractional reserve money? We cannot just measure the amount of money created directly by the Fed's actions, because fractional reserve banking processes increase the amount of money owned by participants of the economy. To know the total amount of money in the economy we must include money created by the Fed and also money created by fractional reserve banking processes.

I did not think it was possible to measure the amount of fractional reserve money that has been created until I read the book.

Does that make sense?

 

[pinqy]

What to measure? Trying measure the money supply directly: count how much money exists in the economy and how that amount changes over time.

Why measure? If we can measure the money supply, we can know the true inflation rate of the dollar.

There's no such thing as "true inflation rate." You're just coming up with another defintion. How does knowing the change in the money supply help you in any way? What's the purpose?

Why include fractional reserve money? We cannot just measure the amount of money created directly by the Fed's actions, because fractional reserve banking processes increase the amount of money owned by participants of the economy.

No it doesn't. It's not in circulation. Including it adds nothing to our tracking of the money supply.

To know the total amount of money in the economy we must include money created by the Fed and also money created by fractional reserve banking processes.

You haven't mentioned any usefullness.

 

[New Freshly]

To address your statement "there is no such thing as a true inflation rate": To be clear, inflation is a generic term. It is not helpful to use the term "inflation" on its own. If we measure an increase in prices over time, that is price inflation. If we measure an increase in the number of whales in the ocean over time, that could be called whale inflation. If we measure an increase in the amount of hair on my legs, this could be called hair inflation. And so on.

The CPI is a measurement of price inflation. Many (including myself in the past), assume that this represents a measurement of an increase in the supply of dollars (monetary inflation). It does not. It is measuring price inflation.

To measure the "true inflation rate of the dollar" we need to actually measure dollar inflation.

How has the supply of dollars increased over time? That question is what I was trying to get at. And the book Debt Inflation has provided an answer to that question in a way that I have not found any other place. It provides a method for measuring the entire supply of money in the economy, including fractional reserve money expansion.

Regarding fractional reserve money creation or expansion: Fractional reserve banking increases the amount of money OWNED by participants of the economy. I didn't see how it actually did this until I read the book, but in it the core of the idea is explained really well. I only "kind of" understood it before.

Essentially, this is the idea. Banks hold other peoples money in deposit accounts. The people that have their money in a bank account continue to make economic decisions (what to purchase, what to forego) based on the amount of money that they own. All the while, the bank uses the money that is supposedly in the deposit accounts in the economy (in the form of loans and investments in securities). When banks do this, a different participant of the economy receives money that they did not have before; ie, their ownership of money increases. These people then make economic decisions (purchases and investments) based on the money that they just received. So, the amount of money OWNED by participants of the economy increases when banks use depositor money in the fractional reserve banking process. Increasing the amount of money OWNED by participants of the economy influences economic decisions (purchases and investments) and is the same thing as increasing the money supply.

It is hard to show the impact of fractional reserve banking on the money supply without using extensive examples. In the end though, I feel the idea of the money supply being influenced by fractional reserve banking is compelling.

 

[EdwardBaiamonte]

I feel the idea of the money supply being influenced by fractional reserve banking is compelling.

dear, a super model is compelling. The question here is why do you care if the money supply is influenced by fractional reserve banking?? You come off as a conspiracy nut libertarian.

 

[New Freshly]

No conspiracy here, and not libertarian, anti-government or anti-Federal Reserve. There is a real conversation to be had.

In economics there is an idea that when an increased amount of money is present in an economy, chasing the same amount of goods and services, the price of goods and services will increase overall. This happens because the supply of money relative to the supply of goods and services increases. In other words, monetary inflation leads to price inflation.

Currently, we measure changes in the price of goods and services (like the CPI) and then many (if not all) people assume the measured changes in price are measurements of changes in the supply of money. But that is a logical leap that should not be inferred. Price inflation does not directly measure changes in the supply of money, because the amount of goods and services in the economy also changes over time. Because of this, price inflation cannot accurately measure the inflation rate of the dollar.

Most people interested in the "inflation rate" are interested in knowing if the amount of money in the economy has changed (ie, the conspiracy theorist wants to know if the dollar is being debased). And yet they end up relying on the CPI to answer this question. The CPI does not measure changes in the money supply.

So, why do we not know exactly how much money exists in the economy? How come we cannot state that X amount of money existed in the economy at the end of April, and now Y dollars exist at the end of May? If we had a simple system in which an entity (government or monetary authority) printed and released money into the economy, we could just count the money that has been released. We cannot just add up the money released though, because fractional reserve banking effectively increases the amount of money owned by participants of the economy. The amount of money owned by participants of the economy matters, because the amount of money each person owns is what influences their purchase decisions.

The structure of the system is what makes me "care if the money supply is influenced by fractional reserve banking." I want to know the true inflation rate of the dollar so that I can honestly and openly answer statements like "the Fed is debasing the dollar" or "Obama is recklessly printing money" or "the hyperinflation bubble is about to pop." Measuring monetary inflation data directly is the correct way to address these assertions and concerns.

If someone suspects the money supply is increasing or hyperinflation is around the corner, what better way to address their concern than show exactly how much the money supply has changed???

 

[EdwardBaiamonte]

If someone suspects the money supply is increasing or hyperinflation is around the corner, what better way to address their concern than show exactly how much the money supply has changed???

too stupid!! thats what economists do all the time. Do you have any point at all???

 

[New Freshly]

If someone suspects the money supply is increasing or hyperinflation is around the corner, what better way to address their concern than show exactly how much the money supply has changed???

too stupid!! thats what economists do all the time. Do you have any point at all???

I am not aware of any other place except Monetary inflation rate calculator that does not rely on CPI data that economists measure the total amount of money that is owned by all of the participants of the economy. Please provide link or direct me to books/articles that show this??

 

[EdwardBaiamonte]

If someone suspects the money supply is increasing or hyperinflation is around the corner, what better way to address their concern than show exactly how much the money supply has changed???

too stupid!! thats what economists do all the time. Do you have any point at all???

I am not aware of any other place except Monetary inflation rate calculator that does not rely on CPI data that economists measure the total amount of money that is owned by all of the participants of the economy. Please provide link or direct me to books/articles that show this??

dear you can use this new thing called Google to look it up yourself. Why do you care anyway???

 

[AdvancingTime]

Predicting when or how much inflation we will see going forward is hard to predict. I contend the primary reason that inflation has not raised its ugly head or become a major economic issue is because we are pouring such a large percentage of wealth into intangible products or goods. This includes currencies. If faith drops in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven inflation will soar. Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.

The timetable on which economic events unfold is often quite uneven and this supports the possibility of an inflation scenario. A key issue being one of timing. If the price of gas jumps to $8 a gallon overnight do you buy gas and not make your car payment or stop driving the twenty miles to work? Answer, it could be months before your car is repossessed so you buy gas.

It is important to remember that debts can go unpaid and promises be left unfilled. If this happens where does it leave us? Chaos and major disruption would result from such a scenario. As we have seen from the economic crisis of 2008 and following many other unsettling developments legal actions can continue to drag on for years. More in the article below.

http://brucewilds.blogspot.com/2014/04/inflation-seed-of-economic-chaos....

 

[EdwardBaiamonte]

Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.
http://brucewilds.blogspot.com/2014/04/inflation-seed-of-economic-chaos....

some libertarian idiots have been worrying about inflation since 2007, [well forever for that matter] and have discredited libertarians 100% in the process. In reality deflation turned out to be the real problem.

Also, if there is inflation we assume the Fed will simply reverse it thus rendering libertarian monetary policy more absurd than ever.

Do you have the IQ to understand?

 

[oldfart]

Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.
http://brucewilds.blogspot.com/2014/04/inflation-seed-of-economic-chaos....

some libertarian idiots have been worrying about inflation since 2007, [well forever for that matter] and have discredited libertarians 100% in the process. In reality deflation turned out to be the real problem.

I totally agree! The surprising thing is that the gold bugs continue spouting this tripe despite all their predictions being wrong year after year.

The events from 2008 til the present have been a "natural experiment" as to the quantity theory of money vs. the Keynesian liquidity trap exception to that theory (Keynes and Keynesians do not claim that the quantity theory is necessarily wrong outside the liquidity trap; claims they do so is simple a lie and a red herring). The evidence has overwhelmingly validated the liquidity trap scenario; when there is a major shortfall in demand, increases in money supply do not result in inflation; price increases are not proportional to changes in the monetary base.

This is just common sense. What mechanism would prompt businesses to try to raise prices when demand is collapsing? What would happen to businesses that did try to raise prices in such an environment? Paradoxically these inflation claims come from pundits who view themselves as great defenders of the market economy; yet they seem baffled about how markets actually work.

A contributing factor in this misguided effort is that liquidity traps are not all that common so people forget. We have only had two in recent history, world-wide in 1930-38 and Japan in the 90's.

 

[EdwardBaiamonte]

when there is a major shortfall in demand,

That is a totally mistaken concept. It is typical lib commie nomenclature used to centralize power and then use that power to "create demand" with soviet style cash for clunkers and bridge to nowhere programs. Demand is low because Barry's lib commie soviet programs kill animal spirits.

Demand for internal combustion tractors and other modern farm equipment that would transform life on the planet was low 5000 years ago too but only because Republican supply-siders had not yet supplied such equipment. The entire issue in economics is how to create the supply of Republican inventions.

Do you have the IQ to understand??

 

[oldfart]

when there is a major shortfall in demand,

That is a totally mistaken concept. It is typical lib commie nomenclature used to centralize power and then use that power to "create demand" with soviet style cash for clunkers and bridge to nowhere programs. Demand is low because Barry's lib commie soviet programs kill animal spirits.

Demand for internal combustion tractors and other modern farm equipment that would transform life on the planet was low 5000 years ago too but only because Republican supply-siders had not yet supplied such equipment. The entire issue in economics is how to create the supply of Republican inventions.

Do you have the IQ to understand??

Simply awesome!

 

[EdwardBaiamonte]

when there is a major shortfall in demand,

That is a totally mistaken concept. It is typical lib commie nomenclature used to centralize power and then use that power to "create demand" with soviet style cash for clunkers and bridge to nowhere programs. Demand is low because Barry's lib commie soviet programs kill animal spirits.

Demand for internal combustion tractors and other modern farm equipment that would transform life on the planet was low 5000 years ago too but only because Republican supply-siders had not yet supplied such equipment. The entire issue in economics is how to create the supply of Republican inventions.

Do you have the IQ to understand??

Simply awesome!

translation: as a liberal I simply lack the IQ to respond substantively!!