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You say " ... If prior increases in productivity add value to the
nation's pile of
stuff and you don't inflate the money supply, then I think all that
happens is the value of the dollar would go up."
If it worked that simply and no expansion of the money supply were done
then we'd have the same fixed amount of dollars chasing more and more
stuff. This would result in running out of dollars before the
expanded stuff could be all bought by the limited number of
dollars. Hence the overall economy fails to grow.
Afterall, money (if macro economics is idealized) is merely a symbol for
the barter the marketplace performs.
Lets look at the simplist of examples. You have $10 and Bob
can produce 10 widgets for $ each
Bob invents a widget mold that can now produce 100 widgets / week and it
costs him $3 to build it.
Now, Bob can sell 10 widgets to you for $7 or 100 widgets to you for
$7 (the other $3 is tied up in his plant expansion. The
economy has actually shrunk then rather than remained constant or
expanded.
Its an overly simplified example of course but scale it up to an economy
and it remains true. Without growth of the money supply to mirror
productivity growth the productivity will either quit growing both from
lack of incentive and lack of capital, or worse, the economy will
actually contract due to dollars previously available to be used to make
purchases now being tied up in investment to produce goods.
Expanding the money supply faster than productivty growth + value of
physical plant will lead to inflation (more dollars chasing fewer
goods). Expanding slower will lead to contraction as per the bob
example above.
boater805
At 11:17 AM 5/18/2008, you wrote:
Thanks for the added insight,
but....
I still can't figure out why future productivity growth, or an economic
expansion, needs the extra money creation to work better at making new
innovations? Why should a piece of paper, an IOU backed by the
government, have anything to do with bringing new idea's to market? The
money is only a convenient way to transfer some sort of implied value
from one person's hands into another person's hands. It just makes it
easier for the inventor to create or consume whatever it is needed to
create their new masterpiece. If the inventor still needs a partner to
try out or perfect a new idea, he or she still needs to convince
someone, maybe a banker, to provide the needed funding.
If prior increases in productivity add value to the nation's pile of
stuff and you don't inflate the money supply, then I think all that
happens is the value of the dollar would go up. It represents the
output, or more of the stuff, made by a nation's innovators and, I
think, can only be valued in the currency of that nation's producers.
It seems to me that the only thing that would change is the amount of
money needed to fuel the new ideas. Since the value of the dollar goes
up, and no inflation of the money supply, I would need fewer dollars to
fund my idea. I still need to compete with everyone else's ideas for
getting my funding.
I know this is simplistic, but isn't this kind of intuitive? Am I still
wrong about this?
Dan
hostmaster wrote:
>
> Friedman's is exactly the model I have in mind. To some extent we do
> see productivity gains "passed along" to the consumer.
Market forces
> however do come into play and without an expansion of money supply
in
> accordance with productivity gains we experience a choking off of
> capital available for growth (of both inovation and production) as
> more and more successes (that have created and benfited from the
> productivity gains) compete for the same limited capital pool for
> their own growth.
>
> The federal reserve bank in San Francisco used to have a game in
their
> lobby (I don't know if they still do) where the visitor could adjust
> knobs for interest rates, money supply, and taxes and then watch the
> effect on the economy in terms of inflation and productivity. Their
> algorithm included lag time from the time of change until the
effects
> rippled thru the economy and reflected the ripples thru the feedback
> loops. It was quite a challanging game to maintain growth and avoid
> collapse while fiddling with the knobs. Only very slight tweaks used
> sparingly from time to time (like flying a helicopter) were
ultimately
> successful.
>
> Boater805
>
> At 06:32 AM 5/18/2008, you wrote:
>
>> This is an interesting discussion and one in which I'd like to
join with
>> my take.
>>
>> Milton Friedman stated that inflation is and always will be
nothing more
>> than a monetary phenomenon. I believe that this makes a lot of
sense.
>> It hearkens back to the simplicity of the barter system of
trade.
>>
>> You bring up an important point, namely, that productivity gains
can
>> offset inflationary growth in the monetary base. I believe this
makes
>> sense also. If we can produce more stuff with fewer resources,
then the
>> price of that stuff should come down relative to everything
else.
>> Right? If we increase the money supply by the same amount, give
or take
>> a bit, then I would think that price reductions from
productivity
>> improvements would be erased. Perhaps remaining about the same
as it
>> were before the inflation of the money supply. So, why is that
maneuver
>> by central bankers necessary at all? Why can't consumers just
keep the
>> benefits derived from these productivity improvements and passed
along
>> to the masses, creating a higher standard of living for
all?
>>
>> What am I missing?
>>
>> Just my thoughts.
>>
>> Dan
>>
>> hostmaster wrote:
>> >
>> > Ira's post in thinly veiled nonsense. Yes, the Saudi's
still have
>> > almost 2 million bbl/day reserve output available. However,
the
>> > Saudis CORRECTLY point out that an increase in production
by them
>> > would not have any material effect on the markets. The
markets
>> > themself are setting the price largely due to speculation
in futures
>> > trading (the sort of thing this list is really supposed to
be about
>> > but that Ira's article totally ignored to comment upon). A
look at
>> > the price fluctuations compared to net changes in
inventories shows
>> > they are decoupled and therefore therefore we can conclude
price is
>> > not currently linked to supply/demand. In fact the net
inventory
>> > changes in crude oil (both in the US and globally) show
that prices
>> > are rising while inventories are rising. Rising inventories
indicate
>> > a declining demand (or at least demand in excess of
supply). Either
>> > way one wishes to interpret it the conclusion is that price
is
>> > decoupled from supply and demand and an increase in supply
would
>> > merely increase inventories without moderating prices.
>> >
>> > Likewise, Ira's rant goes on about inflation and interest
rates and
>> > money supply expansion without discussing productivity.
While I won't
>> > attempt to argue that productivity gains completely offset
some of the
>> > money growth supply factors, the fact Ira completely
ignores that part
>> > of the equation again exposes his tirade for what it is (as
opposed to
>> > any kind of sound financial analysis). I have been a member
of this
>> > list long enough to know that Ira is not a fool nor unaware
of these
>> > counterbalancing economic factors. Therefore I can only
conclude his
>> > article was authored deliberately in a way to justify a
viewpoint
>> > rather than to provide a financial analysis of any kind.
That's just
>> > my opinion but if you go back and reread his tripe in
detail I think
>> > you will find it funny instead of freightening.
>> >
>> > Boater805
>> >
>> > At 11:55 AM 5/17/2008, you wrote:
>> >
>> >> First of all, I seriously doubt if the Saudi's can
raise output. I
>> >> strongly suspect they are at full production now.
>> >>
>> >> As to filling up the reserves, Bush is hell bent to
keep the reserves
>> >> up rather than use them for a short term solution to
high prices. (A
>> >> solution which would do little to help the price
problem anyway).
>> >>
>> >> Ira's post offers some sobering thoughts but what would
happen if oil
>> >> came down? What if it came down to $80? And if we
stopped promoting
>> >> the insane idea of bio fuels driving up food prices? If
grain came
>> >> down 50% and meat 30%? Then what would the consumer
situation look
>> >> like? Science fiction? I don't think so. I think the
whole ethanol
>> >> craze is being seen for just what it is, crazy. A fuel
that costs
>> >> more to make, pollutes worse than fossil fuels, and
drives food
>> >> through the roof is certainly not the answer. Atomic
energy and
>> >> hydrogen fuel cells are where I'm putting my energy
dollars from this
>> >> point forward. Solar and wind will be minor players,
especially for
>> >> home use but they do little or nothing for
transportation and large,
>> >> commercial purposes.
>> >>
>> >> So, a lot of the problems can be solved by simply
forgetting about
>> >> ethanol and I feel there is a large amount of
speculation in oil
>> >> now. We moved from 100 to 125 in days but demand most
certainly
>> >> didn't increase by 25% in days. Who knows, maybe things
will work
>> >> out after all.
>> >>
>> >> Bob
>> >>
>> >> At 01:46 PM 5/17/2008, you wrote:
>> >> >And strangly Mr.Bush justifies Saudi for not
raising oil outputs,not
>> >> >only that he was not in a favour of stopping
filling oil reserve
>> >> >near Gulf of Mexico...very strange attitude and
this has been
>> >> >discussed among all leading newpapers round the
world.
>> >> >--- In
realtraders@xxxxxxxxxxxxxxx
>>
<
mailto:realtraders%40yahoogroups.com>
>> >> <
mailto:realtraders%40yahoogroups.com
>>
<
mailto:realtraders@xxxxxxxxxxxxxxx>>, "Ira"
<mr.ira@xxx> wrote:
>> >> > >
>> >> > > It is time to take a good look at where we
are at this time. In
>> >> >the first quarter of this year more than 158,000
families lost their
>> >> >homes to foreclosure. The American public is going
deeper in debt
>> >> >every day. In a society where 70% of the economy is
driven by
>> >> >consumer spending, inflation and debt are economy
killers. Millions
>> >> >of people have homes that are worth less than the
mortgage amount on
>> >> >their home. When they look at the economics of the
situation will
>> >> >they pay the inflated mortgage payments or walk
away from the
>> >> >house? Family homes were the main source of their
wealth and now
>> >> >with that gone they have no place to go for that
extra money they
>> >> >need to pay the ever-increasing cost of living.
Duke Power said
>> >> >that they are cutting off utilities to 50 people a
day because of
>> >> >unpaid utility bills. Whether the government wants
to admit it or
>> >> >not we are in a recession. We are also in an
inflationary spiral
>> >> >that won't quit. The government is pumping
liquidity into the
>> >> >system at an alarming rate to save the financial
institutions that
>> >> >created a large portion of the problem.
>> >> > >
>> >> > >
>> >> > >
>> >> > > The balance of the article is on the web site
if you are
>> >> >interested.
>> >> > >
>> >> > >
>> >> > >
>> >> > > Just one man's opinion.
>> >> > >
>> >> > > Ira
>> >> > >
www.delta100.com
<
http://www.delta100.com/> <
>>
http://www.delta100.com/
<
http://www.delta100.com/>>
>> >> > >
>> >> > > No virus found in this outgoing message
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10.072.012).
>> >> > >
http://www.pctools.com/free-antivirus/
>>
<
http://www.pctools.com/free-antivirus/>
>> >> <
http://www.pctools.com/free-antivirus/
>>
<
http://www.pctools.com/free-antivirus/>>
>> >> > >
>> >> >
>> >> >
>> >> >
>> >> >------------------------------------
>> >> >
>> >> >Yahoo! Groups Links
>> >> >
>> >> >
>> >> >
>> >>
>> >> No virus found in this incoming message.
>> >> Checked by AVG.
>> >> Version: 8.0.100 / Virus Database: 269.23.20/1452 -
Release Date:
>> >> 5/17/2008 6:26 PM
>> >
>>
>>
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Date:
>> 5/18/2008 9:31 AM
>
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