Gyroscopic Investing

moda0306 wrote: Spending in excess of capacity causes the inflation... it doesn't matter if it's gov't or consumers... though gov't is more likely to spend in excess of capacity.

If you were to see a huge destruction of our productive capacity, let's say massive earth quakes, and the gov't didn't spend one extra dime, but people demanded just as much in goods/services, inflation would hit hard, as this would be an example of demand in excess of a newly low level of productive capacity.

Under the MMM theory, the government spends ALL money into existence.  So by default, consumers cannot cause inflation, because that would imply they have excess money to chase fewer goods/services, but that excesss had to first come from excess government spending (which is probably only known in hindsight).

Now that is completely different than "inflationary" supply/demand imbalances which are not dependent on government-created money being in excess.

Gumby seems to believe that consumer spending causes inflation, whereas consumers do not create any money in the first place, nevermind an excess.  Consumer spending will always be constrained by government spending, it is not a chicken and egg question, it's cat (government) and mouse (consumer).  If he wants to argue that increased consumer demand creates decreased supply, that is an entirely different issue that is not related to the velocity of money.  But, he was arguing for the Philips Curve which maintains there is a tradeoff between inflation and unemployment.  It was discredited in the 70's during stagflation.  Saying that consumer spending is inflationary is conflating cause and effect.  Money is simply not necessary to create increased demand or decreased supply.

Again, INFLATION = GOVERNMENT SPENDING + CHANGE IN VELOCITY OF MONEY - PRODUCTIVE OUTPUT.

Take Japan for example.  It has relentless government spending, stable productive output and a low velocity of money (and varying consumer demand).  Very similar to the USA at present.  There will be no inflation in the system until the velocity of money increases.  Velocity of money does not increase if people demand more than there is a supply of fixed goods/services, it only increases when it is necessary to maintain equilibirum with other assets.

For example, for gold to maintain equilibrium with other competitive assets, the other assets have to have negative real returns because of gold's carrying costs, etc..

Velocity reflects the supply and demand for money itself.  Money responds to the same supply and demand laws as any other asset.  If newly issued Treasury Bonds offer a higher rate of interest than off the run Treasury bonds, bank reserves, savings, M0, M1, blah blah blah, velocity will increase as everyone will want to get rid of the old lower, rate for the new, higher rate.  Inflation will then manifest.  This is the same situation that cause gold to collapse, i.e. real rates rising.

In summary, inflation is a FISCAL phenomenom, NOT monetary and NOT demand side.

MG

MG,

I like what you just posted... I really do... it was the velocity side I was referring to when I said consumer spending causes inflation, but there you have it... nice work.

I very much like that equation too... it doesn't simply imply the Quantity Theory, as right in there is the change in velocity...

Though I wonder, what really is "a change in the velocity of money."  Loan making?  Buying consumer goods?  Trading cash for gold?  Cash for Euros?

I'm not very schooled on what exactly "velocity" means when we get into the details.

Gumby wrote: MG... you seem to be referring to the Quantity of Money Theory. It was disproved in the 1930s.
Most economists do not believe in the Quantity of Money Theory anymore. Monetarism is dead.

I don't know what to tell you any further other than correlation is not casuation as far as consumer spending and inflation goes.  If you really understand the mechanics of MMM then its beyond me how you cannot see that inflation is a fiscal phenomenom, not consumer demand.

Most economists are full of shit, don't believe in MMM, believed in Efficient Market Theory so stringtly it was almost impossible to publish dissenting views up until the late 80's, etc..

AFAIK, the velocity of money hasn't been discredited.  Its a useful tool to gauge supply and demand.  If its voodoo economics, so be it.  I'll use what works.

MG

gizmo_rat wrote:

I guess the stats have changed last I looked at it.  But notice that South Korea and Japan are high on the list.  That seems oddly incongruent.

MG

Velocity of money was the piece added to Quantity that reached what could be argued is a much better measure, is it not?  

I thought "Velocity" was the cure to Quantity theory's errors?

Gumby wrote: I think you'll have a hard time arguing that there isn't a correlation between the disposable income rate and the inflation rate.

I think you'll have a hard time arguing that there isn't a correlation between the rate of government spending and the inflation rate. 

MG

Gumby,

I don't think you disagree with MG.... consumer spending IS velocity of money, is it not?

The AMOUNT of money is the same... the speed has changed... but we have inflation... just like MG's equation says.

Gumby wrote: If the middle class felt wealthy, and had full employment, they could easily spend beyond the productive capacity of the nation. That would cause prices to rise over a period of time — which is what economists call "inflation".

*groan*  If the middle class had full employment, PRODUCTIVE OUTPUT WOULD INCREASE, thus there would be no inflation over time.

Again, the Philips Curve has been discredited.  If you want to argue that velocity of money is discredited and I argue that full employment being inflationary is discredited, then it nets out and leaves fiscal spending as the source of inflation in the economy.

MG

moda0306 wrote: Most of the discussion of "The 1%" had to do with stone believing that deficits are directed towards the uber-rich, and Gumby & myself saying that they really have little to do with it... that even in a gold standard the wealthy would be getting richer.

While these suggest certain value judgements, we weren't throwing around the term "1%" as anything more than a term to help measure whether the distribution of wealth would get worse given a certain set of inputs.

I believe my list still stands:

1) Cut taxes, mostly on the wealthy, and corporate profits
2) Slash spending, mostly on entitlements to the poor/middle class, as well as public education.
3) Deregulate the means of production
4) Strengthen the currency that is owned in droves by the wealthy in the form of bonds and owed in droves by the middle class in the form of student loan, credit card and mortgage debt.
5) Deregulate the financial services industry
6) Eliminate anti-trust laws, since "cartels don't work" anyway

Libertarians.... PLEASE explain to me how these 6 things equal an expanding middle class?

Most of these policies have been tried before and the talking point that was used was "trickle down" economics - that somehow if you make the top 0.1% wealthier, that money will trickle down to the rest of us.  It's hard to disprove this, but I think the last 30 years have shown that economics doesn't work this way.

moda0306 wrote: I'm not very schooled on what exactly "velocity" means when we get into the details.

It is just technical analysis to show the rate of change in supply and demand for money.  When demand increases, the squiggly line will go up.  When demand decreases, the squiggly line will go down.

It cannot be measured directly, so there are different, indirect ways to attempt to do so.

Here's a sample: http://research.stlouisfed.org/publicat ... page12.pdf

MG

moda0306 wrote: Gumby,

I don't think you disagree with MG.... consumer spending IS velocity of money, is it not?

The AMOUNT of money is the same... the speed has changed... but we have inflation... just like MG's equation says.

You could look at it that way, in terms of exchanging money for goods/services.  But that is an exchange. not inflationary, so not technically velocity.

MG

MachineGhost wrote:

Gumby wrote: I think you'll have a hard time arguing that there isn't a correlation between the disposable income rate and the inflation rate.

I think you'll have a hard time arguing that there isn't a correlation between the rate of government spending and the inflation rate.  ;)

MG

Um, Really? Have you been awake the past twenty years? Government spending has soared and inflation is very low.

Perhaps you didn't get the memo, but Monetarism died in the 1990s when it couldn't explain the fact that inflation stayed low as government spending increased.

MachineGhost wrote:

moda0306 wrote: Gumby,

I don't think you disagree with MG.... consumer spending IS velocity of money, is it not?

The AMOUNT of money is the same... the speed has changed... but we have inflation... just like MG's equation says.

You could look at it that way, in terms of exchanging money for goods/services.  But that is an exchange. not inflationary, so not technically velocity.

MG

Yes, velocity is the speed at which people spend money once they get it. All spending is an exchange.

Having disposable income implies that people may start demanding more goods than they would ordinarily be purchasing — which should drive up the cost of those goods.

Gumby, to my mind shifting wealth to those who might buy more stuff could well cause prices to rise but I think that that shouldn't be viewed as a problem. The only problem is if a tail chase sets up with ever increasing wages and prices. I think linking workers earnings to profits is the best way to avoid that. In a situation with employee owners (such as in the John Lewis Partnership) then the 1970s style cat and mouse chase between wages and prices would be avoided along with all the disruption and waste that caused.

stone wrote: Gumby, to my mind shifting wealth to those who might buy more stuff could well cause prices to rise but I think that that shouldn't be viewed as a problem. The only problem is if a tail chase sets up with ever increasing wages and prices. I think linking workers earnings to profits is the best way to avoid that. In a situation with employee owners (such as in the John Lewis Partnership) then the 1970s style cat and mouse chase between wages and prices would be avoided along with all the disruption and waste that caused.

Stone, that makes a lot of sense. I agree. And, once prices rise, people would feel like they had less disposable income — which would keep them from ever feeling wealthy. I think my overall point is that it's difficult for the middle class to ever feel wealthy. You can raise the standard of living of the middle class, but giving everyone jobs and raising everyone's salary (through government spending, or whatever) would probably just cause the prices of goods and services to rise. If their salaries were tied to profits, then I suppose that would just make the velocity more volatile (just guessing).

Stone, what are your thoughts on this...

https://www.commondreams.org/view/2012/01/26-3

Is that something you would back?

Gumby, thanks for the link. I found it very interesting. Craigr said he had spent a lot of time in Sweden and liked the place. I've never been but worked very closely with a Swede and he told me a lot about the place. I do think it shows that a big government can work (though personally I sort of prefer a small government) but I think the really big point to me is that a very unequal society with a small owning class (as used to be the case in Sweden) does not create a good economy.

I am worried about that fact that Sweden was somewhere that sterilized more "stupid" people than even the USA did and that Denmark takes so many children off their parents. To me that though perhaps is a big government issue rather than a redistribution issue.

Gumby, I think if peoples personal earnings were tied to profits, then profits would become less volatile and less in sync across the economy. The business  cycle would moderate with less boom and bust. The loss of small companies such as Mom and Pop stores, small scale artisans etc etc worsens this.

I think it's a very noble idea. But, there really aren't many large employee-owned companies:

List of [notable] employee-owned companies
The Employee Ownership 100: America's Largest Majority Employee-Owned Companies

I haven't heard of most of those companies. I think when someone like Mark Zuckerberg creates a company, like Facebook, the last thing on his mind is handing profits of the company over to the employees. Even Apple pays its employees very poorly — and with few perks — compared to other companies. It sounds crazy, but Steve Jobs didn't want his employees to work for Apple just for the money or the perks. He wanted employees who felt like they were doing something revolutionary and were honored just to be a part of it. It makes me cringe, because those workers should have access to those profits.

Having a society full of employee-owned companies would be very good for the middle class. But, I just don't see it happening on its own. And it sounds like the Nordic Model basically used government to force public ownership (and profits) into the hands of workers — which isn't exactly ideal either.

In the UK our largest one in the John Lewis Partnership. It is a very large company.

I think the largest employee owned company in the World is in Northern Spain but I can't remember its name .

The problem is getting them started. I think New England Biolabs may be such a US company. They are the market leader for what they do.

Gumby & MG,

I still think you guys are agreeing and you don't know it....

Gumby,

The last 10 years we've had deficits, but also had production grow... therefore, low-to-moderate inflation.  This fits with MG's calculation

...but here's where I think MG's wrong, though I have to do a little reaserch...

MG,

I think the velocity of money has to be measured somehow... aka, how quickly it's exchanged for hard assets, goods, and services after it's received... but then again that signifies production, so maybe either my thinking or your equation needs a tune-up.

EDIT:

Nevermind... the velocity increases, increasing inflation potential, and production increases all the same, decreasing potential... still sounds solid.

"The velocity of money (also called velocity of circulation) is the average frequency with which a unit of money is spent in a specific period of time."

- Per Wikipedia

Sounds like if money is spent, that's adding to velocity... I'd say that loaning money probably does not qualify... but here I am in macro 101 again.

moda0306 wrote:I still think you guys are agreeing and you don't know it....

Yeah, we definitely agree on 98% of how we view things. I'm just being obstinate because a wealth tax would fundamentally change the way our government enters our lives. Half of the nation mistrusts our government and the other half thinks it fails us. It would certainly make me feel better that the top 1% would be losing power over the 99%'s lives. But, I just don't see how it would be politically feasible.

Stone's ideas are likely correct, on paper. But, I think that any plan like that has unforeseen drawbacks — like, I don't know, zero interest rates and government officials getting warrants and breaking down doors to determine how many hard assets a person has when it comes time to verify a wealth tax. Seems like a tough sell. Doesn't mean I'm right or he's wrong — it's just my opinion.

I said MG, not stone.

I think the velocity & production pieces cover the fact that we haven't had high inflation to match our giant deficits since 2000.

Oh, whoops. Sorry.

I dunno. MG clearly believe that government spending is directly linked to inflation. It's not. QMT was disproved in the 1930s, and Monetarism stopped being able to explain the world in the 1990s.

Monetarists think that inflation is always just around the corner. And they've been saying it for 20 years now and have been wrong every single day. They follow ShadowStats and its fake M3 projections as if it means anything. They say that Monetarism will be revived as soon as inflation returns. Annny daaay now.

Monetarism died in the 1990s when it couldn't explain the high government spending and low inflation rates. Monetarists try to come up with explanations for the high spending and low inflation, but after awhile it becomes pretty clear that Monetarism can't explain the fiat world.

His equation isn't really quantity theory though, because it contains a velocity element.

That means it takes into consideratin the supply/demand for money that Quantity Theory didn't.

Looking at deficit spending, and not M0, also helps identify that it's the net financial assets, not monetary base, that we should pay attention to, even if QToM is incomplete.

Saying that any one of the elements can generate inflation is correct, but he points out what I believe to be a technicality in that since the government spends the money into existence, it's the base "cause" of inflation.

Of course, that's incomplete if not irrelevent, because even in a fixed money system, production and velocity will still drive inflation/deflation as much as "new money" does.

So I think we're circling the drain of frustrated agreement here... you just think he's talking QToM and he's not, and he thinks gov't drives inflation and that's incomplete.

I still like his equation for now, because it appears to contain the base elements of inflation... using my definition of velocity which may or may not be right... basically, consumer demand & investment (investment being the buying/building of new machinery or a new factory).