Purchasing power

Reading through the comments in the deflation threads it appears there is some confusion around the meaning of the term and the implications on deflation (and by implication inflation).

One way to think about the issue is in terms of the functions of money. Money has three functions:

  • Medium of exchange – here money breaks down the double coincidence of wants.
  • Store of value – money can be stored and used at a future date.
  • Unit of account – money provides a measure of value.

As a store of value money must have a predictable future value – preferably the same value as it has now. Ideally money will have a stable value over time. So that $100 today buys a bundle of goods and services worth $100 and can still do so in one year, or two years and so on.

But we know the purchasing power of money isn’t stable – in a fiat money regime it is very likely that $100 will not be able to buy the same bundle of goods and services in one years time as it does now. Invariably it will be able to buy less. Prices will have risen. That process is often referred to as inflation. But that is only half the story – one of two things could have happened.

  1. The goods and services in the bundle could have become more valuable due to shortages or a new use for those goods. This is a change in relative prices.
  2. The value of the money itself could have declined – the purchasing power of the money declined. Strictly speaking this is inflation.

Similarly $100 could buy more than $100 can today. Prices have fallen. This process is often referred to as deflation. But that is only half the story – one of two things could have happened.

  1. The goods and services in the bundle could have become less valuable due to surpluses, new sources of supply, or consumers not valuing those goods as highly as entrepreneurs, or improvements in technology or productivity. This is a change in relative prices.
  2. The value of the money itself could have increased – the purchasing power of the money increased. Strictly speaking this is deflation.

In each case (2) is a problem but (1) isn’t. In each (2) case what we observe – a change in prices – is being driven by money not maintaining itself as a store of value. This can lead to consumer and entrepreneurial error as decision makers respond to faulty price signals.  Economic decision making becomes distorted.

So failure to act as a store of value results in money not being a good unit of account leading to exchanges that would not otherwise occur.

Now I’m happy to believe that fiat money will result in inflation, and I’m happy to believe that economies can and will shrink or grow, and I’m happy to believe that goods and services can become more or less valuable as relative prices change.  I’m not convinced that fiat money can result in deflation – paper money becoming more valuable?

Now the story can get a lot more complicated than that – Mises, for example, argues that inflation and deflation are political terms and not economic terms and that we shouldn’t expect money to neutral (i.e. work as a store of value).

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57 Responses to Purchasing power

  1. JC

    Sinc:

    Now I’m happy to believe that fiat money will result in inflation, and I’m happy to believe that economies can and will shrink or grow, and I’m happy to goods and services can become more or less valuable as relative prices change. I’m not convinced that fiat money can result in deflation – paper money becoming more valuable?

    Inflation, or at least high levels of inflation are caused by central bank error through policy that is too loose. The CB can also be too tight. It’s erring can be symmetrical.

  2. Noddy

    Mr Davidson,
    Is it true that banks create money at the stroke of a pen?
    Every issue of money by a bank brings new money into existence and every payment of a loan cancels money out of existence?
    Banks do not lend depositor’s money.. True or false?
    If this is not the case then where does new money come from and is money ever issued as a credit rather than a debt?
    Your valued opinion on these questions would be appreciated.

  3. TerjeP

    An ideal “store of value” goes up in value. Who wants the same value when you can have more.

    It is a “unit of account” that you ideally want stable over time. Just like you want stability for a “unit of length” or a “unit of weight”. And why do you want your “unit of account” stable? Because it’s the measure for all manner of commercial agreement from wages and salary contracts, to twenty year office leases. If you can’t have stable you’ll settle for predictable. If you get neither then commercial agreements of any duration are riddled with risk and commerce becomes much more difficult. You’d get a similar set of contractual problems if tape measures were not stable in length.

  4. JohnA

    Noddy you might need to read “The Evil Princes of Martin Place” to get answers to those questions.

    Sinc:

    “In each case (2) is a problem but (1) isn’t. In each (2) case what we observe – a change in prices – is being driven by money not maintaining itself as a store of value. This can lead to consumer and entrepreneurial error as decision makers respond to faulty price signals. Economic decision making becomes distorted.”

    In each case (2) we may not perceive the movement in prices to be a negative. We especially love asset inflation because we appear to be more wealthy – real estate, shares or (usually “and”) superannuation balances may rise in “value”. We like that, but they may still represent loss of purchasing power, as bad as cost-of-living commodity price movements, rather than increases in real value.

    And further, how do we reckon and allow for the concept of feature-creep? That is, where the assets themselves are bigger and more featured than in earlier years. Cars are an easy illustration, but housing today is not exactly equivalent to the fifties: we assume that homes now come with underground power, made roads, fully serviced and paved streets, lots of internal gadgets like TV, internet, labour-saving devices and maybe a pool and a BBQ at the back, which were unknown a couple of generations ago. And we tend to buy the home fully equipped, with a massive mortgage, whereas our grandparents started small and built on as funds permitted.

    Pardon the midnight rambling. Now I must away to my ugly-sleep. To re-jig the old joke, I have a great face for the internet!!

  5. Noddy

    JohnA
    #1161785, posted on January 21, 2014 at 11:58 pm
    Noddy you might need to read “The Evil Princes of Martin Place” to get answers to those questions.

    Thanks for the tip… it looks very interesting.

  6. A H

    Change in the purchasing power of money isn’t bad or good. It reflects time preference.

    If people in general think long term, they save money and less money chasing goods and services means that prices fall.

    If the general time preference is short term, then spending sees prices rise.

    This is natural and healthy. It is a countervailing factor against excessive long or short term time preference.

    Rapid changes in buying power are disruptive because they make doing business unpredictable, like you said, Sinclair. They are usually political events.

  7. brc

    Ok, now take a hypothetical question. Bitcoin takes off as a valid form of money, and replaces the fiat currency in some countries. Bitcoin is limited in issue by design, unlike gold you can’t dig any more up once it is all issued. Unlike paper money you can’t print more.

    Could widespread use of bitcoin cause deflation? Or does the infinite divisibility of a crypto-currency prevent deflation being an issue? Are crypto currencies superior to the gold standard because of this?

    (I’m not interested in all the reasons why bitcoin could not become a major currency, the thought experiment assumes it has)

  8. Percy

    Another great thread Sinc, thankyou.

  9. Blogstrop

    The popular perception of deflation is that it’s good. People love it when our dollar buys more imported stuff. Libertarian economists love it when local manufacture goes under and we buy more imported stuff.

  10. 2dogs

    The change I see happening, brc, is crypto-currencies like Bitcoin linking up with peer-to-peer banking.

    When this happens, money will cease to be something issued by government, or deposited in a bank Everyone just holds a portfolio of electronic securities in their eWallet. These securities are created by peer-to-peer banking, so the thousand dollars in your eWallet might include fifty dollars form your neighbours mortgage and twenty dollars of your cousin’s car loan. When you go to the shops, your pay for the groceries with securities directly from your eWallet.

    There is little or no opportunity for monetary policy under such an economy. “Money”, to the extent it even exists in this case, get reduced to only its unit of account function.

  11. Bruce of Newcastle

    I’m not convinced that fiat money can result in deflation – paper money becoming more valuable?

    Of course it can. Through exchange rate fluctuations. Especially since we import most of our manufactures – these get cheaper so our dollars go further. The Swiss franc used to be in such demand their central bank printed something like a trillion francs and bought euro denominated debt just to try to depreciate their currency as investors fled the euro zone. Eventually they gave up and pegged to the euro.

    This can reverse, as it has done for us. We are now losing purchasing power.

    There is no theoretical reason why appreciation of a currency cannot be permanent, or effectively so. The Zim dollar/Oz dollar crossrate demonstrated this until Zimbabwe adopted USD. And Argentina’s currency was fixed at 1 new peso to 1 USD in the ealy 1990′s (when they knocked three noughts off the currency). Its back to 6 on the official rate, and up to 11 on the street rate. And it will keep going down since the Argentines chronically cannot get their act together.

  12. The Pugilist

    Now I’m happy to believe that fiat money will result in inflation, and I’m happy to believe that economies can and will shrink or grow, and I’m happy to believe that goods and services can become more or less valuable as relative prices change. I’m not convinced that fiat money can result in deflation – paper money becoming more valuable?

    I certainly don’t want to verbal Sinc here, so please Professor doomlord, if I’m misinterpreting you, please let me know.
    Reading between the lines here, I interpret this as being a comment about the incentives embedded in the institutional framework of a fiat currency. Of course it is possible for deflation to occur in a fiat currency regime. If $10 notes were all of a sudden deemed to no longer be legal tender and a commensurate increase in other denominations was not forthcoming, surely other notes and coins would become more valuable. Or if the government were to knock a zero off of everyone’s transaction account balance, a similar effect would occur. However, are we ever likely to see these things occur? Not outside of the most extreme set of circumstances. The temptation for all governments is always to increase the money supply so that their debt can be monetised and the real value of that debt thereby reduced. If deflation were to occur, the real value of their debt would rise…

  13. Rodney

    Sinclair, does true deflation really exist? Has hyperdeflation ever happened?
    Have monetary authorities ever reduced the supply of money significantly, burnt the banknotes in Martin Place, or increased the SRD dramatically?

  14. Token

    Inflation, or at least high levels of inflation are caused by central bank error through policy that is too loose. The CB can also be too tight. It’s erring can be symmetrical.

    Does inflation happen when new credit devices are created or new sources of credit are found?

  15. Joe Goodacre

    Sinclair,

    It would appear that deflation can occur in a system of fiat money.

    If it is agreed that a fiat system can inflate, then money should deflate if the conditions that led to inflation reverse.

    For instance – depositors have produced goods and services and have stored up future purchasing power when they deposit money at a bank.

    Banks lend out approximately 90% of funds lent to them.

    This means that borrowers are able to use 90% of the depositors stored up purchasing power.

    At some point however, depositors will also seek to access that purchasing power that has already been spent by the borrower. At this point two classes of people are trying to spend the same purchasing power. If daily goods and services were bought on credit, this would result in inflation in the ‘basket of goods’. If assets like housing and stocks are bought on credit, this results in inflation in those assets. Asset inflation doesn’t feel like ‘basket of goods’ inflation though – when the cost of milk goes up we feel poorer. When the value of our stocks or homes go up, we feel wealthier.

    People continue to produce goods – i.e. more land is subdivided or apartments are built. If credit does not continually grow greater than the amount of goods produced then these inflationary conditions no longer exist and the asset class deflates as more land and apartments are built. If credit grows again relative the asset class then inflation starts up again.

    Australia is not at risk of deflation in the basket of goods, primarily because that is not where our credit growth occurs. Our credit growth primarily occurs in asset classes like land and housing so that is where the risk of delation lies should credit growth slow.

  16. JC

    Does inflation happen when new credit devices are created or new sources of credit are found?

    That’s like asking if banks can create money. I can’t see how they can. Banks are able to lend up to their prudential limits. At that point they have to raise more capital either through a share issuance or retained earnings. An increase in the money supply has to come from the central bank. Velocity comes into it too, but I forget that stuff and it’s too early in the morning to talk about it.

  17. Token

    That’s like asking if banks can create money. I can’t see how they can. Banks are able to lend up to their prudential limits.

    How about when new banks that source of capital from foreign juristictions join the market?

    Unlike smaller Australian developers, the Chinese do not need to use Australian banks and are using their own banks to fund the developments. Accordingly, funding is now plentiful and the two pillars of supply constraint are crumbling.

  18. .

    Sure we can get deflation, it is just unlikely given that politicians are inclined to expand spending – either raising taxes through fiscal drag or inflating the price level anyway through higher spending.

    I also thank Sinclair for this. There has been a lot of inaccurate speculation posted here. Hopefully people can learn from this.

    Blogstrop’s comment is uncharacteristically, a bit of nonsense. However it is counter intuitive so we should be kind.

    Inflation may increase exports but inflation ultimately also causes a BOP deficit (a mathematical result which is correct by definition). There is more to be considered other than FDI acquisition, FX carry trades, bonds and equities swapping hands and imports and exports changing – the post equilibrium effect is longer and you’ve permanently increased the money base – whilst producers usually import materials. Australian exports also have ‘low exchange rate pass through”. There are also dynamic efficiencies firms gain without quasi protection. There is also a non-homogeneous import/export and manufacturing sector.

    As for the idea that M3 is some wicked plot – M3 has been found to Granger-cause M1 growth. Like the implication from Joe’s argument above – the money creation process can only continue out of equilibrium if there is activity which actually increases output growth.

  19. .

    Token is right. The RBA doesn’t have that much power to manipulate M3 anymore. The growth of CDOs and foreign funding means the old money formation tables don’t work like they used to. You can check the RBA data to see how CDO capital raising means central bank policy is either limited in scope or is weak.

    JC also makes a good point to – simple maths regarding the credit multiplier and money identity also backs up the point Joe G. and myself made – inflation or deflation will only be persistent with intentional fiscal or monetary policy to cause disequilibrium.

  20. Token

    Blogstrop’s comment is uncharacteristically, a bit of nonsense. However it is counter intuitive so we should be kind.

    Please take the time when you have it to clarify why the posts we make are nonsense or why don’t get it.

  21. Token

    Token is right. The RBA doesn’t have that much power to manipulate M3 anymore. The growth of CDOs and foreign funding means the old money formation tables don’t work like they used to.

    Similar question to my other one above.

    Is there inflation created when banks get loose/sloppy when they lend to high risk customers (e.g. low doc loans in the 2000′s) and is it deflation when they pull back from those markets (e.g. like in 2006 to 2008 when banks started to (sometimes brutally & bluntly) wind back the low doc loans?

  22. JC

    Dot

    The RBA doesn’t have that much power to manipulate M3 anymore. The growth of CDOs and foreign funding means the old money formation tables don’t work like they used to.

    The foreign funding aspect can only occur in three ways.

    1. An Australian bank has need say US Dollars, makes a bond issue or commercial paper and plugs that hole. This new asset will still have to fall within the leverage guidelines of its balance sheet.

    2. Unlikely but still… A bank can borrow foreign currency convert it to Australian Dollars. this is the same as above in terms of the leverage limitation. The other point is that conversion of foreign exchange doesn’t add to the money supply.

    3. A currency swap. This also doesn’t impact on the money supply and is a sort of combo of the two above… well a little bit.

  23. JC

    Is there inflation created when banks get loose/sloppy when they lend to high risk customers (e.g. low doc loans in the 2000′s) and is it deflation when they pull back from those markets (e.g. like in 2006 to 2008 when banks started to (sometimes brutally & bluntly) wind back the low doc loans?

    There has to be either an expansion or contraction of the balance sheet.

  24. Token

    There has to be either an expansion or contraction of the balance sheet.

    The story I present there was an initial expansion of the balance sheet as the assets increased when the revenue was booked. The liabilities would be mounting over time and then there was material write offs when it was clear how many people were defaulting on the loans and how much of the revenue previous recognised would not realised.

    PS: I remember the credit squeeze in late 2006 through to 2008 well as it became close very, very difficult for many businesses to get loans for revenue generating asset purchases.

  25. Jim Rose

    Sinclair, I like the money is memory literature, but it underrates the unit of account and economic calculation role of money

  26. Joe Goodacre

    JC,

    Money is a medium to produce other goods and services.

    Banks provide people who have not produced goods and services (borrowers), the ability to purchase existing goods and services.

    Since depositors are not restricted from spending their deposits, or they can obtaining finance themselves with those funds at the bank as security – the banks facilitate inflation because they enable two classes of people to spend the same money.

    Technically all savers facilitate credit growth inflation because they provide the means for banks to lend.

  27. JC

    the banks facilitate inflation because they enable two classes of people to spend the same money.

    No they can’t. If a bank did that it would go broke.

    It can’t lend out money it doesn’t have without replacing the deposit.

    At the end of each day a bank’s balance sheet must balance. Assets must equal deposits and equity.

    Technically all savers facilitate credit growth inflation because they provide the means for banks to lend.

    And savers forgo consumption.

  28. Joe Goodacre

    Token,

    Correct – deflation occurs when credit growth slows, because as people are continually producing new goods and services to pay off their debts, the goods and services in the economy catches up with the quantity of money.

    Any time the banks put self imposed restraints on the growth of credit, can lead to deflationary conditions in the particular area the credit is expended (that point is important). Banks push the envelope of credit growth however, because they will be bailed out and most of the credit growth occurs in asset price inflation which makes people feel wealthier, leading others to want to get on the band wagon (i.e. it’s sustainable because people believe asset inflation is a good thing).

  29. rebel with cause

    Thanks for the definition Sinclair, very erudite.

    If I have this right, under an inflationary scenario, nobody wants to hold money – when you are paid you rush to the store to turn your money into real resources as soon as you can, because you know that tomorrow your money will buy less than today. Prices are bid up as consumers are willing to exchange larger and larger amounts of paper money for a given resource.

    But under a deflationary scenario the opposite would be true – you’d be running a garage sale trying to flog off as many of your assets as possible, knowing that tomorrow you could buy them back for less than you sell them today. Prices fall as consumers are willing to give up less and less paper money for a given resource. You’d see some pretty weird behaviour like supermarkets discounting products and then not restocking.

    The second scenario (deflation) seems pretty unlikely and I would have thought self-correcting: prices are falling, so wouldn’t demand increase in response?

  30. Joe Goodacre

    JC,

    Banks keep only 10% of depositers funds on reserve.

    This means that they are lending out 90% of depositors funds.

    Yes they will go broke if all depositors want their money back at once – what’s known as a bank run. The central bank prevents this, meaning that both depositors and borrowers can spend the same money.

    As an example – if person A has $500k in the bank and goes to buy a property, they think that they are spending their money (and they are). If person B at that same auction has $200k of their own money, and also the promise from the bank that they can borrow 90% of person’s A money then the quantity of money both perceive they can spend, is increased. This leads to inflation in the asset class that backs the line of credit.

  31. JC

    Joe

    My example was made to be simple in order to show the dynamics at play. Banks cannot lend more than what the liability side and prudential limitations allow.

    Saving is to forgo consumption.

    I have to go out and discuss later.

  32. .

    That’s a bad example, Joe G.

    A could lend the difference to B.

  33. Joe Goodacre

    Louis Hissink,

    Schiff has a bit of a blind spot regarding the perceived instability of the fiat system (hence his continual quest to push gold).

    The problem with his reasoning though, is failing to see that government does not have a monopoly on currency.

    Government has a monopoly in the sense that it can dictate the currency that taxes can be paid in, or it make certain currencies illegal, however the ability of people to come up with different ways of transferring purchasing power is unlimited.

    The government can create inflation in the money supply by physically printing money, or paying for government expenditure by issuing bonds by the central bank. We ourselves though can create inflation by lending money to banks that on lend our money to others to speculate in assets (as opposed to pursuing productive pursuits such as investing in factories or inventions). So long as the central bank prevents a bank run when money creation associated with asset speculation spirals out of control, then there is nothing to say that after the rubble settles and the losers lick their wounds, that others won’t start speculating again.

    Schiff’s right that deflation isn’t a bad thing in of itself, and he’s correct in predcting inflation. His mistake is that in predicting that the inflation will manifest itself in such a way as to make people feel poorer, leading to instability in the currency. It’s the opposite – the inflation occurs in the endeavours banks choose to lend to (housing, stocks) – this inflation can feed on itself because people feel like they are missing out on getting richer.

  34. Noddy

    Joe Goodacre
    #1162221, posted on January 22, 2014 at 9:48 am
    Banks keep only 10% of depositers funds on reserve.
    This means that they are lending out 90% of depositors funds.

    I do not believe this statement… indeed it is financial ‘black magic’ and nonsense.
    Have you heard of ANY PERSON going to a bank to withdraw their deposits and the banker saying ‘sorry you can’t have your money today because we have lent it to Joe Blow’.
    The natives of New Guinea have a better understanding of money with their seashells and boar-teeth than many on this blog!

  35. Joe Goodacre

    JC,

    You’re right that banks can not lend more then they borrow + what they keep on reserve.

    Saving is also forgoing consumption.

    Where it gets tricky, is that savers can intend to consume, without consumating the act of consumption (so to speak).

    If we have $500k in a bank account, and we want to buy a house, and we make an offer that is rejected – we are still technically savers (we have money in the bank). However – we have still manifested a consumption intention in the market (by bidding for something) which has implications on the prices of whatever we tried to buy, even if we weren’t successful in buying.

    That manifestation of an intention to consume, even if we were unsuccessful in consuming is an increase in the quantity of the currency because at that point, both savers and consumes are trying to spend the same real purchasing power.

  36. Pyrmonter

    1 – can we move the Social Credit/League of Rights “did you know the banks make money costlessly” conspiratorial discussion elsewhere?

    2 I’m happy to believe that fiat money will result in inflation,

    Given that the relative price of a commodity-based currency will be affected by the intrinsic demand and supply for the commodity (gold discoveries, changes in dental practice being cases in point), why would you expect price stability any more from a non-fiat currency? The issue is one of extent: fiat currencies are cheaper to expand than commodity ones, but that is not to say there is some immutable commodity currency that yields stability.

    Indeed, given the changing nature of both the production and consumption bundles, is price stability meaningful in the long term? (eg, have you tried buying a type writer ribbon recently?)

    3 – examples of deflation “restoring value” to a currency are rare: there is an assymetric bias, explained (I think) in public choice terms by Nordhaus, Tulloch etc. But there are instances of it:

    Percentage Change from Corresponding Quarter of Previous Year ; All groups CPI ; Australia ;

    Sep-1997 -0.4
    Dec-1997 -0.3
    Mar-1998 -0.1

  37. Joe Goodacre

    Noddy,

    You have illustrated the point perfectly – belief has everything to do with the situation.

    It is precisely because you believe that you can get your money out whenever you want that allows banks to only hold 10% reserves.

    If everyone believed the counter example – that your money is at risk and everyone should withdraw their money then we would have a bank run, and the situation of 10% reserves would be impossible. Bank runs used to be common in the early 20 Century and prior. It was the esatblishment of central banks that lie at the foot of your belief in the stability of the system.

    I agree that the system’s stable – this knowledge is useful in making investment decisions because inflation represents a transfer of wealth from savers to borrowers – and deflation a contrary result. Predicting how these things manfest themselves is useful in retaining the value of one’s own wealth.

  38. JohnA

    Noddy #1162247, posted on January 22, 2014 at 10:19 am

    Joe Goodacre
    #1162221, posted on January 22, 2014 at 9:48 am
    Banks keep only 10% of depositers funds on reserve.
    This means that they are lending out 90% of depositors funds.

    Noddy’s reply
    I do not believe this statement… indeed it is financial ‘black magic’ and nonsense.
    Have you heard of ANY PERSON going to a bank to withdraw their deposits and the banker saying ‘sorry you can’t have your money today because we have lent it to Joe Blow’.
    The natives of New Guinea have a better understanding of money with their seashells and boar-teeth than many on this blog!

    Unfortunately because of the system of fractional reserve banking, backed by central banks, this black magic is de rigeur around the world.

    Your understanding is deficient, until you read The Evil Princes, where you will learn that money is fungible, meaning we can’t identify the precise 500K that we deposited, of which the bank loaned 450K to someone else for a while.

    When we return to reclaim our deposit, the bank is not required to present us with the same serial numbered notes which we gave them originally, right?

    To properly deal with inflation via this expansion of the money supply, the central bank needs to impose a reserve ratio equal to 100% of bank liabilities due for redemption within the next accounting period (usually month, could be defined as week).

    This would cover all at call, at date and maturing term deposits, and prevent bank runs forcing banks to close their doors.

    It would nearly happen now if the banks asset-liability matching process was “perfect”, but it would be better if their sensible business practice was backed with some legislative force.

  39. Pyrmonter

    @ Rebel with cause

    The “you’ll defer consumption until tomorrow and demand (Steve Kates notwithstanding) will collapse” argument is really one of degree: modest deflation merely means holding currency becomes valuable – it effectively earns interest. Only in extreme circumstances, not seen in the West since the second war, would the measure of deflation be significant part of the opportunity cost (benefit) of holding currency. Things might have been different in 1931 though, but it isn’t rocket science to say that any significant and unexpected change to the price level will tend to be disruptive.

  40. Squirrel

    I see this morning’s figures include a 0.5% reduction in “Health” – perhaps the ABS price checkers have discovered some new discount pharmacies. A trite observation, I know, but I do wonder how – short of a cataclysm or something approaching it – we could use the usual measures to discern a genuine increase in the purchasing power of money.

  41. rebel with cause

    but it isn’t rocket science to say that any significant and unexpected change to the price level will tend to be disruptive.

    Yes I would agree. I was using hyperinflation/hyperdeflation (?) as a thought experiment. The lived experience of moderate inflation, while infinitely less tragic, is less interesting from a behavioral experience to me as its effect on decision making is so marginal and therefore difficult to discern.

  42. Pedro

    “So failure to act as a store of value results in money not being a good unit of account leading to exchanges that would not otherwise occur.”

    Huh? The fact that the value of any particular money might change doesn’t stop it being a store of value. Clearly, money gets fucked up in a hyperinflation, but that’s not SOP. The value of gold as a currency is also subject to change. What creates anything as a store of value is the expectation that it will be valued n the future. The key aspect of money is that it is the medium of account and it doesn’t stop being that because it’s value might change. Stuff will still be priced in dollars.

    “Now I’m happy to believe that fiat money will result in inflation, and I’m happy to believe that economies can and will shrink or grow, and I’m happy to believe that goods and services can become more or less valuable as relative prices change. I’m not convinced that fiat money can result in deflation – paper money becoming more valuable?
    Double Huh? It should be obvious as others have pointed out that reducing the money in circulation will result in reduced prices for goods and services in exactly the same way that increasing the money in circulation results in increased prices, with the added problem created by the big category of prices that are sticky.

  43. Pyrmonter

    @ rebel with a cause – are you under 40? Have a look at a plot of the rates of industrial action 1960-2000 against a plot of inflation – not perfect, not inevitably causal, but there seems (seemed) to be a connection. And labour markets are but a sub-set of the “menu costs” associated with “moderate” but variable inflation.

  44. Pyrmonter

    @ Token – so far as Chinese banks are making unhedged investments in Australian-based property developers, it will be interesting to see how they go when the dollar falls. There will be a roughness about it, but overall, the cost of borrowing here +/- cost of hedge will be equalling the cost of borrowing there.

  45. blogstrop

    2.The value of the money itself could have increased – the purchasing power of the money increased. Strictly speaking this is deflation.

    Yep. People like that. Status: true.
    Every time some company like Holden goes down, everyone here cheers because foreign cars will get cheaper. Hence my second sentence: Libertarian economists love it when local manufacture goes under and we buy more imported stuff. Status: true.

  46. Pedro

    Libertarian economists love it when local manufacture goes under and we buy more imported stuff has competitive pressure and doesn’t coast on the productivity of others

  47. JC

    Every time some company like Holden goes down, everyone here cheers because foreign cars will get cheaper. Hence my second sentence: Libertarian economists love it when local manufacture goes under and we buy more imported stuff. Status: true.

    Not at all. It’s the inefficiencies people have a problem with. Those jobs were costing us a pound of flesh.

    In any event, isn’t it absurd to be suggesting the Aussie is overvalued but the government forks out billions of dollars to support an industry which displaces imports. I mean if the Aussie is too high it would be better to stop subsidizing the car industry and import cars thereby depressing the exchange rate.

    Lets get one thing straight, the government didn’t tell Ford and GM to stop making cars. It told them they weren’t going to raid the taxpayer any longer.

  48. JC

    so far as Chinese banks are making unhedged investments in Australian-based property developers, it will be interesting to see how they go when the dollar falls. There will be a roughness about it, but overall, the cost of borrowing here +/- cost of hedge will be equalling the cost of borrowing there.

    How do you know they are making unhedged bets? How do you know the Aussie dollar will fall?

  49. JC

    we have still manifested a consumption intention in the market (by bidding for something) which has implications on the prices of whatever we tried to buy, even if we weren’t successful in buying.

    Not succeeding in attempting to consume something is not consumption.

    That manifestation of an intention to consume, even if we were unsuccessful in consuming is an increase in the quantity of the currency

    Absolutely no it isn’t.

    because at that point, both savers and consumes are trying to spend the same real purchasing power.

    Savers aren’t spending or consuming anything.

  50. JC

    we could use the usual measures to discern a genuine increase in the purchasing power of money.

    You don’t get it from the scumbag retailers here, so go buy as much stuff as you can over the web from overseas suppliers and you’ll see your dollar going further. We have freaking packages arriving every other day since wifey discovered the “fun” of internet shopping. The excuses… it’s so much cheaper so I’m, actually saving money, or it’s a steal, is starting to wear thin though.

  51. Pedro

    “both savers and consumes are trying to spend the same real purchasing power.”

    I wish I could get some of that magical money that I can both save and spend.

  52. .

    JC
    #1162802, posted on January 22, 2014 at 5:36 pm
    Every time some company like Holden goes down, everyone here cheers because foreign cars will get cheaper. Hence my second sentence: Libertarian economists love it when local manufacture goes under and we buy more imported stuff. Status: true.

    Nonsense. The wage bill if 190% of the wage payable. Who in their right mind supports this?

  53. blogstrop

    Most Australian manufacturers are paying way more than Asian ones, so we may as well just can the lot and buy more imports, then listen to everyone cheer whenever the exchange rate makes it cheap to do so.
    Make deflation work.

  54. blogstrop

    Then, after you’ve dumped all the local manufacturing, get serious about making exports more efficient. You’ll have to give all the production line people jobs to replace the ones they’ve lost – improving infrastructure so our exports are sent offshore as quickly and efficiently as possible. You’ll also have to completely kneecap all the greenies and unions who are basically opposed to earning foreign exchange by selling anything we have an oversupply of, which is anything that can maintain or improve Australian living standards.

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