August 2011

Bearish on gold? Here is a possibility of going long and benefiting from higher margins should commodity costs fall. I’m thinking on it.

Did I ‘change boats’? Well, I didn’t specify they had to be alive, but the telling fact remains that they are all dead! In any case I would challenge you to produce evidence that Friedman and Smith would support your understanding of inflation.

From Friedman & Schwartz pg 626 & 700
From Adam Smith pg 382 & 387


The whole paper money of every kind which can easily circulate in any country never can exceed the value of the gold and silver, of which it supplies the place…pg 382

Whatever coin therefore was wanted to support this excessive circulation both of Scotch and English paper money, whatever vacuities this excessive circulation occasioned in the necessary coin of the kingdom, the Bank of England was obliged to supply them. The Scotch banks, no doubt, paid all of them very dearly for their own imprudence and inattention…pg 387


Easy money was the near-uniform prescription. Inflation was the near-uniform result. pg 700

Correct, it is a tautology. As already demonstrated, the concepts are illegitimate. Thus the tautology says nothing. Essentially it is nonsense.

Would 2+2=4 be a tautology if the concept of number were illegitimate? Does 2+2=4 say nothing? Is 2+2=4 nonsense?

Since the concept of numbers are not illegitimate, the question is irrelevant. This contrasts with Fisher’s tautology, which bases itself upon concepts, Velocity and the aggregate price level, which are both illegitimate concepts.

The financial markets seem to have very little to teach about economic realities – which is hardly surprising if they are as random as you claim.

That wasn’t my argument at all. My argument was that the financial markets teaches the individual to cleave to, and search for the truth. The reason is glaringly obvious I would have thought; that faith in fallacy tends to prove highly unprofitable. This of course really only applies to those that trade on a macro/micro economic basis. Daytraders of course are savages, many don’t even know the company behind the ticker

As for my ‘investment’, it’s probably rather less than you seem to think.

Of course that is entirely possible, and I’m quite willing to accept your assessment on that. However it seems then rather odd that you would write a book based on anything other than your values [in economic theory], unless it were a say a history of economics, which from your blog does not seem to be the case.

As to teaching; so you would teach a curriculum that you personally did not value? If you did, surely that would create some ethical issues?

If you want to challenge standard economic thinking – and it certainly needs challenging – you have to understand concepts as they are currently used and measured, whether you think they are legitimate or not. There is no point in dismembering Fisher, just because you’ve read something garbled on Wikipedia. Thousands of papers on these concepts have been written since. And most of them will be perfectly logically consistent – they wouldn’t have been published otherwise. Intellectual rigour is plentiful.

Fisher was flawed right out of the box. When it’s wrong, it’s wrong. Nothing can be done to save it.

So you underestimate economists if you think their thinking is as self-serving as you suppose. Their errors are almost entirely in their unthinking initial assumptions (their axioms!) – which for the most part are much closer to the sort of assumptions you make about the outcome of ‘free markets’ than are mine.

I remain unconvinced.

Embrace neoclassical economics – it really is your friend! (But not mine.)

I think I’ll likely pass on that. This is part of the problem.

Diarmid Weir Says:

August 30, 2011 at 1:08 pm e

The comment referred to the argument. I don’t even know if the argument belongs to you.

So let us move on then.

Did you look up the non-government barriers to entry? Sunk costs, access to capital, access to natural resources, customer loyalty, network effects, economies of scale…?

No I didn’t. I was simply waiting for your preferred list.

Sunk costs become the original firms losses. They however can potentially, as previously indicated provide the starting point for new entrants to purchase heavily discounted capital, which lowers their fixed costs. The advantage in lower fixed costs of course means that the strategy of selling at a loss to force the new entrant out of business is no longer possible.

Access to capital, assuming that the capital costs [interest on a loan] are lower than the profit margin, will not be a problem. Add to that the tax deductibility of interest and depreciation, and this is less of a problem still.

Access to natural resources. Since in the original article you claimed that the firm lowered the selling price to a price that created losses, thereby forcing out the competitor, that the original competitor had access to raw materials. I can assume that any new entrant will also have access to raw materials. Therefore this is not an issue.

Customer loyalty. That prior to the higher cost producer being put out of business, we can again assume some % of market share at price X. The new entrant, with lower fixed costs, can sell at a lower price. The lower price may take some market share from the marginal purchasers of the “brand”. This will be based of course on the lower price and the dynamics of demand elasticity.

Network effects. This argument has no relevance to your original argument and therefore becomes something of a straw man. However let me accept the argument of network effects. In that case, no other competitor chooses to enter the field as they feel that the available market is too small, or even non-existent. So now we have a monopoly in the definition of a sole firm. We have both agreed that this definition is not an accurate definition. That the true definition revolves around the question or definition of a monopoly price. This argument has already been addressed and rebutted comprehensively here.

Economies of scale, provide the means to achieve the end of a lower selling price while maintaining, or increasing profitability. If the consumer receives lower prices as a result of these economies of scale, that is a positive. Again, this argument bears no relation to your original article, which is just plain wrong. There is always a limit to the size of a firm, which consist of the law of diminishing returns, and second, the requirement of a market of prices by which to calculate, should the firm grow so large as to become the market, without which it will create losses.

Are these irrelevant because they don’t exist or because some 16th century sage didn’t mention them?

I see that you are a subscriber to the fallacy of new knowledge is superior to old knowledge. That new knowledge always offers an advance in quality over the old. In the social sciences, this is [i] incorrect and [ii] rather dangerous to those that hold this belief.

The recent volatility has created an interesting spread twixt Implied and Historical, with historical higher than the implied. There are various Option strategies designed to trade this spread.

EK missed my GTC Sell order @ $3.48 by a few cents today. Looks as if the order may be triggered this week at some point.

Diarmid Weir Says:

August 29, 2011 at 11:40 am e

Simply that the causative agent for inflation is an expansion of the money and credit supply.

So what? Is ‘an expansion of the money and credit supply’ a necessary or sufficient cause of inflation?

The expansion of money and credit are the necessary cause of an inflation.

If only necessary, what other factors are involved?

As we are talking about money, as an exchangable commodity, it will require other commodities that it is exchanged against to be present. The volume of these other commodities, when referring to inflation, are not important as long as they exist to be exchanged against money.

If only sufficient, can other factors cause inflation?


Is the inflation caused by ‘an expansion of the money and credit supply’ on its own something we should be concerned about or does it need other features to make it damaging?

Yes we should be concerned. Very concerned. Money facilitates and underpins the entire edifice of indirect exchange, and of incorporating time into transactions. It requires no other features other than an economic system that bases exchanges on indirect exchange using money as the intermediary commodity.

Do you know? Do you care?

Yes to both questions.

There is, as demonstrated, no such thing as the price level

There certainly is! Go to—consumer-price-indices—july-2011.html#tab–CPI–Percentage-change-over-12-months

Again, if you take a quote out of context you can distort the original intent. I demonstrated the illegitimacy of the aggregate price level as defined by Fisher. Mathematically it cannot exist, fact. That economists and/or politicians have created one regardless is true. That however does not alter the accuracy nor veracity of my original statement.

Now, whether this is a useful measure or whether there might be some better measure of the ‘price level’, you are quite at liberty to question. But unless you engage with the substantial literature on the topic you cannot expect to be taken seriously.

When you can demonstrate mathematically, or in argument, that the aggregate price level is not illegitimate, then I shall be perfectly happy to recant my position. As to the argument of the substantial literature on the topic, that is simply abusing the use of expertise.

Velocity. More nonsense.

So money doesn’t change hands? Or changes hands within an infinitesimal time interval? These are the only two conditions under which the concept of velocity would be ‘nonsense’.

I have in my wallet a cash balance of $200. I am peckish, and it is a junk food day, so I decide to treat myself to a KFC. The chicken costs me $10. So what is the velocity of this single transaction? Velocity is not an individually defined variable. Fisher can only derive V only as being equal to E/M.

Thus the purchase of my KFC = 1/20 under Fisher’s equation. Therefore Fisher sets up M and V as independent determinants of E. This allows Fisher to then state that if M doubles, and V and T remain constant, the price level P, will also double. Now as V is defined as = E/M we now have M*[E/M] = PT or simply E = PT which was the original equation.

Now then, money is I agree exchanged in any money based transaction, but I have to ask, so what? Individuals who have a money balance will make decisions concerning that money balance: [i] hold/hoard [ii] spend/transact [iii] save/invest are the only three possibilities. Even if we could define V, which we can’t, what exactly do you hope to learn?

…the price level is an illegitimate construction. That it in no way = total money spent.

Indeed it doesn’t. ‘Total money spent’ equals the total no. of monetary transactions x the average price of the goods and services exchanged in those transactions.

There you go, using the aggregate price level concept. That concept, mathematically and conceptually, is illegitimate. You again state that Total money spent = total money spent, which is a tautology. You admit as much yourself just a bit lower.

And that is exactly what doesn’t happen. Newly created money flows to the goods and services demanded by the creators of the new money…

So you accept that it could happen? Is that correct? The second sentence is strictly true in the case of central bank money, but not in the case of commercial bank money. In the latter case, the newly created money flows to borrowers. They demand goods and services with it but they have to negotiate a price, for which the starting point will no doubt be the pre-existing prices of those goods and services.

There are actually two prices. The price or interest attached to borrowing the money and the prices of the array of goods and services that they will demand with that loan. I agree that in the latter case, the starting point will likely be the pre-existing price. And your point is what exactly?

Why do you think financial markets were rising on the back of QE1/2?

Whoops! Sounds a bit inductive!

In correct. Inflation is an a priori theory derived from the theory of money. That the empirical evidence confirmed the theory is to be expected, or predicted.

Until you can prove the equation of exchange, any reference to it is simply incorrect and nonsense.

To be honest, as set up, the equation of exchange/quantity equation is a tautology, and so proof is irrelevant. If you properly understood the concepts with which it is constructed, instead of making them up as you go along, you would realise that.

Correct, it is a tautology. As already demonstrated, the concepts are illegitimate. Thus the tautology says nothing. Essentially it is nonsense.

With that, I think this correspondence has come to a natural end.

I’m now going to float my theory on why this correspondence has come to a natural end and that is this: you as a professional economist, an author of an economic text to be, are heavily invested intellectually and possibly emotionally, in the economic ideology that you subscribe to, whether that be a single, or aggregate ideology. Clearly, your ideology is sadly lacking in intellectual rigor, as demonstrated in the past discussions.

I on the other hand, a financial market chappie, have no particular drum to bang, unless it pays me money. I am very open to the truth, as financial markets have a nasty habit of taking your money if you subscribe to faulty ideas.

This has been the criticism that has been leveled at the ivory tower academics for quite sometime, that their theories are elegant, sound plausible, but unfortunately are just so wrong as to be almost criminal.

I have to add though that I have thoroughly enjoyed the exchange. I have definitely learned some important lessons with regard to precision in the use of language, and since I enjoy leaning new stuff, it has been a major positive for me. Also having to defend and argue various points has clarified my thinking in these areas, another huge positive.

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