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?

No.

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 http://www.ons.gov.uk/ons/rel/cpi/consumer-price-indices/july-2011/stb—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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