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I have been wondering about this and you may be the person to answer it. My thought is that inflation only occurs when the increase in money supply is greater t

by daemin 15y ago

I have been wondering about this and you may be the person to answer it. My thought is that inflation only occurs when the increase in money supply is greater than the increase in wealth generated in the economy. So if an economies' wealth increases at 5% a year and so does the money supply then there's no inflation. Have I got this right or even close to the mark?

marcamillion 15y ago
This is an interesting way to put it, but I must admit I am not sure. The issue I have with this definition is that wealth can be generated even without new money being created - we are seeing it in Silicon Valley at the moment, where vast amounts of wealth are created largely on the back of old money being recycled. Strictly speaking, inflation occurs when more money chases the same assets - so the prices of those assets rise to accomodate the new money. So in theory, by having the prices for those assets rising, wealth is created. i.e. if $100B in new money is injected into the economy, and half of that goes into residential real estate, then the average house prices will increase by no other reason than more money is chasing fixed supply. So the $200,000 house is now worth $300,000 - therefore $100K has been 'created'. But the way the economy is so complex and intertwined, that increase in wealth could beget another increase in wealth - i.e. the owner of that house could take out say $50K of that to start a business which increases his wealth even more (PG has a fabulous essay about creating wealth from nothing) out of his sweat (i.e. not related to inflation other than the fact that he used the rise in the price of his house to start the process but everything else was his own doing). The truth is that I don't think modern economics truly understands inflation yet. For instance, America pumped a TON of new money into the economy (both fiscally and monetarily) and inflation has been subdued in America. China pumped in a moderate amount of money, and inflation has been out of control recently. i.e. much more than the money they have pumped in, so they have been having to tighten the reins. Suffice it to say, I don't know. I wish I could condense it to a nice nugget like that, but I can't. If anyone else can, please chime in and do. That would be interesting to me too.
- chopsueyar 15y ago
  I have a friend who scraps metal (steel, copper, aluminum). He has the best gauge on inflation of anyone I know.

by daemin 15y ago

marcamillion 15y ago

This is an interesting way to put it, but I must admit I am not sure. The issue I have with this definition is that wealth can be generated even without new money being created - we are seeing it in Silicon Valley at the moment, where vast amounts of wealth are created largely on the back of old money being recycled. Strictly speaking, inflation occurs when more money chases the same assets - so the prices of those assets rise to accomodate the new money. So in theory, by having the prices for those assets rising, wealth is created. i.e. if $100B in new money is injected into the economy, and half of that goes into residential real estate, then the average house prices will increase by no other reason than more money is chasing fixed supply. So the $200,000 house is now worth $300,000 - therefore $100K has been 'created'. But the way the economy is so complex and intertwined, that increase in wealth could beget another increase in wealth - i.e. the owner of that house could take out say $50K of that to start a business which increases his wealth even more (PG has a fabulous essay about creating wealth from nothing) out of his sweat (i.e. not related to inflation other than the fact that he used the rise in the price of his house to start the process but everything else was his own doing). The truth is that I don't think modern economics truly understands inflation yet. For instance, America pumped a TON of new money into the economy (both fiscally and monetarily) and inflation has been subdued in America. China pumped in a moderate amount of money, and inflation has been out of control recently. i.e. much more than the money they have pumped in, so they have been having to tighten the reins. Suffice it to say, I don't know. I wish I could condense it to a nice nugget like that, but I can't. If anyone else can, please chime in and do. That would be interesting to me too.

chopsueyar 15y ago
I have a friend who scraps metal (steel, copper, aluminum). He has the best gauge on inflation of anyone I know.