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What people dont understand specially the ones that are against all inflation is this: There is natural and artefical inflation and deflation. You get for exam
by nickik 14y ago
What people dont understand specially the ones that are against all inflation is this:
There is natural and artefical inflation and deflation. You get for example natural inflation when you have supplyshocks (If somebody blow up intel CPUs would be more expensiv) you get artefical inflation when you print money. The first is just the market reacting to 'something'.
The same goes for deflation, you have natural (good) deflation when you become more productive (you can see this for example in times of the (real) gold standard when moneysupply was almost constant.
Bad deflation is when you activly contract the money supply (this is the great depression story and the reason why people think deflation is generally bad).
What can we conclude out of this?
The shock to the economy was pretty big, we shuld have seen natural inflation happening, this is however still represt since the ECB pushes that down by creatning bad deflation (in real terms). In nominal terms this means 2% inflation, in real it is deflation.
When central banks target inflation (say 2%) and the economy is growing around 2% (thus 2% deflation) they acctully produce 4% inflation in nominal terms. This is all works out relativly good and is not to harmful as long as the real terms are not to big. If the become big (say a economy that is shrinking 10% or more) targeting inflation can be very harmful.
The price level should reflect the economy and not what some guy think is the right growth of the price level.
The idea would be to target NGDP or in terms of the formula MV=Py, it would mean holding MV constant (or let it grow 3-7% depening on your opinion on some other matters).
The school that supports this would be:
http://en.wikipedia.org/wiki/Market_monetarism http://en.wikipedia.org/wiki/Market_monetarism
This would mean that the ECB should look at the grow/contraction of the economy and setting the price level accordingly. That would mean in the current case that they would have do QE to hit the 'right' pricelevel.
I would recomend this book:
Less Than Zero: The Case for a Falling Price Level in a Growing Economy
http://mises.org/books/less_than_zero_selgin.pdf http://mises.org/books/less_than_zero_selgin.pdf
Edit: I just found a nice post that shows a nice example of a case in history when central banks tried to recontract after the had inflated befor, this is in many ways simular with what we have today:
Danish and Norwegian monetary policy failure in 1920s – lessons for today
http://marketmonetarist.com/2012/06/12/danish-and-norwegian-monetary-policy-failure-in-1920s-lessons-for-today/ http://marketmonetarist.com/2012/06/12/danish-and-norwegian-...
Edit: Correction of a error point out in comments.
- crusso 14y agoSo really the original article for this thread and you are just saying, "Stop playing currency games to fight strong economic forces. Take your lumps and move on. You'll be better off in the long run."
- nickik 14y agoWell I don't like the word 'devaluation'. A lot of comentors just go 'Well lets devaluate away balbalb better exports blabla' is very unreflectiv talk. Many of the people that call for devaluation do not want to set the price of the currency to what it is worth, they just want devalution 'because it boosts exports' these are the people that want to have inflation all the time and think its a good thing. Im very much against that, the productivity norm (what is discribed in the less then zero book) would acctually produce devlation most of the time. If you want it in the 'proper' terms it would mean just setting a constant MV and let Py jump around as much as it wants. But generally I agree with out, the post is on to something. Specially about defaulting. It is better to default, start fresh. This way the people that badly invested get punished and you get the chance (see iceland) to implment a more modern govermnet (iceland got a new constitution).
- arjunnarayan 14y agoNitpick, when you say "When central banks target inflation (say 2%) and the economy is growing around 2% (thus 2% deflation) they acctully produce 4% inflation in real terms" You mean "actually produce 4% inflation in nominal terms"
- nickik 14y agoYes right. I will change it. Thx.
- nhaehnle 14y agoWhen central banks target inflation (say 2%) and the economy is growing around 2% (thus 2% deflation) they acctully produce 4% inflation in nominal terms. You're mixing up two different notions of inflation here. There is the old-fashioned definition of inflation which calls any expansion of the "money supply" inflation. (With "money supply" in scare quotes because it's a pretty arbitrary concept, considering the multitude of very different definitions that exist.) Then there is the modern definition of inflation, which is simply a different word for aggregate changes in the price level. Those two notions of inflation are only superficially linked, and arguably, the modern definition makes more sense because it is what people are really interested in outside of economics. On the topic of NGDP targeting, the blog Unlearning Economics has two enlightening posts: http://unlearningeconomics.wordpress.com/2012/05/08/on-the-lousy-reasoning-behind-ngdp-targeting/ http://unlearningeconomics.wordpress.com/2012/05/08/on-the-l... http://unlearningeconomics.wordpress.com/2012/05/12/more-on-ngdp-targeting-and-bubbles/ http://unlearningeconomics.wordpress.com/2012/05/12/more-on-...