Question about inflation.

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theDutchguy's picture
theDutchguy
Status: Member (Offline)
Joined: Sep 28 2009
Posts: 11
Question about inflation.

Hi,

I noticed the following in my attempts to understand the concept of inflation:

Wherever the word inflation is used on there forums, debate follows. And while many times people seem to be talking about the same practical economic phenomena, the debate really seems to be about whether to call these discussed phenomena a part of "inflation"(or "deflation") or to call them "inflation" (or "deflation") as a whole. To a complete outsider, it seems like the economic system got so complex so fast, there was no time for us to understand and properly name all of it's inner mechanisms. We seem quite literally short on words.

(How do we collectively align a system with a desired future if we don't have a shared understanding on how it works? To continue on CM's analogy of the car with the flashing indicator lights: I think we might also be fighting the kids in the back seats)

My questions about inflation:

When using the word "inflation" isn't that your own personal view of the term and it's meaning? If so, is discussing it in this form (forum based) productive considering the inherent disadvantages of written language (quick example: "Epistula non erubescit")? Isn't the matter of inflation important enough to discuss seperately in a different, more productive form?

-------

PS.

In case anyone wonders, I'm trying to get a better understanding of how people (mis)communicate in written form as a personal interest and thought this example of miscommunication might be relevant to some people here.

Thomas Hedin's picture
Thomas Hedin
Status: Platinum Member (Offline)
Joined: Jan 28 2009
Posts: 815
Re: Question about inflation.

I hope this can help you better understand.

 

http://www.wealthmoney.org/articles/the-theory-of-inflation/

Doug's picture
Doug
Status: Diamond Member (Offline)
Joined: Oct 1 2008
Posts: 3200
Re: Question about inflation.
theDutchguy wrote:

Hi,

I noticed the following in my attempts to understand the concept of inflation:

Wherever the word inflation is used on there forums, debate follows. And while many times people seem to be talking about the same practical economic phenomena, the debate really seems to be about whether to call these discussed phenomena a part of "inflation"(or "deflation") or to call them "inflation" (or "deflation") as a whole. To a complete outsider, it seems like the economic system got so complex so fast, there was no time for us to understand and properly name all of it's inner mechanisms. We seem quite literally short on words.

(How do we collectively align a system with a desired future if we don't have a shared understanding on how it works? To continue on CM's analogy of the car with the flashing indicator lights: I think we might also be fighting the kids in the back seats)

My questions about inflation:

When using the word "inflation" isn't that your own personal view of the term and it's meaning? If so, is discussing it in this form (forum based) productive considering the inherent disadvantages of written language (quick example: "Epistula non erubescit")? Isn't the matter of inflation important enough to discuss seperately in a different, more productive form?

-------

PS.

In case anyone wonders, I'm trying to get a better understanding of how people (mis)communicate in written form as a personal interest and thought this example of miscommunication might be relevant to some people here.

I agree that the conversation is frequently muddled and imprecise.  I think that is at least partially because there are multiple definitions of inflation that are sometimes contradictory and at least confusing.  That is why I have suggested at times that we discuss exactly what we mean.  i.e., price inflation in understandable, prices are going up, at least in nominal terms.  Velocity of money has a definition I think most agree on.  Dollar depreciation is clear.  The problem is that people frequently think of inflation as some combination of these relatively clear concepts.  If you're not working with the same definitions, then there is no real hope of coming to agreement.

Then, when we use terms that include some version of inflation, such as stagflation, the subject becomes even more confused.  The Dictionary of Finance and Investment Terms, Fifth Ed., 1998 defines inflation as a:

Quote:

rise in prices of goods and services, as happens when spending increases relative to the supply of goods on the market - in other words, too much money chasing too few goods.  Moderate inflation is a common result of economic growth.  Hyperinflation, with prices rising at 100% a year or more, causes people to lose confidence in the currency and put their assets in hard assets like real estate or gold, which usually retain their value in inflationary times.  see also cost-push inflation; demand-pull inflation.

This definition ignores changes in the value and velocity of money.  It appears to mean solely changes in nominal price, driven by supply and demand.  And that's fine, if everyone would agree on that definition.  But, they don't, thereby leaving many of these conversations hopelessly muddled.  It is interesting to note that this definition assumes that hyperinflation causes the loss of confidence in a currency, whereas on this forum it is frequently asserted that a loss of confidence in the currency comes first, causing hyperinflation.

I frankly don't know how to combat these misunderstandings as they are so pervasive, except to again advocate precision in language use.  I am not hopeful.

Doug

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Pistachios
theDutchguy wrote:

If so, is discussing it in this form (forum based) productive considering the inherent disadvantages of written language....

 

Hi TDG,

Ironically, I'm having a hard time understanding what you are asking. Are you saying we should use more specific language, such as price inflation, credit inflation, or monetary inflation in our discussions? Are you saying we should use another form of communication, such as audio or video posts, in our discussions?

I agree that there is a great deal of confusion regarding these terms, so here is a real-world example of how I approach the situation.

Every year at Christmas I like to treat myself to a bag of pistachios. In 2008 and 2009, that bag cost $13, this year it costs $19. Now obviously there are many factors contributing to that 46% price hike in Pistachios. But if I see concurrent price hikes in many other products at the local big box retailer (which I do), its hard for me not to conclude that prices are rising because of easy-credit induced speculation in the commodity markets. But is this broad increase in prices correctly identified as monetary inflation? Are my dollars buying less? In my personal opinion the answer is a qualified no.

The "inflation" that we are witnessing today is just a market phenomenon, and I'm not buying it or Pistachios. I will hoard what "worthless" dollars I have, and wait for a better deal on those items that I don't consider essential. Markets are cyclical, and just as I wouldn't buy into the stock and commodity markets at these prices, I won't buy into the consumer markets either. One day, all these "worthless" dollars that I'm hoarding will buy much more in the markets that they do today, at which point I will stock-up on the non-perishable essentials again, and treat myself to pistachios.

So why am I so sure that the price inflation that we are seeing currently will be a temporary phenomenon? Because sooner or later, the entities fueling this price inflation (the investment banks), will realize higher profits from creating a new trend of declining asset prices than from continuing the present trend of rising asset prices. 

The only way to survive this game is to approach money as a value investor would approach stocks. Buy (hoard) cash when the markets place a low value on it, and sell (spend) cash when the markets place a high value on it. Rinse and repeat.

Best....Jeff

 

 

bluestone's picture
bluestone
Status: Gold Member (Offline)
Joined: Dec 29 2008
Posts: 263
Re: Pistachios

Jeff

How do you safely hoard cash?  in my mind I still may buy that bag of pistachios, even if I expect a deflation cycle.  Suppose the price of pistachios goes down to $10, but at the same time there is a bank run on my bank.  I had $100 in my account , but because the bank has closed, i've lost my money.  (maybe the FDIC has stopped backstopping banks).   would I have been better off to just buy that bag at the higher price. 

Brian

JAG's picture
JAG
Status: Diamond Member (Offline)
Joined: Oct 26 2008
Posts: 2492
Re: Pistachios
bluestone wrote:

Jeff

Suppose the price of pistachios goes down to $10, but at the same time there is a bank run on my bank.  

My fault, I just assumed it was common knowledge to not keep anything of value in "the bank" if you don't have to. When I speak of "cash", I'm speaking of physical cash in your own possession. 

bluestone's picture
bluestone
Status: Gold Member (Offline)
Joined: Dec 29 2008
Posts: 263
Re: Pistachios

Jeff

You're not being facetious, are you?  You're really kickin' it 1930's style.  I could see storing $5k or $10K, in a safe... But what if you had say, $100K in the bank.  would you recommend the same?  Although Im sure many of the CM crowd have 3-6 months of expenses held in cash under the mattress, I doubt many people are storing vast sums in cash.  I don't think it is common knowledge.

Brian

Carl Veritas's picture
Carl Veritas
Status: Gold Member (Offline)
Joined: Oct 23 2008
Posts: 294
Re: Question about inflation.

Inflate  ----  To expand or increase abnormally or imprudently.  from William-Webster dictionary.

"Inflation is taxation without legislation"     .  M Friedman

"The best way to destroy the capitalist system is to debauch the currency.   By a continuing process of inflation,  governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens"     John Maymard Keynes

If you can understand why Keynes would use the words secretly and unobserved, you understand inflation.

-----------------------------------------------------------------------------------------------------------------

The word is is now used to describe a general rise in prices.   For this,  find the inflation calculator on the Bureau Of Labor and Statistics and enter a time period.  It will calculate how much purchasing power has been lost by the dollar during the period entered.

 

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