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Kyoma
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What is the definition of 'inflation'? Will an increase in the demand for goods and services cause an increase in the inflation rate?
Kyoma said:What is the definition of 'inflation'? Will an increase in the demand for goods and services cause an increase in the inflation rate?
talk2glenn said:Inflation is defined as a positive change in the price of a good as measured in a currency of interest.
Yes, all things being equal a change in demand for a good will cause a change in its price in the same direction.
BilPrestonEsq said:Lets say your playing monopoly and you all start out with the same amount of money, say 500 bucks. Let's also say there are 3 others playing the game, so 4 including yourself, that's 2000 bucks in your little micro economy. Now say the banker prints out some more money and loans it out to one of the other players maybe another 500 bucks. Now there is 2500 bucks in your little economic world. So now your 500 bucks isn't worth quite as much as it used to because there is now 2500 bucks floating around. Thats inflation, that's why bread isn't 50 cents anymore. That first guy, the guy that got the loan, he is fine because when he got the loan that 500 bucks was worth 500 bucks but you and the other players got screwed. And that's how are system works!
BilPrestonEsq said:What is QE-2? Inflation equals higher oil prices and demand equals higher oil prices, also an oil company is a private entity so they can do whatever they want, there is no telling what oil prices are going to do.
WhoWee said:There is an old saying "he who has the gold - makes the rules". We can print money - gold (including black gold) is another story.
Lets say your playing monopoly and you all start out with the same amount of money, say 500 bucks. Let's also say there are 3 others playing the game, so 4 including yourself, that's 2000 bucks in your little micro economy. Now say the banker prints out some more money and loans it out to one of the other players maybe another 500 bucks. Now there is 2500 bucks in your little economic world. So now your 500 bucks isn't worth quite as much as it used to because there is now 2500 bucks floating around. Thats inflation, that's why bread isn't 50 cents anymore. That first guy, the guy that got the loan, he is fine because when he got the loan that 500 bucks was worth 500 bucks but you and the other players got screwed. And that's how are system works!
Kyoma said:What is the definition of 'inflation'? Will an increase in the demand for goods and services cause an increase in the inflation rate?
an increase in the supply of currency relative to the availability of goods, which have not changed.
Would a real world example be QE-2 leading to higher oil prices?
Inflation is defined as a positive change in the price of a good as measured in a currency of interest.
Yes, all things being equal a change in demand for a good will cause a change in its price in the same direction.
How is one dollar different from another. This kind of talk only contributes to making this subject more confusing than it needs to be.
hamster143 said:"Whether it's a number in your bank account or money in your hand it is the same thing."
Did you make any money directly because of QE2, either in your hand or in your bank account? Me neither. So if we didn't get any money, but money supply got inflated anyway, how could that possibly happen?
The answer is that some "entities" sold some long-term bonds to the Fed and got cash in exchange. These entities are, for the most part, not people. Some of them may be managing people's 401K's, some of them are investment banks like Goldman Sachs, some of them are foreign national banks or sovereign funds.
On the other hand, most of the 'consuming' of the petroleum, especially the elastic kind that responds well to having more money, is done by private individuals.
The effect of changes in the valuation of your 401K on your spending is negligible. Even if your 401K gains $10k in valuation in a short period of time, that probably does not make you more likely to take one extra road trip to Vegas. Savings accounts and brokerage accounts fare better, but the effect is still far from 1:1. (Besides, stocks are disproportionally owned by the wealthiest 20% of the population, and gasoline is uniformly consumed by everyone.) The single biggest factor that affects your spending is your wage income. So unless and until the inflation of money supply by QE2 translates into an increase in incomes and employment via some mechanism, we should not expect any price inflation.
Quite the contrary. There is a myriad of details, and the biggest mistake you can make is to oversimplify things. You lose sight of important factors and that can lead you to make wrong conclusions from correct data.
WhoWee said:On the other hand, a devalued US Dollar will have less purchasing power. Individuals are not purchasing oil from the Middle East. The commodity price increases when the currency loses value.
hamster143 said:That is true. But once again, what is the mechanism to explain the devaluation of the US dollar as a result of QE2? And is there evidence that such devaluation occurred between today and, say, mid-September, especially on a scale that would explain a 12% jump in dollar-denominated oil prices in the same period of time?
BilPrestonEsq said:The addition of currency 'watering down' the currency in circulation.
hamster143 said:That's precisely the kind of oversimplified reasoning that leads you to wrong results. "Currency due to QE2" does not add to "currency in circulation" in any meaningful way, unless you want to operate with highly idealized, abstract concepts like the M3 money supply.
What is the point of QE2 then?
BilPrestonEsq said:What is the point of QE2 then? What problem is QE2 intended to fix? What about the stimulus package that was passed not too long ago, what was that intended to fix?
hamster143 said:That is true. But once again, what is the mechanism to explain the devaluation of the US dollar as a result of QE2? And is there evidence that such devaluation occurred between today and, say, mid-September, especially on a scale that would explain a 12% jump in dollar-denominated oil prices in the same period of time?
BilPrestonEsq said:QE2 is a way to take that debt and turn that debt which is actually 90% mine and everyone else's money with a checking account and turn that into more money. ... So my money is used to create money that makes my money less valuable as there is more money in circulation? Unless of course the economy is growing and how can it not be growing with all the goods that we export in the U.S.?
talk2glenn said:The debt isn't "turned into" anything; it is sold. The buyer is the Federal Reserve, and the seller is a private intermediary (like a bank).
To the debtor, the process is transparent - you continue to service the debt through a middle-man (a bank or debt processor, usually the party that originated the loan), who insures that the holder of the debt instrument (bond or security) is payed. If the government owns the debt, then they are paid. This effectively absorbs some of the new currency issued by the Fed automatically over time, a point you seem to be missing. Any profits (interest paid on outstanding loans minus losses from bad debt) is paid automatically to the US Treasury, but this is money received by the central bank in excess of the amount original lent out to the economy.
Think of the central bank as just another lender on the marketplace. It just has the exclusive authority to create new currency with which to make its loans - everybody else must compete for currency on the currency markets.
The value of your money is constantly fluctuating according to conditions on the currency market, independent of any action by the central bank. Indeed, the central banks mission (in addition to macroeconmic stability in the United States) is currency stability; they try to protect the consistency of your currency's value over time.
talk2glenn said:The debt isn't "turned into" anything; it is sold. The buyer is the Federal Reserve, and the seller is a private intermediary (like a bank).
To the debtor, the process is transparent - you continue to service the debt through a middle-man (a bank or debt processor, usually the party that originated the loan), who insures that the holder of the debt instrument (bond or security) is payed. If the government owns the debt, then they are paid. This effectively absorbs some of the new currency issued by the Fed automatically over time, a point you seem to be missing. Any profits (interest paid on outstanding loans minus losses from bad debt) is paid automatically to the US Treasury, but this is money received by the central bank in excess of the amount original lent out to the economy.
Think of the central bank as just another lender on the marketplace. It just has the exclusive authority to create new currency with which to make its loans - everybody else must compete for currency on the currency markets.
The value of your money is constantly fluctuating according to conditions on the currency market, independent of any action by the central bank. Indeed, the central banks mission (in addition to macroeconmic stability in the United States) is currency stability; they try to protect the consistency of your currency's value over time.