Saturday, 23 August 2008

Inflation and Deflation

Inflation and deflation are amazingly easy to define, incredibly difficult to predict in a free market and incredibly easy in a command controlled one and almost impossible to measure in either.

Put simply, inflation is an increase in the money supply, relative to itself. It is generally understood to be rising prices, but this is incorrect.

Deflation is the opposite - a decrease in the money supply, relative to itself. it is generally understood to be lowering prices, but this is incorrect.

Price changes are a symptom of inflation/deflation.

In a free market, money is anything that people use as a medium of exchange and this will alter daily in both type and quantity as and when people require it. If traders run out of gold, they'll use silver, if they run out of silver, they'll use oil if they run out of oil they'll use peppermint coughdrops......a medium of exchange is instantly thrown up by market forces and instantly removed by those same forces as and when required.

In a command economy with a fraudulent banking system such as we currently have, the money supply is impossible to determine. High street banks routinely pretend to have more money than they really do (they call this money creation, ho ho) which makes the figure impossible to determine from that point of view.

What we do have is a vague idea is the amount of printed and coined fiat money that there is - roughly £50 bn in the UK. The real question from the point of view of inflation or deflation of course is this - do market participants make their valuation as if that is all the money that there is, or do they think that there are a lot more pounds knocking about than there really are?

People accept numbers on a screen as payment, they accept headed paper with a bank logo and some numbers on it as payment. People accept credit cards and debit cards as payment. Why do they do this?

Well from a brief straw poll of a few dozen people on the high street, because they think that real money is behind the bank logo, "real" money is behind that headed paper. In other words, they price pretend money as "real" money. "Real" money being fiat currency in the popular mind.

Here is the kicker though - pretend money doesn't cost the same as real money. Not by a long shot. Vague promises are pretty cheap and stationary costs very little. However, it IS money, of a sort. Money is anything that people will use as a medium of exchange. The trouble with this mehod is that people are only accepting copies, knock offs, lies and the trouble with lying in this manner is that you have to keep doing it. That piece of paper that was flashed at some sucker with an imaginary "mortgage" had better work tomorrow, and the next day, and the day after, or he's going to stop working so hard to make his "repayments."

Eventually, the bankers might have to come good on their promises.

Even leaving aside this fraudulent aspect of banking and looking at a straight fractional reserve system we have the problem of promising the same item to many people. The value of that one item will be eroded because in the popular imagination there will seem to be many more of them than there really are. This means that when it's working a fractional reserve system will both appear inflationary and be deflationary all at the same time.

When it stops working, the opposite will occur. There will appear to be deflation but actually there will be either static monetary growth or inflation.

Eh? How come?

Using a real object is again the way to explain this, I think. If I have 1 piano and record it as belonging to 15 people and they all believe me, they will all act as if they have a piano. The human actions that result from mistaken belief - 15 people booking concerts, recording studio time, buying piano varnish, hiring piano tuners and so on. This sends signals to the market that there are 15 pianos in existence and so more human actions will follow - the concert hall owner will print tickets, have the place cleaned and that will result in even more actions, impossible to determine and very difficult to predict.

So...what happens if two people come for their piano at once and the warehouse banker is caught out? Well, he is ruined...unless....he can get another piano from somewhere. Now we have doubled the actual piano supply. The piano supply has inflated. But, and this is important - he's either had to have it made or bought it from elsewhere. This has a cost and gives out yet another set of signals.

What happens if all 15 people arrive for "their" piano and only 10 of them can be provided with a newly made one?

The banker goes out of business, the piano supply has actually increased by 10 and 4 people have lost an illusion. (The original piano was also given out.) Pianos will be swiftly repriced by the market to match their newly inflated amount. 4 people will need to either get another piano from somewhere or give up, with resultant loss of human actions that were based on a mistaken idea.

Replacing banker lies with fiat currency is inflationary.

A promise to provide the same item to multiple people doesn't create more of that item. Pictures of an item do not create more of that item. Plausible words delivered by a smiling man in a good suit do not create more of an item. Account statements claiming that there are more of an item than there really are do not create more of an item.

Making good on those misrepresentations, however, does create more of that item.

Not replacing banker lies with fiat currency isn't deflationary.

It's just the death of a delusion, the lie revealed. There were £50 bn, there still are £50 bn. Nothing has happened, nothing has changed, but peoples perception has altered to meet reality. They will act differently, that's for sure.

Velocity of money?

Doesn't mean anything, only known or perceived amount does. Velocity within the banking system is merely a measure of mispricing and mistake.

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To conclude, the fiat/fractional system is an economic nightmare, whether the bankers get away with it or they get caught out. While it operates, no one has any real idea what anything is worth. Market signals are nearly useless. This is a bit of a problem because we've been on such a system for nearly 80 years.

80 years of malinvestment. 80 years of mispricing. 80 years of doing the wrong jobs in the wrong areas.

Think about what that might mean is here that shouldn't be and isn't here that should.



15 comments:

Anonymous said...

People trust bank deposits for the same reason they're willing to do a bungee jump: They've seen other people do it and assume it must be safe.

Anonymous said...

So the question is why do people trust banks and building societies with their deposits and not hairdressers and estate agents?

The reason is that when a bank runs out of pianos it is able to borrow new pianos from the central bank. When an estate agent runs out of pianos the central bank is under no obligation to make new pianos.

Injin said...

Well, for a start there is only one bank and to finish no one I asked out of the 40 or so said that as an answer. A sizable proportion just thought of the bank as someplace that their money sat until they went to go and get it.

Which is actually true come to think of it, but it's been promised to another 30 to 90 people as well.

Of course it might have been a false result thrown up by a random sampling so maybe you could ask around your own high street and let me know what you find.

People in general are utterly ignorant of how banking works. Which is the only reason it does.

Anonymous said...

I'm not disputing that most people don't know how the system works...

Let me put it another way: The banks "promised" pianos to more people than there are pianos. Now what happens? Either people will be disappointed or the central bank will make new pianos. It doesn't matter if people think the pianos are there already or if they will only be created when the ask for them. It doesn't matter to the average person. They only need to know that one-way-or-another they will get a piano. And they are right because the central bank will make the pianos.

Injin said...

Which is inflationary, as I said. you seem to think that the value of something is decided by people's imagination, as though imagining you own a gold mine creates more gold and makes gold easier to obtain....

It isn't, it's the amount of something that there actually is which counts.

If gold is a rare metal but we promise the same bar to millions of people, then each and every one one of them is operating as though it is both rare and theirs.

If you create millions of gold bars when challenged, then gold will be made worthless through hyperinflation.

Oh, and if you think that the mass fraud that is banking doesn't matter to the average person, you are massively mistaken.

Everyone "repaying" a mortgage shouldn't be, for example. Everyone "repaying" a loan doesn't have to.

Leaving that aside, people do not think that the central bank will provide as far as I can determine. No one I asked gave that answer.

Perhaps asking people instead of assuming and then rearguing the same point once it's been refuted empirically is the way to go?

Anonymous said...

What is the cost to the average person if they don't realise that the pianos haven't been made yet? There is no cost because they still get their piano so they don't spend their time working out the intricacies.

As I said before I do not dispute your assertion that most people don't know how the system works. I do agree with you that the banking system very much matters to people even if they don't know why.

Regarding gold... you have tried to understand my position and come to the conclusion that I must think that to imagine gold will affect the price of gold. I very much do not hold that opinion, and since I do not hold that opinion you must have made a mistake in your understanding of my position.

The reason why central bank promises do alter the price of money is that even though the pianos haven't been printed yet their promises are not unlimited. Their promises are limited to the amount of credit created by the banks.

If I'm holding a signed photograph of David Beckham it might be worth less if he promises to sign an identical photo tomorrow. If we trust that he will satisfy his promise the price goes down today not tomorrow when he signs it.

Injin said...

"What is the cost to the average person if they don't realise that the pianos haven't been made yet? There is no cost because they still get their piano so they don't spend their time working out the intricacies."

It's the same cost as a unique piano, because it IS unique, just lots of people think they have it.

"The reason why central bank promises do alter the price of money is that even though the pianos haven't been printed yet their promises are not unlimited. Their promises are limited to the amount of credit created by the banks."

No, there is only one bank and only so much money, which has been promised to many, many people. Each persons estimation of that money is based on how much of it there is, not how many other people it has been promised to because they are in ignorance of all the other people.

An example - there is only one of Picasso's sunflowers, it is very valuable. If you promise it to 15 different people and they all believe it is theirs, how does that reduce it's value?

It doesn't. 15 people all think that the very valuable painting is theirs and theirs alone.

If 14 more sunflowers are produced, then the people will all take them away thinking that they are very valuable and unique, but will quickly find out that the value has been watered down through copies being added to the market.

Because people do not know how banking works, they are mispricing money to an enormous degree.

Anonymous said...

This will be my last post today:

"It's the same cost as a unique piano, because it IS unique, just lots of people think they have it."

You misunderstand my intended meaning in the word "cost". What I meant to say was that if people misunderstand whether there are enough pianos to go around or if new pianos will need to be printed it doesn't matter to them (in the narrow sense). On a local level they still get their piano. Globally of course it matters because the money supply is rising.

"No, there is only one bank and only so much money, which has been promised to many, many people. Each persons estimation of that money is based on how much of it there is, not how many other people it has been promised to because they are in ignorance of all the other people."

Yes, people are in ignorance of all other people but their money is competing with bank credit. An unsigned photo of David Beckham is worth the same as a signed one provided it comes with a (reliable) assurance from him that he will sign it.

"An example - there is only one of Picasso's sunflowers, it is very valuable. If you promise it to 15 different people and they all believe it is theirs, how does that reduce it's value?

It doesn't. 15 people all think that the very valuable painting is theirs and theirs alone."


Yes I agree the Picasso does not change in value but fiat notes are not unique. The Picasso example is appropriate if we are on a gold standard but as we know to our cost, fiat is not backed by anything other than threats.

Anonymous said...

Sunflowers was by Van Gogh..... no?

eye2i2 said...

An aspect here of wise money (versus foolish/insanity money) perhaps comes to light in the use of the analogy of pianos, that I wonder about as being deeply significant. That being that the "piano banker" can't just snap the fingers and the additional pianos poof into existence as inherently the bankster's. Where then do pianos come from? Whereby it seems enlightening to compare the labor (time+energy) of manifesting 14 pianos versus, oh say, 14 FRNs (not to overlook each said FRNs having the snap-the-fingers-poof-ability of being any denomination/valuation)?!
Which raises an aspect of wise(st) money in a voluntary-basis world that still seems a bit elusive to my comprehension.

Perhaps it goes without saying, but for the FRN con game, the most significant reason for it's still refraining value is because of it's initial near identical resemblance to commodity (gold/silver) certificates, the original FS papered money. Where notably (pun intended) "commodity" is simply a grounding (eg mining) or founding (eg foundry) with labor (time+energy equitable base)?

Thanx for your blog labor!

Injin said...

Was it Van Gogh! Oh well, that just makes mine even rarer. :)

Injin said...

2i2

I agree. It's hard to look at the system as it stands and think about it, because it's a product of evolution as much as planning and doesn't actually make much sense.

No one is going to agree to such a system, yet we have one. The history of why is important but I wanted to leave that because it's done by better men and women than I am elsewhere.

As for what is the wisest money - why that's easy.

What do you like to be paid in?

eye2i2 said...

[quote]
What do you like to be paid in?
[/quote]

This reminds me of a point I've often reminded myself of: "easy" in not inherently a synonym of "simple" nor "wise". ;)

Meanwhile, the question of what do I like to be paid in is actually provocative. My initial, and yet lingering response may be simply evidence of my indoctrination, but hey, I like getting paid in paper (check or note form). [the paytridiot in me cringes here: PAPER MONEY?!? EVIL!!!!]
It seems pretty easy to assess why I like paper+cloth (as) money: a.) it's convenient b.) others accept it for the things I value.

For an exercise, I reconsidered getting paid in pianos. They just won't fit in my pocket, so I tossed them ("piano toss"?! lol). Then I reconsidered peppermint candy. They melt in this southern north american humidity (not to mention the kids eating 'em). Goo pockets? So I toss them as well. I also reconsidered diggers. But all that dirt and grime and sharp edges in my car just to make a deposit? Toss those as well. :)

So I presume paper (as) money works fine for payment(s). The change presently simply needing to be that such paper money a.) have no debt/interest attachment, b.) not be monopolized and Government mandated exclusivity, & that c.) it be value-determined by (on par with/market exchangeable for) at least 3 commodity items "at the end of the day"? Thus, be it a dollar of or a pound of, it is of some factual thing; it is exchangeable for them (on demand).
Presently with the FR's pyramid scheme, FRNs are precisely on par with market commodities, evidenced by people using them unquestionably. This is an evidence of their likability. It's the hidden attachments (debt/interest/threat) and allusions (they are falsely believed to be payable on demand in equitable commodity value) only that make them foolish money?

A wise individual in a voluntary society would simply require one that he would work for, to pay with money issued by a banker who's paper+cloth money (certificate or check) is exchangeable on demand (immediately/24/7) in one or more of 3-4 market commodities. Thus my current bank, along with it's ATMs, would have 1.) gas pumps, 2.) groceries, and 3.) a precious metals vault. [note to self: consider how a wise money certificate differs from a title?]
It appears the major distinction presently is that the said banksters are the only ones who at any moment ever have to make commodity/par value payment on demand?!? U.S. dollars (FRNs) and U.K. "pounds" ARE money to everyone BUT the banksters!?!

thanks for exercising with me injin---

eye2i2 said...

Correction:

"It appears the major distinction presently is that the said banksters are the only ones who at any moment never ever have to make commodity/par value payment on demand?!?"

Injin said...

Yep, nothing wrong with paper money per se - it's the involuntary aspect and the fact that it's not linked to anything real that causes problems.

This is a lot like statist arguments "you'd choose it anyway, so why are you complaining?"

Fact is, while there isn't any choice, we don't know what would be preferred.

And yes, I agree (I think) the one group that fiat money is useless to is the bankers. They have an infinite supply - what they really want are assets and people working for them via the tax/workmaster scam.