monetary velocity is not a theory simply refers to the rate at which money is exchanged which obviously can occur at different velocities To increase or decrease Inflation.
Ah, now I understand. It's that word "inflation" in·fla·tion inˈflāSH(ə)n/ noun noun: inflation the action of inflating something or the condition of being inflated. "the inflation of a balloon" Economics a general increase in prices and fall in the purchasing value of money. "policies aimed at controlling inflation" So when Kaz said-- --I thot he was using the second definition, the one in economics that refers to just price inflation. You were using the first definition. Like, do banks increase tire inflation? Absolutely not.
my post was "...the money supply has just increased by $1K to $2K (the first guy's demand deposit note plus the next guy's borrowed cash)"-- It's a matter of definition, and generally money supply is understood to be the total of all monies that people have even if they're borrowed money from someone else. If we change the definition to include my borrowing from my own savings, then anyone can decide to increase the MZM by 'loaning himself' a trillion dollars in money that he's 'borrowing' from himself backed w/ collateral of a 'really neat pen' he found. Usually economists prefer to deal in markets where many people are trading and not just a market where one person's trading with himself while no one's looking.
I'm not disagreeing with you. For sure, debt based production and consumption is not the means to sustainable growth. It results in malinvestment, loss of price discovery and collapse
An increase in the supply of money results in a decrease in the price of money. Thus, if it formerly took 10 widgets to buy one dollar, now it only takes, say, 8 widgets to buy one dollar. So, from the dollar seller's perspective, his dollar used to be able to buy 10 widgets, but now it only buys 8.
deflation is a bad thing and so the fed will prevent it just like it will in theory prevent inflation.
It definitely causes asset price inflation -- bubbles -- but that doesn't always trickle down to consumer prices.
Exactly, the Fed and many economists keep telling us that deflation is a bad thing, and that constantly having a little bit of inflation is a good thing. Their supposed reasoning is that, if we had deflation instead of inflation, people would start saving more money and spending less. (I don't see that as a bad thing, especially since debt levels in our society are already so high) Sometimes you have to wonder if some of these economists are brain dead and operating their logic based on failed economic theory. Or maybe they are just trying to keep up the debt to keep the whole house of cards from collapsing.
Maybe the reason it hasn't trickled down to consumer prices is because wage levels haven't been increasing. In other words, if it wasn't for that inflation we might have seen consumer prices fall. Probably would have been a good thing since wage levels weren't increasing, and we need to break our addiction to cheap offshoring.
I'm just saying that, with such an expansive definition of the money supply, could there also be certain things that act as a "negetive component" of that overall money supply? Like the more of a certain something there is, the effective money supply will be smaller. That's why I'm saying debt may not increase the money supply. Of course debt creates more money, but could it also be creating a counterbalancing effect? It seems that debt creates money for the creditor, but maybe it effectively does just the opposite for the debtor.
So that's interesting. It may be that changing the reserve rate doesn't actually directly cause inflation or deflation of the money supply, but causes inflation/deflation by preventing the level of debt people are permitted to take on through banks. Thus forcing people to get into less debt and/or save more could cause deflation. If they can't keep borrowing money, they can't keep spending it. (Not really borrowing money from someone else, but just buying things now by promising to pay in the future)
That's where we usually end up, you say more money supply always causes more inflation, then I show you a bunch of times when less inflation happened along with more money supply, then I explain why -- What, you want me do expain again? You have specific questions? Is your mind just made up no matter what?
Over at wikipedia the got a writeup w/ this table-- --w/ all the kinds of money and the kinds of money supply, I like the MZM becuase it's the biggest & there's more info available w/ it..
A problem w/ deflation is businesses fail, runs on banks, people lose their jobs, mass starvation, death, stuff like that. We had a really bad deflation in the 1930's; prices of everything fell, and that included wages and sales receipts. You can say you don't ever ever ever borrow money (good for you) but in running a business you expand or you fail (and lay off workers who starve and die). When a business borrows an amount of money calculated to be paid off w/ future sales, the owner's S.O.L. w/ deflation because prices fall which means incomes fall but the loan payments stay the same. So the businesses default and then the banks fail and all you wonderful savers lose all your money (bad for you). That's why in early 2009 the big rush was on to stop the crippling deflation that began and lasted a few months. The economic destruction caused by that little bit of deflation was blamed for 8 years of slowed U.S. economy (tho there may have been other causes of that...)..
All of these bad things are caused by decreasing prices (which means increased productivity)? Can you describe the mechanism? Deflation, like inflation, can be accounted for by businesses. You still seem to think that lower prices to consumers is a bad thing. I'm not sure why.
Some people had the idea that if there was a central bank issuing all the money, which could manipulate things in the economy, it would be able to prevent another Great Depression from happening again. Unfortunately the whole system is so complicated few ordinary people can understand how it actually works, and what the full economic implications are of any policy decisions that Fed decides to undertake. Not exactly the most transparent for democratic decision-making. It's also a giant red-herring because many people imagine the Fed's policy-making abilities as a magical cure-all for anything wrong with the economy. (Typical liberal progressive thought mentality)
Maybe you're going to ask why the U.S. Treasury didn't just take on the role of issuing money? Probably the same reason the ACA didn't include a single payer option.
Please work with me. During deflation wages fall. That means people won't buy more when prices fall. Businesses have loans (fact of life). Loan payments don't fall w/ deflation because they're set back when the loan was issued before the prices fell. When business' sales receipts fall during deflation and their loan costs remain high the businesses fail and the staff becomes unemployed. From 1929 to 1933 the unemployment rate went from 3% to 25% while inflation went from +1% to -10%.
--and I can make up bad things you seem to think but that's not my style. My style is to give you one more chance in the hope we can consult on stuff like money and feeding our families. During deflation wages fall. That means people won't buy more when prices fall. Businesses have loans (fact of life). Loan payments don't fall w/ deflation because they're set back when the loan was issued before the prices fell. When business' sales receipts fall during deflation and their loan costs remain high the businesses fail and the staff becomes unemployed. From 1929 to 1933 the unemployment rate went from 3% to 25% while inflation went from +1% to -10%.
Businesses can adapt to a consistent deflationary environment just as they can adapt to a consistent inflationary environment. They will build expectations into their decisions so that their loans account for the anticipated deflation.