Supply.

[brentdax]

This began as a reply to a post on bgmaster's journal that outgrew its playpen.

I.
To have any sensible discussion about inflation and deflation, you need to decouple two concepts that a lot of people jumble up: price level and money supply. The money supply is the quantity of money in circulation, taking into account the multiplicative effects of banks

Comments

[izuko]

*flies over Brent in a helicopter and drops a few bags of $100 bills*

[chiave_trust]

*laughs* Oh, it could be worse - the original post (the one through commentary on BG's post) mentioned Atlas Shrugged, and so I immediately looked forward to a catfight economic commentary.

[izuko]

Ok, now for the serious reply. This is one of those situations where I agree with your conclusions, but not some of your arguments. And, being a former (and future) nuke, I am required not to settle for "Right Answer, Wrong Reason (RAWR

[brentdax]

I'm generally arguing from the Austrian school here (Mises and Hayek, if you're familiar with them

[countalpicola]

> All you have to do is create a currency whose supply is constrained by some outside force

This is, of course, the theoretical underpinning of tying money to things like the gold standard.

> prices would slowly fall as firms found more efficient ways to produce

I don't want to detract from your (entirely correct) point in any way, but it may be worth mentioning that this is frequently not what actually happens. Instead, what we often see (particularly with electronics) is that the same dollar buys a better product, rather than simply more of the original. The relevant measure is not so much price as it is consumer surplus -- the amount of value retained by the consumer in a transaction.

So, to rephrase what you said a bit more precisely: The amount of consumer surplus would slowly rise as firms found more efficient ways to produce.

[izuko]

Ah, but often the ability to purchase a better product at the same price is coupled with the alternative to buy the same product at a cheaper price. The old model may be repackaged and rebranded, but the option still exists, unless it becomes too obsolete to bother selling or buying.

But obsolescence is an entirely different argument.

[crucially]

Yes, it worked so well with the gold standard

[brentdax]

Maybe you're right. After all, it's not like the Industrial Revolution was a very prosperous time, or the building out of the railroads improved peoples' lives.

[crucially]

And so was the 1500-1700s in Spain, which had a very stable economy based on gold.

[brentdax]

Noted. I never mentioned gold because it is not ideal for money by definition: it's only good if it's hard to mine more. Spain during that period had massive gold inflows that they took great care to keep within the country. In that situation, gold is a terrible form of money, nearly as bad as paper printed by incompetents (I don't count the Fed in that category).

[brentdax]

The argument against the stimulus is that it doesn't ease the pain, it just spreads it out over time. The analogy I've heard is that it's like peeling off a band-aid-you can do it quickly or you can do it slowly, but you can't avoid the fact that it's going to hurt

[countalpicola]

> people are (thankfully) starting to save again.

Unless they're the government, or anyone who happens to listen to Newsweek. I've never been able to discern the logic by which, if spending caused this economic mess, doubling down on spending is the only way to cure it