Inflation - why do we need it?

[Chief]

Guys, do you think the RBA could solve the current "inflation monster" (as Rudd calls it) by printing more money?

If petrol price increases are costing households an extra $300 each year, why doesnt the RBA just print enough money so that the government can give each houshold an extra $300 to cover the cost?

p.s. I went to the same school of economics as Wayne Swan so I know what I am talking about.

That's like having 10 football teams in one city and giving them all a million dollars, then expecting players not to ask for more money.

 

[fairdinkum]

I'm pretty sure the first words I said in that post where "I might be wrong" meaning I wasn't sure what I was saying was correct.

So why bother posting something that pretends to be knowledgable if you know you are probably wrong?

Now the OP of this thread of course, is just quite clearly ignorant of a lot of things, but I don't particularly like the way people have paid out on him for it. At least he's sticking his neck out and asking a question, quite clearly not ashamed to be ridiculed for his blatant lack of knowledge. This is to be commended imo.

Blatant lack of knowledge? You are the guy who reckons that currencies are all 'indexed against gold'!

Of course, the idea of HIM calling ME an idiot when you consider his first post in this thread, is really quite funny!

You are clearly far too stupid to realise the irony of this, so I'll point it out to you.

The whole point of this thread was to illustrate how little people actually know about inflation - especially those who think they know. Your posts in particular have done exactly that.

 

[Jumpin' Jimmy]

Of course, the idea of HIM calling ME an idiot when you consider his first post in this thread, is really quite funny!

Totally agree. Perhaps he now considers himself an expert on the subject. The Federal Opposition currently have a vacancy which he may be angling for

 

[nokiacasio]

The central bank aims for 2-3 per cent inflation. It could aim for 0 per cent inflation but then there is a risk that we have negative inflation, i.e. deflation. That is, instead of value of goods going up it goes down. Many people might thing petrol prices going down all the time would be good, but it is not. The reason why is because everyone will hoard cash and wait till the future to spend (since prices will go down). If everyone hoards and nobody spends, the economy stuffs up. This is what happened in Japan during the '90s, aka the Lost Decade.

But paper money is not a commodity.

Paper money is a commodity. A commodity is defined as a mass-produced good that is all identical. E.g. wheat, rice, gold, paper, fiat currency (a type of paper).

I might be wrong but for all countries except the US currency is indexed against gold. So printing more money doesn't mean we have more gold, it just means we have more notes, spread out across the same value of gold.

Money isn't something in and of itself, its representative of a certain value. So printing more money diminishes the value of the existing money.

I'm not sure if its as simple as that. But then, I have no interest in gold.

As Warren Buffet once said "I don't' understand it, we spend hundreds of millions of dollars digging it out of the ground, then we put it in a room and spend millions more protecting it. It's absolutely useless"

Everything you said is correct except the first sentence. A long, long time ago all currencies were pegged to gold, but no national currencies are anymore. The Australian dollar's value closely correlates to the price of commodities like gold because Australia exports lots of commodities, but this is not because of any fixed-exchange rate regime set up the government.

Warren Buffet thinks gold is a bad investment. He believes this because gold does nothing. It just sits there and looks good. However, unlike the Coca Cola Corporation or Petrochina (companies he made lots of money from) gold does not produce anything, it does not expand and grow, etc. This doesn't mean gold is useless. Gold is what you hold if you have little faith in paper money. This is because of the belief that if fiat currency stuffs up (e.g. we have a massive collapse of the world's financial institutions), we all revert to using gold as currency. Based on my observation, usually weird conspiracy theory-type people hold gold.

If petrol price increases are costing households an extra $300 each year, why doesnt the RBA just print enough money so that the government can give each houshold an extra $300 to cover the cost?

I hope you're joking. This is a Pauline Hanson solution. The simple answer is that petrol prices will rise.

"printing money" to be confusing, because the creation process for money is far more complicated these days, requiring a borrower as much it requires a "printer." And of course, no actual printing goes on...it's just legally authorised operatives agreeing to put extra $$$'s into an account... the bucks actually didn't exist before that business decision there.

You're right, there are many types of money other than paper currency. Research M1, M2, etc.

I just reckon general Economics involves a fair bit of hand waving & mumbo-jumbo, simply because the subject matter is not that amenable to our scientific methods so far. ie/eg we know how to do chemistry way better than we know how to do economics, BUT... instead of this leading to more circumspection and open doubt in econ, it leads to more Belief and insistence and emotional reaction due to our doubts about important things... ala religion.

Economics is not quite like chemistry. It's more like medicine except the patient is not a person but a country. However, just as it's difficult to know how fiber reduces cancer it's also difficult to know how to prevent recessions. Nevertheless, you cannot escape economics. We need to find a way to make people prosperous and keep them prosperous. Prosperity is the basis of good health, happiness, etc.

Isn't that what Kevin Rudd effectively did to the pensioners? He didn't take away anything from the pensioners think that no one would notice or at least think "well he didn't give them anything, but he made sure they didn't lose anything either.". Obviously he over estimated how gullible everyone is.

Yes, probably. Centrelink and employers should increase payments or wages in line with inflation. Otherwise, you may find it hard to live.

From my understanding inflation is the result of increased result of investment and growth.

Yes, that is right. It's called demand-pull inflation. Think of an auction. If there are more people with more money, the price bidded will be higher.

Think about the choices

1) inflation
2) deflation
3) Stagnation

Inflation is prices going up, deflation is prices going down, and stagnation is not related to prices. Stagnation is when no one buys anything, but this may affect prices.

Now I understand that increasing the money supply (whether by tax cuts or interest rate cuts) is inflationary, but someone need to explain to me how simply "printing more money" is inflationary.

Like I said before, money is just another commodity. If you double the amount of oil on earth, petrol prices should drop. Similarly, if you double the amount of money, the price of money will drop (that is, the currency will depreciate), which means more of it will be required to buy a certain good, and therefore that good will go up in price, which is inflation.

Most countries have floating currencies that mean currencies are determined by a process that I have simply no idea about, and arent indexed to gold.

Floating exchange rate means that the currency is allowed to change prices freely. For example, in Australia petrol prices are floating since service stations are free to set whatever prices they want. In some countries, e.g. China the government subsidized petrol to make it cheaper for the people, so if they are diligent enough in theory they could keep petrol prices fixed.

Exchange rates are fixed not because the government simply says it is. The central bank must hold reserves and then actively buy and sell their own currency to change its value back to the fixed rate.

 

[Scallop Industry Thug]

Based on my observation, usually weird conspiracy theory-type people hold gold.

We all appreciate your answers. Thanks

These conspiracy types (who usually support Ron Paul) believe that the cause of the US financial ills is the inflated money supply. They believe this fiat currency will lead to financial collapse.

They want the currency indexed to gold to reduce the money supply. All paper notes would be redeemable in gold so the Fed would only produce enough notes that can be redeemed in a finite amount of gold. This would have the effect of drastically reducing the money supply as the Fed could not produce currency whenever it felt like.

 

[Karl Pilkington]

So why bother posting something that pretends to be knowledgable if you know you are probably wrong?

So I can learn of course. I don't worry about my ego getting hurt by being wrong.

Blatant lack of knowledge? You are the guy who reckons that currencies are all 'indexed against gold'!

I don't think that at all - I learned otherwise.

You are clearly far too stupid to realise the irony of this, so I'll point it out to you.

The whole point of this thread was to illustrate how little people actually know about inflation - especially those who think they know. Your posts in particular have done exactly that.

Please. Nobody believes you're some kind of machevellian genius trying to exhibit other peoples lack of knowledge.

I'm happy to admit I'm no expert on the subject, and have already done so. You give the impression that you are very troubled by what people think of you.

 

[Scallop Industry Thug]

Last time I checked neither Karl or myself have degrees in economics. I'm sure at some point you didn't know either.

Those truly confident in their own abilities arent afraid to ask questions and admit they don't know.

 

[Karl Pilkington]

Everything you said is correct except the first sentence. A long, long time ago all currencies were pegged to gold, but no national currencies are anymore. The Australian dollar's value closely correlates to the price of commodities like gold because Australia exports lots of commodities, but this is not because of any fixed-exchange rate regime set up the government.

Warren Buffet thinks gold is a bad investment. He believes this because gold does nothing. It just sits there and looks good. However, unlike the Coca Cola Corporation or Petrochina (companies he made lots of money from) gold does not produce anything, it does not expand and grow, etc. This doesn't mean gold is useless. Gold is what you hold if you have little faith in paper money. This is because of the belief that if fiat currency stuffs up (e.g. we have a massive collapse of the world's financial institutions), we all revert to using gold as currency. Based on my observation, usually weird conspiracy theory-type people hold gold.

Thanks for that. According to fd I was wrong on more than just the first sentence - but he hasn't explained how yet.

 

[Karl Pilkington]

Last time I checked neither Karl or myself have degrees in economics. I'm sure at some point you didn't know either.

Those truly confident in their own abilities arent afraid to ask questions and admit they don't know.

Exactly. Its called theorising.

Imagine if Descartes or Pythagoras was scared of being wrong? (yes I just pretty much compared myself to Descartes).

 

[Scallop Industry Thug]

Like I said before, money is just another commodity. If you double the amount of oil on earth, petrol prices should drop. Similarly, if you double the amount of money, the price of money will drop (that is, the currency will depreciate), which means more of it will be required to buy a certain good, and therefore that good will go up in price, which is inflation.

By this way this didnt exaclt answer my question of why the act of "printing more money" is inflationary.

Surely the simple act of printing money (and, say, leaving it in a warehouse at the mint) isnt inflationary.

Isnt it the act of more money being spent that is inflationary? So by "printing more money is inflationary", is what they mean "printing more money, distributing it to consumers and them spending it is inflationary"?

 

[Richo88]

By this way this didnt exaclt answer my question of why the act of "printing more money" is inflationary.

Surely the simple act of printing money (and, say, leaving it in a warehouse at the mint) isnt inflationary.

Isnt it the act of more money being spent that is inflationary? So by "printing more money is inflationary", is what they mean "printing more money, distributing it to consumers and them spending it is inflationary"?

But the question then needs to be asked why are you printing money and leaving it in storage for no further use...

 

[Scallop Industry Thug]

But the question then needs to be asked why are you printing money and leaving it in storage for no further use...

Good point.

But, increasing the money supply (which is what I assume the "print more money" crowd want) can be done via tax cuts or interest rate cuts which don't (I think) require more money to be printed.

 

[Richo88]

If you really are interested in all this currency debate google Post War Germany inflation.

 

[fairdinkum]

At least he's sticking his neck out and asking a question, quite clearly not ashamed to be ridiculed for his blatant lack of knowledge. This is to be commended imo.

You give the impression that you are very troubled by what people think of you.

You can't even keep your own story straight.

Please. Nobody believes you're some kind of machevellian genius trying to exhibit other peoples lack of knowledge.

Not only do you not know how to spell Machiavellian, you clearly don't even know what the word means.

More importantly, the last 60 posts or so have provided a lot of evidence that inflation (and the Reserve Bank) are topics that are very poorly understood by the general populous. Whether or not you think that this was my intention is inconsequential.

 

[fairdinkum]

Thanks for that. According to fd I was wrong on more than just the first sentence - but he hasn't explained how yet.

Where'd I say that?

 

[Karl Pilkington]

Where'd I say that?

In one of your posts on the previous page.

 

[Karl Pilkington]

You can't even keep your own story straight.

It's completely consistent.

I think anyone should be commended for asking a question about something they're interested in, but don't know a lot about.

I think you personally have tried to defend your lack of knowledge in a manner that suggests you were embarrassed by your first post (personally I don't think you should be).

Not only do you not know how to spell Machiavellian, you clearly don't even know what the word means.

More importantly, the last 60 posts or so have provided a lot of evidence that inflation (and the Reserve Bank) are topics that are very poorly understood by the general populous. Whether or not you think that this was my intention is inconsequential.

Give me an example of how it is very poorly understood. Most people here seem to have a decent grasp of it (myself included) without knowing all the finer details.

I'm sure if you asked an advanced chemistry question on this board, that the majority would not have a good understanding of it either - does that mean we should do away with medicine?

I don't think you really had a point to this thread other than your original post. I don't believe that you were trying to exhibit anything, rather, you were embarrassed by your rudimentary understanding (at best) of economics and now are trying to save face.

Personally I don't think you have any reason to be ashamed. You asked a question, which is the first step to knowledge.

 

[Karl Pilkington]

The whole point of this thread was to illustrate how little people actually know about inflation - especially those who think they know. Your posts in particular have done exactly that.

This is what I was referring to btw. It implies I was somehow drastically wrong, whilst also giving the impression I thought I knew a lot about inflation (which is funny considering I prefaced what I wrote by saying "I might be wrong" which, along with my subsequent responses, suggests I was more than happy to be corrected.

According to nokiacasio I had a pretty good grasp of inflation, and he seems quite knowledgeable, in fact, nobody here has pointed out a single thing I said regarding inflation that was wrong.

My comment regarding indexing to the gold standard isn't really inflation related anyway, so clearly you're suggesting something I said regarding inflation is incorrect. I hope you can point out what it is, so that I can learn from it.

 

[fairdinkum]

I think you personally have tried to defend your lack of knowledge in a manner that suggests you were embarrassed by your first post.

Well, as usual, you are wrong.

I am more than happy to admit that I do not know who is in charge of printing money in this country. I am also more than happy to admit that I am slightly confused that the Reserve Bank would cut the interest rate when inflation is well above the target band. I have never claimed to know anything I don't.

What would be embarrassing would be posting a comment along the lines of all currencies being indexed to gold. Now that would be incredibly embarrassing.

Give me an example of how it is very poorly understood. Most people here seem to have a decent grasp of it (myself included) without knowing all the finer details.

No, anybody who thinks that inflation is related to currencies being 'indexed to gold' does not have a 'decent' grasp of the topic. Period.

I'm sure if you asked an advanced chemistry question on this board, that the majority would not have a good understanding of it either - does that mean we should do away with medicine?

That is a terrible comparison on several levels.

I don't think you really had a point to this thread other than your original post. I don't believe that you were trying to exhibit anything, rather, you were embarrassed by your rudimentary understanding (at best) of economics and now are trying to save face.

As usual, you are wrong.

 

[fairdinkum]

This is what I was referring to btw. It implies I was somehow drastically wrong...

You were.

My comment regarding indexing to the gold standard isn't really inflation related anyway

So why did you make a (incorrect) reference to it in the first sentence of your post?

 

[Karl Pilkington]

What would be embarrassing would be posting a comment along the lines of all currencies being indexed to gold. Now that would be incredibly embarrassing.

Good thing I didn't say that then.

No, anybody who thinks that inflation is related to currencies being 'indexed to gold' does not have a 'decent' grasp of the topic. Period.

That isn't what I said.

That is a terrible comparison on several levels.

Because it proves how stupid your false premise is.

As usual, you are wrong.

I don't believe I am, but please feel free to point out where I'm wrong. I like to learn from my mistakes (that's something you could learn from me imo).

 

[Karl Pilkington]

You were.

Why did you skip the rest of that post? Are you unable to answer the questions I posed?

So why did you make a (incorrect) reference to it in the first sentence of your post?

Why not? It was in relation to a question HK asked. I suggest you read the thread.

 

[fairdinkum]

Because it proves how stupid your false premise is.

No, because it completely misses the point.

But please humour me - just what do you think my 'original premise' was?

I don't believe I am, but please feel free to point out where I'm wrong. I like to learn from my mistakes (that's something you could learn from me imo).

You aim to learn by making mistakes.

I prefer to learn by asking questions and doing research for myself.

 

[fairdinkum]

Why did you skip the rest of that post? Are you unable to answer the questions I posed?

What question? I didn't even see a single question mark in there.

 

[Karl Pilkington]

No, because it completely misses the point.

But please humour me - just what do you think my 'original premise' was?

No, it really doesn't.

Your original premise was exactly as your first post read. You were asking some mind-numbingly stupid questions. Rather than just accept you didn't know what you were talking about, you've tried to deflect attention onto the only other person in the thread to get it wrong (me).

It's a tactic I used to apply, back when I was an idiot.

You

aim to learn by making mistakes.

I aim to learn. How I do that doesn't bother me.

I

prefer to learn by asking questions and doing research for myself.

But you've been claiming you knew these answers all along, so you aren't really learning anything with this thread, are you?

You're welcome to do the research yourself (even though you haven't done the research yourself). Personally I figure there's going to be someone on this forum who already knows more than me about the topic, so I just ask the question straight up - whilst offering my own theory in the process and seeing if I'm right.

When you start working in the corporate world, as you no doubt will, you'll realise that people hate it when someone just flat out asks a question. They much prefer it when you have a theory yourself and seek to validate it instead.