We suggest that without the preceding increases in money supply, there cannot be a general increase in prices, or what is popularly called “inflation.”
6 comments · 50% upvoted · source · other discussions
Inflation expectations influence inflation by workers increasing wages and businesses increasing prices in anticipation of high inflation which essentially becomes a self-fullfilling prophecy.
If more money is spent on oil and energy-related products, less money will be left for other goods and services, since a price is the amount of money spent per unit of a good. Instead, the prices of oil and energy-related goods will go up while the prices of other goods and services will go down.
Even is you go with incorrect assumptions about the shape of supply curves, this just wrong.
In an open economy, when terms of trade change, overall we get richer or poorer. The theoretical disinflation described can be offshore.
Also money is not destroyed in a transaction. There is still the same amount of money, it’s just now in different hands which will also spend it
Thinking outloud:
Maybe Mises think something like:
TotalRealGDP = VelocityOfMoney * QuantityOfMoney / PriceLevel
Where you assume VelocityOfMoney and TotalRealGDP are fixed.
So you add more money and the price level changes.
PriceLevel = QuantityOfMoney * ( VelocityOfMoney / TotalRealGDP )
If these - ( VelocityOfMoney / TotalRealGDP ) are constant K1.
PriceLevel = K1 * QuantityOfMoney
But if Iran closes the Straights of Hormuz, then Total Real GDP declines.
Say we assume Quantity of Money and Velocity of Money are the constant - K2:
PriceLevel = K2 / TotalRealGDP
Now if TotalRealGDP declines the price level will increase.
When you get to this kind of thing I think the solution from Austrians is that this "change in the price level" is not "inflation", i.e.: you define away the problem.
My AI is calling me a conspirator, but there is some truth to the article even though I still somewhat disagree.
Inflation expectations were the explanation economists added to help explain the Phillips curve irregularities. What was occurring, despite money supply metrics like M2, which Volker tried to control, was that monetary expansion was occurring in offshore markets, which created monetary inflation; also, this monetary expansion was focused more in developing nations as globalisation expanded and caused higher unemployment in the developed nations. The idea was that the economy would get rid of lower-rung jobs and create new ones, and while that did occur in things like tech, the hollowing out of manufacturing caused fractures in developed nations.
I am not discounting the fact that there were two distinct oil supply shocks, which were the main and most important cause of price rises in the 70s. I am merely trying to highlight that the monetary expansion occurred in a way that both the economists at the time weren't aware of (in offshore banks) and had vastly less control over (controlling reserve assets didn't adequately restrict offshore dollar credit).
This helps explain the Mises article, but it is still an alternative explanation, not that monetary inflation causes inflation expectation but why it appears that way. Unfortunately (for me), Mises tends to be more Austrian in nature, and therefore they tend to run away from the idea that banks are the creators of money and that credit doesn't need to be backed by commodities (gold or oil).