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Inflation

I thought Frances Coppola's recent piece on inflation was interesting:

http://www.coppolacomment.com/2019/03/inflation-is-always-and-everywhere.html

Cullen,

Fundamentally speaking, inflation is caused by too much money chase too less goods/services. The problem with current condition is that when someone purchases goods/services, over the time the goods will get broken/disappear through its usage, or the services can be only utilized once. On the other hand, the money that is used to buy these goods/services still exist. Thus, more money still remain in the system, while there are no any goods/services back up these money anymore.

Isn't this a flaw by nature ? The money is supposed to vanish as the goods/services also vanish too. So, there will be balance between the existence of money and its underlying goods/services.

Hi Cullen,

Do you have any idea for above ?

Hi Kev,

Just a tip on questions - if you want to make sure I see a question start a new topic instead of responding to an existing question with a new question. I get alerts on new topics, but not new comments so I miss a lot of stuff.

As for this specific question - it's not really accurate to say the goods disappear. For instance, innovation eliminates the need for a lot of goods. 200 years ago we needed to fuel everything with wood. Then we replaced wood with gas burning fuels. Now we're replacing that with various renewable energies. That is, in many ways, the beauty of capitalism. It's a competition to constantly produce things that destroy your competition because the new stuff is more cost effective to produce and maintain.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Hi Cullen,

I think if every new question started with new topic, the forum will be flooded with many topics with short discussion. Thus, I rather continue it in the same thread.

So you are saying that although some goods disappear due to the usage, actually it leads up to efficiency for other means of production thus creating more goods with less available money ?

I think the key point is that we don't actually consume everything we produce. If we did then everything would become a scarce resource. But what's actually happening, in most cases, is that our investments are resulting in an abundance of goods. Ie, we are producing more goods than we're producing money. For instance, take food. We've basically mastered how to mass produce food. So, even though we literally consume food the investments we've made in production have resulted in the ability to produce even more food than we consume. In other words, the investments reap much more than the consumption that results thereby leading to an excess in food and not a deficit.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

From an accounting perspective, inflation can also be measured as nominal GDP growth less quantities of produced goods/service growth.  This inflation view is based on accounting identity:  PQ=Y .  Thus %P  = %Y - %Q.  The notations and chart are defined as follows

%P = percentage price level change
%Q = percentage quantities of  goods/services change
%Y = percentage nominal GDP change
Blue dash line=%P
Red line = %Y - %Q

 

There are two problems in the statement: inflation is caused by too much money chase too less goods/services.

(1) unclearly-defined terms. Which money chase what goods/services?
(2) I think this inflation concept is based on demand/supply equilibrium equation:  MV = PQ and  has similar terminology issues:  Which money supply (M) chase (V)  what goods/services?