MUSINGS ON INFLATION

Obviously, I've been inspired in my facebook communications this week, whipping out epic comments and shit over the last three days or so.  Anyway, in a discussion on welfare, my Dad's half-sister, April, wonders what the effect of phasing out welfare might have on inflation, asking if it might cause a massive increase.

So I responded.

April, inflation is typically an aspect of the money supply. When the amount of dollars in circulation increases, that's inflation; conversely, when the amount of dollars in circulation decreases we have deflation. All kinds of stuff can affect this, but it's usually interest rates doing the heavy lifting, because most new money entering the economy comes out of the loan process. But it's not just interest rates. The gas shocks of the 1970s, for instance, greatly contributed to the inflationary spiral, making everything else cost more because everything gets shipped around using gasoline--actually, I should do some more reading on this, because I don't know that gas price increases actually increased the number of dollars in circulation as much as it simply had the effect of increasing all prices; maybe for economists it's six of one as far as this goes.

Anyway, ending welfare would actually take money out of circulation, which I imagine would have a deflationary effect, instead of causing inflation. But I don't even know that enough people are on welfare for it to have any effect at all. At any rate, inflation, like fire and capitalism, isn't always bad. Indeed, when the economy grows, we need more dollars in circulation to cover all the new transactions that come with growth. Otherwise, there would be less growth, simply because the money wouldn't exist for new business activity.

This is also why Ron Paul style gold bug weirdos are out of their minds. We HAVE to have a floating currency or we're handicapping the economy unnecessarily.

And then I got some more inspiration

More on inflation regarding the 70s gas shocks. Another way to consider inflation is in terms of relative relationships between the money supply and available goods and services. Inflation is when we have too much money chasing too few goods; deflation is when we have too many goods and services but not enough money available to purchase them.

Now, the 70s were weird in any case because generally inflation is a problem associated with economic expansion --times are good, people want to buy, and it's hard for businesses to keep up with demand, so prices go up making it all level out. But in the 70s we had a sort of ongoing recession, or rather, stagnation, or lack of growth, which is how we get the term "stagflation," which means a stagnant economy also hit by inflation. The inflation in the first place was very likely caused by Vietnam War expenditures on top of LBJ's Great Society domestic programs, guns and butter, for which the Feds didn't really have enough money, so they printed it up, flooding the currency market with dollars. Thus, inflation. And then the two gas crises aggravated it all, causing massive price increases across the board. Then workers started demanding raises to keep up, which also increased inflation, and businesses raised prices in anticipation of supply price increases, which increased inflation even more. This was called an inflationary spiral, all kinds of shit contributing to make things cost more.

Only Reagan had the balls to raise interest rates, which forced a horrible recession on the nation, but it had the effect of tightening up the money supply enough such that the spiral ended, and then the economy bounced back pretty quickly. Actually, that's the one thing for which I admire and give credit to the Friedmanites, ending stagflation, when my favorite economists, the Keynesians, had no answers.

Really, I don't know where I'm going with this other than to illustrate that it's all very complicated.

Again, 'nuff said!

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