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In todayâ??s Wall Street Journal, U.S Treasury Secretary Timothy Geithner, Singapore Finance Minister Tharman Shanmugaratnam, and Australia Treasurer Wayne Swan worry aloud that, in emerging economies, â??rapid growthâ? increases â??the risk of domestic inflation.â?
Baloney.
Inflation is the result of too much money chasing too few goods. So by increasing the flow of goods (and services) produced in an economy, rapid growth decreases the risk of domestic inflation. That the finance ministers of three major world governments do not understand this fundamental fact is appalling.
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AnonymousAmen. In real economic growth, T leads V. Leave it to to the worlds most powerful economic engineers to mistake the redistribution of a counterfeiting spending frenzy with economic growth.
Mao_DungIâ??m glad that you finally agree with me that some people have too much money chasing after to few goods. That it took an economics professor with a PhD his entire career to understand this fundamental fact is appalling.
Mao_DungIâ??m glad that you finally agree with me that some people have too much money chasing after to few goods. That it took an economics professor with a PhD his entire career to understand this fundamental fact is appalling.
Raja_rLearn to read â?? it is such an important skill.
Mao_DungBtw, there are millions more (insignificant) people that are simply fodder for industry that have too little money chasing (actually plodding) after too few necessities. These poor peoples wages have a hard time keeping up with the inflation caused by others that are chasing after a Ferrari and a Swiss chalet. Iâ??m sure some libertarian will find a way to blame the poor for inflation. It goes with the territory.
http://blsciblogs.baruch.cuny.edu/luc/ Mike P.F.i thought they were worrying about the sudden and massive international capital flowsâ?¦
they are understandably worried that once our, and western europeâ??s economies, start picking up a little faster, those international capital flows that once came in so suddenly will depart no less swiftly. THAT will lead to another asian financial crisis.
actually if that happens, it would be pretty interesting. chinaâ??s housing bubble potentially bursting at the same time those capital flows taking flight.
http://www.in.gov/iwm/2334.htm The Other EricAnd in your â??entire careerâ? you have done exactly what? You misquote for the wrong reason. Itâ??s not â??some people have too much money.â? You have too much. You clearly have enough to purchase internet access and the technologies needed to place your weak-minded ideas in this comment section. You have some unsupervised time, which would be valuable in the hands of others and so it is you who have too much money, time and accessâ?? all trappings of wealth.
It should be taken away. That you have so much and waste it is truly appalling.
AnonymousWhat if the same amount of money chases more goods faster? This seems like a real abuse of the equation of exchange on your part, Don. It matters whether the growth is demand-lead or supply-lead in this case, because that matters for the velocity of money (not to mention the creation of non-base money and the extension of credit). Demand lead growth does introduce an inflation risk. Geithner is right about this. Supply lead growth or growth from increased productivity largely doesnâ??t. Thatâ??s generally speaking but of course you canâ??t say anything with certainty because the relationship between money and the price level is an accounting identity, not a behavioral law.
http://twitter.com/manuakula Manu AkulaWhat an apt screen name Mr. Dung.
Your posts seem full of it.
http://pulse.yahoo.com/_LKTHJ4U2MIPFUPKIHNN5RT5K4Y sarah fergusonPerhaps the finance ministers were thinking in terms of government spending as economic growth?
Engineer-not-EconomistI hesitate to write this as I am an economic neophyte "â?? but here goes.
"Inflation is the result of too much money chasing too few goods"?. No argument there. Where I need clarity is the interpretation of the Ministers statement ""? in emerging economies, "?rapid growth' increases "?the risk of domestic inflation'."? Aren't they stating the similar concept of increased demand (rapid growth) on a fixed supply increase prices?
I maybe splitting hairs here but there appears to be an important element that I am missing. Any clarity on this is greatly appreciated. My apology in advance if this is too simple an inquiry for this audience.
Don BoudreauxEngineer-not-Economist: You ask â??Aren't they stating the similar concept of increased demand (rapid growth) on a fixed supply increase prices?â? If so, then thatâ??s not growth; thatâ??s higher demand backed up by nothing â?? i.e., thatâ??s inflation.
Growth â?? real, actual, honest-to-goodness growth â?? comes only from increased productivity.
SelginIf the â??geniusesâ? Don refers to had claimed that an increase in the velocity of money, or in total spending, was creating inflationary pressures, that would be one thing. But what they said was that â??growthâ? was causing those pressures. Thatâ??s reference to increased y (output), not increased V (or MV or Py). Don is therefore perfectly right to insist that they are talking nonsenswe.
The fallacy, by the way, is a very common one, and is nothing other than the flip-side of the old stable Phillips-Curve fallacy. That old fallacy said that, if the rate of inflation went up, the result would be more employment, and hence more output. The new one says that, if the rate of output goes up, the result will be a higher rate of inflation! In both cases coexistent effects (higher inflation and increased output) of a common cause (more rapid spending) are fallaciously regarded as cause and effect.
jjoxmanâ??My apology in advance if this is too simple an inquiry for this audience.â?
Donâ??t apologize. Many in this audience think (incorrectly) they are beyond such questions.
There are two types of price changes at play here. One (inflation) is a general increase in the level of all prices. The other, that you mention here: â??increased demand (rapid growth) on a fixed supply increase pricesâ? would be a change in the relative price of a specific good or service. This need not, and typically would not, cause general inflation of prices.
For a general price inflation to take place, first money supply has to outpace money demand. It is doubtful this will take place in a rapidly growing economy.
SelginIf money supply is â??unlikelyâ? to outpace money demand in a rapidly growing economy, then presumably there have been few cases of â??rapidly growingâ? economies since the 1970s, when inflation, with rare exceptions, became a chronic worldwide phenomenon!
AnonymousGeorge (I assume) â?? Iâ??m not sure why youâ??re acting like everything else is just going to stay put. Yes, if we kept M and V fixed but let P and Y move, weâ??d see a decrease in the price level. But how does that make any sense? What could possibly lead Don to assume such a thing? These magnitudes are simultaneously determined. Growth leads to both an increase in V and Y if itâ??s demand lead growth. You canâ??t treat these identities like theyâ??re anything other than accounting identities. You canâ??t get causal relations from an accounting identity and just say that when you increase Y you wonâ??t get inflation.
Thatâ??s like the people that claim that fiscal policy works because Y=C+I+G, so if you increase G, Y increases. Youâ??re doing precisely the same thing â?? youâ??re treating an accounting identity like a causal relationship. Thatâ??s wrong.
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