I prefer that usage too: i.e. the expansion of money, ... and, under a fiat-money system, its artificial creation. However, under this concept of inflation, wouldn't the best measure of inflation be something that directly measures the quantity of money?

In what sense do you use the term "inflation" here: to mean a rise in prices or to mean an expansion of the money supply?

The price of something as durable as gold also take into account the future expectations.

Amber, The term "inflation" is used to mean two things: a rise in prices and a rise in the quantity of money. One can try to use it to always mean one or the other, but one still needs a term to use when talking to others (it is unfortunate that there is no other word to describe "price-rise"). Anyhow, that is about convincing others. Before that, one has to form one's own conceptualization. I think of it as follows:

Prices tend to rise when there is an expansion of the money supply. This is an abstract form of the so-called "Quantity theory of money" (Aside: I think this is the level of abstraction that is valid, while trying to get more more detailed, with P x Q = M x V, is potentially misleading.) At that level of abstraction, the quantity theory of money is a restatement of the ordinary Theory of Demand: when there is more of something, its price declines. When there is more of money, it's "price" -- in terms of other goods and services -- declines... and the price of other goods and services (as expressed in money-- rises)

There are two important additions to this:

1. Money itself has many close substitutes. So, the laws of substitution also apply. If the supply of a certain type of banana stays constant but the supply of another close substitute suddenly rises, it can make the price of the former fall, since some demand is satisfied by using the plentiful (and, now, cheaper) variety. Economists debate about whether money is best described as M1, or M2, or MZM, or M3. Actually, there is a whole continuum of substitutes. We might have to choose one or two of those if we're to compile a metric; but, that metric will only hold as long as the mix of substitution stays within a narrow range.

The payoff of this point is this: we live in an economy where credit is a large part of transactions. Some transactions -- like home purchases (perhaps autos too)-- have more credit flowing from the buyer to the seller than they have "real" cash. Given the system we have in place, this credit is not necessarily someone else's cash being channeled to the seller. It can be manufactured money (i.e. expansion). In our money day economy, the largest expansion of money is driven by the expansion of credit, not the printing of bills. We've had a long-time expansion of bills. In addition, what we had in the recent past was a particular expansion of credit.

2. When money is expanded, the new money hits some particular person first. Someone gets the "free-gift". So, this person's ability to spend goes up while that of everyone else remains the same. So, the price-rise impact will be felt in areas where this person spends money. Of course, such expansion happens across thousands of people, so it's an easy assumption to think that such expansion happens somewhat evenly across the population. However, this is mostly not true. Credit expansions are often targeted. Sometimes it could be targeted at a geographical area, sometimes at an industry, etc. The less-targeted areas will then not see an impact for a while. The knock-on effect of such targeting is that impacts relative market values. Instead of everything rising in price, homes might rise in price much more than other assets. This, in turn, changes the valuation calculus and increases the relative demands between goods. In the case of homes, it made more people think of homes as an investment, which was false. This brought forth more relative demand for housing. It is very difficult to parse out the various motivations of buyers in the aggregate; so, these things have a temporary self-fulfilling effect while they look just like a real increase in demand. They are made worse by charlatans who pile on seeing that they can ride a bubble for a year or two.

As time passes, it becomes apparent that the change in relative demand was a fiction. The change was in nominal (money/credit) terms, but not in real value. People really do not value housing so much more than everything else. Since the focus of monetary expansion has been an asset market, where valuations are based on future expectations (housing, stock-market, etc.) the change in expectations can cause a crash. [e.g. If I think gold will go to $2000 in 5 years, it is worth a certain amount to me; if I think it will go to $2000 in ten years, its current value to me crashes.] Since this asset has been financed by credit, the buyer's ability to repay comes into question. Thus starts the fear phase and the default phase. This is a phase where credit contracts as a whole lot of credit is simply written off, while banks are more wary of giving new credit, and people are more wary of taking on new credit.

So, for a little while we've been in a phase of contraction of credit that has counter-balanced the Fed's creation of new money. In addition, in a phase like this, the demand for money rises (witness all the talk of money "sitting on the sidelines"). We're somewhere in that contraction phase now.

I'm not sure what exact point you're making Ray, but look to the modern stereotype of a religious state: Iran. What one sees is a revolution that came by popular request, which means ... by ideology. The pure force element was the Shah, with his army and his secret police, but this force proved powerless when popular mood reached a tipping point. The real threat comes from the ideology of militant Islam that has become the loudest voice within Islam; it is a threat not because it wields power as such, but because it wields power as it convinces more people that it is the right ideology.

If the U.S. moves toward being a religious state any time this century, it will not be because of some assault by force by the winning religion, it will be via ideology. Of the unlikely scenarios, the most likely would be a growing shift toward a conservative-looking, Judeo-Christian sympathetic, nationalist ideology that promises protection from the left's impotence on the economy and on protecting the security of the U.S. So, the worst foreseeable long-term consequence of Islamic-sponsored violence against the U.S. will be to push the country further into the hands of "conservatives".

The hold that these religions have is primarily through ideology and only secondarily through force. Attila needs the witch-doctor, even if they're embodied in the same person.

Congrats! I love it.

This is analogous to the question that is sometime asked on forums: what if some rich enemy bought up all the land around you and did not let you leave your house?

As for public property, if using it is trespass, immigrants are not the only one's violating rights.

Yes, of course it would be absolutely great to see the axis swing somewhere in between those two extremes.

Right now, it is mostly irrational laws. Witness the fact that many people simply are disallowed from entering the U.S. even as "non immigrants", even if they have jobs waiting for them. That's the implementation now: zero allowance. Yes, the law allows many other people to enter, but that is no good to those who have no category under which they are allowed to enter (with security having nothing to do with that categorization).

This is like someone in 1780 Virginia saying; "being a freeman is not impossible, as demonstrated by the white people who are free." for many people in the world, there is no legal way to come to the U.S. to work.


Does it follow that leaving the streets open to potential American criminals is also violation of my rights? Does this mean the government should establish roadblocks where it can continuously monitor the movement of citizens. After all, who knows which one is a criminal. Perhaps the cops should be allowed to enter homes freely, after all non-criminals have nothing to hide... I suppose this would reduce the the threats to my rights from those American citizens who are up to no good.

The fear of terrorists is simply a Republican mantra.

True. However, along with these, there are aspects of the law intended to deprive non-citizens of their legitimate right to enter the U.S., and that bad part is the overwhelming aspect of the law. The overwhelmingly bad law also creates a huge incentive for good people to break it. In this sense it is like the prohibition laws. These good people often need the help of professional bad-guys in order to break the law. This funds bad guys and let's them branch out into doing much more than helping good guys break bad laws. This is a case where the bad law actually undercuts the minor good bits. If the bulk of immigrants could enter the country with some basic background checks, and if drugs were made legal to adult buyers, it would undercut the two largest sources of funds for the cross-border criminal networks.

As bad as those aspects are, they are far from the worst. The real sin of the law is that people in many demographic segments are virtually barred from entering the U.S. it is not a question of getting into a slightly longer line; rather, the line is either non-existent, or so long that it might as well be. The system has made it impossible for certain people -- particularly low-skilled Mexicans -- to immigrate to the U.S. even to work temporarily.

This is simply not true. For the most part, the law violates rights without offering significant extra protection to anyone. Enforcing the law compounds the evil.

Looks like the last few characters were chopped off the URL above. I assume it was supposed to be: http://www.google.com/reader/public/atom/u...label/OBloggers

I don;t think your analogy is very accurate. A better one would be...
... the screen shows a New York Times article, with a picture of a building by Roark, and the caption says "Roark's bank echoes the Parthenon"

I realize this is not the main thrust of this topic, but one has to draw a distinction between what von Mises said he did and what he actually did. Though he expounded an epistemology based on "a priori axioms" etc., he did not actually derive his theories from any such axioms. (Since there are none, it would be impossible for him to do so.)

People do not put their money in banks only so it can be lent out. They also put it there for safe-keeping and for the convenience of using checks and (today) electronic transactions. A free-market banking system would evolve so that different banks cater to these different needs, or different account-types (with different contractual arrangements) cater to these different needs. Almost all discussions about fractional reserve treat the bank accounts as if they're one thing, when they really are not. Those advocating for fractional-reserve will say something like "bank accounts are a mechanism of saving and investment"; those advocating against fractional-reserve will say something like "bank accounts are a form of bailment". In fact, these are two different customer requirements. The situation is more complex because a customer could easily be happy with a bank-account that provides elements of both.

When banks were relatively free, there were some that kept almost a 100% reserve against checking or current deposit accounts. People like Carnegie and Ford kept millions in such banks. They were using these are bailment. For that portion of their wealth, they wanted safekeeping, coupled with the convenience of using a bank-account instead of cash.

If a bank account is used as a vehicle for saving and investment, then the customer must understand that his money may not be available when he wants it. However, here too, there was a need for contracts to evolve to make the agreement clear. A bank is not a mutual fund. The bank actually agrees to pay money on demand, without any riders attached. That is fraudulent, because it is a pretended bailment. Of course, customers understand that banks lend out money, so they realize that it is not quite an actual bailment. So, it is not an out and out fraud: rather, it is a poor business practice. What is required is clarity of contract. A bank contract should specify the parameters under which the bank will operate.

The government has killed the development of such contracts. Take your example of the government setting rules on banking hours and when a bank can be declared bankrupt. The real problem with such rules is that they preempt private contract. If the government had stood aside, it is likely that more sophisticated contract would have arisen, that spelled out what the bank was guaranteeing and what it was not. The real killer of any advancement in contracts was the FDIC. Since the FDIC stands behind all small to mid-sized accounts of individuals, there is no reason for such protected customers to ask the bank for any assurances. For instance, a few months before CountryWide collapsed, they were offering higher than market CD rates. I was looking to put some money in a CD at the time. Even with all the news, I was happy to place the money with CountryWide, knowing that -- worse come to worse -- the FDIC would clean up the mess in time. I would not have been as sanguine about a checking account, since convenience is paramount there. Still, even for current accounts, there aren't really huge risks.

In summary, bank accounts serve two main purposes (bailment/convenience and saving/investment). A free-market would see various types of bank-accounts, each with different contractual conditions. These would span the gamut from 100% bailment, to accounts with higher degrees of saving/investment. The contractual conditions would clearly spell out the obligations of the bank and the conditions under which it may not be able to pay out 100% of a customer's money. Then, one would have a free and objective way to decide if the bank has defaulted on its contract and should be shut -- or given some other legal penalty.

However, if one considers an ideal system, then this is not the right question. The question is: is it fraudulent to issue a debt instrument that people understand to be a debt instrument, if the conditions of its issue are clear. In addition... suppose these conditions included the fact that the issuing bank would pay money to the bearer on demand, except in certain pre-defined cases where some other conditions would apply). Would this be illegal or fraudulent if all sides knew exactly what they were dealing with, and understood that this is not money but a bank-note of a specific bank. I don't see how this is any more fraudulent than any other credit instrument.

Legally, the crucial question is: can the factory be considered "abandoned property"?

To illustrate, suppose you leave your home and you come back to find that some people have occupied it, improved it and even earned some money off it by renting it out... can you claim it back?

Clearly it is not "my idea", in any meaningful sense.

Inventor, if you follow the logic of your post, wouldn't you end up recommending locking up or sending away all muslims in the U.S.?

Judges do not decide things by a criteria such as you imply: vaguely defined membership of a fairly diverse ideological group. This would be like me saying about someone charged with a crime: "Oh, you say you're an Objectivist? Then you are obviously innocent."

In my judgement, based on a TV interview she gave, this girl appears to be mistaken about her parent's intentions.

Of course, that does not mean she should go back to her parents. A judge has yet to decide what is to be done with her. Right now, the Florida judge is merely sending her back to Ohio. The child-services department there have lined up a foster family for her. An Ohio judge will decide the case.

Given her age, the strength of her legal representation, and the usually over-board attitude of state child-services employees, I see little chance that the Ohio judge will force her to go back to her parents.

Lady Brin's posts always made me picture someone with great vivacity. I was sorry to hear this news. Thank you for the fitting tribute.

C.W., if I read between the lines, I think you're objecting to a crude type of monetarist thinking: i.e. the idea that an increase in M1 is the root of all evil.

If that's what you're saying, I fully agree (though, I have not gone back in this thread to see if anyone actually posted such a monetarist view).

We live in a credit-based economy. Nominal buying power does not come from cash alone. Much of our nominal buying power comes from credit, created by banks and non-banks. Through various methods, we the people cheered this creation of credit: FHA, Fannie/Freddie, low rates, and so on. China -- buying in to the notion of export-led growth -- helped as well.

When nominal buying power is created, it is not created uniformly all over the economy. Most recently, the flow of nominal buying power was skewed toward largely to housing. It did flow to other areas as well, but in many of those other areas it was mostly matched by rapidly increasing world production. So, house prices went up, even though the CPI (which does not account for them, remained fairly stable).

The credit bubble has burst, as credit bubbles do. Now, there is a huge deflation of nominal purchasing power, even as the Fed has pumped up M1, and even as the Fed is directly providing some credit where the banks etc. have stepped aside.

C.W., I mostly agree with your post. I'd add the following...

Firstly, if we grants that the last couple of decades have seen a huge growth in real productivity that is a huge explanation of why prices have not risen. The productivity has come from three main sources: structural opening of the U.S. economy post 1970; globalization... China putting millions to work (i.e. structural opening of the Chinese economy, and of others two); finally, from internet and telecommunication improvements.

Second, China's huge dollar accumulation has been allowing prices to rise within China while helping keep down prices of consumer items in the U.S.

Finally, owner-occupied housing is a huge expenditure for most people but the CPI does not account for short-run changes in this expenditure.

This has been my sentiment as well. I prefer Shedlock's economic commentary. He's a libertarian and every now and then will have some really crazy post on animal rights or on ditching morality, but when he's talking economics, he makes sense. He's in the "deflation now, inflation later" camp, and has a few articles (and pointers to other people's articles) that explore that debate.

I know of one effort, that calls itself "The Prometheus Initiative" that is trying to do a free-books project in U.K.

You fail to mention that many prominent politicians in the BJP are seriously religious, and have acted on that when they have been in power.

I disagree that the BJP has done more pro-freedom things. The Congress leans socialist and the BJP leans fascist. Fascists always have a pro-business veneer, but this typically works to favor current businessmen who have pull. A lot of businessmen supported the fascists in Germany, and many US businessmen saw them as an answer to communism.

It is true that the Congress party spearheaded India's push to socialism from Independence, all the way to the 1980s. It is even true that some of the opposition parties of those earlier times -- e.g. the tiny Swatantra Party -- had a lot of pro-individual rights folks. However, major "opening up" in India was caused by the ideological shifts within the Congress party.

Arguably, the coalition that took over from the Congress in 1977 set India back, by throwing multi-nationals out of the country.