Monday, November 12, 2012

Too Much Money Chasing Too Few Goods?

Milton Friedman said, and Anna Schwartz perhaps as late as 2008 said that inflation is always and everywhere demand-pull inflation. As Schwartz put it:

An increase in the supply of money works [by] stimulating spending. Business firms respond to increased sales by ordering more raw materials and increasing production. The spread of business activity increases the demand for labor and raises the demand for capital goods. In a buoyant economy, stock market prices rise and firms issue equity and debt. If the money supply continues to expand, prices begin to rise...

But inflation which results from increased spending must arise from an excess of the medium of exchange. Not from an excess of the medium of account.

An excess of the medium of account may cause a bidding-up of financial asset values, real asset values, and cost-push inflation. It cannot cause demand-pull inflation.

The change in our economy toward greater finance is associated with the decline of real-sector income, with the concentration of wealth, and with a kind of inflation that will never be ended by demand-side constraints.


The Arthurian said...

It troubles me to say that the medium of account "cannot cause demand-pull inflation". It troubles me, because I think the MoA money must be spent, too. Less often, perhaps. But MoA money buys financial assets or becomes financial assets, and moves to better financial assets by means of spending.

I think it helps to think of "the two economies". If MoA causes demand-pull inflation, it causes asset inflation or bubbles or inflation within the financial sector. And it has a trickle-down effect as cost-push inflation at the consumer level.

The Arthurian said...

And from my comment above, a hypothesis arises: MoA is the MoE of the financial sector.

Clonal said...


Remember people using their houses as piggy banks? People taking out second and third mortgages on their houses so that they could get money to spend? Asset bubbles, in particular stock market and real estate bubbles will lead to this kind of behavior. Leads to an explosion of borrowing against assets. Same thing happens with stocks. People take loans against their stock holdings.

Two ways of controlling these two bubbles - the Tobin tax on stock transactions, as well as introducing uncertainty in stock pricing (my idea.) Real estate bubbles can be controlled by having a Land Value tax.

Luke Smith said...


I think the pinnacle moment for borrowing against stock was the Panic of 1907. Investors were trying to corner certain stocks, and they lost brilliantly as the stocks used as collateral fell in price.

Bank lending froze up as a result. JP Morgan corralled variouus prestigous members of the financial community to work on a bailout for Wall Street. Though, it wasn't the first bailout by JP Morgan.

And Art,

I look at JP Morgan's bailouts as a way to preserve the MoA, since afterall, he was the greatest financier of his time.

You make a good point, because it would explain Ben Bernanke's idea that 'deflation is not an option'. Though, I disagree with Bernanke, deflation is perhaps the best option.

Greg said...

"MoA is the MoE of the financial sector."

Yes, but additionally MoA is the means by which the financial sector extracts MoE from the rest of us.

"Hey little boy.... want to get your hands on this shiny new GE stock? Its yours for ONLY 1000$! Itll probably be worth 2000$ next year. Great deal. Decide now or Ill go ask that guy over there."

You know its always occurred to me that the upper10%, those who own over 90% of the MoA priced things really want to sell that stuff to us (the 90%), temporarily, let it fall in value, buy it back and sell it again. They cant really make much exchanging it amongst themselves because they all know better and are vultures.

Making our lives so we dont need those things should be the goal of most of us.