Thursday, July 20, 2006

Another inflation number

Recall from the last post that the Austrian school of economists says that inflation isn't the change in price, it's the change in money supply. Now I'm a bit confused as to what is considered money in their school, so I looked at it in two fashions.

First, I looked at the M3 rate - which is no longer reported as of March of this year. However, for as long as it lasted the number's been pretty clear. 9 to 10 percent inflation annually - a 9 to 10% increase in M3 every year - for the past 20 years.

But it's my opinion that some things not measured are also money. For example, loans and derivatives of loans outstanding. Off to the treasury - office of the comptroller ( for information.

During the Clinton reign, the total Austrian inflation was 6-7% except for 1998 (almost 10%) and 1999 (just under 9%), with 2000 going back to 6.7%. Under president Bush the rate's been 8 to 9%.

Let me be upfront - I could be double-pulling numbers. In other words, numbers in M3 may show up in the other values as well. And for that matter, I know the austrian argument would be that outstanding debt may be related to velocity (frequency a dollar is used) instead of supply. However, it's my opinion that such a loan is a creation of money instead of a recycling of it - it's the paying off of the debt that starts the recycle chain.

Regardless, it's pretty obvious that by Austrian definitions, inflation has been just under 10% for quite some time - a lot less than the official government rate of ~3%. (Of course, that's massaged too, but that's another post.)

Now, IMO there can be good reasons for money supply to increase. Let's start with 1000 people producing 1 good apiece and a money supply of 10,000. Nominally, everything costs 10 units. Now if the population increases to 2,000, each still producing 1 good apiece, we have two choices. We can deflate the prices to 5 units each by keeping money supply constant, or we can inflate the money supply to 20,000 and keep prices constant. Each has benefits depending on circumstances not considered. All else being equal I prefer a constant in prices, so I consider it a 'good reason' to inflate the money supply.

But our population isn't increasing at 10% per year, so the increase in money supply is... wrong.


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