Economics: Why are mainstream views different from reality?

pmaitra

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Dude, you are blinded by the entire current system and it has clouded your arguments.
How is that statement countering post #77? You clearly do not have an answer. Please answer post #77, will you?

I cannot give you a better example for first point. My grandfather could buy 1 kg wheat with 1paisa. Today it costs say 10Rs. The value of 1paisa has gone to zero today in real terms. But I can still afford 1 kg of wheat because my nominal wages have increased more than inflation. (Nominal means level of measurement. For eg 1m and 100cm are equal. Just quoting the length as 100cm does not make it longer.) So everyone cares about real wages and it has risen even though my grandfathers 1 paisa almost means nothing in today's world and fit your graph very well. Tomorrow I can just recall old notes and make 1000Rs in the old system=1Rs in the new system. France did it with Francs sometime back.
What is nominal? Anything that you express in units of currency. So, no matter what the nominal value is, the real value remains the same.

But yes, you are suggesting a solution here. Thank you. At least, something useful is coming out of this discussion.

I told you not to mix hyper-inflation with the argument. If you have read my previous posts on other thread I mentioned creating money out of thin air goes to inflation and I even posted a pdf about it. The point I made above is:
Yes, I agree with what you are saying, but you are not coming clear on post #77 and that graph I posted. Either agree, or disagree.

Suppose you are an entrepreneur and you design XYZ flying suits.
No one flies using XYZ suits today. But you create it and now it is available in the market and it has some demand, but it would not get reflected on the inflation indices atleast for another 10 years. But this is increased productivity and people can use it with all the things they were using before. So, if you do not increase money what will it do?? Either XYZ suit will not see light of the day or some other product would die or nothing would die but consumption of all previous goods together would decline to make XYZ suit successful. Now if you use gold dig in a year to add to the money supply, it would probably avoid the above situations. But using a fiat currency and scientifically determining how much money to print depending on productivity increase looks more appealing to me.
That last sentences was, well, just too much. Scientifically determine? You're kidding me right? This entire system is unscientific. It is like an equation that we cannot balance. Like an irrational number or a power series, which we do not know how to control.

Ok, can you please answer post #77?
 

pmaitra

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Do you have to ask me that? That's a stupid question that I don't have to answer. Who in his right mind likes the stupid hyper inflation in Zimbabwe...? Dude?

No central banker in his right mind will do what was done in Zimbabwe. Zimbabwe's problems are more political than economic. So the solution for Mr. Mugabe is to neutralise his disastrous political decisions not to print more worthless money.
Ok, good, now that you are refusing to answer my question.

I was indeed annoyed that you kept on avoiding my question. I had to corner you. Thank you for your refusal to answer my question. At least, there is some acknowledgment.
 

pmaitra

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After moving posts:
Post #77 is now post #60.
Post #81 is now post #64.
 

Sakal Gharelu Ustad

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How is that statement countering post #77? You clearly do not have an answer. Please answer post #77, will you?


What is nominal? Anything that you express in units of currency. So, no matter what the nominal value is, the real value remains the same.

But yes, you are suggesting a solution here. Thank you. At least, something useful is coming out of this discussion.


Yes, I agree with what you are saying, but you are not coming clear on post #77 and that graph I posted. Either agree, or disagree.


That last sentences was, well, just too much. Scientifically determine? You're kidding me right? This entire system is unscientific. It is like an equation that we cannot balance. Like an irrational number or a power series, which we do not know how to control.

Ok, can you please answer post #77?
I answered post #77 above. You have an inflation but you also have an increase in nominal wage(you must have heard of sixth pay commission). The graph you posted shows nominal value of 1rs held today goes to zero with inflation. And I say, that does not make a difference as long as my nominal wage increase faster than that.

1 Rs today= 1kg wheat(say demand-supply remain const over time, an unlikely scenario but it can be some other thing which say would have the same market conditions)
Say nominal wage w today. So today fraction of my salary spent on wheat = 1/w
Let inflation 10% and wage growth 10%.
Tomorrow, fraction of my salary spent on wheat= 1*1.1/1.1*w = 1/w

So, nothing changes and your graph just like I said before captures only nominal aspect and so is useless.

Scientific determination: You do not have an idea why people came up with a 4% inflation target for US and not any other number. It was exactly because of what I mentioned in the last paragraph above. And you did not comment on the reasoning, just played rhetoric on last sentence.
 

pmaitra

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I answered post #77 above. You have an inflation but you also have an increase in nominal wage(you must have heard of sixth pay commission). The graph you posted shows nominal value of 1rs held today goes to zero with inflation. And I say, that does not make a difference as long as my nominal wage increase faster than that.
Fair enough. I agree with the point you are making here.

1 Rs today= 1kg wheat(say demand-supply remain const over time, an unlikely scenario but it can be some other thing which say would have the same market conditions)
Say nominal wage w today. So today fraction of my salary spent on wheat = 1/w
Let inflation 10% and wage growth 10%.
Tomorrow, fraction of my salary spent on wheat= 1*1.1/1.1*w = 1/w

So, nothing changes and your graph just like I said before captures only nominal aspect and so is useless.
I don't think so. When inflation goes over the roof, you have what you have in Zimbabwe. Going by what you are saying, even if Zimbabwe did not print a lot of currency and pump them into the economy, would their condition be any worse, or better?

Yet, today, they have to carry wads of money to perform even the simplest of transaction like grocery shopping.

Scientific determination: You do not have an idea why people came up with a 4% inflation target for US and not any other number. It was exactly because of what I mentioned in the last paragraph above. And you did not comment on the reasoning, just played rhetoric on last sentence.
Why 4% inflation target? It is like setting a lower decay value that will, rhetorically speaking, only delay apocalypse. If I am wrong, which I could be, I need to see why. Perhaps I do not have an idea; in fact, I really do not. Can you please explain?

And your solution is what? Change the currency like what France did? So that is again proving my point.
 

Sakal Gharelu Ustad

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Fair enough. I agree with the point you are making here.


I don't think so. When inflation goes over the roof, you have what you have in Zimbabwe. Going by what you are saying, even if Zimbabwe did not print a lot of currency and pump them into the economy, would their condition be any worse, or better?

Yet, today, they have to carry wads of money to perform even the simplest of transaction like grocery shopping.


Why 4% inflation target? It is like setting a lower decay value that will, rhetorically speaking, only delay apocalypse. If I am wrong, which I could be, I need to see why. Perhaps I do not have an idea; in fact, I really do not. Can you please explain?

And your solution is what? Change the currency like what France did? So that is again proving my point.
Zimbabwe is a screwed up case and I was putting my arguments for scientifically decided 4% inflation rate and not some 6.5 x 10^18% .

Read some of my above posts above and I said their is productivity gain that is unaccounted for in the inflation indices. Some researches found how much productivity does increase over time to find that unaccounted thing. Now, to keep the economy growing, you print money with 4% inflation target keeping your inflation index in mind. But that is not printing money out of thin air, that is printing money for the unaccounted growth of productivity.

This way the total products and services grow in the market as well as the money supply. France did not have hyper-inflation, they just changed it to make it simple. If India does that after 50 years I do not have a problem, if they do it in next 5 years, then there is definitely a problem(which happened in Zimbabwe).
 

pmaitra

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A sudden influx of gold into the economy will inflate its price and make it less valuable. This acts as a natural deterrent against countries relying excessively on gold, though countries with large gold reserves will still have an "unfair" advantage when it comes to the gold standard.
Let me turn your statement around a bit.

Say there is a sudden discovery of a lot of gold, but no new introduction of paper currency notes or currency units into the economy. So, we have an increased supply of gold vis-à-vis all the currency units. That means, one currency unit can afford more gold than what it could before the discovery of this gold.

So what is the net result?

Interestingly, however, from a historical standpoint the wealthiest countries in terms of gold and silver bullion did not have large natural reserves of the metals, but acquired them through trade. Pre-colonial India is one such example.
Good point.
 

pmaitra

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Zimbabwe is a screwed up case and I was putting my arguments for scientifically decided 4% inflation rate and not some 6.5 x 10^18% .
Yes it is a screwed up case. However, this is also the case with many other countries.

Read some of my above posts above and I said their is productivity gain that is unaccounted for in the inflation indices. Some researches found how much productivity does increase over time to find that unaccounted thing. Now, to keep the economy growing, you print money with 4% inflation target keeping your inflation index in mind. But that is not printing money out of thin air, that is printing money for the unaccounted growth of productivity.
Ok, I will take your word for it in good faith. The 4% inflation rate is based on increased productivity that is not accounted for.

I will ask more questions on this at a later time, but for now, that is a reasonable answer.

This way the total products and services grow in the market as well as the money supply. France did not have hyper-inflation, they just changed it to make it simple. If India does that after 50 years I do not have a problem, if they do it in next 5 years, then there is definitely a problem(which happened in Zimbabwe).
Ok, so I agree with that solution you are providing. Many other countries have done that. France, Germany, etc..

So, that means, at one point, India will issue new Rupee notes, and people will exchange old 100 Rupee notes for new 1 Rupee notes, for example.

Reasonable enough.

So that is how we take care of this uncontrollable exponential decay of currency.

Stop gap method; interesting nonetheless.

Anyway, I will debate on this again on a later day.

Thanks y'all for your participation.
 

Sakal Gharelu Ustad

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Yes it is a screwed up case. However, this is also the case with many other countries.


Ok, I will take your word for it in good faith. The 4% inflation rate is based on increased productivity that is not accounted for.

I will ask more questions on this at a later time, but for now, that is a reasonable answer.


Ok, so I agree with that solution you are providing. Many other countries have done that. France, Germany, etc..

So, that means, at one point, India will issue new Rupee notes, and people will exchange old 100 Rupee notes for new 1 Rupee notes, for example.

Reasonable enough.

So that is how we take care of this uncontrollable exponential decay of currency.

Stop gap method; interesting nonetheless.

Anyway, I will debate on this again on a later day.

Thanks y'all for your participation.
Yeah, finally you agreed after so much of my hard work. That is not really a stop gap method. Japan should do that now, it is such a pain to carry so many coins and notes(although they had deflation for so many years).

I will write about basic use of money and explain how fiat money works better if you know why you need to print it and when to print it.
 
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pmaitra

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Yeah, finally you agreed after so much of my hard work. That is not really a stop gap method. Japan should do that now, it is such a pain to carry so many coins and notes(although they had deflation for so many years).

I will write about basic use of money and explain how fiat money works better if you know why you need to print it and when to print it.
I agree with the solution, which IMO is a stop gap solution. I still do not agree with a currency not backed by something tangible. I prefer stable currency over an inflating one, just to be on the record.

Just clarifying what I agree with and what I don't.

I will come back to see your further posts, but not tonight.

Have a good night!
 

panduranghari

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I have become a fan of your partial analysis. If you dig gold and then print money, how does that make a difference??

The above analysis applies to your system as well.

And I know the next argument that you are going to put now, but I will wait for it before writing the rebuttal.

P.S. I have no interest in abortion talk now. But Ron Paul's abortion debates bring a smile on my face.
Sir,
The difference is gold increases approximately 2% annually while paper can inflates may be over 200%
 

panduranghari

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Well, I would try to be as crisp as possible.

Printing the money also implies, people will have more money in their wallets(and I am not talking of hyper-inflation here). So, if there is a growth in wages say by 1% the real earnings would be stable. No one cares about nominal variables and your above analysis is completely nominal. Learn to differentiate between nominal and real variables and when to invoke the concept of "ceteris paribus".

Now coming back to inflation, there is no perfect measurement of inflation. New services and products are added everyday and they do not get reflected in any of the inflation indices. But productivity has been rising all through this time and one cannot attach the printing of money to something as random as gold dug out in an year. So, even though current printing of money say 4% p.a. might look like being created out of thin air due to use of existing inflation indices, it actually reflects productivity increase in the economy. And I do not stick to the 4% figure just because I quoted it above, it can be revised over time depending on the situations. Hope that helps.

This is how the standard of living has goes up by printing of money whether backed by gold or not else we could not have avoided the deflationary trap.
Could you please elaborate where did you get the 4% figure from? Or how do you come to a %?
 

panduranghari

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This is how the standard of living has goes up by printing of money whether backed by gold or not else we could not have avoided the deflationary trap.
Standard of living has been increasing ever since man learnt how to kindle fire. Standard of living was increasing even when the US had a Gold Standard. This is just baseless argument.
The move away from gold standard allowed the expansion of money supply which permitted the sale of gadgets at a cheaper price. This did contribute to a improved living standards. But not for all the world. select few in the west and east.
 

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panduranghari

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But the more curious aspect of the gold standard is that it unfairly favors countries with huge natural gold deposits... How about countries with no significant natural gold deposits, then they have to buy gold from a gold producing country? So African countries with huge gold deposits can just sit back (and be lazy) as they are automatically zillionaires... Wow...

Moreover, don't think that gold is not subject to speculation. Even now a lot of economists think that the inflated gold price is largely due to speculation.
That is a very poor argument. The gold in the ground is like oil in the desert. Do you begrudge the middle east as well for the oil deposits. They can do what ever they want with their gold. But if gold is going to settle the debts the country which does not produce will see a net outflow of gold.

Why was India known as a golden bird in the yesteryears. Hindustan as it was known then used to produce a lot of things which were wanted all over the world. the settlement of the debt for buying the local indian produce was in gold and silver. it has been recorded in history of multiple empires right from Roman to Greek to Assyrians to Babylonians and even the Incas.

Why is the middle east trying to move away from oil into other things as well|? They know the oil will run out one day and then they have nothing to fall back on.

Your argument is baseless.
 

asianobserve

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Your argument is baseless.

Really? Then why is India and BRICS agitating for an alternative currency to the US Dollar? Why not just revert to the Gold standard since Hindustan has been the "Golden Bird" of yesteryears...? :thumb:
 

panduranghari

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Really? Then why is India and BRICS agitating for an alternative currency to the US Dollar? Why not just revert to the Gold standard since Hindustan has been the "Golden Bird" of yesteryears...? :thumb:
We do not need a gold standard. Gold standard will not allow the convenience of monetary expansion.


The new global currency will be EURO. You heard it here first. I know what people say about Euro. But I have to say if you do your research and due dilligence you will know what Euro is all about.

Also for those who want gold standard- my question is this- do you not trust the free market?

to those who do not understand Euro-

http://defenceforumindia.com/forum/europe-russia/31888-european-debt-crisis-posture.html#post424875

Don't believe all the noise, and there's a tonne of it right now. They don't know what they are talking about. The euro survives and thrives regardless of how the European debt crisis is ultimately resolved, and no countries will leave the euro. In fact, there are countries trying to get in, and none that will leave short of a coup, revolution or state failure, which isn't even a consideration right now. And even if that happens, the euro will still survive and thrive while the country that leaves will suffer greatly, the local hyperinflation that will ensue being the least of their problems.

Spend some quality time with the Eurosystem's balance of payments and marvel at how remarkably balanced Europe is with the rest of the world. Then compare that with the US (AND UK) balance of payments. As just a quick example, in April (one month) the Eurozone imported only €4.1 billion more goods than it exported. The US, on the other hand, imported $58 billion more goods than it exported, and April was the lowest month yet this year for the US. Of course that's just goods. For services, the US exported $14.5 billion more services than it imported. How much of that do you think was "Wall Street financial services"? Europe also exported more services than it imported, but only €2.8 billion.

So for goods and services combined, the Eurosystem ran a trade deficit of €1.3 billion in April, while the US ran only a $43.5 billion deficit (down from its previous normal $50 billion, but back up in May). Looking back at 2010 (just to get a full year's picture) the US ran a $500 billion goods and services deficit for the year. The Eurosystem (even with those lazy PIIGS) actually ran a trade surplus for the year, exporting more goods and services than it took in! So how can that be? As a currency representing a community of more than 300 million people, the euro is quite healthy compared to the dollar!

Of course there is a huge imbalance inside Europe between the states running a large surplus and those running a large deficit. But with a shared currency the adjustment pressure for such an imbalance is foisted elsewhere, not on the currency. It lands squarely on the politicians, who couldn't be a more deserving bunch of Aholes. For the dollar, the structural deficit and debt of the US places a massive devaluation pressure directly on the dollar. But for Europe the currency is balanced with no (or very little) adjustment pressure.

The economic flow of goods and services within Europe will of course have to contract as the imbalance retreats. If the euro weakens on the global currency stage Europe will start running an overall trade surplus again, like China, which will soften the blow of a contracting internal economy. If the euro strengthens, things like cheaper oil will help soften the contraction. Internally the politicians have their hands full. No doubt! Externally, the euro is just fine. To the euro the politics of the PIIGS and Germany are little more than a sideshow.

And notice I didn't even mention gold yet. Anything that would appear to seriously threatens the euro, like an outright sovereign debt default, would explode the price of gold which would simultaneously rescue the euro balance sheet and kill the dollar.
 
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asianobserve

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We do not need a gold standard. Gold standard will not allow the convenience of monetary expansion.


The new global currency will be EURO. You heard it here first. I know what people say about Euro. But I have to say if you do your research and due dilligence you will know what Euro is all about.

Also for those who want gold standard- my question is this- do you not trust the free market?

to those who do not understand Euro-

http://defenceforumindia.com/forum/europe-russia/31888-european-debt-crisis-posture.html#post424875

Euro? Oh you're a funny man. :pound:
 
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panduranghari

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Oil is only valuable because it is an essential industrial ingredient, and industries give us all that we need and want. What does gold do? It's practically just a lump of metal with not much industrial value. The value of gold is purely speculative... it only exist in the minds of speculators (like how monetary values exist in the minds of central bankers...)?
Exactly Gold has the only function you talk about- it acts like a store of value.

It does not do anything.

Gold is the only commodity in which oil can hide in.
 

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