From: rja@redwood26.cray.com (Russ Anderson)
Subject: Re: Inflation and Carter?
Originator: rja@redwood26
Organization: The 1991 World Champion Minnesota Twins!
Date: 26 Aug 92 09:44:03 CDT


In article <81258@bcsaic.boeing.com>, rwojcik@atc.boeing.com (Richard Wojcik,snake) writes:
> In article lmB@engin.umich.edu, jwh@citi.umich.edu (Jim Howe) writes:
> >In article <80861@bcsaic.boeing.com>, rwojcik@atc.boeing.com (Richard Wojcik,snake) writes:
> >|> OK, I'll bite.  Why would anyone reject the idea that the more than double
> >|> rise in gasoline (& don't forget other oil products) caused inflation?
> >
> >You are confusing cause and effect.  Inflation is not caused by a rise
> >in prices, higher prices are the result of inflation.  Inflation is caused
> >by an increase in the supply of money...
> 
> I don't want to split hairs with you (although I have this queasy feeling that
> splitting hairs is what these debates usually devolve into).  One definition of
> inflation is an "an increase in the amount of money and credit in relation
> to the supply of goods and services".  Another, perhaps more general
> view, is that it is an "increase in the general price level...causing a decline
> in purchasing power".  Both quotes are excerpted from my Webster's New World
> Dictionary, 3rd College Edition. 
> 
> Please bear in mind that the inflationary period did not happen because Jimmy 
> Carter one day sat down an mumbled, "Let's increase the money supply and see
> what happens."

It was more along the lines of the Fed saying "We have to get the economy
going, lets push down interest rates" where the mechanism to push down
(short term) interest rates was the Fed buying Gov debt (increasing the 
money supply.

The two main period of such behavior are 1970-73 (Alan Burns under Nixon)
and 1977-79 (G. William Miller under Carter).  Note that both *preceeded* 
the oil price increases.

>                It happened because a consortium of foreign nations, who controlled
> the supply of oil, decided to hike prices artificially.

It should be noted that, in both oil "crisis"s (1973 & 1979), US inflation was
increasing *before* the oil supply was interupted.  This means the real (inflation
adjusted) price of oil had been going *down* when OPEC moved to increase the 
(nominal) price.

>                                                         Given the broad impact of
> oil on the cost of things in our society, that caused a rise in prices and set
> off inflationary pressures in the economy.

Look at it this way.  You have a fixed amount of money and the price of
something you buy (say gas) goes up.  Your choices are to either a) buy
less gas, b) buy fewer other good, or c) some of both.  Producers will 
try to pass their (oil) cost increases to consumers, but if consumers 
have a fixed money supply, they cannot buy everything at the new higher 
prices.  The result would be a recession (representing the shift in wealth
out of the US) but not inflation.

>                                             Monetary policy did not *cause* the
> inflation, although it came to be seen as a tool to control inflation.  Bear in
> mind that the US was not the only nation to suffer inflation during that period,
> and it was most certainly not US monetary policy that caused inflation in other 
> countries.  It is really you who is confusing cause and effect.  BTW, the cure
> for inflation was as much political as economic.  The collapse of OPEC, not US
> monetary policy, had much to do with bringing down inflation on an international
> scale.

The collape of OPEC was due to setting the price of oil too high.  At the 
higher price it was economicly viable to drill/pump higher cost oil (ie
North Sea crude) which increased the supply (and reduced OPECs share of the
world oil production).  Saudi Arabia, the lowest cost oil producer (which
had been reducing its supply to keep the price up), realized that the best
way to maximize their income was to set their price *below* the cost of
many other oil producers (North Sea, TX) driving out some of their competition.
They have to keep their price *below* the production cost of other sources
to continue to maximize their income.

-- 
Russ Anderson    |  Disclaimer: Any statements are my own and do not reflect
------------------              upon my employer or anyone else.  (c) 1992
EX-Twins' Jack Morris, 10 innings pitched, 0 runs (World Series MVP!)
Newsgroups: talk.politics.misc