From: jwh@citi.umich.edu (Jim Howe)
Subject: Re: Inflation and Carter?
Date: Wed, 26 Aug 92 10:46:26 EDT
Organization: IFS Project, University of Michigan
Reply-To: jwh@citi.umich.edu

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. 

The problem with the second definition is it doesn't explain why
the price level changed.  It is well established that increasing the
money supply will result in an increase in the price level, unless
goods and services are increased to match.  This is acknowledged by
Keynesians, Monetarists, and Austrians.  Inflation is *not* caused
by people arbitrarily deciding to increase prices.  If you have
a fixed money supply, an increase in prices in one area will
result in a decrease somewhere else.  It's not possible for all
prices to rise because you have a fixed amount of money.  Think
of it this way, if you have $100 and you use it to purchase gas,
and food, if the price of gas increases and you don't adjust the
amount you purchase, you will have to reduce the amount of food
that you purchase.  In other words, your demand for food will
decrease.  Alternatively you could reduce your gas expenditures
and keep your food expenditures constant.  This results in a
lower demand for gas.  Lower demand, lower prices.

|> 
|> 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."  

No, inflation was caused because of budget deficits and a Fed who
monetized them.  While Carter did not have direct control over
the Fed, he could have vetoed unbalanced budgets and pressured the
Fed to tighten money.

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

What it most likely did was create a 'tight' money situation which would
have put upward pressure on interest rates.  Pumping money into the
economy would help keep rates lower but would also fuel inflation.
To reiterate, inflation is caused by an increase in the supply of money
in excess of an increase in goods and services.  Without the increase
in money, there wouldn't be inflation.  The oil price shock certainly
put pressure on the US to inflate its currence but the price rises
themselves were not the cause.

|> 
|> [...].  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.

Other countries are also capable of increasing the supply of their
own currencies.  I don't have the data but I would bet that if
you examined the money supplies in those countries you would see
that they were also increasing.

|> It is really you who is confusing cause and effect.  

I don't think so.

|> 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.
|> 

First of all, the collapse of OPEC was very much an economic event.
Cartels are not self-sustaining.  Second, the collapse of OPEC may
have made it easier to have a tight money policy, but it was the
tight money policy that brought inflation down, not lower OPEC
prices.


James W. Howe                  internet: jwh@citi.umich.edu
University of Michigan             uucp: uunet!mailrus!citi.umich.edu!jwh
Ann Arbor, MI   48103-4943         
Newsgroups: talk.politics.misc