Greenspan: Deficits are OK

[Drake Tungsten]

Since when does your degree determine your ideology?

How can anyone with a proper understanding of economics be a supporter of communism? I guess you could technically be a communist economics major, but you'd have to be a pretty piss-poor student...

[Imran Siddiqui]

Decent troll, Drake .

[Kontiki]

Originally posted by Ned


Yes. And I think that inflation is or was caused in the 1970's by keeping the federal funds rate at or below the rate of inflation. It took a long time of monetary discipline to get inflation under control.

This is one of the reasons that I think that interest rates, in particular the Federal funds rate, is a primary cause of inflation when this rate is set below the rate of inflation.

Today the Fed conducts open-market operations to set the Federal funds rate, which is remarkably different from what they used to do in the 1970s. Today, monetary policy controls inflation, leaving the issue of stimulus to fiscal policy.

OK, but clearly there's some sort of disconnect when you say this:

the supply of money affects interest rates. Inflation is related to the price of goods and services.

Maybe you should explain the mechanism as you understand it. I'm really not trying to be condecending here - perhaps typing it out will allow you to see how the money supply affects inflation. Just do the basics - don't worry about any historical examples or Japan's current situation.

Also, this is a problem:

If the economy has excess capacity and also has unemployment, demand increases can lead to increased production without inflation. Increasing demand does not always lead to inflation.

That doesn't follow from basic supply/demand theory. Excess capacity simply means that production can be ramped up relatively quickly without major investment in plant. Even if there is excess capacity, an increase in demand will lead to an increase in prices due to profit maximization. There may be some lags, but an increase in demand almost always leads to an increase in prices, regardless of capacity.

A simple example: you and a friend make widgets. Not so long ago, there was a demand for 100 widgets a week for $20 a widget, and you could meet that demand with the equipment you have. But now the economy has weakened and you can only sell 50 widgets a week at $15 a widget. You have the means to make 100, but you only make 50 - so you have excess capacity. Since you only need to make 50, you and your friend only work part time - so you have unemployment (well, really underemployment, but it still works in this example). All of a sudden, demand picks back up to 100 widgets at $20 each. You're still within your capacity, but there has been price inflation. However, if demand picks up even more, then you will need to add to your capacity in order to meet it. The investment in equipment will mean that you need to charge even higher prices (which, luckily, the boom in demand allows for) - this is when inflation really takes off.

Bottom line - inflation is slower with excess capacity, but not non-existant.

[Drake Tungsten]

Decent troll, Drake.

I try my best.

[Ned]

Originally posted by Imran Siddiqui

Debt = money

money = good

debt = good

Let me guess, you have $500,000 in debt to your name in credit cards bills?

If you owe $100k, the banks own you. If you owe $100 million, you own the banks.

[Kidlicious]

Originally posted by Drake Tungsten

Since when does your degree determine your ideology?

How can anyone with a proper understanding of economics be a supporter of communism? I guess you could technically be a communist economics major, but you'd have to be a pretty piss-poor student...

For me one thing was that economists are utilitarian, and I'm not. Understanding someone's point of view doesn't mean you have to agree with them. I earned my degree in economics, I understand it pretty well, and you could say that I understand pretty well that I don't agree with much of what I learned. I'm still happy to have learned it though.

[Kidlicious]

Originally posted by Imran Siddiqui

Since when does your degree determine your ideology?

Just say the joke was funny / unfunny and leave it at that .

If I had said it wasn't funny you would have said I was being bitter.

[Imran Siddiqui]

That isn't the point .

For me one thing was that economists are utilitarian, and I'm not.

Not really.. even though they do refer to maximization of utility, it is more of a 'how things are' type of measure; they also think efficiency is just as important as happiness.

[Kidlicious]

Originally posted by Imran Siddiqui
That isn't the point .

For me one thing was that economists are utilitarian, and I'm not.

Not really.. even though they do refer to maximization of utility, it is more of a 'how things are' type of measure; they also think efficiency is just as important as happiness.

That's part of it, but I was refering to their ethical model. Efficiency doesn't really have anything to do with ethics.

[Imran Siddiqui]

Economists have an ethical model? :hmm:

[Kidlicious]

Originally posted by Imran Siddiqui
Economists have an ethical model? :hmm:

[Imran Siddiqui]

Hehe... which is why I think Commies can be economists... even if they are wrong .

[Kidlicious]

Originally posted by Imran Siddiqui
Hehe... which is why I think Commies can be economists... even if they are wrong .

3/10

[Imran Siddiqui]

It was better than that!

[Kidlicious]

Originally posted by Kontiki
That doesn't follow from basic supply/demand theory. Excess capacity simply means that production can be ramped up relatively quickly without major investment in plant. Even if there is excess capacity, an increase in demand will lead to an increase in prices due to profit maximization. There may be some lags, but an increase in demand almost always leads to an increase in prices, regardless of capacity.

An increase in demand doesn't lead to higher prices when there is excess capacity in the short run. You have to realize that the laws of supply and demand only apply to a situation with full employment. When there is so much excess capacity efficiency lags, because average unit costs go up. Prices are lower when you can stretch your fixed costs over a large volume of production. When you are at full employment you are already operating efficiently and an increase in demand will cause inflation.

Originally posted by Kontiki
A simple example: you and a friend make widgets. Not so long ago, there was a demand for 100 widgets a week for $20 a widget, and you could meet that demand with the equipment you have. But now the economy has weakened and you can only sell 50 widgets a week at $15 a widget. You have the means to make 100, but you only make 50 - so you have excess capacity. Since you only need to make 50, you and your friend only work part time - so you have unemployment (well, really underemployment, but it still works in this example). All of a sudden, demand picks back up to 100 widgets at $20 each. You're still within your capacity, but there has been price inflation. However, if demand picks up even more, then you will need to add to your capacity in order to meet it. The investment in equipment will mean that you need to charge even higher prices (which, luckily, the boom in demand allows for) - this is when inflation really takes off.

This depends on the assumption that you sell widgets for a lower price when there is less demand. In fact, your unit costs are likely to be higher, so you would probably keep the same price.

Originally posted by Kontiki
Bottom line - inflation is slower with excess capacity, but not non-existant.

It probably is nonexistant, or you might get deflation if productivity has improved over the period.