The "standard" definition preferred by political economists (for the obvious reasons) is useless for making accurate predictions. The economic effects of inflation are all due to the changes in the money supply; the changes in prices are an side effect of this and many other factors, not a cause.
You can't just look at the money supply. Let's say that we hold the money supply perfectly constant. Then one dollar becomes worth, not a fixed amount, but a fixed fraction of the economy (assuming velocity remains constant).
For example, let's say that there are 1000 dollars in circulation, and the velocity is 2 - on average, each dollar changes hands twice in a year. So the GDP is $2000.
Ten years pass. We learn to be more efficient. The economy produces 20% more than it did ten years ago. But the GDP is still $2000, because that's how much money there is.
That seems unreasonable to me. If I saved a dollar, why does that dollar give me a claim, not just to what the dollar would have bought when I saved it, but also a claim on a part of all the growth since I saved it?
> The economy produces 20% more than it did ten years ago. But the GDP is still $2000, because that's how much money there is.
More or less, yes. The improved efficiency is reflected in the fact that prices are now 20% lower, so the same GDP buys more goods. I'm not saying that prices shouldn't be considered. Prices are an important economic metric—which is exactly why it's a bad idea to conflate natural price signals with the noise caused by artificial changes in the money supply.
> If I saved a dollar, why does that dollar give me a claim, not just to what the dollar would have bought when I saved it, but also a claim on a part of all the growth since I saved it?
Because the improved efficiency and growth are in part due to the fact you chose to save that dollar, meaning that during that time there were $1 worth of extra goods and services available for other people to invest or consume. You created a surplus and essentially loaned it to everyone else by choosing to consume $1 less than you produced. The drop in prices is the interest on that loan.
Of course, it could go the other way too. If people choose to consume capital rather than invest in the future then the economy could shrink, resulting in rising prices. The general rate of return represented by deflation or inflation (in the absence of interference with the money supply) represents the baseline level of return a venture needs to offer in order to be worth investing in, not just for the individual—who would be looking for the best rate of return in any case—but for the economy as a whole. If you can't find anything better to invest in than the real-valued return you would get from stuffing your money in a mattress and waiting, we're all better off if you do just that and avoid taking resources away from actually beneficial investments. An inflationary economy incentivises people to invest more, but if the inflation is artificial then the result is a lot of malinvestment from people simply looking for a safe haven for their money, even if it's still losing real value over time.
> Because the improved efficiency and growth are in part due to the fact you chose to save that dollar, meaning that during that time there were $1 worth of extra goods and services available for other people to invest or consume. You created a surplus and essentially loaned it to everyone else by choosing to consume $1 less than you produced. The drop in prices is the interest on that loan.
Well, no, the "interest on that loan" is the return on the investment. I lent the money to company A, they bought some tools to improve productivity, and they paid me back part of the increased value they produced. That's my reward for consuming less - I got my $1 back, plus some.
But at the same time, company B borrowed some money from somebody else, and used it to increase productivity. So did companies C through Z. Why should I get rewarded for my loan to A by the gains in productivity made by B through Z?
> Well, no, the "interest on that loan" is the return on the investment.
Exactly as I said. The "return on the investment", for saving money in a deflationary economy, is the increase in the amount of stuff you can buy with that money. Which is exactly what I referred to earlier as the "interest on that loan".
> I lent the money to company A, they bought some tools to improve productivity, and they paid me back part of the increased value they produced. That's my reward for consuming less - I got my $1 back, plus some.
Except you didn't literally loan the money to company A, you (in effect) loaned the value of the money to everyone—including companies B through Z in your example—by temporarily taking it out of circulation. You could have bought $1 worth of stuff for yourself with that money but chose not to, so that stuff was available for others to buy, and their prices were a bit lower since you weren't bidding against them.
Money is just a stand-in for other goods. It's not a consumable end product, an intermediate material, or a capital good which can be used to produce other goods more efficiently. If it helps, think of that $1 in savings as one share of ownership in the entire economy—a claim to a little bit of everything being produced. Or an extremely broad index fund. As the amount of goods being produced changes, the value of your share also changes, the same as any other equity investment. When you eventually trade your share in the economy for an equivalent fraction of the available goods, if your investment in the economy helped it to grow (along with others' investments, of course) then one share's worth of goods will be a bit more than it would have been before you invested.
Do you have an issue with the idea that a person can buy shares of IPO stock in a company, funding the company's growth, and then be rewarded later by selling those shares a higher price? If so, I probably can't help you; otherwise, this is essentially the same thing but for the entire economy rather than one company.
I can sort of twist my mind far enough to see what you're saying about not using the resources leaves those resources available to everyone else. But...
I could have it both ways. I could lend the dollar to A, and get paid back a decade later with interest. Now I have (more than) a dollar after the decade. But that dollar is still worth 1/2000 of the year's output, so I also got paid for everyone else's gains, even when I didn't leave them the resources (because A had the resources, because I lent the dollar to A).
Even within your perspective, I have a hard time seeing how that would be considered just.
> I could have it both ways. I could lend the dollar to A, and get paid back a decade later with interest. Now I have (more than) a dollar after the decade. But that dollar is still worth 1/2000 of the year's output, so I also got paid for everyone else's gains, even when I didn't leave them the resources...
So company A paid you back your original nominal investment, which is already worth more than it was at the start, plus interest, which means that whatever they did produced a better-than-average return for them to be able to afford to repay the loan. You did something even better than just hold your money and wait without interfering—you contributed to raising the average rate of return. Resources (others' savings, as well as your own funds) were put to better use due to your wise choice of investment. Ergo, you get a higher reward than those who just passively waited for the economy to improve.
This whole discussion is missing a major point in my eyes.
Inflationary expectations is a major driver of inflation of prices. If people expect the prices to increase, they will buy earlier. That leads to producers having pricing power, so they tend to increase prices, which leads to... higher prices, and confirms the consumer expectations.
This is also why you can't really use money supply as a measure of inflation. As you note "money is just a stand-in for other goods" - which of course leads to the standard definition of inflation. If money is a stand-in for other goods, then we measure how much of these good money can buy. That's exactly what the standard definition of inflation captures.
> If money is a stand-in for other goods, then we measure how much of these good money can buy. That's exactly what the standard definition of inflation captures.
Which is completely useless if you don't take into account how much money people have to buy things with. What you want is a metric of prices vs. wages, which neither version of inflation takes into account. Money supply inflation would be a better predictor of prices vs. wages, however, since when the money supply is inflated prices tend to rise faster than wages (and vice-versa). Price inflation is a lagging indicator which incorporates a bunch of noise along with the delayed signal, especially when the supply is deliberately manipulated to achieve specific CPI targets.
For an even better predictor, look at money supply vs. actual economic output. If the economy's producing 20% more actual stuff, and the money supply grew 20%, that's not inflation. That's stability.
The standard definition of inflation is a standard for a good reason: it's what effects consumers!
It's been that definition all through the 1970s when inflation was a real problem, so your implications it is that for political reasons is incorrect.
You can keep trying to argue for a different definition, but the OP was clearly trying to hedge against consumer price inflation - otherwise he'd hedge for investment asset inflation by investing in the assets subject to that increases, not a metal like silver which isn't correlated with those increases.
> The standard definition of inflation is a standard for a good reason: it's what effects consumers!
No, what affects consumers is how consumer prices have changed relative to wages. The CPI doesn't tell you that, or really anything else of value. Hypothetically, let's say the CPI indicates that prices are double what they were ten years ago. Is the median consumer better or worse off? Who knows! Maybe wages are the same as they were ten years ago, and everything takes twice as much work to acquire. Maybe wages have tripled in that time and goods seem cheap. Without a fixed money supply, all it really tells you is that someone set a CPI target that resulted in doubling the prices over ten years. In other words, a tautology. Which is a shame, really, since the fluctuations in general price levels would otherwise tell us useful things about how much investment is needed and what the minimum return should be for a venture to be considered worthwhile.
Inflation (as measured by the CPI) measures price changes. Wage indexes measure wage changes.
You want to measure both separately so you can do exactly the kinds of comparisons you want to do above ("Hypothetically, let's say the CPI indicates that prices are double what they were ten years ago. Is the median consumer better or worse off? Who knows! Maybe wages are the same as they were ten years ago, and everything takes twice as much work to acquire. Maybe wages have tripled in that time and goods seem cheap.")
Money supply is measured separately since it affects lots of other things too (eg, the relationship between interest rates and money supply). You have to measure all these things separately because that lets you tease apart the relationships.
Again, if the OP is talking about increases in money supply (which I agree can lead to increases in the speculative assets) then you need to explain how buying silver would protect against those increases (since the silver price is uncorrelated with those speculative increases).
