Continued from above. Sorry that it took so long to post this, life intruded and claimed my attention.
Now OPEC raising oil prices and all oil-related prices go up in accordance with that. Our borrower, who was an entrepreneur, finds that he can no longer compete in his business because his production methods were more oil intensive than this competitors. He declares bankruptcy. He still owes $800. The bank gets $100 in settlement from the bankruptcy court. It loses $700. The money supply declines by $700. OPEC's price increase has a deflationary effect on the economy.
Of course, other things are happening as will. Consumers are hit with higher gasoline prices so they withdraw savings to meet expenses, for example. But these effects are all deflationary where deflation is understood as a reduction in the money supply. This is why the conflation of the terms inflation and deflation to mean either changes in the money supply OR increases or decreases in the price level can create a great deal of confusion.
Thus, an oil price shock, as well as a devaluation, is a contractionary event. The reason we do not experience it that way is because the central bank, seeing the rising unemployment and other signs of economic slowdown, acts to reverse the effect. This can take a number of forms. The can lower interest rates. They can loosen lending standards. They can lower the reserve requirement, etc. All of these measures will tend to increase the money supply i.e. they are inflationary measures.
So, where the initial event would produce, what neo-Keynesians claim causes cost-push inflation, actually leads to stagflation. But this stagflation wouldn't produce an overall increase in the price level. You would have selective price increases and selective price decreases. The decrease in wages, however, typically takes the form of higher unemployment. Since, according to Keynesians wages are a "sticky price" actual wages do not respond to deflation quickly. So the statistics do not show wage declines even though the actual money spent on labor has declined. The difference occurs in the form of unemployment.
Now , if this is properly understood, it should be clear that there is no basis for any endogenous increase in the money supply due to price increases. Even if we do see an increase in the CPI due to this "cost-push" inflation, the CPI does not capture the decline in aggregate wages that takes the form of unemployment.
There is nothing in this scenario that would lead to an increase in productivity and therefore to an increase bank deposits. On the contrary, the aggregate effect is heavily biased toward reduced productivity and reduced bank deposits.
Instead, at least in the post-depression world, the money supply grows due to exogenous money creation due to central bank policies although other government agencies can play a part.
This is why I asked you to specify the mechanism by which price increases can lead to an increase in the money supply. You simply responded that it produces endogenous money creation. The above analysis shows that such a scenario is extremely unlikely.
In Milton Friedman's point of view, the Fed should deliberately increase the money supply to smooth these things out. I don't agree with that, bit that is off-topic. Generally, the Fed members, regardless of any previous ideology wind up doing that anyway, but their approach is more seat-of-the pants than it is systematic.
Nevertheless, the end result is exogenous money creation. Price shocks cannot produce endogenous money creation except in the most unusual circumstances if it were possible at all.
Your entire argument is based on your redefining of the word "inflation" from its meaning in the English language and as used in economics.
This leaves you with a very simple logic train and your entire argument is,
If you redefine inflation as an increase in the money supply,
Then inflation is caused by an increase in the money supply.
It is simple but useless. It is circular reasoning, begging the question.
And you have the problem of what to call a general increase in prices and a fall in the purchasing power of money.
You also have redefined the word "devalue" to mean the exact opposite of its English language definition, "reduce or underestimate the worth or importance of." Your meaning in the explanation above is that the devaluation of the currency, the money, is deflationary, that the value of money increases when it is devalued. Under deflation, prices go down and the value of the money increases. You need less money to buy the same products than you did before.
In the real world the devaluation of money is inflationary, not deflationary. When prices go up the value of money is decreased. Because the value of the money has been decreased, you need more money to buy things, that is, inflation.
You can't declare that the devaluation of the money is deflationary and then turn around and say that inflation debases, devalues that money, the two statements contradict each other.
You reach the incorrect conclusion that devaluation of the currency is deflationary through this train of illogic.
Now OPEC raising oil prices and all oil-related prices go up in accordance with that. Our borrower, who was an entrepreneur, finds that he can no longer compete in his business because his production methods were more oil intensive than this competitors. He declares bankruptcy. He still owes $800. The bank gets $100 in settlement from the bankruptcy court. It loses $700. The money supply declines by $700. OPEC's price increase has a deflationary effect on the economy.
Or he could just raise his prices, which is what the vast majority of businesses did.
But let's go with it. Let's assume that he is a especially stupid entrepreneur and the option of raising his prices didn't occur to him and he went bankrupt and deflated on his loans.
No, in the example you listed the money supply decreased by $100, the amount of the loan that was payed back to the bank. When your borrower took out the loan the money supply grew by the $800, value of the loan, the bank credited his account with the $800 creating that money out of thin air. Had he paid back the loan the money supply would have decreased by the $800 plus interest that he paid back to the bank. Since he defaulted on the loan and only $100 was paid back to the bank the money supply was only decreased by the $100. The difference of $700 is still in the money supply and will stay there permanently.
And your whole scenario depends on redefining a word, "deflation" to mean a decrease in the money supply, not a general decrease in prices.
Moving on, yes, if the price of oil goes up and people tighten their belts and don't spend as much on other things and don't demand higher wages to cover the higher prices there wouldn't be any endogenous money creation from the inflation. But there will be inflation because of the price of oil going up, using the English language/economics definition of inflation. But there also will be a decrease in economic activity because consumers will stop buying other goods and services in order to pay for the higher price of oil. This is stagflation, the combination of a stagnate economy and inflation.
If it is your position that inflation is always caused by exogenous money creation, as per your definition of inflation, you must be able to show that the increase in the prices of oil was caused exogenous money creation and not because, say, that OPEC wanted more money for their oil and controlled enough of its supply to be able to get it, just to toss out another possible reason.
And you must also be able to show that any increase in the money supply increases prices. The free market loving, pro-quantity theory of money loving monetarists don't go this far, they admit that an increase in the money supply will only increase prices if the economy is at equilibrium, that is at full employment and full capacity. At any other time they admit that increasing the money supply will stimulate the economy, reducing the unemployment toward the equilibrium level.
What the QToM tells us is that the money supply should grow to accommodate the growth in the economy, and allow for the money that enters or leaves the economy as a result of foreign trade. And to produce a small amount of inflation ever the year to make sure that there is enough money in circulation and to make sure that we don't slip into deflation. That where your and the free market economists that you follow including the Friedman monetarists fail is in assuming that the velocity of money and the number of transactions in the economy are always nearly constant, a necessary requirement for inflation to be caused by the growth in the economy. In the real economy these vary as a function of how people feel about the future direction of the economy.
On the other hand, if your position is that inflation can be caused by an exogenous increases in the money supply among many other reasons, including wage/price spiral, price shocks like the two oil ones, etc., then I would say welcome to the real world. Now we can have a constructive discussion.
Now we have to decide how often each of those reasons occur to produce inflation. How often inflation is caused by exogenous money creation and how often the increase in the money supply is caused by the endogenous creation of money as a symptom of inflation, not the cause of it.
For example, the oil price increase touched nearly every product in the economy. It raised the price of nearly everything, the classic example of cost push inflation. There was no escaping the increased prices. And when consumers did buy things on credit and the corporations borrowed to build or to cover seasonal sales drops and governments issued bonds to build schools, hospitals and roads the credit that all of them used had to be larger, for more money, to cover the inflated costs.
Price increases first, increases in the money supply follows because of the increase in credit and the endogenous creation of money that resulted.
Your QToM requires a
dematical
But as to the original discussion, for the Wiemar Republic hyperinflation, it is pretty clear that the devaluation of the currency because of the need to buy gold from other countries to use to pay reparations, occurred a good six months before the hyperinflation set in, that the sequence was mark devaluation, inflation, then the increase in the money supply occurred. If the increase in the money supply had been the cause of the hyperinflation the sequence would have been reversed, the increase in the money supply, inflation, then the devaluation of the mark. Also, if the expansion of the money supply had caused the hyperinflation then the relief from the reparation payments wouldn't have relieved the hyperinflation and wouldn't have stabilized the rentmark, the sequence that happened.
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