Inflation, Deflation & Capacity Utilization

[IBMua]

9:00 Rolls Roys costs more. ;)

[QCREIGN]

17 people are ignorant

[submissivegirl12]

thank you!

[g7bgko]

Its difficult to realize, but you have to overcome the belief (which i see most commentors here have) that inflation is only dependant on money supply. It is nicely illustrated in this video that velocity of money is just as infuential in determining inflation as money supply. Inflation is simply the general price level of goods and services, and contrary to what commentors have insinuated, the information in this video is not misleading.

[rotateddisk]

your a wanker ok - as most of us humans think that - how does the normal person raise prices? Most of us dont have businesses. You're still fukked because most people dont have what you have on your example. Most people work hard so what the fukk do we do, dumb ass.

[midtra52]

This video is very wrong. Inflation is an increase in the money supply. An increase in demand on a lemonade stand does put pressure on the stand to raise prices, but if they do a competitor can increase their supply and take a greater market share. The increase in demand can and is a result of the increase in money supply. More dollars are chasing fewer goods! So this video is incorrect. The narrator doesn't even know what inflation is.

[juliusreea]

i kind of green in economics, but if some1 could guide me in money supply increase in us i would be very thankful. to my understanding the money supply increase in us is caused by china's immense purchase of us treasury bills(cause of excess dollar accumulation in their central bank), so lowering interest rate and increasing borrowing? am i correct?

[midtra52]

@juliusreea Money supply increase in the U.S. is caused by the only group that can print money without any repercussion and that's the Federal Reserve. China buying out treasuries allows them to keep the exchange rate fixed between the U.S. and China. China is also printing more money to buy our reserve notes. Always remember inflation is an increase in the money supply. Inflation only exists in a society where an organization is allowed to counterfeit fiat currency.

[juliusreea]

@midtra52 alright thanks, but what about capacity utilization, the logic and correlation between inflation and capacity utilization seems like its reasonable cause.

[midtra52]

@juliusreea He is talking about capacity utilization within one company. A company can choose to raise their capacity and serve more customers or raise their price. If they raise their price a competitor can increase their capacity to absorb new customers. BUT what causes any company to reach their cap. util. is demand and increasing currency suppy puts more demand on a good or service.

[midtra52]

@juliusreea For instance, pretty much everyone likes gold. So if you print more currency you have more dollars chasing gold which is still just as valuable as it was before, but now you have more demand for it because everyone has more money, that pushes up the price of gold in dollars (devaluing the dollar). The supply of gold in the world is relatively fixed so we're essentially already at max capacity. So the only thing to increase the price would be demand coming from dollars printed.

[juliusreea]

@midtra52 ye it sounds reasonable, however i just got one off-topic question. my first impression that this whole system is like game of monopoly, except you just can print as many paper money as you want, and buy as much stuff as you want. but whats the underlying value created of these printed money and for how long and what scale you can print that money? something doesn't add up and it just bugs my mind:)

[midtra52]

@juliusreea Well you're right about your analogy. The Fed can print as much as it wants, but that is inflation and creates rising prices. So everyone else that can't print money, like you and me, we are being stolen from. The reason is the dollar goes down in value. We have our personal savings and if the Fed doubles the money supply then food and gas will cost twice what it used to, yet we still have the same amount of savings so we can only buy half of what we used to.

[lugankid]

@midtra52

taking from this simplified version, you would also owe half as much as well. Most people have a lot more debt than savings

[midtra52]

@juliusreea The reason it seems that it doesn't add up and it bothers you is probably because it is a corrupt system. The Fed and bankers can rob everyone else by printing new money while the rest of us watch the value of our hard work and savings plummet. The value of the dollar has lost 98% of it's value since the Fed was formed. So 98% of your grandmas savings from 1913 has been wiped out today. So the more the Fed prints the more it dilutes each and every dollars purchasing power.

[juliusreea]

@midtra52 yep thats a good point

[lugankid]

@midtra52 98% of gramdmas' mattress account has lost its value. But then again if its hard currency, the antique value of it has gone up. So no your wrong

[midtra52]

@lugankid I'm not talking about hard currency and neither is the video. We're talking about fiat currency. And an actual hard currencies value doesn't go up, it stays the same, just the value of the fiat currency drops due to dilution from printing and in fait dollar terms it looks like the hard currency is up.And the point is that irresponsible banks have a huge amount of debt so we're rewarding them by printing money while we punish the responsible banks that hold a higher level of assets.

[lugankid]

@midtra52 Well Grandma's savings would not wither away if they were in a interest earning bank account. The interest would adjust with inflation in most savings. The hard currency would lose half its value (purchasing power). The fed provides liquidation when the banks need it (2008). And then they can decrease the money supply as well afterwards once the banks are solid again. The banks did a crap job, but its better than the alternative of not bailing them out.

[midtra52]

@lugankid Except that the Fed never decreases the money supply. It's been in existence for almost 100 years now and we've had inflation the entire time. We would need 100 years of deflation to get back all the money the Fed has stolen from us. And you can't assume a savings account gives you more interest than the inflation rate. Right now true inflation is around 9% when it's calculated honestly. The most you can get out of a savings account is 1.5% and that's pushing it.

[wadams19]

@khanacademy

what is measured as utilization in a service economy?

[Orygyn]

"In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time." - Wikipedia

*looks at the number of thumbs up bullshit alternate definitions are getting and facepalms*

It's depressing when on an educational video where people are vulnerable to being deceived by false information, people who know nothing about the subject or have a political agenda say that the video is wrong instead of themselves.

[midtra52]

@Orygyn That's wikipedia. Anyone can write whatever they want there and special interest groups moderate pages relevant to their cause. Get a real economics textbook written by an actual economist and you will see the actual definition of inflation. Or simply use common sense. What causes an increase in prices? If you print mountains of money so that everyone had loads of dollars will an apple still cost what it does today? Of course not.

[Leobons]

Ill quote Henry Hazlitt's What You Should Know About Inflation: "The word 'inflation' originally applied solely to the quantity of money. It meant that the volume of money was inflated, blown up, overextended. It is not mere pedantry to insist that the word should be used only in its original meaning. To use it to mean 'a rise in prices' is to deflect attention away from the real cause of inflation and the real cure for it"

Please remove the video its a disservice if u want to educate the world

[exemsexis]

Love the Island example, very entertaining :)

[Sexisttroll]

damn! THANKS SAL! I JUST GOOGLED AGENT ORANGE! (sarcasm)

...now I won''t eat for about a week... and I'm still puking...

...the class was good though...

[pdeg001]

For a good debate look up: "Peter Schiff Robert Prechter debate"

[mateo3470]

I would consult the following articles by Caroline Baum at Bloomberg:

"Greenspan Forgets Where He Put His Asset Bubble"

"Inflation Doves Put Faith in Output-Gap Religion"

By the way, the macro aggregations are completely useless. An economy will not go back to inflationary conditions overnight, because we are suffering the consequences from the past bout of inflation created by means of arguments just like yours.

[alonelychild]

Now I beg your pardon for dreadful English, I am an economics undergrad student from Brazil

[alonelychild]

But if take inflation solily on your basis, I agree with you. Now, the reason why America hasn´t seen inflation since 1983 is due to the imports from Asia and Europe. Imports crowded out and off good wage jobs in the industrial sector, the one who is capable with leveling up all wages, not only the qualified jobs ones. And it is because of the imports that capacity in America hasn´t grown, therefore creating new sustainable demand. Instead, you had credit-debt based bubbles

[alonelychild]

I disagree on the concept of inflation. Bytes of fiat money can be endless, while economical goods are by the definition limited, otherwise they wouldn't have value and be tradeable. In my opinion inflation should be measured by a constant avaiable good. Since history has crown gold, for me the real inflation is when gold becomes expensive. Even if the manufactured goods do not rise up firstly, the makers will eventually realize the loss of purchasing power in solid asset, they would hike prices

[narutofan1108]

Keynesianism < Austrian School

[dalcde]

"Have you ever taken the time to look up the word "inflation" in a dictionary?" "Inflation - The rate at which the general level of prices for goods and services is rising" "I don't care what the dictionary says I care what stuff really is. Dictionary said Earth was in the center of the universe for centuries." The last statement is totally ridiculous. The Earth being the center of the universe is the nature of the universe, (to be continued)

[dalcde]

@dalcde The Earth being the center of the universe is the nature of the universe, which you cannot change. Inflation is human-defined and the current definition is the general level of prices for goods and services is rising. It was previously defined as the amount of money in cirulation as you have said, but the definition has already changed. I have got this all from wikipedia, and if it is wrong, an economic professor would have changed it years ago.

[ScottcNehrer]

The main deficiency of the velocity of circulation concept is that it does not start from the actions of individuals but looks at the problem from the angle of the whole economic system. This concept in itself is a vicious mode of approaching the problem of prices and purchasing power. It is assumed that, other things being equal, prices must change in proportion to the changes occurring in the total supply of money available. This is not true.

[nagasako7]

She's the ho.

But srsly I like your style of teaching econ. It's not like physics, though some pretend it to be. This pragmatic approach to human confidence in money supply/cap is more academically honest.

[johnje82]

You guys are spending time and effort on semantics. I suggest the meaning of "inflation" has changed (in common parlance) to mean CPI rather than Money Supply these days. It's a lost battle on the words, so just use others. Clearly the expansion of the Money Supply will cause CPI inflation when velocity returns.

[MrVxtay]

great

[chaseef]

If there is a wheat shortage and the price of bread doubles, is that inflation or is that supply and demand?

The creation and destruction of money/credit is something totally different and should be looked at separately, IMO.

[johnje82]

@chaseef Depends what caused the wheat shortage, doesn't it?

[chaseef]

I dont understand why economics doesnt distinguish between money/credit creation and normal supply and demand when defining 'inflation'.

It makes things so muddied and unnecessarily complex.

These are great videos. But they are just explaining a mechanism by which supply and demand act on the price level, not inflation.

[ubud167]

Thank you for all the wonderful Youtubes. You have forgotten more things than most people know. These Videos prompt one to think...just great . Great Job !

[maldojr88]

A question that I'm trying to answer as well is how do taxes relate to inflation. Due to the rising deficit and national debt, I think it is something that MUST be looked at in order to address inflation for the future.

So is there a correlation between higher taxes and inflation because if you think about it if I get taxed more on my company, I will probably have to increase prices to make profits ... this would be good if explained

Thanks for the videos!!

[sirvolders]

@CaronteEmpire What a negative attitude! maybe you should go back to school to learn how to be polite. Inflation is in fact caused by 2 causes: Overcapacity and increasing of costs. The high capacity could be used to export more to the new markets, like the former USSR. More ways to sell products, will not lead to increase prices.

[christo930]

First of all, most of what I said agrees with your other comment, second, you don't have to be a dick.

[TheMetalPerson]

Deflation is not decreasing prices. Decreasing prices usually result from an improvement in efficiency through technology.

This is usually followed by a period of high prosperity as the cost of living goes down and standards of living go up.

Deflation happens when money is extinguished through people paying off their loans and/or defaulting.

[nagdude]

100% purebred bullshit!

So Zimbabwe has consistently high utilization in their economy leading to hyper inflation.

[glassvision]

Pure deception.

[ulysseinvest]

khanacademy,

You usually have excellent videos but this one was my first deception...

Inflation and/or deflation only refers to the increase or decrease of the money supply. Price fluctuations are merely a result of inflation/deflation. Price can fluctuate without any inflation/deflation of the money supply (increased need for a product, scarcity in ingredients, or product runs obsolete, etc). Inflation of the money supply is the most insidious way to redistribute "wealth" stored in dollars.

[jahege]

@ulysseinvest You don't know what you are talking about, sorry to say. Money supply is just one factor determining inflation. To put it short: dollars squirreled away don't have much to say for inflation, dollars at work do. A practical example, the billions of dollars the Chinese save have little to say for inflation as long as they are not spent.

[ulysseinvest]

@jahege

Like I said (those who understand pardon my repeating) Inflation and price Increase are two totally different things. The billions of dollars the Chinese save ARE THE inflation. It was the increase of the US money supply which diluted the currency (US storage of wealth) the dollar paper represents. The inflation in the money supply does NOT impact any good/service price index until it's spent. I think you confuse the I in CPI for "inflation" when it actually refers to Index.

[jahege]

@ulysseinvest Have you ever taken the time to look up the word "inflation" in a dictionary? CPI is a way to messure inflation, while the actual inflation is hard to get at since the goods and services sold vary so much over time. Economics is a field with a lot of pseudoscience, and you should be aware of this.

[ulysseinvest]

@jahege

If you decide to take the red pill, you stay in Wonderland and I can show you how deep the rabbit-hole goes. Welcome to the fallacy of our century - that with the CPI we can compute the degree of inflation of a currency. M0 is increasing at great speed but prices are not moving (decreasing?). Prices will start moving in xx months when M2 picks up. At which point they'll just raise rates up to yy% to bring back in the excess of money supply. Let me know what your dictionary thinks.

[jahege]

@ulysseinvest Where did the question of inflation and CPI go? Honestly, do you really think YOU who did not have a correct knowledge of CPI and inflation as economical factors have all that much to tell the world about economics? Do you allways start to talk about "the evil government conspiracy" when you loose a discussion ?

[ulysseinvest]

@jahege

I don't understand the meaning of your question - and I don't think you do either. Good luck with all your upcoming plans and future investments.

[jahege]

@ulysseinvest I know how to use a dictionary. Investopedia:"CPI is one of the most frequently used statistics for identifying periods of inflation or deflation...", "Inflation - The rate at which the general level of prices for goods and services is rising". Oh, and don't trust this dictionary I found in a minute, find other dictionaries and look up the definition of Inflation and CPI.

[ulysseinvest]

@jahege,

I don't care what the dictionary says I care what stuff really is. Dictionary said Earth was in the center of the universe for centuries. First, CPI merely attempts to portray the extended effect of M2+ on prices, thus M0 can increase (inflation) while prices decrease (like we have today). Second, the calculus of the CPI is loaded with hedonics etc so I can recommend trusting this number even if you feel like using it. You need to learn how to use your head more than your dictionary.

[ulysseinvest]

@jahege

Last message: by the time most will wake up to reality, we will have all witnessed the greatest wealth transfer of all times (in man's history) due to this whole CPI number that Soros and others want you and others to drink while thinking you're computing "inflation"... In the meantime Soros and Goldman Sachs will be buying gold and selling their toxic assets to you (mainly through your central bank). At least with the Earth in the middle of the universe we didn't steal from the poor.

[ulysseinvest]

@jahege,

You are (just like many) confusing the word "inflation" with the "i" in "CPI" which stands for Index. Inflation IS an increase in the money supply. Period. It's not "one" factor - it's the "ONLY" factor and it's the DEFINITION of inflation. An increase in consumer prices (or an index of prices) is regarded as a potential way to measure "inflation" but the faster you figure this great mathematical fallacy, the less money you will loose.

Good luck with all of your future investments.

[christo930]

Rising prices is not inflation. When a product starts going up in price, it usually creates an incentive for others to start producing that product and it causes prices to drop. When prices start dropping, people stop producing which creates shortages and prices go up. Sometimes, increases in productivity can cause prices to permanently come down (like computers and cell phones). An increase in the money supply WILL cause inflation, because it is inflation. This money will eventually be spent.

[bobbobmarley27]

@christo930 theoretically ur ryt...but in reality, economically speaking i mean I am talking of MARKET Activity...as Commodity (like crude,Gold,natural gas etc.) rises this would affect also to the product that we are buying...

Therefore, rising Prices means there is inflation.

[christo930]

You can blame a flood on the water going over the levy, but why did the water go over the levy in the first place?

Not all rising prices are caused by an increase in the money supply, for example, Oil is going up because of supply constraint and increased production costs because of fields being more and more inaccessible?

[bobbobmarley27]

@christo930 I agree with what uve said but the reality is there are an investor or trader in the market who love to hear and love see the oil prices gets higher and higher...now u ask me why?beuse this is the only they can earn their money...You cannot understand here of what I am saying here unless u are in a stock trader. In a market arena, inflation,deflation, recession , Govt intervention , and US FED intervention is a part of economic activity.

[christo930]

Even as an investor or trader, oil going up and up isn't a good thing. Oil is the most important comnodity in the world and will effect the prices of EVERYTHING. I would also expect smaller margins because the price is going up because the cost is going up (as well as supply constraints. So your cost of living will go up with the price of oil.

[high5flyer]

If capacity utilization drives inflation, then what drives capacity utilization? Is it the artificial rates set by the FED?

[jgposner]

I think demand drives capacity utilization. I think ultimately confidence drives demand. The problem with the Fed is the artificial rates stimulate the economy too far. People see their home values increase, their stock portfolios increase, but that wealth is just an illusion. But because they feel wealthy they spend against that wealth and of course, reality sets in as the market crashes.

[jpongin]

I think you should come out with your own Kahn Economic board game to compete against Monopoly. I'd buy it.

[jgposner]

Cool idea. I bet he could come up with some sort of game to teach these princples.

[debtfreecurrency]

there is less money left for "capacity" utilization or production The ever increasing debt service on unissued interest is the true cause of price inflation. As more money, debt, is lent into existence the system will reach a limit where debt service on the interest alone will be greater than the total money supply and the system must collapse.

[debtfreecurrency]

Why, why why does everyone keep saying the government is "printing money" The government is not printing money. Money comes into existence in the federal reserve system as a bookkeeping entry by private banks for the issuance of debt(loans). All money(except coins) is BANK CREDIT. The volume of debt will always exceed the volume of money in circulation because the interest on the debt is never issued into circulation. As an ever increasing % of the money supply is subsumed by debt service

cont.

[dodanimal]

The methods for measuring inflation have changed over time, to hide the governments money printing and to reduce expectations of inflation. Expectation of inflation actually causes inflation, so in an effort to keep inflation low, the government lies about the inflation data.

The government has an interest in keeping inflation officially low, but in reality high.

So I think that the graph of inflation is misleading. Inflation was actually much higher in the 80s and 90s.

[netmasta10bt]

This is discussing price inflation not monetary inflation.

[norpsta]

inflation is really deceasing purchasing power ....

[siggyboss]

I think the expressed demand theory is bunk. First, an insignificant percentage of any population will receive money and not spend it. Second, these individuals who don't spend the money will likely deposit it in a bank, which lend it out at a multiple depending on reserve requirements. Only an individual who buries the money in the backyard wont express his demand, and that's negligible in a world of FDIC-insured banks.

[peerLAN]

Yet you didn't mentioned anything about the inflation tax on savers when you increase money supply. If people lose confidence in saving money in dollars, the dollar will go down because people will exchange it for something else.

[BachGuitar3]

I under inflation related to capacity and velocity, but doesnt pumping more money into the system affect the long run. The value of the dollar since the

1930s has done down because the US removed the Gold Standard, the increase in money supply, and the factors mentioned in this video.

[BachGuitar3]

Great Video.

[lmcdowall]

Thanks for the great video Sal !

[Y3rMawm]

Stella is correct. Classic dictionary definition: inflation = increase in money supply.

The "increase in prices" definition, developed as a tactic to divert attention away from the Keynesians central bankers as the real cause via the printing press.

You are correct that money has to enter the economy. Japan did not have inflation because of the carry trade. We shall soon see if we can pull that off in the context of Stimuli to the Obamabots

[CreepNarrator]

oops. seems like you two didn't pass high school economics.

[Y3rMawm]

A) sorry for the 2x posts.

B) I take that as a compliment give who wrote those HS Econ books

[JordanViray]

Y3rMawm, nowadays inflation is defined as a general increase in prices (an effect) of which an increase in money supply is a cause (the main one).

Historically though, inflation was defined by that increase in money supply. The historical definition is probably better but there's nothing wrong with the modern one so long as you understand exactly what it means.

[Y3rMawm]

Agree. However, are we changing the rules as we go, so we get better answers?

Not unlike the "Living Breathing Constitution"? Perhaps so.

[stellaconcepts]

Your premise for this video is actually incorrect. Inflation is increase in the money supply. As a result, prices increase to soak the surplus supply. When a currency is over printed, or no longer demand, the supply of them increases and prices increase as there is less demand and buying power for the currency.

This video only explains why a company many increase or decrease their prices... which has nothing to do with inflation/deflation (economically speaking)

[stellaconcepts]

*many increase = may increase

[khanacademy]

Inflation is the general rise in price of goods and services. One can increase the money supply and still not have inflation if the velocity of money slows (as happened during the Great Depression and during Japan's lost decade)

[JordanViray]

Speaking of which, do you think that Geithner's bank subsidy will result in the phenomenon of zombie banks that resulted from that lost decade? The Obama stimulus package seems similar as well to the massive infrastructure spending in Japan which hasn't helped them. They are at 200% debt to GDP and it's hard to find a solution. Your take?

[DavidAKZ]

It appear to me, Ben and Tim are determined to 'protect' the finacial system at the expense of the economy where goods and services are exchange, the extent to which printing increasingly worthless sea shells destroys any value they one had relative to a basket of goods and serializes

[DavidAKZ]

yes, like dropping sea shells on the island via helicopter (Ben). So would say in an increasing debt laden economy no amount of velocity would reflate the economy ?

[Y3rMawm]

Technically Stella is correct on the definition. This was changed in recent years to hide the root cause of price increases.

Price inflation is a result, not a root cause. Japan did not suffer tremendous inflation because A) they produce stuff. B) Carry trade.

[JordanViray]

Japan, in fact, underwent deflation. Probably the deflation was more due to the collapse of the 80s real estate bubble and its effects coupled with the good deflation from increased productivity effects from an emerging China.

[ulysseinvest]

@khanacademy

Khan, great videos, fan I am, but you really have to avoid using "inflation" for price fluctuations. Prices increase and/or decrease, money supplies are inflated or deflated. Now, even great Austrian economists slip and use the word "inflation" for price behavior - but we need to start somewhere and differentiate and I think your videos could be a good (the only?) location where clear thinking can start...

[Nintendomanwill]

So let me get this straight-you categorise an allegedly scientific phenomenon with a definition that could and does apply to things totally divorced from the phenomenon at hand? After all, you can have an absolutely *stable* supply of money with generally *increasing* prices if production of everything falls or if people start consuming more of what is currently available in the form of final goods. 'Capacity utilisation' is the BS I would expect from someone who believes spending creates growth

[Nintendomanwill]

This is downright mendacious. The bad effects of inflation are NOT rising prices. If all prices rise by exactly the same rate, precisely nothing in the economy has changed. The problem with inflation is that it reduces the propensity to save money which, with enough inflation, will cause people to abandon the currency entirely or give up capitalistic modes of extended production. Inflation furthermore distorts intersectoral prices by increasing them UNEVENLY thus distorting signals to investors.

[ScottcNehrer]

@khanacademy

The velocity of money is a non-concept. Money is never "idle." It always renders to somebody the only service that it can render, namely being a part of a man's cash holdings.

[amalmansy]

@stellaconcepts agree with u

[ybulldog14]

@stellaconcepts this guy is a genius, man, come on.