
Is A Higher Price Level?
I strongly agree that it is a blunder to gauge the purchasing power of money solely by the costs of consumer goods and services–the CPI or CEP. But I don’t believe that the costs of financial possessions should be included in a way of measuring inflation. For real assets, I think that only the newly-produced ones should rely. In other words, I think that the GDP deflator, or something like it, is the least bad approach to calculating the purchasing power of money.
First, consider equities. If we believe that a talk about of stock is a claim to a fixed quantity of goods, then any increase in the price tag on a share would imply a lower purchasing power of money. However, guess that a company is likely to become as profitable twice. The price of a share would rise, but it could not be a higher price for the same quantity of future goods.
It will be a higher price for a higher level of future goods. Now, suppose the market interest should fall, and the low discount of future profits leads to higher prices of equities and existing long-term bonds. Superficially, the purchasing power of money is less. It is necessary to pay more for the same level of future goods. However, suppose we resided in a global world where in fact the only saving instrument was a keeping account. There is no likelihood of capital gain or loss on financial assets.
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If the interest should fall, then it is true that money placed into a keeping account provides less future intake. But is that a lower purchasing power of money? Saving or gathered wealth now produces a lower nominal and real income. Is that a higher price level? I don’t think so. I guess my thinking about them is very much influenced by some kind of presumption that inflation is bad and the financial routine should be stabilizing the purchasing power of money. Therefore, I would ask if a financial contraction would desirable to power down the costs of consumer goods and services enough to offset the upsurge in long term relationship prices. I don’t think so.
The coordinating role of the lower interest is to raise the demand for both consumer goods and services and capital goods. For example, suppose there is a rise in saving source. The direct and immediate effect is a lower demand for consumer goods and services. The coordinating role of the lower interest rate is to increase the level of consumer goods and services demanded as well as the number of capital goods demanded.
The result is exactly what returns saving and investment back into balance. I certainly give that it would be inappropriate because of this reallocation of resources to occur with stable charges for consumer goods and services. Lower prices of consumer services and goods along with higher prices of capital goods should be expected. Now, the low rates of interest should lead to higher prices of all existing capital goods–not just the newly produced ones.
This doesn’t require anyone to spend hardly any money on all of these capital goods. It is just that entrepreneurs will be ready to offer additional money for them and the ones using them now will insist on a higher payment to part with them. Should the weighting of capital goods in the price level depend on all of the capital goods or simply the recently produced ones? 200 billion shift popular.
Suppose that this 2.5% reduction in demand for consumer goods results in 1% lower prices. However, the 10% increase in the demand for capital goods requires 4% higher prices. If we look at only produced goods currently, the price level remains the same. Would it not be better for the costs of consumer goods to fall more and the increase in the prices of capital goods to go up less?