RE:RE:RE:RE:Joe Biden’s America
Frankie10 wrote: The theory is, if you hold the money supply constant, through technological advancement there would be deflation in terms of prices - therefore saving "money" would actually result in an increase in purchasing power - as it should imho. The current "money" is broken - as are the systems built around it - the most hideous of all being the central banks.
This can be explained using the Quantity Theory Of Money. This is the formula in percentage format.
Δm + Δv = Δ p + Δ t
m= money supply
v = velocity of money
p = price level
Δ p = inflation
t = volume of goods and services
Δt = real gdp
If you are more productive, say through technological advancements, then you can earn a higher wage equal to the inflation rate plus the productivity rate. Generally speaking, Δv and Δ t are stable and do not diverge much from each other. If you earn a higher wage, you spend more and increase the velocity of transactions. In theory, these should cancel out and so we are left with the change in money supply ( Δm) equal to the change in price level ( Δ t). That is to say, changes in the money supply is equal to changes in inflation.
Ex 1: If money supply stays constant at 0% and velocity has increased above and beyond real gdp, then it can be entirely possible for inflation to be above 0%.
Just rewrite the quantity theory of money equation and solve for Δp.
Δ p = Δ m + Δ v - Δ t
Δ p = 0% + > 0%
Δ p > 0%
Ex 2: you earn a higher wage due to technological advancement but you are saving more income than before. In this case, money supply is constant and Δv - Δ t < 0%
and Δ p < 0% as explained in example 1.
If money supply is held constant and you are saving more of your disposable income, then you get deflation.