Comments on Mark Perry's CPI "chart of the century"

Mark Perry at AEI published a CPI chart which was called the "chart of the century" by CBS Marketwatch. Here is the figure:

Source: Mark Perry's blog

The chart  is the inflation data of the BLS tracked by the sector where consumers spend their money, for a period of 21 years.

There are many conclusions which Mark draws from the chart (about government involvement, etc.) which are unfortunately not true. However, the chart does serve to show an important point.

That inflation data is largely noise: because depending on how you combine these elements, given that textbooks have gone up 180%  and hospital services by 211%, vs. TVs which have fallen 97% and Software which has fallen 68%, and if you can weigh them differently you will come up with a different headline inflation number for CPI. Furthermore, it also shows that my inflation is not someone else's inflation, because the way I spend my money in these groups is not the way someone else does. An example: A retiree will spend no money on college tuition and books, whereas a student in her twenties probably spends a lot of money on them.

I have shown previously the problems with inflation measurements, and this chart shows some additional confirmation of what was said there.

The BLS does some quality adjustments-they call them hedonic quality adjustments, which really is using statistics to fool the public. When you buy a coke from a kiosk vs a coke in a high end restaurant or in Disneyland, you pay not for the coke, but for the great furniture and ambiance in the restaurant, and the great place that Disneyland is (once inside, you have a ton of wonderful entertainment in walking distance,  that's what you pay for). Similarly, when you buy a hot dog from a street vendor vs. in a well designed mall, most of the cost of the hot dog is the privilege to be able to be in the mall. Hedonic adjustments make subjective judgments of quality and contributing factors by experts, but most of these factors are not visible. The point of the coke and hot dog example above is not to criticize the BLS experts, but simply to show that one can't determine the factors of what makes a product good or bad quality; they are sometimes hidden deep down somewhere. A store may make its parking lot bigger or better lit, put a better road connecting it to the highway, and raise prices-it is unlikely that BLS experts consider all these factors in their hedonic regression model to account for the price increase at the store.

But coming back to Mark Perry's chart, one can see that the inflation data depends on how you combine all these elements and their weights; you can give me a CPI number you want, and I can combine all these to come up with that number. The deviation in the prices of the constituents is so large that there is nothing representative about a headline CPI number.

Related article:
What is money and what are its uses

Why we should ban plastic toothbrushes immediately

We all know how bad plastics are for the environment-from giant islands of plastic floating in the Pacific to fish dying of swallowing this toxic material created by the petroleum industry. Big money controls oil and plastics, and the world is waking up to how much damage plastic causes. The future of humanity is very dim unless we do something about this.

Off late there have been bans and restrictions on uses of plastic bags and plastic straws, a great step towards a cleaner, greener earth. But we have missed the plastic appendage we use at least once a day-the plastic toothbrush. I lay down the case here, with scientific evidence, that toothbrushes should be banned immediately from the entire planet.

A terrible invention of the plastics industry which you use every day-the toothbrush

A typical toothbrush has several hundred fine plastic bristles. See a closeup here:

Each toothbrush has about 300 bristles-enough to kill 300 small insects and fish

Can you imagine what happens if a fish in the ocean swallows these bristles? It is sure death for the poor thing. Even land animals like small insects cannot handle plastic bristles, and confusing it for something edible, readily swallow it.

CNBC report on mosquitos eating plastics, most probably they are toothbrush bristles.

Plastic bristles from toothbrushes, and other plastics in fish

Source: Plastic-pollution.org

The result, millions of insects die EVERY DAY from swallowing plastic bristles of toothbrushes. This is in addition to the large number of fish, including micro-fish, which die on swallowing these bristles.

My research shows that plastic bristles are even worse than plastic bags or other plastic objects like straws because of their small size-i.e. the number of innocent animals which will die because of toothbrushes is much larger.

I hereby urge the world community to take actions to ban toothbrushes, where the fine plastic bristles are killing millions of fish, insects and worms every day!

Filed under: Satire

Making sense of economics data-M2 money supply

The biggest repository for economics data in the US and probably the whole world is FRED, of the Federal Reserve Bank of St. Louis. It really has some wonderful data series, but the sheer amount of economics data available ( more than 500,000 total series) shows that the economics data generators are spewing out data right and left, and most of it has to be irrelevant, or noise.

Let us analyze some good data series, often misinterpreted by not just the public but even the Fed officials themselves. I will analyze only the US data.

M2 money supply

This is a very useful data series. Here's the chart of the M2 money supply, non-seasonally adjusted, from 1959 to the present (2019). [Click on charts to enlarge]

M2 is a good measure of how much savings US households (primarily, also includes non-profits) hold in near liquid money. Most is held in savings accounts and checking accounts. The amount of about $14 trillion in 2019, and as you can see from the graph above, it basically keeps going up with time, even during recessions.

I am against adjustments of seasonality, etc. it is best to just look at  the raw data.

M2 is a good indicator of the advancement of the country. As the country overall becomes wealthier, the amount held in liquid money goes up with time. 

You may hear of absurd arguments like the Fed lowering or raising the fed funds rate to affect the money supply. Here is the chart of the Fed funds rate.

As one can see from the two charts above, the fed funds rate has no effect on M2. The money supply M2 keeps going up, while the Fed funds rate is all over the place. The big trend is that M2 keeps going up, without much correlation with the Fed funds rate. 

You may also hear of banks increasing money supply by lending. Unless someone borrows money and puts it right back into a bank (and certainly the banks will offer them lower rate than their borrowing rate) and wants to lose money, it makes no sense that loans end up back in banks. People borrow money to use in productive purposes, e.g. buying a car, house, etc. Note that the people who are borrowing are not the same people who hold these savings of money which shows up in M2-it is a different set of people. A retiree will have a large amount of money in her savings account; a student only a little. Borrowers are normally younger, and savers are older. It is only the aggregate data for the whole US population which shows in M2 money supply.

Banks and Fed can't change M2, these are net savings of people, and it is preposterous to believe that banks or the Fed can change the value or purchasing power of what you save by changing interest rates, reserve ratios, etc. (notwithstanding the odd theories of inflation). M2 is also very stable because of the FDIC guarantee of deposits of $250K per depositor per bank, people feel safe holding funds in their savings and checking accounts because of this reason. 

The banking system is a small part of the financial system, which is itself a small part of the economy, as I have already covered here.

Lastly, I will comment that another measure of money supply, M1, is an inferior measure of liquid money because of the large amount of money which people hold in savings accounts, which can have a check or debit card attached to it, which shows only in M2. One can safely ignore M1 in their analysis of the net liquid savings of the residents of  the US.

M2 and money supply in other countries

A growing M2 is certainly a good indicator of a steadily advancing country, but if M2 does not grow in a country, it does not mean that the country is not advancing. In certain countries, the banking system is not as reliable as in the US, and there you can have advancement without growth in M2-people will prefer to save their wealth in other forms like real estate, accumulating US dollars (as happens in Latin America) or Euros (as happens in Eastern European countries). 

Furthermore, some countries include government deposits in M2, and one must be careful about the definitions before coming to conclusions about M2 and what it means.

A primer on what is money and what are its uses.

An open-source, digital currency to facilitate commercial transactions worldwide.

Summary

A brief history of money and its uses is presented. A new digital currency, the Smith Unit, to facilitate commercial transactions is proposed. Shortcomings of cryptocurrencies (bitcoin), existing paper currencies (dollars, euros, yen, yuan, etc.), and gold and silver are covered. The Smith Unit is compared to similar products like the ECU (European Currency Unit-the predecessor to the Euro) and the SDRs (Special Drawing Rights) of the International Monetary Fund.

What is money and what are its uses?
(you can skip this section and go directly to "Defining the Smith unit (SMU)" if you are not interested in the economics and theory behind the existence of money and currencies)

Adam Smith in 'The Wealth of Nations'[1] shows us that the fundamental, true measure of the value of an object is labor-objects which need more labor to make, in general, are worth more than objects which need less labor to make. Allowance must be made for different skills and training involved: an object (or service) of labor of a few hours is sometimes worth more than the object of labor of many days, due to the higher skill and training required in the former.

However, it is inconvenient to talk about objects in terms of their labor content or units of labor they save the buyer; and since most objects are exchanged with one another rather than with labor itself, money becomes a more convenient measure of value.  This is the reason goods (and services) are quoted in money prices; but we must not forget that the true value of goods is measured in labor. You exchange the produce of your labor with the produce of others' labor. You get paid for your labor in money, and you exchange that money with the goods produced by other people's labor, is the real exchange going on in the world. Labor is the true price of all objects; money is their nominal price only.

There are two main uses of money; 1) As a facilitator for buying and selling of goods and services by being a unit to measure their value, e.g. 1 kg of potatoes for 1 Euro, and 2) As a measure of someone's worth, e.g. Maria is worth a million dollars. The use of the same term money to denote these two has caused substantial confusion for humanity, as covered by Adam Smith. However, the primary use of money is the former-a unit of the measure of the value of goods and services.

When considered as a measure of value of goods and services, money may be thought of as similar to the unit of mass, the kilogram (kg) or the unit of length, the meter (m), which from the Système Internationale (SI) units conventions, are standardized units of measuring mass and length.

We must remember that the kilogram and the meter are not absolute measures. When you measure something with a weight scale, it is never a completely accurate reading-because of the calibration errors in the weight scale against the 1 kilogram international prototype in Paris[2], which is the standard unit of mass in the SI convention (i.e. when you buy 1 kg of something, it is never really 1 kg). This error, the difference between the mass and the actual mass if you had the prototype in your hands, is tolerated depending on your applications-if you are measuring something ultra-sensitive, you need a very accurate and calibrated scale; whereas for most goods, an error of let's say 1% is acceptable (the 1 kg of oranges you weighed are really 990 g if the oranges were weighed by the Paris prototype, but you can live with this error.). Furthermore, the prototype of mass in Paris is itself a variable (recent attempts to put them in terms of physical constants notwithstanding)[3] and susceptible to drift over time-what it was a hundred years ago is not what it is today, because of corrosion, loss from use and wear and tear, etc. The point is-that even for a physical unit like the kilogram, there is no absolute measure, but we carry on our lives quite well despite the uncertainties and errors.

However imperfect it may be, money (a dollar or a yuan, for example) is a measure of value just like the kilogram for the mass. Different observers will give a different value for mass, length, etc. for an object depending on the accuracy of the tools they have, or how much experience they have with similar objects; the same is true for value, wherein an object can be assigned different values by different observers. You can also think of value being measured in money terms as in imperfect units like the pennyweight, the cubit or the bag which were used until a few hundred years ago-when you do not need exact units, you get by with these cruder units just fine (e.g. a bag of coal).

Value thus may be considered to be a fundamental property of all objects just like the mass or the length, and we can say:

Object properties: Mass (kg), Length (m), Value (dollars, yuans, etc.), and other properties.

What we needed for mass or length in practice were standardized, easily reproducible international units-and the same is needed for the value of an object.

Before the standardization of mass in kilograms, countries and regions of the world had their own standards of mass (e.g. pound in the Great Britain, seer in India, momme in Japan), and some continue to be used to this day. However, the SI units with their standardized definition of kilogram really simplified things-and the SI unit of mass has gradually replaced all other standards in the last 100 to 200 years.

Great Britain might have insisted for national pride reasons that the international unit of mass be the pound, or Japan might have insisted on it being the momme, but the kilogram eventually was accepted in almost all fields of life in all countries.

Not just for mass, but the decimal based SI units have replaced region and country specific units for length, time, etc. as well. The same needs to happen for money-we need to give up the national pride issues falsely associated with a currency, and adopt a worldwide currency.

I propose a unit called the Smith unit. The unit is named in honor of Adam Smith, the founder of Economics.

Defining the Smith unit (SMU)

A Smith unit (SMU, or more simply, just the Smith) is a fixed currency basket derivable from published prices of major world currencies. The unit is 20% each of the US Dollar, the Chinese Yuan, the Euro, and the Japenese Yen and 5% each of the Brazilian Real, the Indian Rupee, the Swiss Franc, and the British Pound on 1 January 2011 and its value was set at one USD ( 1 SMU=1 USD) on this date. The methodology is very similar to how major stock market indices are calculated all over the world.

Based on these percentages and published exchange rates of major currencies in USD (data was taken from the Federal Reserve bank of St. Louis[4]) , the actual currency amounts in one Smith unit are shown in the table below (Column 3):

Table: Currency amounts in 1 Smith unit on 1 Jan. 2011

Currency	Currency Weight in Smith unit	Currency Amount in one Smith unit
US Dollar USD	20%	0.2
Chinese Yuan CNY	20%	1.32
Euro EUR	20%	0.150727
Japenese Yen JPY	20%	16.334
Brazilian Real BRL	5%	0.083155
Indian Rupee INR	5%	2.24
Swiss Franc SZF	5%	0.046845
British Pound GBP	5%	0.032484
Total:	100%	---

The weights were chosen to represent the approximate importance of these countries and their currencies in the world, and easily available public quotes for their prices.

Many other currencies could be included in the basket-but as mentioned above-currencies are not to be used to parade national importance,  and as long as we have a clear and simple standard for buying and selling goods and services, as the Smith unit is, we can use it to define the value of goods and services in all parts of the world, just like the mass of an object is defined in kilograms everywhere.

With the eight currencies above and the associated percentages, we get a good representative paper currency basket for the entire world. Most of the world trade involves at least one of these eight currencies-and adding more currencies to this basket is therefore not necessary.

The detailed Smith unit (or the Smith) calculations file can be downloaded here (.xls format).

The file to calculate the daily value of the Smith quickly can be downloaded here (.xls format).

The currency amounts in the Smith are fixed and not changeable, except when a re-balancing is required, which is covered below. I used data from 1 January 2002 to 31 December 2016 for calculating the Smith unit. Going before and after in time from 1 January 2011, the percentage of currencies in the Smith changes. The maximum weight of any currency was about 26% for the US Dollar, reached on 31 January 2002. The maximum weight of the Chinese Yuan was about 25%, reached on 19 March 2015.

The charts below show how the Smith unit has changed over time vs. the US Dollar since 1 January 2002 until 31 December 2016, a period of 15 years (click on the charts to enlarge them).

There is only one re-balancing rule for the Smith unit:

1. The Smith unit will be re-balanced if one currency becomes 70% of the unit. 

I would like the re-balancing (if needed) to be done by the SI, or the International Committee for Weights and Measures in it's General Conference, which is held every four to six years.

The Smith is an open-source currency, and can be thought of as a currency of an imaginary country called the Smith Republic somewhere in the High Seas, whose only goal is to facilitate the buying and selling of goods for the world.

The Smith Republic has no political connections or preferences for any country, and is most like the SI, which is why I propose that the re-balancing of the Smith, if needed, is to be done by the SI. Data from the last 15 years (2002 to 2016, both years inclusive) shows that no re-balancing has been necessary in these years.

When the world transitioned from gold and silver pegged currencies to floating paper currencies (Bretton Woods abolition in 1971), alarmists published all kinds of warnings-but the transition went about quite smoothly and no country ties it's currency to gold reserves anymore. There's nothing magical about a currency; it's only use is the ease with which it can help in buying and selling of goods by ascertaining their value.

As the proliferation of bitcoin in the last few years has shown, there is no need to involve the banking and financial systems of the world in choosing or controlling currencies-as long as people quote their products in bitcoin and someone (an exchange) converts existing currencies to bitcoins, the new currency can be used to buy and sell goods without issues.

We must agree that there is a real need for a standardized world currency to eliminate the massive transaction costs in conversions from one currency to another-especially in world trade. World travelers also will benefit considerably from a world currency-they lose every time they convert currencies. We will also get rid of the constant babble of countries trying to "manipulate" currencies, keeping currencies low for increasing exports, etc. (all these so called manipulations have no effect on the value of objects; much like changing the unit of mass from kilogram to pound has no effect on the actual mass of the objects).

Problems with the bitcoin

The bitcoin has some very serious shortcomings, which make it a risky currency for transactions: 1) Bitcoin can be mined, i.e. more bitcoin can be created by computers, etc. and if mining costs collapse, the currency will fall very considerably in price, or even go to zero and 2) it is liable to fraud-because it can be hacked or stolen (the biggest exchange of bitcoins, Mt. Gox, lost USD 500 million of its clients' money in 2014 and was shut down, Bitfinex lost USD 65 million of bitcoin in 2016 due to hacking). There are no such problems with using the Smith as a currency unit in transactions, assuming it is accepted as a true currency of a disinterested party. and 3) Governments of countries normally guarantee bank deposits (in the country's currency) upto a certain amount. The FDIC in the US guarantees deposits upto $250,000 per bank. No such guarantee exists for bitcoin deposits with banks, brokers, etc. This is a major risk for all holders of bitcoins, 4) bitcoin is very unstable against existing currencies, the volatility making it a poor choice as a global currency.

Moreover, the bitcoin (and other cryptocurrencies), because of its association with solving complex computing problems etc. is unnecessarily complicated. If science and progress is about simplifying complex things and not making simple things complicated, the Smith with its easy to implement calculations is a much nicer solution for a global currency than the bitcoin.

The massive appreciation in the value of the bitcoin against all currencies since its creation shows that it is being used as a store of wealth (the second use of money, pointed above) and speculation, rather than as a currency to help exchange in the buying and selling of goods (a new currency should be stable in value against existing currencies). The large number of cryptocurrencies launched after the invention of the bitcoin show that it is not that hard to come up with cryptocurrencies-and the creators and promoters of these currencies stand to make a lot of money as long as the bubble keeps going up. It reminds me of Internet stocks of the late 1990's who went up fast, only to collapse later on (I believe that the bitcoin and all other cryptocurrencies will stop being used as currencies, but may continue to be used as a store of wealth and investing like baseball cards, collectible cars, or art and jewelry). A new global currency solution should be relatively stable vs. other major currencies and provide a smooth and continuous transition from them. The Smith meets that criterion well, by its very design.

One must note that a block chain/distributed ledger system is different from bitcoin the currency (Nakamoto's amazing contribution is the design of the block chain/distributed ledger system, and not the bitcoin), and can work well with existing currencies and the Smith.

Problems with existing paper currencies (dollars, yuans, etc.)

The main problem of using a dollar or a yuan as a world currency is that the currency is thought of as a matter of national pride, because of incorrectly thinking of money and currency as being a national asset, and not an instrument to facilitate trade of goods and services (the same confusion mentioned above, in the two uses of money), and countries for this reason like to have their own currency and full control over them. If a country X doesn't have a good relationship with the US, it is hard to convince the businesses in the country X to accept the US dollar. In some cases, e.g. Ecuador and Panama, countries have accepted foreign currencies to be used in every day lives, and do not see any problems, with most goods in these countries being quoted in US dollars. However, there is always the risk that Ecuador goes back to using the Sucre, because a currency being a matter of national pride is well entrenched in society. Italians still debate about going back to the Lira and the Greeks blame their problems on joining the Euro, and want to bring back the Drachma. Worse still, many countries do not want their currency circulating outside their borders (e.g. China and India). Adopting the apolitical Smith, which is a simple mathematical derivative of some of the world's major currencies, solves this problem.

Another problem is best illustrated with an example. If country Y want to use the US dollar as its currency, as long as as there are paper US dollar bills in circulation, the country Y needs to depend on the US Treasury Department (who prints the bills) in some way. The US Treasury has a monopoly over printing US dollar bills, and that makes it very inconvenient for country Y to adopt the US dollar. The US dollar can be adopted for digital transactions in country Y, but it cannot be adopted for bills if country Y does not want to depend on a foreign entity for the circulation of bills within the country. If the US Treasury allowed printing of US dollars outside of the US, just as the one kilogram prototype of mass in SI has many copies all over the world to replicate the kilogram, it would not be an issue, and US dollar bills could become a world currency to replace all paper currencies.

It is unlikely that the US Treasury will give up this exclusive right to print dollar bills-and it is therefore best to start afresh, with a new currency like the Smith, which if needed can have bills in the future, emitted by the SI, with the same methodology used today for replicating the one kilogram prototype.

In this example I took the US dollar and the US Treasury as starting points-but you can imagine the difficulty of adopting the Japanese Yen or the Chinese Yuan as international currencies-because they are even less popular than the US dollar. Coming up with a basket of currencies seems to be good way to solve this problem.

Countries generally guarantee deposits in their banks. They however do this only for deposits in the country's currency; and foreign currency deposits are not guaranteed by the country (this is completely irrational and very awful for the savers; the Argentinians found this out the hard way in the Argentine crisis in 2001-2003, when their US dollar deposits were converted to Argentine Pesos forcibly). Chilean banks will accept deposits in Pesos and US Dollars, but the State entity for guaranteeing the deposits only guarantees the Chilean Peso deposits. All international governments will be more amenable to guarantee deposits in a neutral, worldwide currency like the Smith and not limit the guarantee to the home country currency.

Countries like Ecuador and Panama have adopted the US dollar as their official currency, and loans and interest rates are also quoted in US dollars. Clearly if currency and money was such an important thing as people are told by nationalistic rhetoric, this would not be possible.

If  Norway were to adopt the Euro, it would not change the real price of anything in the country, but would be a considerable benefit for Norway's citizens and visitors to Norway, who would not have to lose money while converting from kroner to other currencies, or the reverse. The risks to Norway of adopting the Euro are largely imaginary-as is clearly seen by how efficiently the Euro was adopted in various Euro zone countries. Norway can stay a separate country and still adopt the Euro as its official currency, to the tremendous benefit of its citizens. If the United States decided to adopt the Euro as its official currency, nothing would change inside it, and business would carry on as usual, with everything quoted in Euro. Instead of pushing for the Dollar or the Euro or the Krone as a world currency, adopting a neutral, basket-based currency solution like the Smith would be an amicable solution for all countries.

Comparison to the European Currency Unit (ECU) and the Special Drawing Rights (SDRs) of the International Monetary Fund

The ECU was the predecessor to the Euro. It was a basket of currencies just like what is proposed for the Smith here, and the Euro zone did transition successfully to the Euro from the ECU[5]. The major problems with the ECU were 1) That of other paper currencies emitted by countries-a vehicle of national and regional pride. The ECU was used as a political instrument to suppress smaller countries-wherein bigger countries were given larger weights in the basket and apparently because they were more important to Europe. Outside the Euro zone, it was promoted as a tool to further Europe's interest, etc. which made it a bad choice for adoption by other countries and 2) Too much re-balancing, apparently to reflect the share of European trade, making it an arbitrary rule. The meddling finance types would calculate the share of European trade every five years and adjust the weights of currencies in the ECU. They forgot that trade data itself is approximate and quite volatile, just as most other economic data is.

This is the reason that the Smith has just one re-balancing rule, of a currency becoming 70% of the basket, because wide variations in it's composition are completely okay, as long as the market knows how to convert the various world currencies to the Smith in a transparent manner.

If the Euro did not have these shortcomings, it would serve as a good worldwide currency.

Despite all these problems, the Euro's overall success in replacing all the member states' currencies does show that a currency basket can be used as a currency of many countries, and therefore ensures that if the Smith is adopted by the world, it will become successful as a global currency.

The SDRs of the International Monetary fund[6] have the same problems as the Euro 1) Political unit  2) Arbitrary re-balancing. There is an additional problem with the SDRs-they are too heavy on the US Dollar and the Euro already and are very unlikely to be adopted by a country which doesn't not consider the US or the Euro zone to be their ally.

Using a major stock market index as a world currency

Anything whose value is clear and easily accessible to the general public, and which cannot be manipulated easily, can serve as a currency. The US S&P 500 Index is such an index. One can base a currency off it, and use that for transactions worldwide. Divisions of SPY (SPY is the most popular ETF connected to the S&P 500 Index) can be used to buy and sell things on eBay for example-you are just debited the amount in SPY instead of dollars or euros or yuans. That's easy to implement, and does not need too much regulatory oversight-after all the S&P 500 is guaranteed by the faith of the US capital market system and therefore indirectly the US government. You could make coins of fractions of SPY as well.

The problem with using a stock market index as a currency is that there is high volatility with respect to currencies in certain periods e.g. in 2008. Combining many stock market indices of the world to come up with a new currency doesn't help because stock markets worldwide are massively correlated  (when they go down, they all go down together).

Implementation guidelines

Having covered how the Smith can be used as a currency, here are some implementation guidelines:

1. Businesses and retailers need to set up a new currency, the Smith, and if needed, tie it to a new country, the imaginary Smith Republic, in their accounting systems. They need to quote the price of their products in Smiths in addition to other currencies.

2. Exchanges need to convert existing currencies to the Smith (much like what they do for bitcoin), so that consumers can use the Smith to buy goods from retailers who accept the Smith. The Smith needs to be quoted in several currencies for this-and exchanges can use the formulas mentioned above to calculate the current price of the Smith.

Exchanges need to offer an easy mechanism to convert the Smith back into other currencies (a two-way market). The indicative value of the Smith will also be published on this website periodically.

3. The Smith is proposed as a unit to facilitate commercial transactions. It is not designed as an investment or a speculation vehicle, or that it will appreciate in time, etc. against other currencies. Clearing and security of Smith accounts and transfers from them should be the same as for currency deposits today. The Smith needs the active involvement of banks and financial institutions and governments worldwide to be successful. It is not a currency to hide wealth, taxes, etc.

4. There is no paper currency for the Smith, it is purely digital. There are no Smith coins either. The decision to emit paper currency or coins of Smith can be made in an SI General Conference.

5. Much like the slow and gradual adoption of the ECU in the Euro zone before the complete phasing out of individual country currencies like the German Mark and the French Franc and the launch of the Euro, a switch to Smith as a world currency should be a slow process, with the businesses and consumers always having the choice to deal in whatever currency they are comfortable with-it is important to launch the Smith as a parallel currency, and not a replacement for other currencies. If businesses and consumers see the advantages in buying and selling their goods using the Smith, they will automatically start shifting to it, as happened in the Euro zone with the ECU.

Some people have disagreed with me on thinking of money as a unit of measure of value, like the kilogram for the mass, or the meter for the length. They say that value is not a physical property like the kilogram or the meter. I may remind them of the notion of time, measured in seconds, or temperature, measured in Kelvin, as both being man-made intangible, non-physical properties as well, just like the value. If we have universal units for time and temperature, we certainly can have a universal unit for value. The value of objects may be different at different places and times (the same bottle of water costs a lot different in downtown Paris vs. a small town in Portugal), we all know this and are fine with it; a standardized unit of value worldwide would be like extending the Euro over the whole planet, instead of limiting it to just the Euro zone.

We have moved from gold and silver coins to paper currencies successfully in a period of a few hundred years. However, we now have hundreds of paper currencies-and we need to move forward and standardize everything on one global currency. The Smith is proposed with that final goal in mind.

Originally published on the Smith Money site in March 2017

This work is licensed under a Creative Commons Attribution 4.0 International License.

What is money and what are its uses? From gold to paper money to electronic money

Adam Smith in 'The Wealth of Nations'[1] shows us that the fundamental, true measure of the value of an object is labor-objects which need more labor to make, in general, are worth more than objects which need less labor to make. Allowance must be made for different skills and training involved: an object (or service) of labor of a few hours is sometimes worth more than the object of labor of many days, due to the higher skill and training required in the former.

However, it is inconvenient to talk about objects in terms of their labor content or units of labor they save the buyer; and since most objects are exchanged with one another rather than with labor itself, money becomes a more convenient measure of value.  This is the reason goods (and services) are quoted in money prices; but we must not forget that the true value of goods is measured in labor. You exchange the produce of your labor with the produce of others' labor. You get paid for your labor in money, and you exchange that money with the goods produced by other people's labor, is the real exchange going on in the world. Labor is the true price of all objects; money is their nominal price only.

When considered as a measure of value of goods and services (the most common use of money), money may be thought of as similar to the unit of mass, the kilogram (kg) or the unit of length, the meter (m), which from the Système Internationale (SI) units conventions, are standardized units of measuring mass and length. An open source cryptocurrency based on a this idea, Smith Money, here.

From gold and silver to paper money, and now to electronic money

Many things have been used as currencies in the past-salt, cattle, sea  shells, dried fish, etc. Paper money started becoming popular in the times of Adam Smith (around 1760).  However, banks were still required to hold reserves in gold and silver, and the paper currency was backed by gold. This would later be formalized in 1944 by the Bretton Woods agreement, where all currencies were required to be backed by reserves in gold, and someone could exchange their currency for gold by going to a bank at any time.

The Bretton Woods system came to an abrupt end in 1971, when the US, the main original creator of the Bretton Woods agreement, opted out of the convertibility of the US dollar to gold. This was credited to President Nixon, and many economists and finance types predicted the end of the world and run away inflation after this was instituted.

None of the crazy things predicted by the economists happened after 1971. The US continued to become a richer country, and floating currencies (currencies with no gold backing) became the norm after that time.

How could this be? How could a country (US) or the world, transition to a completely paper based currency system, and still have no major catastrophes? A paper currency bill guarantees nothing except that you can exchange it with another one of the same denomination at the bank, now that the gold backing was removed.

The faith in the dollar bill is a faith in the US government, because all collections of taxes are in US dollars, and the US government runs all its operations in that currency - pays the government workers in dollars,  makes payments in dollars for purchases made from private companies, etc. This is why the people could accept a freely floating currency- they realized that as long as the US government collects taxes and runs its operations in dollars (it may help to think of the  US government as a the largest non-profit corporation in the US, which employs about 10% to 20% of the population, directly or indirectly. If the biggest employer in a country runs their operations in US dollars, all smaller entities are fine using the same instrument), their money will always have good value, for the government would not manipulate an instrument it uses itself for its operations (this lesson unfortunately is not understood or followed everywhere, which is why Venezuela's currency has no value). With the removal of the gold backing, the banking system became less relevant.

This successful transition to floating currencies also happened because prices are a time series, and people work hard at an individual level to provide price stability, and in reality exert a constant downward pressure on prices (the inflation data and story is a big lie). When millions of Americans (and the same thing happens in other countries) go out to buy stuff in the grocery store today, they use the prices of yesterday (or whenever they went to the grocery store last) as an anchor, because their wages have not jumped up suddenly in 24 hours. They naturally try to get the most amount of goods for the X dollars they want to spend in the grocery store today. If prices of a product jumps up suddenly, they will buy a much smaller volume of that product, or in many cases will not buy that product at all. This behavior, coupled with the thousands of products which they can spend their money on, forces the prices of goods to fall constantly. This in effect means that dollars saved are worth more tomorrow than today, because they will buy more goods tomorrow that today, even if you just hold the dollar bills and get no interest.

This general stability of money value is also the reason that in most developed countries, people will buy a house on a 20 or 30 year mortgage. They know that prices of goods are generally stable, and so are their jobs. If they were not sure of the general stability (or downward movement) of the prices of goods or their wages (if they lose their job, they can find another job in a few months) they would never enter into such an onerous contract as buying a house on mortgage. They also have some liquid savings in paper dollars (or the country's currency), which can cover the monthly mortgage payment in case they can't earn anything for some months. All this shows an inherent stability in the system-and there was no need for them to rush to a bank to turn their dollars into gold. This happened BEFORE the gold standard was removed; the banks were rarely being called for converting their dollars into gold in the US before 1971. The paper currency took a value of its own, and with a stable government and a reasonably responsible banking system backed by a central bank (which doesn't give money out to people for free) which in turn is backed by the US government, the system in the US and all countries successfully transitioned to freely floating currencies without any backing of gold.

Together with this there was an important development-the invention and acceptance of checkbooks (checks are an extension of paperless bank-to-bank transfers, where previously you had to go to a bank to transfer money from your account to another account. You could now do it much more easily by issuing checks). Checkbooks are a predecessor to credit and debit cards and electronic money-they removed the necessity of carrying around wallets and suitcases (if you buy expensive objects) full of dollar bills. Once checkbooks became an acceptable form of payment, the banks needed to print even less dollar bills, because many payments, especially the larger ones (e.g. buying a car, a house, or company-company payments), could be made via checks.

Credit and debit cards took out checkbooks from the equation. As I write this (in 2017) a large amount of purchases are done by credit and debit cards. We can safely say that in many countries, and this includes not just the wealthy and developed countries, but even developing countries like India and Chile, that most transactions in money are electronic; via bank-to-bank transfers, checks, debit cards and credit cards. I would guess that more than 95% of the total value of the transactions in any developing or developed country are non-cash, i .e. electronic (Sweden reports that only 2% of the country's transactions are using paper money). Most transactions are electronic because most of the total wealth held in money by individuals or companies in any developed or most developing countries is held in electronic form in banks as deposits, with only a fraction, maybe less than 5%, held in actual paper currency. We don't carry around large amounts of paper currencies in most countries; and it is safe to say that we have now moved from paper money to electronic money in the 21st century. The advent of the Internet which simplifies bank-to-bank transfers, worldwide credit card companies like Visa and Mastercard, and payment wallets like Paypal and Venmo are all aiding in a complete elimination of paper currencies, and I surmise that in a couple of decades they will cease to exist altogether, with all money being completely electronic. Sweden already has committed to a completely electronic money system from 2020 onwards.

Every individual or company keeps a small part of their wealth in money (the only exception is the financial sector). Most individual assets are in real estate, household objects and furniture, cars, jewelry and gold; and stocks, which represent ownership of assets via a stock exchange. Companies hold assets which are saleable and do not want to hold money...they would rather own objects which they can sell for a profit than money. Companies hold some money only for liquidity purposes, to assist in the buying and selling of the goods or services they trade in. Most money being already electronic in most developed and developing countries, it follows from this than even a smaller portion is held in paper money (dollar bills, other currency bills) and coins.

When a country like India implemented demonetization to target this small wealth of people which they hold in paper money, they wasted everyone's time rather than rooting out corruption or tax-evasion, because they did not realize that most wealth of individuals is not held in paper money.

The total amount of money in a country is published by central banks. In the US, the money supply M2 most closely matches the electronic money and cash which could rightly be called money. Here is an article about M2 money supply and its meaning.

Currencies and money

Most countries emit their own currencies to run domestic operations, both government and private. Taxes to government are paid in a domestic currency, which give the most direct value to it.

It is helpful to think of goods (and ultimately, labor) as deciding the value of a currency, not the other way around. If you have a fair government which doesn't borrow too much money and is generally responsible in running its accounts, paying its interest on time, etc. people will have faith in the currency of such a government, and people will keep a part of their wealth in that currency.

If a currency goes down against many other currencies in a short period of time (as is the case for Argentina, Venezuela and Turkey in 2018 and 2019) it is not that the goods in these countries are going up in price; it is because the currency has lost its value against these goods. Goods are traded worldwide and is the reason why world trade exists; currencies often are not exchangeable outside a country. Goods maintain their value worldwide. This is very obvious with high value goods like electronics, computers, etc. which can be easily transported across borders if there is a substantial price difference between two countries. This arbitrage or profit opportunity prevents the value of goods from deviating too far between countries-if the arbitrage opportunity is large, people find a way to get the goods in or out of a country. A sudden fall in the value of a currency against all other currencies is an indicator of a problem with the government or central banks, which is not running its account in a responsible manner. This is why capital controls or currency pegs fail; the government cannot force people to accept a currency if it itself misuses it (e.g. by giving out silly loans which are never called back, as normally happens between central banks/banks and government entities).

Currencies are often blamed for crises. Italy blames the euro for a bad economy, and wants to bring back the lira. The same is the case with Greece, who says the euro caused it to become bankrupt, and the drachma should be brought back. Argentina on the other side says completely the opposite-it says that the peso is the cause of all its problems, and adopting the dollar is the only solution. All these currency blame games are without any basis. As explained above, money is a unit of measure, of value, and the value of something doesn't change if you change the units. Just like if you switch from meter to foot, dimensions of objects do not change. The value of assets of a country's citizens do not change if you measure them in dollars, pesos, euros, liras or drachmas.

Role of the banks and financial system

There is a lot of confusion in investment and financial circles on the meaning of money and the role of the banking and financial system. More on the role of banks here.

For an updated version of this article download my Economics book on Amazon Kindle here

Business-margins vs. volume; why low taxes are good for a government, demand functions

As a general rule in business, as you lower prices of your goods, your profit margin (net margin of profit, as a percentage of revenues) goes down but you more than make it up by selling higher volume. This happens because people are more likely to buy or buy more of a product when it gets cheaper; or the demand of a product goes up with a decrease in price.

Conversely, if you raise prices of a product, people find alternatives, or simply do not buy as much of it-they have a thousand other products to buy with their money.

Walmart operates at a low profit margin of about 3%. A small kiosk has a very high profit margin, maybe 50% or even 100%. Who makes more money? If the profit margin percentage is the measure, the kiosk seems to make more money. But the kiosk won't sell much volume at those high prices. Your total profit is normally proportional to the total revenue, which is the volume of goods sold multiplied by price, and since your goal is to increase your total profits, you must never forget to consider volume when you consider setting prices for your goods. Volume of goods sold does not increase linearly as you lower prices, it increases in a power law or exponentially as you lower prices (how it does exactly is not known to anyone...more on this below). The key to a successful business which gives you large dollar profits is high volume, low prices or low profit margins. It is better to sell 1000 oranges at $1 each than sell 10 oranges at $10. Assuming oranges cost $0.50, your total profit in the first case is $500, whereas in the second case, only $50.

I often hear people complain about higher prices (sometimes disguised as inflation, covered in detail here). Any time a business raises prices they give up volume. The reason the McDonald's burger costs $2 and not $20 is because they won't sell much volume at $20.

A good businessman friend of mine, Rajesh Santlani, once said to me-if you want to make money, operate at low profit margins, and sell high volume. For success in a business, the name of the game is volume . It is as true for governments (taxation) as it is for businesses-if the governments ran themselves as a good business, and you can think of the government as a large non-profit or zero-profit business in one sense, they should lower taxes as a percentage of the value of goods, and never increase them.

Let us say the government increases the sales tax on a consumer good from 10% to 12%. Politicians often vote for these kinds of increases, because they think of this as easy money; they forget to consider that if the volume of goods sold goes down by more than 20%, the government will actually take in less money than before. For example, for a $100 value of goods sold, the net tax collection was $10 in the original scheme, and if the volume of goods sold decreases to $70, the net collection will be $8.40, which is less than before.  The net tax collection goes down when the percentage of tax is increased.

Assuming that a government wants to increase its total tax collection revenue, which would mean the net dollar amount collected by the taxes to support the government, the best strategy is the same as a strategy for a large business-lower the tax percentage and try to get more volume of goods to tax.

This is also true in taxation on imports. Keeping taxes on imports low (as a percentage of the value of goods) increases the volume of imports, and it is a good idea to keep trying to lower the taxes if a government wants to collect more total taxes at customs. Often times the clamor of nationalists and "buy home made products" clouds this policy, and imports are taxed highly; they effectively kill the volume of imported goods in the  country, to the great disadvantage of the government itself, who could pick up more total taxes if they kept the percentage of taxes low. This also hurts the consumer, who is left with less choices of goods in the home market.

Demand functions and how price and volume of goods sold vary with each other

From what I have said above, we can model an approximate demand function. If "V" is the volume of goods sold and "P" is the price:

V is proportional to 1/P^2

or V = K/P^2 where K is a independent of P.

With this formulation, the Revenue, R, is:

R= PV = K/P

which agrees with the observation that revenue goes up as the price decreases.

The volume of goods sold can go up slower or faster as price decreases, but will always increase as price decrease, so we can say, in general:

V = K/ P^n , where n>1

This relationship between price and volume is independent of the number of actors in the marketplace, competition or monopoly power, etc. Even if there is only one company which has a complete monopoly over selling a product, as this company decreases prices, it will find that it can sell higher and higher volume. Therefore, even for this monopoly it makes sense to lower prices to increase profits. The common theory that only in the presence of competitors prices go down is flawed; a smart monopolist still comes out ahead if it lowers prices. However, monopolies are lazy and do not always act in their own best interest, and do have a tendency to maintain or raise prices.

Business school and finance types will talk about stuff like price elasticity of demand and prices, Giffen goods (goods whose demand go up as their price goes up), etc. They have little experience in running a business in real life, and do not realize that businesses, especially the stable large ones, have a simple rule of success-to lower prices constantly and increase the volume of sales to increase their total revenues and profits. They do not pay much attention to maximizing profit margins-as long as they are profitable even at a very low, e.g. 1% profit margin, they will keep selling their goods. Because the goal of a good business is to take in large and increasing amounts of net total profits (in dollars or euros, or whatever), not to maximize profit margins.

Valuing stocks using the PEG (Price to Earnings Growth rate) ratio is not a good idea

PDF VERSION
Of all measures to value stocks, the PEG (Price to Earnings Growth rate) ratio is one of the most incorrect. It should be completely ignored.

A PE (Price to Earnings) ratio is based on what a company made in revenues and earnings the previous year. The theory is that customer habits are predictable, and what you sold in revenue and earned in profit last year, you can at least repeat that this year. This works okay as a company gets bigger, because buyers have patterns; and if buyers bought an average of X dollars worth of stuff from the company last year, they are likely to buy X worth of stuff this year as well (or this could stretch out over several years-they may purchase X dollars worth of stuff every 5 years, and since there are many customers doing this in a staggered fashion, you can still predict revenues and earnings every year). Most businesses are based on repeat customers, and the PE ratio captures that well-the predictability of yearly revenues and profits is nothing but a predictability of repeat customers. However, the company needs to be quite big (e.g. at least 10 billion dollars revenue per year in the US) for you to be able to say this with confidence, or should have a subscription model or a contractual purchase model (predictable revenue streams), where barriers to switching are high. If this is not the case, what you earned last year (or made in revenues) has little to do with what you will earn this year, because your revenues can be very different. Because buyer behavior is not 100% predictable, they are not locked in, and you can't extrapolate what happened last year to this year.

With the PEG ratio you are bringing in the growth rate (of revenues or earnings) as another variable. Predicting the revenues and earnings of a company is hard enough when thought of year over year,  but growth rates cannot be predicted or extrapolated at all. That a company grew at 15% for the last 3 years year-over-year, doesn't mean that the next year it will grow 15%. Similarly, a company which didn't grow at all for the last 3 years doesn't mean that it won't grow this year. Growth rates are very volatile, and are not based in the logic of repeat customers, predictable revenue streams, etc. which the actual revenues and earnings are based on. Mathematically speaking, the growth rate is the derivative of earnings or revenues with time, and the pattern of this derivative is highly unpredictable, and has nothing to do with the predictability of the original revenue or earnings.

Previous low growth rates do not extend to lower growth rates in the future, nor do historical high growth rates extend to high growth rates in the future. The PEG ratio is a completely idiotic invention in evaluating stocks. Please stop using it.

Errors in inflation measurements-no such thing as inflation

A lot of questionable statistics is used to collect inflation data and to calculate stuff like CPI (Consumer Price Index). Your mortgage and other interest rates and sometimes your rent are adjusted to this number; and this statistical trickery of taking data to find out the value of money and how it varies over time has a bearing on your everyday life.

The problem of circular referencing

Inflation theory is basically circular referencing. You can't adjust price of a chair this year by an index of inflation when the index is calculated using the price of the chair last year, or something which was correlated to/depended on the price of the chair last year.
The index needs to be *independent* of the price of what you want to adjust.
Like a unit of mass-previous values of mass can't be used to calculate subsequent values of mass. You need an independent reference (the 1kg block in Paris, Planck's constant, etc) to adjust your mass value. In Science, this is called calibration. You calibrate your measuring instrument against an independent standard. You can't calibrate using previous observations of what you want to measure!
This is the central problem of inflation theory.

Problems with how inflation is measured

Can we give a precise value for money (dollars) by measuring the value of all other things the way the Index with the inflation basket does? I don't think so.

My inflation basket is not your inflation basket

1. The choice of the standard inflation basket is arbitrary, and even if the data for the basket were statistically reliable (more on that below) , one can't say that the basket can be used to measure the general value of money over all things for all human beings (thousands of things and millions of human beings consuming them in different ways, plus what a person consumes this year is often different from what they will consume 5 years from now). It is a measure of money for that basket only, and any conclusions about the general spending habits of people in so many other ways they spend money from that basket is outright silly.  The inflation data, strictly speaking, is valid just for that basket. Even that basket is constantly changing, sometimes because products in the baskets change (better packaging, more durable, more vitamins in the products, etc.) and sometimes because the people who measure inflation numbers (BLS  in the US) change the basket! Talk about fixing data to suit your model...

The very fact that different baskets give different values for inflation shows that there's nothing real behind the inflation number, it is all noise. If there were a real inflation number, it would be independent of the basket design, would be more robust than only a tiny basket determining it's value.

Worse still, inflation data is calculated using indices like Fisher's and Laspreys/Paasche. They are all imputations of prices and volume because actual volume data for sales is seldom known; a lot of approximations go in into coming up with these indices. The improving quality of products is not considered (more on this later).

2. It does not consider the statistical deviation in prices. Whenever an inflation data is published, I would like to know the standard deviation (variance) of the data. No mention is made; to hide the fact that the prices vary all the time! For the basket used to measure this data, what is the standard deviation of the price of the basket? The Index covers prices consumers pay for services from medical visits to airline fares, movie tickets and rents-all kinds of variable things, and you just can't add the means and come up with a value without talking about the variability or standard deviation of these things! Note that variances of sums of variables add, and the overall variance of a sum is larger than the individual variances of the variables being added. Since prices of the inflation basket constituents are quite variable, an inflation basket derived by summing together these prices will be even more variable (the co-variance terms being zero or very small). See also Comments on Mark Perry's CPI "chart of the century" and What is money and what are its uses?

Worse is when the deviation in prices of objects drowns out the difference between the mean prices of two baskets. Because these goods and services which inflation baskets measure vary a lot at any given point in time, you must consider that variation when talking about difference in one year of a set of these goods and services, like an inflation basket. This is one of my favored statistics, the Cohen's d. If inflation by a basket of inflation or the inflation index is 2% and we know that prices are varying by 5% to 10% anyway, the difference between the means being much smaller than the variation in the prices, basically the trend, even if there is one, is utterly meaningless in reality. This is related to "statistically significant but clinically meaningless" in medicine-where small effects even though statistically significant have no practical meaning. This is after you assume that baskets of inflation are representative. The statistical noise or variation is drowning out any real signal. Interestingly, the same holds for data on global warming, which is statistical bullshit, and you can learn more about Cohen's d here, what can be applied to global warming temperature or sea level rise data is also applicable to inflation data in most cases, because the inherent variation in all these series is huge, and drowns out any trend one way or the another (unless you indulge in data massaging, discarding outliers, etc.).

3. Measuring the value of a basket in money terms, or a bunch of items in money terms, does not give you the value of money. The demand of money varies just like of other things (potatoes, electricity, whatever) and you cannot just average it out over a bunch of things and come up with "one value" of money, as a CPI calculation does. The natural variation of prices of everything, and of money (cash) in itself, is not considered at all.  One must consider that the demand and supply of money, just like of any other commodity (if you could treat it that way), is itself variable.

The basic idea of measuring things to get the value of money is not bad-you can get an idea, a very rough idea about inflation, if EVERYTHING in your basket goes up in price by a significant amount (at least 10%). For small variation in prices, less than 5%, you cannot conclude that the price of things increased because you printed more money, or because of simply that the demand of money went down in relation to other things, etc.

If there was something real in measuring the value of money using things in the inflation basket-ALL items would go up with a very similar and significant amount e.g. 12%. Then you can say with confidence that it is the price of money which is changing and it is not the statistical variation in it which you are capturing. But because the individual components of the basket are quite volatile, the correlation coefficient (if measured, of all these prices going up together) will still be small, because the standard deviations enter into the denominator of the calculation of the correlation coefficient. Note that high co-variance (high correlation) does not necessarily imply causality.

Comparison to wage data

Just like the mean or median wage of a country doesn't tell you much, because of the massive variatin in individual incomes, an average inflation or a basket doesn't either. Worse still, at least the wage is one number; the inflation basket is averaged over hundreds of products, and that makes it even more variable. No one made policy decisions on the basis of an increase of 2% in the median wage (or mean wage), because we all know that the distribution of wages is highly variable, and the mean or median does not account for what's happening for most people in real life. Strangely, we are made to believe that there is such a thing as an average inflation rate, and that that's representative for all the different ways consumers of a country spend their money.

We need to think of inflation like a wage data. Your wages are not my wages, and your inflation is not my inflation. Neither of us has anything to do with the basket based inflation data published by a Government agency, which is the inflation of another imaginary human being who consumes the inflation basket goods, in the exact proportion the basket says.

The prices of all products go down with time, deflation is the norm. Wage increases are 100% real

If everyone is given 10% more money: the salaries of wage-earners go up by 10%, the capital returns of all capital owners go up by 10%, it cannot be said that the prices of all goods will go up. We hate to pay higher prices for the same product-and many times will simply not buy the product at all if prices are raised. The inflation proponents in this case will say that part of the rise in salaries (or capital gains) will go to raise prices (e.g. 3% of the gains will go towards raising prices, while the rest of 7% is the real wage increase (wage growth after accounting for inflation)). One can argue equally well that prices of the exact same products actually went down by 4%, and the real gain of wages is not 7% or 10%, but 14%. In the following paragraphs, I will show you that this is what happens more than likely; that prices of goods are generally falling with time, and the maxim "money saved is money earned" is as true today as it was five hundred years ago, without us needing to correct the buying power for inflation.

Inflation results (that it is generally a positive number, and that prices are going up with time) are contrary to what every human being tries to do in life-save money, get a better deal and a constant push towards finding the same product at a cheaper price. 

A rise in a salary will not cause you to run out and pay a higher price for the exact same product (only a fool would do that!)-and the natural desire of human beings to find better deals from several producers is always pushing prices lower for the exact same product. A corollary: buyers will pay higher prices for higher quality products in the same category.

Similarly, if by just having more money in your pocket you pay more for the same goods (and cause inflation), rich people are causing inflation all the time! They have more money..therefore they will pay more for the same goods than poor people? Rich people are not fools; and just because they have more money doesn't mean that they will overbid for stuff. Inflation caused by more money in the system assumes this behavior.

When you get more money and go to a supermarket, you don't pay more for the same things. What you do do is to buy more things-in other words, you increase the volume of your purchases, but do not push up prices. The richest buy more volume of things; but do not pay more per unit for those things. Being richer really means that the shopping cart has more items in it; and it does not mean that you have paid more for the same items.

This essential thing about volume is lost in many other fields of life as well, not just in measuring inflation. When oil prices rise people who are long the oil market celebrate-not realizing that the net revenue of the oil producer is price multiplied by volume, and if you reduce the volume too much on increasing the price, your revenues are reduced. Or, similarly, many merchants celebrate when they can increase prices; not realizing that they are digging their own grave, because increasing prices leaves competitors a chance to get in, because they can offer goods at lower prices.

One must note that it is buyers who decide the final price in any transaction; sellers only make offers. Buyers enter into the transaction voluntarily (no one forces them to buy something, they can just sit with the money, or buy something else with the money) and are the final deciders of what all goods are priced at. Since buyers are always trying to lower prices, it follows that there is a constant pressure on goods to go lower in money price, or a constant tendency of deflation. Every man wants to buy the cheapest, and deflation is the norm in that sense. If sellers were setting prices it would not be the case; but it is the buyers who set prices. Buying is a voluntary act, and they can choose not to buy, with no one forcing them to go ahead with the transaction. Since most goods except  basic foods are in reality luxuries, it follows that buyers are always lowering prices of goods, shopping between different producers to find a better deal on the same or similar products.

However, buyers will pay higher prices if the product improves; which is really the best use of their increased wages (or capital gains). This explains why over long periods of time (several decades), when you can see that wages do go up, why goods seem to go up in price. Many goods are now better quality than before, and comparing even simple products at two different points in time, the points separated by several decades-will make you realize how much their quality has improved. Quality also has many intangible components-e.g. you will pay more for a coke in Disneyland than in a Seven Eleven. Most of the coke's higher price is going to Disneyland. The quality, includes durability and packaging of vegetables in much better today than 50 years ago. The price of carrots seems to go up in 50 years; but if you consider how much the quality of carrots has gone up, you will realize that the gain has been nothing more than an adequate compensation for better quality, better packaged, cleaned, ready to eat and nice looking carrots rather than the same carrots being sold at higher price. In real life at a certain point in time, when we go to a supermarket, we do pay slightly more for a better product (you will pay more for cleaned, ready-to-eat carrots than unwashed carrots with their leaves attached to them). Accumulate this preference over several decades and you will see why carrots today are much better than carrots 50 years ago. I chose carrots as an example of a simple good; the real quality improvement in complicated machinery, electronics goods, etc. is much larger over a period of decades; $1000 would buy you a 2MHz Processor, 200KB RAM computer 20 years ago, today it gets you a 2GHz processor, 5GB RAM. Or in other words, the computer of 20 years ago will cost you pennies-because of the improvement in the production technology of computers. I remember paying $500 for a 1.2M pixel camera 15 years ago, today a 10M pixel camera is a standard, free feature in all smartphones which cost $200. Improvement in digital camera technology has been very rapid, and the costs of the same product have dropped down exponentially. It is the slow accumulation of higher prices for better products by consumers which caused the elimination of the 1.2M pixel camera. Let me explain this further.

Cost of Hard Drive (per GB) Source Mkomo.com

The chart above shows the cost of storage in computers (per GB). The same curve is seen for DRAM prices, CPU prices, display prices, etc. (adjusted for quality of units). You can see that the cost has collapsed exponentially, and computers are much cheaper today than they were some years ago. A great reduction in prices, but maybe not as dramatic, has happened for car and truck parts, the washing machine, microwave ovens, and all sorts of machines and finished goods.

Fifteen years ago, when the 1.2M pixel camera was launched, it cost US $500. In one year after that, the price of 1.2M pixel camera was $400, but a 1.5M pixel camera was $500 (the manufacturers lowered their cost and because of competition, prices of the exact same camera of 1.2M pixel went down) . I chose to pay $500 for the 1.5M pixel camera. Do this successively for a few years and you will realize how it was consumer preferences together with better (cheaper) technology which caused the elimination of the 1.2M pixel camera from the market.

Inflation baskets and measuring inflation using them do not consider the improving quality of products, i.e. they do not control for product quality (some attempts are made by what is called hedonic adjustments; they are basically a lot of junk statistics, where some "experts" assigns quality attributions to products. They simply do not consider the thousands of other variables, some very far from the eye, which contribute to rising prices. For example, you pay more in a mall for a product, because a lot of what you pay goes to the mall. As the mall improves, the product price goes up. There are hundreds of ways a mall is improved, and you can't guess that by just looking at the product in the store). While some exact products might really increase in price with time, for most products, there is constant improvement going on in quality. Most price increases you see in life on products is because of a real improvement in the quality of these products, which is not adequately captured by inflation measurements. In the United States, the cheapest car might have cost US $5000 in 1965 and today in 2016 it costs US $15000, but the increase in price is not because of inflation or more money in the system; it is a real improvement in the quality of the car in this period. Wage increases are also completely real-and inflation doesn't "eat away" into wage increases as often quoted.

What happened to the $5000 car of 1965, why is it not available in 2016? That's because there has been a real improvement in the US (and the same goes for most other countries) in these years, and people earn enough money to not have to buy the $5000 1965 type car anymore. In poorer countries, you will find a car for $5000; because society there has not improved to an extent that everyone can afford a $15000 car. A $5000 car today in a poor country is much inferior in quality than a $15000 car in the US, as anyone can plainly see. It is normally much smaller in size, power, sturdiness, etc. In one way the $5000 car of today, which is available in poor countries, is the same as the US $5000 car in 1965. But the US has become a much richer country in these years, and people have completely stopped buying the $5000 car (which is less spacious, breaks down more often, not as fuel efficient, etc. etc. than a $15000 car). Spatial comparison can be extended to the temporal dimension as well; and you will come up with the same conclusions-a product which is cheaper in Bulgaria today than in the US, in general, is worse quality than the US product, and is comparable to a previous generation product in the US which was the same quality and price as the present data Bulgarian product.

Within the same country, if a product costs X in Baton Rouge, Louisiana, and costs Y in Manhattan New York, and if the price of  Y is substantially greater than X, then we can safely say that Y is better quality than X. Because within the country there is clear arbitrage-same quality products cost about the same within the country (easy shipping-X will cost the same everywhere in the country, approximately speaking). Shipping is not easy internationally, but even so, if the difference in price between two products in two different countries is very large and they are about the same quality, products will be imported from where they are cheaper and brought to where they are dearer. This is the whole reason for importation-because it is cheaper to import than buying it from a domestic supplier, who for whatever reason is not able to bring the product to market at the foreign supplier's price (including cost of shipping, customs, etc.).

This becomes easier to see when you look at everything from the producer's side. The producer C1 has a product A selling in the market, and they improve on the product to launch a better product, product B (can be better durability, better aesthetics, better resolution, better efficiency, etc. or a combination of these). They will price the product B at a slightly higher price than product A, in money terms. As the market realizes that product B is really better, and worth the higher price, it will start buying B. In a few years, as everyone earns more money, they will stop buying A altogether, and the market will only have product B from company C1. This is how lower quality products get phased out-if new products of better quality are launched, the lower quality products go away from the marketplace, as long as people have enough money to pay for them (which they earn by selling better quality products themselves wherever they work). If  you have the means to buy better quality products, or have more money, you will buy better quality products. This is why in a rich country products are generally of better quality than in a poor country; and within a country, people who are richer have better quality products.

We must remember that money is just an instrument to facilitate the trade of goods and services-the real value of goods and services always being measured by labor or man hours.  In the example above, the real exchange going on is as follows: Imagine the marketplace with only two companies, C1 and C2. The company C1 produces products A and B, where B is an improved version if A. The company C2 produces products X and Y, where Y is the improved version of X. The money price of B is more than A, and that of Y is more than X (that's how the companies will price them when B and Y are launched-improved versions are launched at higher prices than existing versions). Employees of company C1 initially exchange their product A with product X of company C2. When the improved versions B (by company C1) and Y (by company C2) of these products are launched, that exchange starts to take place more and more, eventually completely replacing the original exchange of A with X. Note that to be able to buy an improved product, you must be able to sell an improved product yourself. This is how you "trade-up" in daily life-you buy better quality products, but you must have the means to buy them, and those means or money to buy better quality products you acquire by yourself selling better quality products to the market. You purchase with you labor what other purchase with theirs; is the real exchange going on in society (adjusted for skill and natural ability).  Improving quality of products is the real reason you see increases in price over several years, and inflation data fails to account for this.

You can see how over a period of 20 or 30 years the quality of simple products like shoes, furniture, household appliances, building materials, automobiles and motorbikes, etc. has improved. I remember that 20 years ago shoe laces used to break-but in 2017, when I am writing this part of the article, they don't break anymore. Nor does the plastic at the tip of the shoe lace, which holds the shoe lace in-tact, come off. The soles don't give that easily. These are real improvements, and many are captured by increase in the price of these shoes, as I showed you above when you look at things from the producer's side. Nike has been a major shoe supplier for many decades-and if you look at the improvements in shoe quality (including options in colors, aesthetics, in addition to durability, etc.) you will realize that a lot of the price increase is but a fair payment of the better quality of the shoes. Note that competition always brings prices down (for the same quality, i.e. for the same quality of product), and this means that if something seems to be going up in price in money terms, it is even more likely that it is higher quality. Products like shoes and furniture do not improve as fast as electronic goods or mobile phones, but they do improve. These things are not caught at all in inflation measurements, who will compare the price of an average shoe in 1980 vs today (2017) and say that shoe prices have gone up a lot-attributing it to inflation, and not improvement in product quality.

Consider another example-a McDonald's burger. Inflation proponents can clearly say that the price of a McDonald burger has gone up so much in time! But anyone can see how much better McDonald's has become over a period of 30 or 50 years. See graphic here to realize how much these burger chains have improved over the decades. The service is faster, more machines are used to make the products cleaner, packaging has improved considerably especially if you consider take-out menus, and the McDonald's restaurants worldwide are much more comfortable and nice looking than what they were a few decades ago. All these are improvements which have resulted in good returns for McDonald stock investors, and again looking at things from the producer's perspective, you can see that the stockholders and management have been working to improve the food and the overall experience, and the higher prices of a burger are but a fair recompense for a job well done, and not because of inflation! Competition in the market forces them to do that-if they offer the same product for 10 years without improving its quality, it a certain that competitors will come-in to take away market share. Burgers are a commodity business-and competition is intense in such sectors, with little possibility of monopolies. This is a great recipe for improvement in the products-lots of competition is the surest way to improve products in any category.

A rich country has people who are producing better products, which are exchanged for other better products being produced by other people in the country. The higher prices of products in a rich country are a direct representation of a better quality, and not due to inflation or more money in the system. Same goes for a rich neighborhood in a city in a poor country (e.g. Mumbai, India) -the products in such a neighborhood are generally better quality than in the poorer parts of the city, which command a higher price.

From all this, I hope that it becomes clear that deflation is the norm; the constant desire of every individual to find better value for their money forces prices to go down constantly. A yen or euro saved today will get you more products in 10 years, even if you get no interest.  Banks pay little or no interest in Yens and Euros in the corresponding countries, and to think that people are fools to be saving in these banks (because the interest is lower than the headline inflation number) is to insult the common sense of  savers. The metric of inflation is bad, and largely useless-because comparing goods in inflation baskets does not consider that the products have changed with time, that their quality has improved significantly. The buying power of saved money in dollars, yens or euros is generally increasing with time (for the exact same products) even if you do not get any interest.

It follows from this that all wage increases are 100% real. It is a real improvement in the buying power of labor which shows as an increase in wages. You do not need to correct wages for inflation. The standard nominal vs. real wages (corrected for inflation) comparison is therefore invalid-the nominal wage increase is the real wage increase in the buying power of labor. When you get a raise of 5% from your boss, you increase your buying power by 5% (your real buying power will increase more than 5% because you are able to bring down your costs every year even if you do not get an increase in salary).

The US median household income data shows an increase in annual income from about $5K in 1950 to $50K in 2015. An improvement of about 10X in wages over 65 years is not a surprise, and is a real improvement in wages of about 3.6% per year. If you have $50K today and could somehow bring all the products of US in 1950 to 2015, you will find that those products from 1950 are much inferior in quality than 2015 products, and in reality, will cost 1/10th of your earnings, i.e. you will pay $5000 for those 1950 products in the US. This is a hypothetical experiment, but a similar situation exists is if you take your $50K to a poor country, a country which is 10X less wealthy on an average (e.g. India, Bolivia). You will find that the products in India on average are about the same quality in 2015 as the US products in 1950, and you will find that you will spend only $5000 for acquiring those products in India. You can't go back in time and do time travel; but going with your dollars to a poorer country is a very similar thing . In a very crude approximation, you can think of India and Bolivia in 2015 as where the US was in 1950 in terms of general economic state of society (measured by GDP/capita, or median earnings). These numbers are very approximate, but you can get an idea of progress by traveling all over the world, and an approximate comparison like this helps you realize the large difference between the standard of living (or quality of products and services, which is the same thing) in different countries. You can't go back to what the 1950's US life was; but traveling to Bolivia or India today in 2015 is a good proxy for it.

Similar quality products costs about the same worldwide (from the arbitrage reasons mentioned above-if they didn't, importers and exporters will ship them where they are cheaper to where they are dearer, and they do) and what makes a country different from another is the general quality of products and services, which is much better in a rich country than a poor country. This includes services of the government, monopolies like utilities and telecoms, etc...all these services are much better quality in a rich country than a poor country, and you pay more for them in a rich country because of this. There are some exceptions, but in most cases, you get what you pay for, worldwide.

The wage data in the US (which shows that the median annual wages of US households have gone from $5K in 1950 to $50K in 2015) when corrected for inflation data, as the economic experts like to do, shows that real wages have been stagnant since about 1970. According to these experts, the US worker hasn't seen her lot improve in 45 years...she works harder to consume the same amounts of goods as 45 years ago. The US worker is painted as an idiot by these experts, who apparently know more about real life than her. It is my belief that the US worker knows far more about economics than most economists and financial types, and knows well that their real buying power has improved considerably every 5 years (allowing for year over year fluctuations), and over a period of 45 years, the American worker is far wealthier. They have more goods to consume, more choices, better quality products, better services; and the 'correction due to inflation' is a foolish exercise. The real improvement is not just 3.6% per year, but more, because of the constant pressure on prices from consumers on producers, importers, etc. which pushes the price of products and services downward constantly. The nominal wage increase is 100% real, and the increase in the real buying power is more than the nominal wage increase because of this reason. If wages were not to increase at all for 5 years, in a period of 5 years the US worker would still be better off than before. From personal experience, I am able to constantly drop my costs by finding better deals, and if my income remains the same, I am certainly better off this year than the year before. This is true for most of humanity.

Some people have shown me examples of the exact same products going up in price. While this may be true for some products, for every one product like this, there are ten others whose price has gone down. The weighted average of these products will see a reduction in price. In other words, prices of the exact same product going up with time is an exception rather than the rule. One should not base their judgement on exceptions-and overall you must realize that the same amount of money gets you more of the exact same products with time, i.e. for most products, the price goes down with time.

Will also add that if inflation was as they say, 2% per year, then it would be factored in by everyone, and we would again have no inflation. People look ahead, markets discount, etc. and what is widely known ceases to be a factor in prices of goods and services, investments, wages, etc. In Chile they already have something called UF (Unidad de Fomento) which basically adjusts the currency by  inflation. Now everything is quoted in UF, and therefore UF becomes the official currency for large transactions like real estate, etc. In other words, if inflation was a set number as seems to be reported is US for example of about 2%, one can create another indexed dollar, of 2%, and then it ceases to be a factor in forward prices.

Inflation in Walmart

Walmart is a good proxy for the US consumer...everything is available in Walmart, you can pretty much life off Walmart. Prices of items range from $0.25 to $1000. Do you think that the average price of items, or a basket full of items purchased from Walmart, goes up about 2% a year? That's what inflation proponents are saying.
First problem is the sheer amount of items and their range of prices..you can't talk about an average items price increase...because the variance is so large. Quality of items keeps going up, making comparisons at two different points in time difficult. People have different ways to spend their money in Walmart-every person will have a different inflation number. Worse still, your preferences change with age-what you bought at 20 is not what you buy at 60. What you do is go with let's say $1000 a month and try to get what you can for that price-an assortment of goods, if you will. The budget is fixed-but the shopping cart items are very different at different ages, and for different consumers.
Inflation data experts are saying that an average basket is going up in price by 2% a year, even after controlling for quality. Worse still, they attribute this rise to some banking operations..which is another causality being invoked. But think about Walmart alone and what inflation data means for the goods purchased in that store-and maybe you can see that inflation data is a lot of garbage.
At least you can say that prices remain same with time (keeping quality constant) or that if you see prices go up in time, it is probably because of improving quality. Don't forget that you purchase more items when they are on sale...something ignored by inflation data takers.

Inflation indices and calibration in physical measurements

The creation of inflation indices and using them to find the "correct value of money" is similar to what you do in physical measurements, e.g. of length, mass, etc. A ruler will drift with time, and a 30cm ruler will not be exactly 30cm always; there is an SI standard for rulers and this is a replica of that standard. In hot weather the ruler will expand, and in cold weather, the ruler will shrink etc. Therefore, when you measure the length of an object with this ruler, you will either realize that the measurement is not really perfect, or re-calibrate the ruler with a known object which you know has a dimension which is accurate and closer to the the original SI definition. You do this with weight scales also-you calibrate the apparatus with know weights and adjust the spring etc. to get the right reading, and after that start weighing unknown objects.

Inflation indices are trying to do this in calculating the value of money. But they use some average of the same data set which they are measuring as a representative accurate sample; which is ridiculous. The calibration block (the inflation basket) needs to be independent of the objects you are going to measure. So imagine if you were uncertain about the exact length of a ruler (30 cm) and you just measurement 10 different objects, and knew the values of those objects 1 year ago measured with the same ruler, and now you would attribute the change in length to the change in the ruler! Without any regard to the fact that the objects themselves might be different, or the natural variation in the lengths of objects, etc. which might be so large as to drown out any real change..etc. This is what inflation measurements are doing. They need to have a fixed standard over time, for example a block of gold which used to be used when there was the gold standard, and then you could assume that the value of the money changed, because you could call the gold block the invariant, calibrating fixed item. Since we do not use the gold standard anymore, and money is basically floating, any idea that its value is changing is as bizarre as talking about the change in the length of a ruler when you don't have a calibration object.

People however will live with a crude ruler if they know that objects themselves are varying, and if they know that some errors in their measurements is ok and tolerable. That's what floating currencies are. I have covered the similarity between money and units of mass and length here.

The case of Panama and Ecuador

The futility of inflation measurements is best illustrated by countries like Panama and Ecuador, which use the US dollar as their currency. Since they have no influence or control over how US dollars, a foreign currency there, is valued, or is brought into their country, their inflation measurements are nothing but noise-in the sense that there can't be regular pattern to it. Amazingly, they do have inflation measurement departments...where dozens of statisticians and bureaucrats are employed to come up with this data. Link for Panama here   and Here for Ecuador. Since they can't do anything if the inflation is high or low, why measure it at all!

In Ecuador, the reported annual cumulative inflation was 3.38% in 2015, and 3.67% in 2014. The geniuses in Ecuador and Panama who are reporting these numbers, massage the data to make it look like a nice number, instead of saying it is statistical noise. They publish this number to keep the banking community and financial guys happy. As long as it is between 0 and 5%, everyone is happy. Data which will make it go beyond these is readily discarded.

Obviously if US dollar inflation in US is 1% to 2%, why would it be more in Panama or Ecuador? Inflation should be same in all parts of the world where you are using USD. The very fact that it isn't shows that we are talking about noise here..not real data.

Digression 1-As a general comment, I think most people, including scientists, will make up or polish data to prove what they want to prove-because their jobs, their funding, etc. depends on it. In the end, for most people, it is just a job; and a bit of data jugglery is a part of their job, just as it is for people who work in Sales and Marketing-who will make up data to sell their products. Not more than 5% will publish the data as it is, and agree that it might just be noise (and this is in all walks of life, not just economics, medicine and global warming; subjects I have covered in this blog to show you how a lot of what you see is noise disguised or polished as data).

Digression 2-As I grow older, I realize that a lot of data we have around is is just noise, and a large amount of foolishness of humanity is to confuse this random data as relevant. This is how stuff like the existence of God and astrology was born. Even though science has advanced greatly in the times since we invented the idea of God and planetary movement affecting our daily lives, I still find that a lot of humanity still confuses noise with data. Wherever people see patterns, I generally see noise. And as Nassim Taleb said so well in one of his books-good data shouts at you, you don't need to look for it or justify it by long arguments.
 
There are a lot of holes in the basket measurement of inflation. Any number which is less than 5% and is quoted as inflation is but noise-and they are careful to hide the noise by not publishing the standard deviation of data.

Other holes in the measurement of inflation: a) they invented something called "core inflation" to remove the volatile parts of the inflation basket, food and energy. A real statistician never discards any data, here it is being discarded on purpose to remove the deviations and noise in the data, to make the inflation numbers "smooth" and b) a small change in the composition of the inflation basket will lead to an entirely different number for inflation. If the real value of money was being measured, a change in just the composition of the inflation basket should make no difference.

Inflation measurements which are increasing steadily at say 2% or 4% per year are in reality a clever way of defrauding the persons who borrow-who almost always see their interest payment go up with time, because they measure the index in a peculiar way to make it increase slightly almost every year. The noise of the measurements is removed carefully to always come up with a slightly positive number  between 0% and 5%, to give the banks a license to increase interest payments on the borrowers. Or rent payments, which are also adjusted to inflation in most big cities. The inflation data publishers meet the needs of the market well-the massage the data to come up with a number of between 0 and 5%, and get to keep their jobs. But the real value of all this data is zero, for the reasons mentioned above.

Inflation in Venezuela and Argentina

There is documented inflation in Venezuela and Argentina, and from what I know, in Zimbabwe (between 2000 and 2019). This is not because there's more money in the system; it is because no one wants to hold the currency, because the central banks are not managing their own balance sheets well and there is fear that they are bankrupt, or giving loans away as gifts (negative interest rates) generally to government entities. For the same amounts of goods in a country, if people decide to hold less and less currency, the value of the currency goes down. Goods decide the value of money, and if people believe that the money of the country is not being run responsibly, the refuse to hold any of their savings in that currency, pushing the price of the currency down relative to the goods. In Venezuela and Argentina, goods have retained their value in USD or Euros; it is the value of the currency which has gone down. 

Inflation in these countries comes about because of crazy central banks, who are themselves devaluing their own currency and are not reliable, which makes people price things in other currencies like the USD.

This is entirely different from a normal functioning country where central banks are somewhat responsible and don't do silly things like raise interest rates to 60% (as in Argentina today) or in Venezuela where we don't even know the balance sheet of the central bank. This makes the public lose faith in the currency, they they spend it as soon as they get it (via salaries, etc.) which makes it seem that the value of goods is going up, but it is just a collapsing currency causing this.

This is rarely the case in developed countries and most developing countries as well.

Inflation feedback loops

The most ridiculous use of inflation data is by utilities  (electricity, telecom companies, etc.) and essential services companies. Utilities use this data to justify increasing rates. They say that because of inflation, they be allowed to raise rates. Since their own products form a part of the basket of things used to measure inflation, they basically go into a feedback loop-the basic necessities companies raise rates because of inflation data, and since they raise rates, next year inflation data shows even more inflation, and they raise rates even more. Imagine if every product or service in the inflation basket started raising rates, the next year's inflation would go through the roof! Here in Chile where I live, this is why gas and electricity prices are the highest in the Americas (North and South)..and the Government lets these utility companies increase rates , who use the excuse of higher inflation.

Here's what Smith said about increase of paper money possibly causing inflation (which seemed to be a theory in 1760 as much as it now!) in Book 2 of the Wealth of Nations, chapter on "Money Considered as a particular Branch of the General Stock of the Society"

"The increase of paper money, it has been said, by augmenting the quantity, and consequently diminishing the value of the whole currency, necessarily augments the money price of commodities. But as the quantity of gold and silver, which is taken from the currency, is always equal to the quantity of paper which is added to it, paper money does not necessarily increase the quantity of the whole currency. From the beginning of the last century to the present time, provisions never were cheaper in Scotland than in 1759, though, from the circulation of ten and five shilling bank notes, there was then more paper money in the country than at present. The proportion between the price of provisions in Scotland and that in England is the same now as before the great multiplication of banking companies in Scotland. Corn is, upon most occasions, fully as cheap in England as in France; though there is a great deal of paper money in England, and scarce any in France. In 1751 and in 1752, when Mr. Hume published his Political Discourses,*36 and soon after the great multiplication of paper money in Scotland, there was a very sensible rise in the price of provisions, owing, probably, to the badness of the seasons, and not to the multiplication of paper money."

Related posts:

What is money and what are its uses?

Comments on Mark Perry's CPI "chart of the century"

 Central banks have no influence in jobs creation, unemployment or real interest rates. Here's the post explaining this.