> What causes inflation?
>
> that's simple: too much money chasing too few goods.
> ;-)
>
Such is the "quantity theory". But it matches reality only if the
adjustments between all goods and all money are instantaneous and
simultaneous. What is reflected in market-equilibrium models of the kind of
Walras-Debreu's, and what explains that Walras calls for a mythical and
universal "auctioneer". David Hume, who was the grand-father of that theory,
saw the price rise "by degrees" ("Of money"). What means that the adjustment
by prices is not immediate. Now, what is the other adjustment variable, as
long as the requested price level has not yet be reached? Answer: stocks
variation. As long as demand excesses supply, stocks drop. When they stop
dropping, that means that supply matches demand, and then there is no reason
for prices to continue rising. Now, is it possible that stocks keep dropping
for thirty or fourty years?
In other words, grand-father Hume killed himself quantity theory at birth.
And such is the reason why quantity theorists needed a newtonian market
place: to have not to take stocks variation in account. The modern theorists
have well understood that, and in order to escape the trap, they invented
"rational anticipations". As "inflation" is anticipated, instantaneity and
simultaneity are actualized in the mind of economic agents. Let us stop
smoking.
Te truth is quantity theory is absolutely wrong. Money quantity is not a
cause but a consequence of increasing price level. All historic cases of
"inflation" or even "hyperinflation" involve a third factor: growth or debt.
Growth in long-term-inflation trends of Rome's world system, of 16th-century
Europe, of occidental world after second world war. Debt in Weimar Rebublic
of 1922-1923 and in today's Argentina, Turkey, etc. Growth is simple to
understand, as it exerts a permanent tension on stocks, within an economic
chain where basic activities are disadvantaged from the point of view of
productivity
