# At last, an idea that makes economic sense: reduce VAT instead of stamp duty!



## dontaskme (11 Oct 2006)

[broken link removed]

Referring to a call to reduce VAT instead of trying to cut stamp duty.

VAT reduction should at least damp inflation as retailers and service providers could be encouraged to pass on the cut, whereas cutting stamp duty would probably just reduce the Government's cut of house prices.


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## ClubMan (11 Oct 2006)

*Re: At last, an idea that makes economic sense*



dontaskme said:


> VAT reduction should at least damp inflation as retailers and service providers could be encouraged to pass on the cut


Why would they necessarily? If they know people will put up with the _VAT _inclusive price then why would they not simply keep prices as they are (more or less) and pocket increased margins? We all know how many _Irish _people are content to pay what they consider high prices and then only moan about supposed rip-offs after the fact so there's no evidence to suggest that there would be any great pressure on retailers to cut prices in the face of such taxation changes.


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## room305 (11 Oct 2006)

*Re: At last, an idea that makes economic sense*

High prices are not inflation they are the result of inflation. The only way to combat inflation is to reduce the money supply and tighten credit lending practices. Since we cannot set our own lending rates, the government should be looking to increase taxes rather than reduce them.


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## edo (11 Oct 2006)

*Re: At last, an idea that makes economic sense*

Complete Red Herring

Just a another lobby Group kite flying a wish list ahead of what is expected to be a "giveaway" budget.

As Clubman and Room305 have said - the market takes care of pricing - in our case the average irish consumer exercises about as much financial restraint and forethought as a 6 year old with Daddy's credit card in a toy factory.


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## NorfBank (11 Oct 2006)

*Re: At last, an idea that makes economic sense*

Agreed in theory.

Except for the fact that the 6 year old must have had a great deal of forethought to get to  Daddy's credit card without his knowledge and unless he has the PIN or is a dab hand at forgery then the financial restraint will be severe.


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## edo (11 Oct 2006)

*Re: At last, an idea that makes economic sense*

A





> greed in theory.
> 
> Except for the fact that the 6 year old must have had a great deal of forethought to get to Daddy's credit card without his knowledge and unless he has the PIN or is a dab hand at forgery then the financial restraint will be severe.


heh heh - eloquently put! - then again the ease with we irish seem to gain access to credit would make you wonder if a six year old couldn't do all the above - We definitely must be the world's experts at getting cash out of people , from the Taoiseach down - Its how and what we spend it on would make you feel there wont be a nobel prize for this category coming in our direction anytime soon.


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## dontaskme (11 Oct 2006)

*Re: At last, an idea that makes economic sense*



room305 said:


> High prices are not inflation they are the result of inflation. The only way to combat inflation is to reduce the money supply and tighten credit lending practices. Since we cannot set our own lending rates, the government should be looking to increase taxes rather than reduce them.


 
this is true with payroll taxes, perhaps, but if vat were doubled overnight it would have a striking effect on inflation. 

Conversely, consumer prices are probably sticky downward if VAT were reduced, by say 3%, but retailers and service providers would be suspected of price gouging if they were putting up prices at the same time that their margin is increasing by 3%. It might not come through as reductions, but it should at least stave off price increases.


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## ClubMan (11 Oct 2006)

*Re: At last, an idea that makes economic sense*



dontaskme said:


> this is true with payroll taxes, perhaps, but if vat were doubled overnight it would have a striking effect on inflation.


Not necessarily as I have pointed out above.


> Conversely, consumer prices are probably sticky downward if VAT were reduced, by say 3%


 What do you mean by "sticky downward"?


> but retailers and service providers would be suspected of price gouging if they were putting up prices at the same time that their margin is increasing by 3%.


 So what? Look around - many people ultimately pay what they think are high prices and just moan about it after the fact even though there are often cheaper alternatives.


> It might not come through as reductions, but it should at least stave off price increases.


 Why? If a retailer can increase margins further without impacting demand  then they will.


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## room305 (11 Oct 2006)

*Re: At last, an idea that makes economic sense*



dontaskme said:


> this is true with payroll taxes, perhaps, but if vat were doubled overnight it would have a striking effect on inflation.



You are making  the mistake of thinking inflation can be controlled by lowering the prices of goods and services. Inflation is an increase in the money supply (usually faciliitated by loose credit) which results in an erosion of the purchasing power of that money.

What percentage of a price is composed of tax is completely irrelevant from an inflation perspective. If anything the government should look at increasing the VAT on goods. The prices won't change but it will remove liquidity from the system (by putting it in the government's coffers) and help combat inflation.


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## darag (11 Oct 2006)

VAT is a great tax.  It's relatively easy to collect but more importantly it's a tax on consumption.  This encourages investment (i.e. saving) over consumption which is good for the economy long term.  Our relatively high consumption tax and low income tax is probably a happy accident but a beneficial one.


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## owenm (11 Oct 2006)

didn't one of the governments try this in the 80's, halved vat to cut inflation? it worked for 12 months only because they would have to more than halve vat again (or eliminate it altogether) in the next budget to have the same effect....

Room305 is right, inflation is excess money not rising prices. we just use prices to gauge it

Also Charlie McCreevy put vat down by 1% in 2001(?) and put it back up again 12 months later because he said buisness's and retailers weren't passing it on......


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## dontaskme (11 Oct 2006)

*Re: At last, an idea that makes economic sense*



room305 said:


> You are making the mistake of thinking inflation can be controlled by lowering the prices of goods and services. Inflation is an increase in the money supply (usually faciliitated by loose credit) which results in an erosion of the purchasing power of that money.


 
The ECB target rate of inflation is based on consumer price index, not money supply.



room305 said:


> What percentage of a price is composed of tax is completely irrelevant from an inflation perspective. If anything the government should look at increasing the VAT on goods. The prices won't change but it will remove liquidity from the system (by putting it in the government's coffers) and help combat inflation.


 
It is the change in the percentage that makes the difference, it is not supposed to work as a long term fix, it just reduces it while the change passes through the system. Profit margins etc. should return to their long-term mean after a while.


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## dontaskme (11 Oct 2006)

owenm said:


> didn't one of the governments try this in the 80's, halved vat to cut inflation? it worked for 12 months only because they would have to more than halve vat again (or eliminate it altogether) in the next budget to have the same effect....
> 
> Room305 is right, inflation is excess money not rising prices. we just use prices to gauge it
> 
> Also Charlie McCreevy put vat down by 1% in 2001(?) and put it back up again 12 months later because he said buisness's and retailers weren't passing it on......


 
yes, it is not a long term fix. 

And 1% is a miserly amount anyway (as one could expect from McCreevy )


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## room305 (11 Oct 2006)

*Re: At last, an idea that makes economic sense*



dontaskme said:


> The ECB target rate of inflation is based on consumer price index, not money supply.



Exactly. Rising prices are the feedback loop to tell the ECB to throttle the amount of money they are pumping out. Falling prices would imply the opposite. What you are proposing is attacking the effects of inflation rather than the cause.

If I present myself at the doctor covered in red spots that might indicate meningitis, it would be a pretty poor doctor that suggested I cover the red spots with concealer and forget about it.



dontaskme said:


> It is the change in the percentage that makes the difference, it is not supposed to work as a long term fix, it just reduces it while the change passes through the system. Profit margins etc. should return to their long-term mean after a while.



I am saying that reducing the tax on goods will _increase_ inflation because it will increase the amount of money in the system. I am not following what you are saying about change and long-term profit margins. Surely the price the retailer sets is the highest he can get away with?


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## Western_Sean (11 Oct 2006)

darag said:


> VAT is a great tax.


 
Aren't forms of taxation which are unfairly incident on lower wage earners generally considered poor and inequitable?



> The ECB target rate of inflation is based on consumer price index, not money supply..


 
Wasn't the ECB originally using M3 money supply as part of it's approach? 
I suspect that this only changed in response to economic issues that arose subsequently, perhaps we are now observing the beginnings of a return to this method?


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## dontaskme (11 Oct 2006)

*Re: At last, an idea that makes economic sense*



room305 said:


> Exactly. Rising prices are the feedback loop to tell the ECB to throttle the amount of money they are pumping out. Falling prices would imply the opposite. What you are proposing is attacking the effects of inflation rather than the cause.


 
Talking about cause and effect of inflation is like debating chicken and egg. 
According to wikipedia inflation is a rise in the general level of prices and that is good enough for me.
The ECB also pay close attention to money supply measures.



room305 said:


> I am saying that reducing the tax on goods will _increase_ inflation because it will increase the amount of money in the system. I am not following what you are saying about change and long-term profit margins. Surely the price the retailer sets is the highest he can get away with?


 
as an example assume someone grows a cabbage and sells it for 1.21 and 21% is vat so the guy keeps 1 euro and passes 21 cent to revenue. 

Now assume vat is reduced to 10%. Now the guy keeps about 1.09c and passes 12c to revenue. Now assuming that someone else is competing with the cabbage seller and cuts their price to 1.11, now they keep one euro (which is what the pre-tax price was before the change) and pay 11 cent to revenue. 

If the other cabbage seller wants to compete, he has to reduce prices as well, he can't keep the difference as an extra profit margin.

In other words, the retailer charges as much as he can, with competition acting as a limiting factor.


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## Sherpa (12 Oct 2006)

Didn't McCreevy cut the top VAT rate from 21% to 20% in one of his budgets and then promptly raise it back to 21% again when it became clear that retailers were just pocketing an extra 1% margin?


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## ClubMan (12 Oct 2006)

*Re: At last, an idea that makes economic sense*



dontaskme said:


> Talking about cause and effect of inflation is like debating chicken and egg.
> According to wikipedia inflation is a rise in the general level of prices and that is good enough for me.


Fair enough - let's just accept that for the moment. So why do you think that reducing tax will necessarily reduce prices charge by retailers as I have asked above? There is nothing to suggest that this would be the case. If the retailer knows that the _VAT _inclusive price is one that the market/consumer will bear then s/he will charge it. If _VAT _is abolished then that changes nothing. The breakdown of the price into its constituent components (e.g. cost of goods, margin, tax etc.) is irrelevant. I think it's all to do with price elasticity of demand or something but my macroeconomics is a bit rusty and was never chrome plated in the first place.


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## ubiquitous (12 Oct 2006)

owenm said:


> Also Charlie McCreevy put vat down by 1% in 2001(?) and put it back up again 12 months later because he said buisness's and retailers weren't passing it on......



That was McCreevy's excuse. It was easier for him to blame the business sector for the 1% VAT hike than to admit that he needed to do this to shore up the public finances which were in the red at the time because of his own reluctance to introduce public spending cuts in advance of the 2002 election.


darag said:


> VAT is a great tax.  It's relatively easy to collect..



I don't agree. There is a remarkable level of VAT fraud in this country, and indeed internationally - if you don't believe me, ask anyone who has ever paid cash for domestic service work.  That's leaving aside the spectacular international VAT frauds that cost the UK government alone a number of Billions last year. The VAT system, as currently structured, creates an immediate and direct competitive advantage for tax-dodging businesses at the expense of compliant businesses. In certain sectors this advantage is so pronounced that the dellboys flourish while legitimate businesses find it difficult to survive.


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## dontaskme (12 Oct 2006)

*Re: At last, an idea that makes economic sense*



ClubMan said:


> Fair enough - let's just accept that for the moment. So why do you think that reducing tax will necessarily reduce prices charge by retailers as I have asked above? There is nothing to suggest that this would be the case. If the retailer knows that the _VAT _inclusive price is one that the market/consumer will bear then s/he will charge it. If _VAT _is abolished then that changes nothing. The breakdown of the price into its constituent components (e.g. cost of goods, margin, tax etc.) is irrelevant. I think it's all to do with price elasticity of demand or something but my macroeconomics is a bit rusty and was never chrome plated in the first place.


 
It's up to the consumer to look for the lower price. It won't necessarily reduce prices, but it should act as a damper on inflation.

If you have a plumber round at the end of December and he charges 100 euro and comes round in January for the same thing, and if you know he is paying 5% less tax, and he tries to charge 100 euro again you can try to pressure him to pass on the reduction. And you would be very sceptical if he tried to charge more.

Reducing inflation does not mean reducing prices, but slowing the rate of price increases.

So even if the reduction is not passed on (which consumers should be demanding), the price should at least be not increasing.


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## intermission (12 Oct 2006)

The quoted article doesn't even mention stamp duty!

All it states is that cutting VAT is _less _inflationary and more equitable than cutting income tax.

Cutting income tax gives people extra spending power straight away, creating extra demand in the economy.

However, cutting VAT will still be inflationary in the long run as the total price of goods/services is ultimately controlled by supply and demand. Demand will raise the price to the level it was before, given that consumers were prepared to pay that price originally.

All cutting VAT does is temporarily skew the Retail Price Index, which is what we use to measure the rate of inflation.

To control inflation:
1/ Reduce public expenditure by raising taxes / raising interest rates / tightening credit.
2/ Reduce Govt expenditure by cutting services / benefits - not popular!
3/ Place limits on wage increases - not popular!
4/ Limit the growth of money supply


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## baby_tooth (12 Oct 2006)

interesting suggestion, 

reduce vat ..thus reduces price / cost to consumer of staples..like esb gas, etc....

now raise income taxes.

off sets loss of revenue in vat cut and also reduce money supply.
economicaly sound if the pursuit is to reduce inflation, or couse other repurcussions to consumers spending patterns.


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## dontaskme (12 Oct 2006)

intermission said:


> However, cutting VAT will still be inflationary in the long run as the total price of goods/services is ultimately controlled by supply and demand.


 
Yes, you are probably right insofar that prices would mostly stay the same i.e. 0% inflation, which benefits the consumer. In this case there would also be more money in the system but it would be in the pockets of businesses. Therefore it would be more likely to spur investment, rather than blind consumer spending.



intermission said:


> Demand will raise the price to the level it was before, given that consumers were prepared to pay that price originally.


 
And this is why house prices always only go upward! :lol:



intermission said:


> All cutting VAT does is temporarily skew the Retail Price Index, which is what we use to measure the rate of inflation.


 
Yes, the VAT cut would have a temporary effect on inflation.


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## room305 (12 Oct 2006)

Essentially dontaskme, you are looking to use our tax money to bribe retailers in the hope they will reduce prices. If we introduce this measure, in year's time, everyone will be standing around scratching their heads wondering why the retailers continued to charge what the customer was willing to pay.

As a customer I couldn't care less about how much of a good is VAT, what the running costs of the business are or if the owner of the business just had a good win on the horses. If the business is operating in a competitive environment the price will already be set to what the market will bear. Where is the incentive for the retailer to pass on a reduction in VAT? When the price of oil increased dramatically retailers largely absorbed the costs (even though it hurt their margins) and are unlikely to reduce their prices now that oil prices have fallen again. Remember it is the consumer that sets the price for the good by paying for it, not the retailer.

In Zimbabwe inflation is running at over 1200% a year, crippling their already poor economy. In an effort to curb inflation, the government intervened and fixed the price of petrol. Result? Petrol owners refused to open their garages to sell the petrol and the army was called in to force petrol station owners to serve petrol at gunpoint. Has this reduced inflation in Zimbabwe? No, the money has to find a home somewhere and no doubt with petrol costs fixed, the price of something else increased correspondingly. It is the amount of money in the system that is the problem, not the price of the goods.

Interesting suggestion babytooth. Reducing VAT will improve the retailers profit margin and increasing income tax will reduce the consumer's spending power with the likely result that the retailers will be forced to reduce their prices (and will have the means to do so).


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## darag (12 Oct 2006)

> I don't agree. There is a remarkable level of VAT fraud in this country, and indeed internationally - if you don't believe me, ask anyone who has ever paid cash for domestic service work. That's leaving aside the spectacular international VAT frauds that cost the UK government alone a number of Billions last year. The VAT system, as currently structured, creates an immediate and direct competitive advantage for tax-dodging businesses at the expense of compliant businesses. In certain sectors this advantage is so pronounced that the dellboys flourish while legitimate businesses find it difficult to survive.


And these people who commit VAT fraud are fully compliant with respect to all their other tax obligations?  It is riskier committing VAT fraud as it either requires the complicity of the customer ("cash price") or leaving an external paper record that you charged VAT (in the form of an invoice or receipt) which can be used as evidence that you committed VAT fraud.  Fiddling taxes which involve nobody but the fraudulant company and revenue is far more common.  These "delboys" you refer to are likely to be fiddling far more income tax than VAT.

The case of the international VAT fraud is a product of the relatively recent international tax agreements which allow refunds against foreign VAT which were enacted without putting in the relevent bureauocracy to check such refunds.  Again there is nothing particular to VAT in this regard.  There is huge international fraud of income taxes (e.g. non-declaration of foreign investment property rent) yet no-one claims that we should scrap income taxes.  Or at an even bigger scale is international transfer pricing to avail of lower taxes on corporate profits - currently under scrutiny by the US authorities; the figures involved here dwarf any international VAT fraud.  The UK loophole has been closed in any case.



> Aren't forms of taxation which are unfairly incident on lower wage earners generally considered poor and inequitable?


Most people agree that progressive taxation is appropriate for income.  Fewer would argue for progressive taxation on wealth  - e.g. rates on property.  But I've yet to hear an arguement for progressive taxation on consumption.  Making VAT progressive would achieve nothing that couldn't be achieved with adjustments to income tax and would be impossible to collect.  People pay VAT on what they spend from their take home pay - if you want higher earners to pay more you can take the money off them before they even get to the shop.


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## room305 (12 Oct 2006)

dontaskme said:


> Yes, the VAT cut would have a temporary effect on inflation.



No, it would have a temporary effect on the measure we use to observe inflation. You do not seem to be able to make the distinction between the two. When I am driving I cannot reduce speed by tampering with the speedometer.


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## dontaskme (12 Oct 2006)

room305 said:


> No, it would have a temporary effect on the measure we use to observe inflation. You do not seem to be able to make the distinction between the two. When I am driving I cannot reduce speed by tampering with the speedometer.


 
According to Wikipedia

"In mainstream economics, *inflation* is a rise in the general level of prices, as measured against some baseline of purchasing power. The prevailing view in mainstream economics is that inflation is caused by the interaction of the supply of money with output and interest rates."

But maybe, it would make it clearer to you if I said that reducing VAT would have a positive effect on price stability.


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## dontaskme (12 Oct 2006)

room305 said:


> Essentially dontaskme, you are looking to use our tax money to bribe retailers in the hope they will reduce prices. If we introduce this measure, in year's time, everyone will be standing around scratching their heads wondering why the retailers continued to charge what the customer was willing to pay.


 
Not necessarily to reduce prices, but to at least slow the level at which prices are increasing. But it would also be up to consumers to look for the lower prices and to spur competition.


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## room305 (12 Oct 2006)

dontaskme said:


> Not necessarily to reduce prices, but to at least slow the level at which prices are increasing. But it would also be up to consumers to look for the lower prices and to spur competition.



But why would they look for prices to not increase if the money supply is increasing and there is an expectation of inflation? If consumers want lower prices they should look for them and they will get them. How much of the good is tax and how much is pure profit for the retailer is irrelevant unless you are suggesting that goods in Ireland are currently priced as low as the retailer can sustain.

The idea seems to be based on a principle of "cut tax and hope" rather than any sound economic reasoning.


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## dontaskme (12 Oct 2006)

room305 said:


> As a customer I couldn't care less about how much of a good is VAT, what the running costs of the business are or if the owner of the business just had a good win on the horses.


 
Large shopping chains like Tesco and Aldi and Lidl tend to drive a harder bargain. 



room305 said:


> If the business is operating in a competitive environment the price will already be set to what the market will bear. Where is the incentive for the retailer to pass on a reduction in VAT?


 
I would imagine they would pressure their suppliers, and then if the market is competetive, they should compete on price. And if one of them reduces prices to consumers, the others should have to follow.


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## room305 (12 Oct 2006)

dontaskme said:


> According to Wikipedia
> 
> "In mainstream economics, *inflation* is a rise in the general level of prices, as measured against some baseline of purchasing power. The prevailing view in mainstream economics is that inflation is caused by the interaction of the supply of money with output and interest rates."



This doesn't contradict anything I have said.



dontaskme said:


> But maybe, it would make it clearer to you if I said that reducing VAT would have a positive effect on price stability.



In which case, as I have already pointed out cutting VAT will have the opposite effect. To stabilise prices during periods of inflation we need to take money out of the hands of the consumer. To do this, we need to increase taxes not reduce them.


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## dontaskme (12 Oct 2006)

*Re: At last, an idea that makes economic sense*



room305 said:


> You are making the mistake of thinking inflation can be controlled by lowering the prices of goods and services. Inflation is an increase in the money supply (usually faciliitated by loose credit) which results in an erosion of the purchasing power of that money.


 
This is what you said.

Now I'm asking you, what happens if prices of goods and services go down? Are you trying to say that has no effect on inflation?

I'm not saying the lowering of the prices controls inflation, however by lowering prices, inflation, by definition, goes down.

The definition is in terms of consumer prices, not in terms of the money supply.


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## dontaskme (12 Oct 2006)

room305 said:


> In which case, as I have already pointed out cutting VAT will have the opposite effect. To stabilise prices during periods of inflation we need to take money out of the hands of the consumer. To do this, we need to increase taxes not reduce them.


But if the consumer has extra money, where did it come from?

From price reductions, where the VAT decrease has been passed on.

And, if the reductions are not passed on, the extra liquidity is in the pockets of businesses, who can use it for investment, not in the hands of the willing consumer.


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## room305 (12 Oct 2006)

*Re: At last, an idea that makes economic sense*



dontaskme said:


> This is what you said.
> 
> Now I'm asking you, what happens if prices of goods and services go down? Are you trying to say that has no effect on inflation?



It will have an effect on inflation measures not on inflation itself. If the prices of goods are low then the money will find a home somewhere else. For years now we have had a rapidly expanding money supply but controlled prices by importing deflation from countries like China. This didn't eradicate inflation because during this time the price of houses exploded.



dontaskme said:


> I'm not saying the lowering of the prices controls inflation, however by lowering prices, inflation, by definition, goes down.



Yes but we would need to lower the price of everything which is simply not possible. Lower the price of one good and the money will just push up prices somewhere else. To follow your argument to its logical conclusion we could pump out all the money we want - make everybody rich on paper - and then prevent hyper-inflation by directly intervening in the market to keep the prices of goods and services low.



dontaskme said:


> The definition is in terms of consumer prices, not in terms of the money supply.



Yes because that is how we observe inflation. When your money can purchase less goods then it is clear that the purchasing power of that money has been eroded.


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## room305 (12 Oct 2006)

dontaskme said:


> But if the consumer has extra money, where did it come from?
> 
> From price reductions, where the VAT decrease has been passed on.
> 
> And, if the reductions are not passed on, the extra liquidity is in the pockets of businesses, who can use it for investment, not in the hands of the willing consumer.



This doesn't make any sense.


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## dontaskme (14 Oct 2006)

*Re: At last, an idea that makes economic sense*



room305 said:


> High prices are not inflation they are the result of inflation. The only way to combat inflation is to reduce the money supply and tighten credit lending practices. Since we cannot set our own lending rates, the government should be looking to increase taxes rather than reduce them.


 
I've thought about this and I don't buy it. You seem to say that inflation is an increase in the money supply rather than an increase in prices.

If the money supply were to double overnight, and the number of people in an economy doubled and the amount of goods and services available for sale doubled overnight as well, then prices would not go up.

Another example, if the money supply were to stay the same but there were sudden shortages of goods and services, then prices would go up. This is inflation.

There are a number of factors that have a bearing on inflation e.g. supply and demand, monetary policy, fiscal policy, growth of the economy, demographics and money supply is one of these factors.


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## tyoung (15 Oct 2006)

*Re: At last, an idea that makes economic sense*



dontaskme said:


> If the money supply were to double overnight, and the number of people in an economy doubled and the amount of goods and services available for sale doubled overnight as well, then prices would not go up.
> 
> Another example, if the money supply were to stay the same but there were sudden shortages of goods and services, then prices would go up. This is inflation.


I think you're right on the first point. Under a strict gold standard mild price deflation is the norm due to rising productivity and rising population. Nothing wrong with that though.
On the second point I would disagree in theory anyway. If there was a shortage of certain goods and sevices certainly their price would rise but if the money supply is fixed wouldn't the price of other goods/sevices have to fall? less money to spend on them etc.
The Ecomonist mag had an article on the link between monetary inflation and price inflation a couple of months ago. The take home message, if I remember correctly, was that monetary inflation is a useful predictor  of price inflation  but with about a 3 year lag.
 When monetarism was in high fashion everybody used to pore over the latest monetary data for clues as to the direction of interest rates.
Now the ECB looks at monetary data when setting the course of interest rates. It's been sky high for the last few years.
 The US Fed does not. It stopped publishing M3 figures last year.
Regards


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## room305 (15 Oct 2006)

*Re: At last, an idea that makes economic sense*



dontaskme said:


> I've thought about this and I don't buy it. You seem to say that inflation is an increase in the money supply rather than an increase in prices.
> 
> If the money supply were to double overnight, and the number of people in an economy doubled and the amount of goods and services available for sale doubled overnight as well, then prices would not go up.



Inflation is an increase in money supply as the purchasing power of said money is eroded by simply having more of it. If the money supply is doubled then the purchasing power of the money is halved and prices will double.

Otherwise, we could print all the money we want and never fear an inflationary payback once we contrive to keep the prices of goods low. So despite there being more money in circulation, somehow the purchasing power of money would never be eroded.

It's simply not feasible. Look at the current situation, the price of goods was kept in check by globalisation and increased competition but the price of houses simply expoded. That's inflation.


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## room305 (15 Oct 2006)

*Re: At last, an idea that makes economic sense*



dontaskme said:


> If the money supply were to double overnight, and the number of people in an economy doubled and the amount of goods and services available for sale doubled overnight as well, then prices would not go up.



If we double the number of people, double the money supply and double the amount of goods and services then nothing has really changed has it? We've just increased everything by a factor of 2.


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## dontaskme (31 Oct 2006)

*Re: At last, an idea that makes economic sense*



room305 said:


> If we double the number of people, double the money supply and double the amount of goods and services then nothing has really changed has it? We've just increased everything by a factor of 2.


well, not according to my definition of inflation. The money supply has doubled but prices remain the same so inflation is 0%.


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## room305 (31 Oct 2006)

*Re: At last, an idea that makes economic sense*



dontaskme said:


> well, not according to my definition of inflation. The money supply has doubled but prices remain the same so inflation is 0%.



If you scale everything by a factor of two _nothing_ has changed.


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## intermission (1 Nov 2006)

*Re: At last, an idea that makes economic sense*



dontaskme said:


> well, not according to my definition of inflation. The money supply has doubled but prices remain the same so inflation is 0%.


 
Inflation would not be 0%... it is not measured on the basis of whether prices have changed overnight.

If the rate of inflation was 2.5% and you doubled everything else overnight, inflation is still 2.5% the next day.

The rate of inflation is measured by comparing the cost of a basket of goods every month against a base date and how much prices have fluctuated since then.

Inflation would only be 0% if you took the previous day as the base date - but that's not how inflation is calculated.


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## dontaskme (1 Nov 2006)

*Re: At last, an idea that makes economic sense*



room305 said:


> If you scale everything by a factor of two _nothing_ has changed.


If there was twice the population in Ireland (i.e. goes from 4 to 8 million), twice the money supply and twice the amount of goods and services, you would tell me that nothing had changed?


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## room305 (2 Nov 2006)

*Re: At last, an idea that makes economic sense*



dontaskme said:


> If there was twice the population in Ireland (i.e. goes from 4 to 8 million), twice the money supply and twice the amount of goods and services, you would tell me that nothing had changed?



I should have been more specific. Inflation is an increase in the monetary supply relative to the number of people. If you double the number of people but don't double the money supply you will have deflation. Conversely if we grow the money supply so that it increases disproportionately to the number of people, we get inflation. In your scenario, the same amount of money is still chasing the same amount of goods and services so it is not inflationary.


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