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I have to agree that a significant amount of price increases in a product like Coca-Cola is probably due to inflation. As an example, I was curious so I looked up US inflation and there's a chart showing historical inflation from 1650 to 2000. It shows inflation being a wild rollercoaster of positive and negative inflation all the way up to 1950, which probably balances things out over time. From that point forward inflation was still a wild rollercoaster, but only in the positive inflation side. Well, there does appear to a small turn down into the negative for a brief moment.

A discussion on why the ups and downs before 1950 and why only positive inflation after 1950 is beyond my area of expertise. But part of me does wonder on the accuracy of the chart because it shows several spikes much higher than the highest level of inflation past 1950. I'm assuming those are due to wars.

The difference is that until fairly recently, no nation had a coherent monetary policy. One of the reasons is that economics did not really understand what money was until fairly recently. For a long time, people looked at money primarily as an asset that could be used for trade. Because of this, they viewed precious metals such as gold and silver as having intrinsic value. When they do not. Today, we understand that the primary backing of money is trust. Trust in gold, trust in governments, trust in economies.

Good post. This might be a slight derail, but: I wonder if part of the problem with getting people to accept this is the use of the value-laden word "trust". Many people immediately react to this concept with horror: they don't "trust" the government in the same way they trust their spouse or their parents. I wonder if economists would do better to replace "trust" with "future expectations" or something like that. [Edit: when presenting to mainstream audiences.]

Predictability is probably a better word; uncertainty is enemy of business planning, far more so than unfairness or corruption or incompetence. Business (writ large) is just fine with incompetence or corruption, as long as it can plan around it.

The talk about "trust" is also problematic from an empirical point of view. You see plenty of people who loudly proclaim that they don't trust the government / the Fed / any official institutions, yet you seem them using the currency provided by those institutions. Clearly, trust is not what gives the currency value.

Granted, those people may not have their savings in assets denominated in that currency (if they have any savings at all), but - in line with what you write - investment decisions shouldn't (and rarely do) have anything to do with "trust". Consider that security-thinking folks more or less define a "trusted person" as "somebody who can undermine your security".


I hear that used sometimes and I think it's better than trust, but it still holds some connotations that seem undesirable for the purpose: right now, a significant number of people in the USA seem to dogmatically believe that the government "can never be trusted"; these same people, if asked how much credibility the US government has, would say "none"! Etc... basically, there are lots of people that see "government" as pure evil and they make their decisions and form their beliefs around that. IMO it'd be really nice to change that, of course; but as long as people have extremely emotional responses like that, it might also be worth looking for ways that word choices can be made in order to make communication more accurate.

Frankly I don't see this as a problem with accuracy of terminology. Both trust and credibility are perfectly adequate and sufficient terms. The fact that money has any stability at all is testament to the fact that a majority of the people who use it do 'trust' the 'credibility' of the government to manage it, whether a bunch of wingnuts think they ought to, or like the terminology used to describe it, or not.

naw, trust is fine. trust is pretty specific in this context

I personally have no issue with the word trust in this context. My concern is with the many people who vote and who aren't educated about what its specific meaning is in this context and react to the word emotionally. In the case that the participants in the conversation are trained in economics, "trust" seems exactly the right word to use.

The interminable Free/free/Libre/"free as in freedom, not as in beer" comes to mind- sometimes jargon or switching words is better, so you don't confuse people not already in the conversation.

"Technology" in economics also comes to mind as something that causes a lot of confusion.

Have you ever read The Wealth of Nations? It would seem that at least some economists understood this principal.

The gold (and silver and other metals) standard. When more gold was discovered, all of the sudden, there was a huge increase in the money supply. When no one discovered any gold for a little while, deflation increased.

There are other reasons including weak governments that had much less control over the economy and a lack of knowledge about how the economy worked but the money supply was a big part of it.

It is my understanding that continuous inflation is a major goal of those working with the money supply, due to fears of a deflationary spiral. That the risks of deflation are significantly worse than manageable inflation. (http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation...)

Positive but low inflation.

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