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Comment by panarky | Hacker News Reader

Many people speak with great confidence about inflation, the money supply and "econ 101". Most of those with the greatest confidence in their own knowledge are not familiar with the fundamental equation of exchange, MV=PQ.

Here, M is the money supply, V is the velocity of money, P is the price level, and Q is the real quantity of goods and services.

It's easy to see that if M increases and Q increases the same amount, then if V is constant, P will also hold constant.

Or if Q is constant and a decrease in V offsets the increase in M, P will again hold constant.

Increasing the money supply by printing money does not automatically cause prices to increase, because there are other variables in the equation.

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Thanks, and I understand that... but I feel like you don't understand the context of my reply.

Mr. Beer above stated that an increase in demand for Netflix would not increase the market price of Netflix. But because Netflix is a quasi-monopoly, they would be likely to increase prices to find the new equilibrium maximum profit point.

That is, he made a microeconomic argument which was invalid-- arguing that because Netflix's marginal cost is low the price elasticity of the product they supply must necessarily be low-- but this is not necessarily true. Netflix has some degree of pricing power.

I made no macroeconomic argument, and.. while I agree with your macroeconomic assertions... increasing the supply of money still increases inflationary pressures. If you're facing massive deflationary headwinds because of slowing velocity of money, sure, it may not be enough to cause inflation or even entirely prevent deflation, but it still is net inflationary.

My reading of GPs comment was more about the cause and effect of any corresponding price increase, not whether Netflix would actually increase their price in this scenario.

For a physical good, if you have a surge in demand as more people can afford you're product you start running into supply issues. This will likely result directly in a price increase as you can't increase profit by just selling more when you don't have anymore to sell.

In the example of netflix, the supply issue almost completly disappears. They don't HAVE to increase the price to increase their profit. Yes Netflix may decide that with the flood of new customers they can put the price up and maintain or increase their profit.

The point I think that is being made is that their isn't a physical supply issue in effect "forcing" them to increase the price. They are doing it because they want to, not because they need to.

Sure, there's no "force" to increase the price. But finance and marketing wonks read books like "Pricing and Revenue Optimization", and seeing a big upswell in demand are tempted to do the math again and see what the new maximum profit point is if they have pricing power.

If the marginal cost of a new subscriber is 0 then increasing their costs should only decrease revenue.

>But because Netflix is a quasi-monopoly, they would be likely to increase prices to find the new equilibrium maximum profit point.

That's the thing though, if they have a perfectly horizontal supply curve, then the maximum profit point would move horizontally but not vertically, and price would not increase. This sort of analysis is surely too simplistic, but that's the model.

Yeah, but that is redirecting the focus away from the major problem that we face in practice, which is that M doubles and the money gets given to people who didn't earn it. To add insult to injury, they are also usually wealthy and taking extreme risks that destroy value.

It doesn't matter if prices double, remain constant or halve. It matters is people can afford more, the same or less stuff. At the moment, the rapid pace of technological advancement means most people should be able to afford much more and they can't because of the incessant money creation being done by people in charge of the system.

It isn't "given" though, it's loaned, or used to purchase an asset (generally a government bond which the government is obliged to pay the holder coupon payments on in future if the holder doesn't sell)

Slightly off topic, but talking about absolute price levels does not make much sense to me. Let's say V goes down, because consumers have discovered the value of thrift and are storing cash under their mattresses. Prices then should come down, to reflect the new economic reality, send signals to decrease production etc.

Then, if money is unexpectedly debased, absolute price levels may not change, but they would go up relative to where they should have been. Contracts still end up being distorted. People with cash under their mattresses still end up with their holdings devalued.

I wonder, if one had the task of building an economic system from scratch, if they would come up with the current system or with something else. The current system seems like a mess of patches upon patches, many heuristics, and is not very philosophically sound.

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