Serial Bubbles: Inflation, Hysteresis and Elasticity
I have found it amusing that some believe there is no inflation or inflation is tame. We can use physics to disprove their nonsense.
Take a fresh un-inflated balloon, use a marker to make three small circles. Write IL in one, D in one and P in one. Inflate the balloon. What happened to the circles on the surface of the balloon?
The inflation acts as a microscope. i,e. everything on the balloon grows larger, inputs and labor (supply), demand, prices and the distance between the circles grows larger. During the inflation all quantum fluctuations are magnified.
At this point the balloon's elasticity is distorted. In economics, elasticity refers to the degree of responsiveness in supply or demand in relation to changes in price. If a curve is more elastic, then small changes in price (monetary stimulus) will cause large changes in quantity consumed (demand) and economic activity.
Therefore, all things on the bubble are distorted from the act of inflation. This distortion gives false readings, making the estimation of labor and inputs or supply, demand, and true price discovery impossible.
After awhile deflate the balloon. Note the neck is slightly shorter and the bulb is not quite as small as before. This is hysteresis or the phenomenon in which the value of a physical property lags behind changes in the effect causing it. i.e. with each successive reflation and deflation, due to progressive deterioration of the balloons surface resistance, the balloon becomes larger in both the inflated and deflated state.
Serial bubbles amplify the lags or hysteresis and also lead to this condition, a loss of elasticity. If a curve is less elastic, then it will take large changes in price (monetary stimulus) to effect a small change in quantity consumed (demand) and economic activity. This explains why efforts at reflation require ever increasing amounts of stimulus for ever decreasing economic returns.
Take a fresh un-inflated balloon, use a marker to make three small circles. Write IL in one, D in one and P in one. Inflate the balloon. What happened to the circles on the surface of the balloon?
The inflation acts as a microscope. i,e. everything on the balloon grows larger, inputs and labor (supply), demand, prices and the distance between the circles grows larger. During the inflation all quantum fluctuations are magnified.
At this point the balloon's elasticity is distorted. In economics, elasticity refers to the degree of responsiveness in supply or demand in relation to changes in price. If a curve is more elastic, then small changes in price (monetary stimulus) will cause large changes in quantity consumed (demand) and economic activity.
Therefore, all things on the bubble are distorted from the act of inflation. This distortion gives false readings, making the estimation of labor and inputs or supply, demand, and true price discovery impossible.
After awhile deflate the balloon. Note the neck is slightly shorter and the bulb is not quite as small as before. This is hysteresis or the phenomenon in which the value of a physical property lags behind changes in the effect causing it. i.e. with each successive reflation and deflation, due to progressive deterioration of the balloons surface resistance, the balloon becomes larger in both the inflated and deflated state.
Serial bubbles amplify the lags or hysteresis and also lead to this condition, a loss of elasticity. If a curve is less elastic, then it will take large changes in price (monetary stimulus) to effect a small change in quantity consumed (demand) and economic activity. This explains why efforts at reflation require ever increasing amounts of stimulus for ever decreasing economic returns.
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