The only thing we learnt from history was that *we learn nothing from the history*.
For the past decades, what were the central banks all over the world doing? Nothing but printing money. Whenever there was a (economical) crisis, the only measure was printing money, *nothing but printing money*. Were the problems resolved ever? Never!!. They event pretended to be innocent by asking "why there were no inflation". Of course, there was no inflation as the design of CPI, the indicator of indicator, was flawed. CPI does not consider price of assets, otherwise sky would be the limit. There were crisis simply because the money went to the people who didn't it that much. Printing much made things worse as most of the printed money went to those didn't need it much, but nonetheless had postponed them a lot.
Such pretending to be dumb game could have being played a lot longer if not the pandemic which made them had no choice but printing money and sending them to those in need. And all of a sudden, those who needed the money most had so much cash they had never imaged before? What were they going to do? For sure spending them all.
Now here is the long *expected* inflation, what are central banks planning to deal with it? Increasing interest rate to where it should be? Seems too hard, let's print more money!
Central banks have one universal lever, and they use it. (This is by design, so it can be mostly independent.) The responsibility is on the fiscal side to spend it on shit that actually matters.
Sending people money without means testing is dumb, but politics in this age is dumb.
Unfortunately harping half-truths about central banking won't help with the situation :/
Your comment completely ignores the supply side of inflation, ie. food & energy prices. Ie. there's a war between the food and fossil faucets of Europe.
See also the whole baby formula debacle (sustained government intervention reduced the market to a very fragile one, and lobbying and protectionism prevents imports to the US), see the perverse incentives in low-paying logistics sectors (the big ports are all owned by local governments, and they are shit at responding to supply-and-demand, and trucking is of course completely fucked because the liability is shifted to the drivers while the profit is nicely shifted off of their hands, due to a relative large pool of potential new drivers to fleece).
Most of the spike in energy costs for the consumers is caused primarily by how energy markets are designed, not by hikes in gas prices (which could only justify a small part of the price hike).
See this long, but well explained, video on the topic [0].
Neglecting issues due to the war in Ukraine, a lot of the “supply side issues” are not totally isolated from central bank policy, QE, and stimulus. The use of QE and stimulus increased demand, while simultaneously, government policy decreased supply. Now, supply is (mostly) recovered, but demand still remains elevated. Supply can’t keep up, because its target is too high.
This is why we see talk from the Federal Reserve about how consumers will “feel pain” - the only way to reduce demand is to reduce employment or wages, to a level that the supply chain is capable of keeping up with. The Fed press conferences are really interesting to watch as they make this very clear - we are really looking at an “imbalance between supply and demand” due in part to all of economic, social, and political factors.
Also, regarding the CPI not reflecting asset prices: the CPI does not include any measure of equity prices, for instance. Since so many rely on equities to fund their retirement, an increase in equity prices is a meaningful inflation. If the price of the S&P 500 for instance is higher due to an asset bubble, it decreases my ability to purchase shares of it. The increase in equity prices we see is really inflation of equities, but never branded as such. We call it “return on investment”, because the people talking about it are mostly those who already own equities, not those looking to buy them. It’s the same reason as why homeowners dislike seeing home prices increase, while homebuyers enjoy it.
I’ll also mention that the CPI has a lot of other bunk practices in it. For instance, “hedonistic adjustment”. A (slightly conspiratorial) site called ShadowStats computes a modified CPI that uses older CPI methodology (before the meaning of inflation was redefined to show lower inflation) that currently sits at 17 or so percent.
> If the price of the S&P 500 for instance is higher due to an asset bubble, it decreases my ability to purchase shares of it.
BLS says that the CPI doesn't track savings, just day-to-day living expenses. And that's okay, people want these indices to do everything. (And the Fed is not even using the CPI, they are using the PCE ... and there's a bunch more https://www.bea.gov/resources/learning-center/quick-guide-so... And the PCE is considered too broad, because it has inputs from businesses, nonprofits, etc. But of course it's not like business costs are irrelevant to the economy...)
That said, I think the biggest problem is that these general indices are used for things like welfare calculations, but they already don't represent the average welfare recipient. So adding equity would make it even less useful for that. (Which is mostly just an argument for having more indices, each representing a large chunk of society. But of course the cynic in me says that we already have one for the important people, the SP500, and poor people only matter when they are undecided voters in swing states.)
> Now, supply is (mostly) recovered, but demand still remains elevated.
Mostly, though basic input like oil is still not at the early 2020 levels. Aaand OPEC cut production just yesterday.
> we are really looking at an “imbalance between supply and demand” due in part to all of economic, social, and political factors.
Yep. And every think tank from the political zoo has their own critique of the actions of the Fed, but monetary policy is simply a blunt tool, and all of the structural problems are ... surprise surprise ... structural conflicts between big powerblocks. (One common laughing stock is the Jones Act. US shipbuilding is basically non-existent, and what's left is useless for "national security" purposes anyway. But it's somehow completely entrenched. Similarly other protectionist policies that serve special interests serve exactly one purpose to enrich members of those special interest groups. It's bad for consumers, it's bad for the economy, it's bad for labor markets, etc.)
All in all there's an argument in this about how the US fucked up the transition during globalization. (The big one is using market access as a carrot in WTO, but then not enforcing reciprocity with China and others. And the lack of any real and effective management of wage deflation in the affected areas, like the rust belt, goes without saying.)
This is clearly an oversimplification because the crisis of 2008 was met with extreme money printing which did not cause a burst of inflation and was reeled in with relative ease as the economy restored itself. If money printing were the variable then it should cause inflation every time but it does not.
I think the GP is saying, 2008's money printing did cause a burst of inflation in stocks, which would have otherwise fallen even further. Measuring CPI by excluding assets like growth stocks hides the true effect of this money printing by glossing over what most already wealthy spend money on.
The extreme money printing (look at the Fed's balance sheet before and after 2008 [0]) showed up as inflation in house prices, which have ballooned in relation to wage income. This was done for the explicit purpose of keeping the biggest lenders flush (see Timothy Geithner's comments about 'deeply unfair', e.g. [1]) and is exactly what the GP is describing.
> because the crisis of 2008 was met with extreme money printing which did not cause a burst of inflation
The inflation was very much visible in the places where the people who received the money spend their money (i.e. Wall Street). The money never made its way to Main Street, so naturally there would be no price pressure found there.
This time around the money was distributed to Main Street.
The money printing in 2008/9 was in response to a deflationary spiral. It didn’t cause inflation because it was mopped up by the deflationary conditions.
At this point the fed seems to be saying that those days are over, they will continue to increase rates until inflation hits 2%. Obviously this cannot go on forever because it becomes impossible to service the debt and you have to print money to pay it off. But it gives you more time and prevents hyper-inflation and we can hope that by then AI and other technological advances have made what we consider "economics" mostly irrelevant.
A company borrowing money to buy back stock sounds like me borrowing money to go on vacation. Rates are cheap, its a no-brainer right? Government will anyway bail me out as soon as a crisis hits, right?
>we can hope that by then AI and other technological advances have made what we consider "economics" mostly irrelevant.
Is there a serious hope that AGI will invent a replicator soon after coming online? It seems likeliest to me that if a greater-than-human intelligence comes online it won't have a circumvention for the laws of thermodynamics and there still won't be such a thing as a free lunch.
No replicator, just extremely cheap labor and energy. Imagine if someone from 1000 years ago could have access to an American garbage dump. Things that in our current economy have zero or negative value would be extremely valuable to those people (Plastics, Metals, Electronics, Machined Clothes, Plant Seeds)
That same thing will happen again once we have another huge advancement in technology. What we consider to be expensive and valuable today will be of zero or negative value to someone 100 years from now.
The 1974 and 1980 peaks from the article correspond to the steeper slope regions in those same years on my graph. (I'm plotting 1/[CPI-U price level], while the article is plotting d/dt [CPI-U price level])
On my y-axis is the purchasing power of a US dollar, relative to current level. So when the y-axis shows 9.813 on 1962-10-04, this means that sixty years ago, a one-dollar bill would buy a basket of goods that today would cost $9.813.
It certainly "feels scary" when the purchasing power is eroding quickly (i.e. a fast-declining slope on my purchasing power graph, or a peak on the article's year-over-year derivative graph).
I haven't dug into everything you are doing, but the biggest flaw I see seems to be that you assume Cash returns 0% nominal, i.e. that there is no return for holding cash. That is only true if you hide it under your mattress(and no deflation happens). Most people do not hide money under their mattress anymore, especially if they have large amounts of it. They put it in a bank account or in a MMF or some other interest producing place.
Since 1972, Cash has a real return of 0.53% (inflation adjusted):
Is that surprising? Alternatively, do you have a fix in mind? Having power means you can build more things that give you more power faster than someone with less power. You can't change this using inflation, as people will just hold something else instead of cash (and, in fact, inflation seems to most punish the people with the least power, as those people are spending a much much greater proportion of their income on critical consumption and are least able to hold assets that aren't cash... hell: we make laws that actively limit or even prevent poorer people from holding non-cash assets "for their own protection").
That blows my mind. I'm allowed to spend $10 in a bottle of alcohol or a packet or cigarettes, no questions asked, but I'm not allowed to spend those $10 in stocks of a tiny company unless I'm able to demonstrate that I sleep with the founders or make their lunch or run their accounting, or that I have so many millions on my name that investing $10 without doing any of the above really could not harm me.
It's not like accreditation exists to ensure poor people stay poor, framing it like that is disingenuous. Small-time investors are unlikely to be able to even semi-accurately estimate the value of a company, so they're much much more likely to be tricked into overpaying.
It isn't that it exists for that reason, it merely has that effect as a callous side effect of not really caring about the power imbalance it causes on said poorer people. "The road to hell is paved with good intentions" 100% applies to people trying to protect other people from none other than themselves.
> Doesn't that practically mean the rich get richer and the poor stay poor? If it would be net 0 everything would stay the same?
The rich aren't rich through this route, although things they do mean that bank interest rates are a guaranteed return for people who are less risk-tolerant. They're rich through one or more of: risk-taking, talent, hard work, luck, connections, etc, all of which feed into the one thing that makes them money: usefulness to other people.
Not because of this one thing, every bank offers some return on holding cash. Most are ridiculously low.
Personally I like to think of it as, the US govt guarantees a return on overnight cash based on the Federal funds rate. Banks and other people that hold cash will give you that rate minus some fee(s) for the hassle of keeping up with your cash for you. Most banks have a very hefty fee, but not all banks.
As of this writing:
The Federal Reserve will pay 2.56% for cash deposited with them.
Bank Of America pays 0.01%, for a fee of 2.55%/yr.
Ally bank pays 2.25% for their savings account for a cost of .31%/yr
If you are willing to hold cash in an ETF, ICSH will hold cash for a 0.08%/yr fee.
For the record, I'm not against Bank Of America, I have an account with them, but I don't hold much, if any, cash with them for any length of time, because I know they charge a lot for that service.
Yes, if it were not for the inherent risk that comes with it. If you put the cash in your mattress you only face the risk of losing it due to it being stolen or when it burns. You can get insurance against that it this would need to be deducted as well. So effectively you are losing money.
Now for money on your bank that pays interest it's not necessarily better. The bank can be robbed or simply go bankcrupt. And since the money there was used by the bank for various things, there's no guarantee you'll get it back. This inherent risk needs to be priced into the ROI.
So IF the government always saves banks with buyout, then yes. That's also why I believe it's not a great idea and people of such a bank should lose at least a part of their assets/savings to understand the fact that the money isn's just stored by the bank.
This is dumb. That's not an insult -- I'm not calling you dumb, but just your argument.
1) Banks are FDIC-insured, so unless the federal government goes under, my money can't be lost. If the US disappears, so does the dollar.
2) If people lose part of their money due to a policy like the one you propose, they won't "learn." You're asking ordinary people to be aware of things which are accessible to a fraction of a percent of the population. They'll assume banks are safe, and lose trust in "the system" if they're not.
3) Even so, I have no way of knowing what's going on at my bank. For all I know, the executives might be crooks embezzling money for the Italian mafia. We have organizations like the FBI, SEC, etc. since individuals can't investigate these things. I'd like to focus on my family and my job. That's why we've specialized.
The current approach for banking is better than free market. Personally, I think banking would best be nationalized, a la China. It's not an industry where efficient free markets do very well. That's true for health care and parts of real estate too. (And yes, there are other industries I would privatize much more, like education. This shouldn't be an ideological socialist versus free market argument, so much as looking at the extent to which free market assumptions apply to a given industry)
> This is dumb. That's not an insult -- I'm not calling you dumb, but just your argument.
No worries, I'm here to discuss and learn things, so happy about your reply!
> 1) Banks are FDIC-insured, so unless the federal government goes under, my money can't be lost. If the US disappears, so does the dollar.
Yes, but there is still the chance of a "haircut" or similar. At this scale, rules can be bend. But my response was a bit more independent of the country, so maybe it doesn't apply well to the US, point taken.
> 2) If people lose part of their money due to a policy like the one you propose, they won't "learn." You're asking ordinary people to be aware of things which are accessible to a fraction of a percent of the population. They'll assume banks are safe, and lose trust in "the system" if they're not.
Maybe for the first time. But if you think about it, maybe the system is how it is _because_ people trust in it (too) much.
There are a couple of options. For instance, the state can give a guarantee for only a limited amount of money (think $20k or something like that) per person and/or institute.
Second, it might very well be that banks will come up with two different kinds of accounts: 1) an account where the money is not safe and can be used by the bank for investments - but you get interest. 2) an account where the money is safe, but you don't get interest but have to pay a fee for the bank's services. The money then stays your property and the bank just keeps it for you, so even if it goes bankcrupt, no one can take the money since it's still yours.
I don't think that would be a bad idea.
> 3) Even so, I have no way of knowing what's going on at my bank. For all I know, the executives might be crooks embezzling money for the Italian mafia. We have organizations like the FBI, SEC, etc. since individuals can't investigate these things. I'd like to focus on my family and my job. That's why we've specialized.
I believe that for your health, your relationships (friends, familiy, ...) and your finances, you cannot delegate that, you must keep control yourselve. You can get people to help you, but in the end both control and responsibility are yours. That's what I think works best.
> No worries, I'm here to discuss and learn things, so happy about your reply!
Thank you! I enjoy discussions with folks like you.
> Maybe for the first time.
If we're having regular bank failures, we're going to enter "failed state" status. Can you name any nation which regular bank failures which isn't a hellhole?
People don't learn from once-in-a-lifetime events.
It's also not what I want people to learn. Systems like this ought to work well enough in a well-governed country that ordinary individuals don't need to think about it.
The US has problems, but not at the level of people worrying if their bank accounts will disappear tomorrow.
I also want sufficiently functioning police departments that people don't need to worry about how to defend themselves. There are things which ought to work. Retirement savings ought to be one of those.
> For instance, the state can give a guarantee for only a limited amount of money (think $20k or something like that) per person and/or institute.
The current limit is $250k. This seems reasonable, and potentially low. I'd set it at $1M, and include accounts like 401k and IRA accounts, so your retirement investment savings can't disappear in a poof for reasons outside of your control. If I bought stocks, I can (and should) expect their value to change, but I should be able to count on Fidelity safely making sure those are still my stocks.
> Second, it might very well be that banks will come up with two different kinds of accounts.
It might well be. 0.1% of the population will chose wisely. Like medicine, this is something you want to just work.
> I believe that for your health, your relationships (friends, familiy, ...) and your finances, you cannot delegate that, you must keep control yourselve. You can get people to help you, but in the end both control and responsibility are yours. That's what I think works best.
Why? All evidence suggests the contrary:
- People seem happiest in communal societies, where they don't pick their friends or family. We evolved in tribes.
- I'd love to live in a structure where I get healthy food and plenty of exercise as a "default." Staying healthy with companies marketing high-sugar foods, and obsolete parts of my brain pushing me to be lazy, is a constant uphill battle. I'd stop short of a mandate, but if everyone is healthy, we're all better off.
- Finance is a black hole for most people. People ought to be able to trust that if they work hard, they'll be able to afford basic food, shelter, and medicine (including in retirement). It feels like a trap to make people manage this.
If my life consisted of:
- Wake up for morning exercises. There are plenty of communal spaces for exercise. Volunteers run free dance, martial arts, yoga, etc. classes. My taxes fund the space.
- Work hard on open source, which benefits everyone, for some number of hours
- Spend time with my family
- Not worry about much of anything else, and count on systems working
I'd be pretty happy. We haven't figured out how to do that, but utopian ideals don't have everyone needing to investigate their local hospitals for corruption, banks for fraud, and mastering medicine and finance. As a nerd, I enjoy learning about those, but it shouldn't be mandatory.
> Can you name any nation which regular bank failures which isn't a hellhole?
That's a bit unfair, because there is no country (yet) where there is a system similar to what I proposed. If there were, then maybe it would be pretty normal and putting money on the bank that yields interest will just be seen and regulated as investing into stocks nowadays.
> It's also not what I want people to learn. Systems like this ought to work well enough in a well-governed country that ordinary individuals don't need to think about it.
To me it feels like you are trying to push away a responsibility that is impossible to push away. (sorry for me bad English)
What I mean is, once someone gives money to the bank and the bank _uses_ it instead of storing it (e.g. for a loan/credit) then there _is_ a risk that the money will be lost.
So if you want banks to be failsafe in the sense that it is legally guaranteed that you can never lose your money (currently that's not the case right) then banks should be fully government controlled or at least so tightly regulated that they are very very different from a regular business. I mean, banks are already highly regulated, but not nearly enough in my opinion. If the bank can't lose/go bankcrup, then it also shouldn't win, so no profit or highly regulated profit.
EDIT: I forgot to say that if the state is essentially insurance for the bank, it should charge for that service just like a normal insurance company would.
> Why? All evidence suggests the contrary: (...)
None of the points contradicts what I said.
But look: even in a communal society YOU pick your friends, no one else. And if there are two kinds of foods, one tasty, cheap and unhealthy und one so-so, kinda expensive but healthy, would YOU trust the advertisements which one to pick?
Even with a doctor: sure, it's great to have competent doctors. But it's a fact that there are better and worse doctors. So if health is important to you, YOU have to pick the right doctor. If you rely on someone else to do so, you are essentially putting your life in their hands. While anyone can decide to do that, I just don't think that it's a good idea.
The problem with your nice example life is that once things go southwards (and eventually they always do) then you can't deal with it. I prefer a slightly less optimal system that has less potential to go really bad, even if average quality of life is a bit lower.
> That's a bit unfair, because there is no country (yet) where there is a system similar to what I proposed. If there were, then maybe it would be pretty normal and putting money on the bank that yields interest will just be seen and regulated as investing into stocks nowadays.
You can do this in the USA, look up the ETF ICSH for instance :)
Yeah but that’s not the whole picture… in 1962 the ford truck was $2000 now is around 40,000 so while a new one is better you still have to earn 2x as much to get the most basic one available
When I go to ford.com and look at their basic truck, the 2023 Maverick, I see "starting at $22,195". So if a 1962 truck truly sold for $2000, the inflation seems to account for entirely the price increase. And I'm pretty sure everyone will agree a 2023 Maverick is superior to a 1962 F-100 in every conceivable aspect.
Housing and healthcare are better examples of goods or services whose prices have increased faster than CPI-U.
In the 80s when I was a kid, we owned our own house, even though my father was a small time farmer and my mother stayed home raising us. We scraped by. In today's standards, it was a life of abject poverty. I knew a guy whose father ran a steel company (self made millionaire). Their house wasn't much bigger than ours, but they had VCR, microwave, CD players and satellite TV years before we did. But the real difference was that they had a new Mercedes and we had a low-end Ford that we drove until it fell apart. Our house build cost about 4x the price of the Ford. The Merc? I don't have exact figures but I think you could have built our house at least 2.5x times before you hit the price of a new Merc. These days that's totally flipped around. For the cost of building my parents house today, you could have at least 4x new Mercs.
In the 1920s it was cheaper to retain a servant full time than to own a car. Now it's completely the other way round, and for a car a million times better. Production of goods scales; anything labour-intensive does not, especially when land supply and usage are constrained by government regulation, and cost of labo[u]r is inflated by same.
I'd be surprised if you can get a truck at anywhere near MSRP these days. Trucks aren't a great example anyways because they're seen as a luxury good in the US today, which wasn't the case in the 60s.
Check the new car market again. Buyers have radically cut back as the economic uncertainty has proceeded since summer, plus the supply chain issues continue receding into the past.
First, you can't get the old vehicle new for cheap. That option is no longer available. You do get an objectively better one, but value is fundamentally subjective.
Marginal economics bridges this gap with consumer choice, but if no choice is available then I don't think you can assume consumers are better off.
In any case, I think inflation is a backwards lens through which to examine vehicle prices. The primary mover is industrial learning curves. Inflation is downstream.
In the 20s, when domestic car sales increased annually, the auto manufacturing industry was constantly growing. Factory efficiency increased every year and prices came down every year. The model T got cheaper every year, not just better.
Part of what caused the depression was this process maturing. Auto sales peaked. Manufacturing volume stopped growing. Efficiency stopped growing with it.
This breaks many financial assumptions/instruments and results in deflation, or rather, a local quanta of deflation. Growth industries can vary a lot of long term debt/equity/promises. Shifting from one state to another is deflationary/deleveraging.
Anyway, vehicles stopped getting cheaper 100 years ago. They get better/nicer gradually. Not cheaper though, ever.
Cars don’t break down as much and last much longer. A 20 year old car nowadays can still be perfectly usable. So in effectively they did get cheaper, just buy used (at least that was the case until 2020..)
Same, also one that is 40 and one that is 60. There hasn’t really been an increase in reliability over time. The difference between manufacturers has always been the defining factor. Simply compare a new Nissan to a new Toyota and you’ll see what I mean. Project out resale value 10 years and you’ll see a dramatic drop in value for the less reliable one. It was cheaper to manufacture, used lower quality parts and engineering and the result is wildly different reliability.
The F-150 is the lowest cost full size pickup truck Ford makes. If you can't put full sheets of plywood and 2x4s in it, it's not really a pickup truck.
How Much Does the Ford F-150 Cost?
The 2022 Ford F-150 starts at $29,990, which is the lowest base price in the full-size pickup truck segment. However, that's for the three-seat Regular Cab, so if you're looking for more room, take note of the Super Cab's $34,075 base price and the SuperCrew's $37,700 MSRP.
The 2022 Maverick has an engine literally twice more powerful than the 1962 F-100 (270 vs 135 hp). With your logic, picking on one tech detail of many, I could argue the 1962 model is "not really a pickup truck" with such a puny engine of weak towing abilities !
What this shows is that Ford merely decided to trade 18 inches of pickup box space for a second row of seat, a more powerful engine, and many other higher-end specs. Today Ford could definitely make a 1962-spec'd pickup with a weak 135 hp engine at less than $20k.
The one tech detail chosen is pretty relevant to the economic (as opposed to style) use-case here.
Being able to carry a 4x8' sheet is the difference between a productive vehicle or not for a significant chunk of the contracting tradesman market.
Sure, lots of users want trucks for other reasons where a short box does fine or a second row of seat is the winning feature regardless of box space, but the logic being applied for a full size bed requirement isn't arbitrary.
I want a full bed. As a result when I looked I was doing so in the past. Came close to buying a VW flatbed with a tools compartment built in. Thing was from the 60s.
I suspect that to an extent, prices rise with the proportion of income people are willing to allocate to something. Cars will rise to the amount that matches the importance people place on them. If cars become less important due to electric bikes and Zoom, manufacturers will be able to charge less. The investment in researching car design would decrease accordingly. Same with energy sources etc.
True, but only for goods with a moat. Let's say an iPhone. I may value a fruit at 10 Euros and you may sell me a fruit at that price, but if someone else can produce them for 2 Euros they will perhaps sell them for 5 Euros and make a good profit. So the price will be 5 or even less.
I’d prefer a brand new 62 f-150 to a 2023 maverick.
But yeah housing is a better example. We really fucked that one up didn’t we?
Healthcare is hard because we have so many better technologies, but worse outcomes so the price increase is arguably not worth it. Maybe this one is like the truck. Lotta new technology, at the end of the day not better.
And most people rarely need a pickup truck for its specifically design utility. They likely just want a safer car which is essentially an arms race at that point. I think less pickup trucks on the road would be a good thing considering how the majority of people drive.
Are modern pickup trucks objectively safer than modern cars, or is it more about the perception of driving something that feels it's half way to being an armoured vehicle?
In Europe almost no-one drives around in a truck. Even the tradespeople (carpenters, plumbers, roofers, gardeners, heating installers, you name it) all drive light vans, not trucks.
> In a collision with a significantly lighter/smaller car? Usually
Can you give a source for that?
I'm struggling to find anything up to date which isn't blatantly biased, so here's something (old!) from Berkeley Lab:
'Those who think that driving big is driving safe, or that lightweight, fuel-efficient vehicles are inherently more dangerous than their heavyweight counterparts, need to think again. A researcher with Lawrence Berkeley National Lab (Berkeley Lab) has teamed with a researcher from the University of Michigan in a unique risk analysis study which shows that, contrary to conventional wisdom, vehicle quality is a much more important safety factor than weight for the drivers of vehicles involved in a crash.
"Most cars are safer than the average sports utility vehicle [SUV], while pickup trucks are much less safe than all other types. Minivans and import luxury cars have the safest records," states the report, "An Analysis of Traffic Deaths by Vehicle Type and Model," which was prepared by Tom Wenzel, an energy analyst with Berkeley Lab's Environmental Energy Technologies Division, and Marc Ross, a professor in Michigan's Applied Physics Department.'
You can't just pick one single item and consider it 'representative' of inflation. [1] Some things cost more than they used to, some less. Cars happen to have tracked very well.
That doesn't match my experiences; IME cars do last longer now.
I have owned and spent substantial time driving a 1978 Buick Regal and a 1968 Westphalia VW van.
I don't think that you're gonna see 200K miles out of either of those vehicles. The Buick had about 120K on it and was clearly on its last legs. It's likely been scrapped. The VW only runs because I sold it to a mechanical engineer who wanted to have a project to work on with his children, and it's now a "vintage" toy instead of my daily driver.
I am at about 180K on my 2014 Tacoma and I expect to get at least another 120k out of it before I sell it.
random anecdote: 2004 chrysler Sebring - nothing special, hit 180k before I had some 'unknown' engine problem. Mechanic spent a couple hours trying some stuff, and something worked, and I got another 60k miles out of it before it was time to let it go. That was over a 14 year period. If I was mechanically inclined, I probably could have done a little bit more on my own re: preventative/etc, to get a bit more out of it. Or... had I sunk another $2k in (estimate) to fix a bunch of stuff, who knows? I might have got another few years. But I went with something smaller, newer, better mpg, and probably overall better safety (12 years newer).
People are extremely overestimating how cars last decades ago. Barring other things, corrosion protection was nonexistent, few year old cars were rusting away.
I had no idea that kids in 1962 were spending $100 on one piece of licorice. Kinda puts the “millennials and their avocado toast” thing in perspective, huh?
This is a nice demonstration of the variability of inflation and how under-trend we have been for many years. There was a strong push from some monetary policy people to move toward a longer term, average inflation targeting that would make the Fed have symmetric reaction functions to upside and downside inflation while attempting to keep a longer term average as the goal.
One interesting explanation for high inflation during the 1970s to early 1980s was that the monetary system and supply of real assets had to adjust to a massive influx of working age adults (babyboomers). A second wave from that population event started to enter the workforce over the last ten years. It might be interesting to normalize the data here against the size of the workforce.
My partial theory is oil production grew exponentially up till a bit after 1970. And before that the US had outstripped domestic supply and started having to import oil.
And you are right boomers household formation increased demand for stuff.
The most dangerous thing that can happen to an advanced economy is credit markets grinding to a halt. It was the panic of 1907 that created the federal reserve in the first place.
Over the ensuing decades there was a very awkward path to eventually figuring out that at the moments where a complete halt to credit markets looks imminent, the fed should step in and release the jam. What we’ve learned is that just the knowledge of the fed being able to just print and buy any debt and that they would do so caused major crises to be avoided (2008 and 2020).
The problem recently has been that this fed is simply incompetent. They do not form their own opinions and simply follow what the prevailing narrative dictates. If it’s consensus that rates should not be lifted, they just coast through those meetings towing the same line and continuing to buy bonds.
Then one day the narrative shifts and concern starts to grow over fed policy. So the fed suddenly reverses course and announces sudden rate hikes. When it turns out that cpi moves slower than the fed hoped, the pressure to intervene grows.
Now the consensus is that the fed should be making multiple 75-100 bps hikes so that’s what they do.
The question now is will the narrative shift fast enough for them to not end up going too far the other way.
I sincerely hope the next fed chair is someone who understands the relationship between credit markets and the economy and the need at times for the fed to be the lender of last resort, but also understands that the fed should be an independent entity capable of forming its own policy and having the courage to ignore what market pundits say should be done. The Fed’s mandate is not to make Wall Street happy.
We want to avoid structural damage: Lost jobs, bankrupt businesses, lost mortgages, and so on. Structural damage leads to loss of real productivity, and real harm to people's lives. The only way I knew to get through COVID shutdowns was to devalue currency by about as much as we've done.
I didn't mind the short-term money printing, and I expected inflation to result. The inflation is painful, but the alternative is much more painful. My income buys less than it did two years ago, but I'm thankful I have a job. I was even more thankful when jobs were easy to come by. If my employer went under or I lost my job, I'd be profoundly unhappy.
The right approach now would be to accept a dollar is worth less than it was before, and to give an honest estimate of how much less.
Aggressively trying to control inflation by raising interest rates is a lost cause, and will do a lot of real harm. The outcome here seems to be that rather than mitigating the harm of COVID shutdowns, we've delayed them, and did a lot more harm along the way.
"We want to avoid structural damage: Lost jobs, bankrupt businesses, lost mortgages, and so on."
I disagree - I think what we need is a constant, low, background level of structural damage - which includes lost jobs and especially bankrupt businesses.
I grow increasingly fond of the forest fire / controlled burns analogy:
We have come to realize that preventing, or extinguishing, every wildland fire causes a dangerous level of fuels to slowly build up, eventually erupting in an unstoppable conflagration that destroys much more than the sum of the fuel overload.
Preventing recessions and keeping business firms afloat that would otherwise fail without easy loan rollover - that's the financial equivalent of refusing to maintain fuel loads with controlled burns.
Eventually the dead fuels (zombie business firms) will overwhelm all firefighting efforts (QE ? Negative interest rates ?) and will take down a much larger portion of the economy than otherwise would have failed along the way ...
> We want to avoid structural damage: Lost jobs, bankrupt businesses
Completely incorrect. If the jobs and businesses in question existed only due to speculative excess, they shouldn't exist. Easy money generates what David Graeber would call "Bullshit Jobs", that contribute anywhere from zero to negative real value production.
We want these businesses liquidated and the employees out on the street, to pursue work that actually contributes to society.
The trick is to somehow limit the collateral damage to businesses that do produce real value. I don't think that's a problem that's been solved.
Spoken very fairly. For a central banker, it's either high inflation or high unemployment. Strangely enough, they prefer the latter. Inflation affects everybody mildly, a recession affects the unlucky few that lose their jobs very badly
Elsewhere in this subthread I pointed out that California is not printing money; it's spending surplus from 2021. California cannot print money bc we use US dollars and not CA dollars.
But I think a more interesting aspect of this is the cynical way language around the same idea has changed. The Franchise Tax Board is calling them a "tax refund", though your "refund" is based on your income being low, rather than your tax bill having been high. But the press has certainly been cooperative in calling them "inflation relief" recently, though the program was planned before inflation rose to the top of so many people's list of concerns. Politically, Newsome wants as much credit as possible for handing back a windfall of taxpayer money that came in mostly because of economic conditions he did not create and taxes that he did not introduce.
In this case they're using debt, because while they may have had a surplus in a single calendar year, they're still over $150bn in debt. So it isn't spending surplus, because they're massively underwater and a "profit" is meaningless.
California doesn't print money, the Federal Reserve does. California is required to balance its budget by law, like every state but Vermont. Nearly every state has more money than normal right now (some of it from high tax revenues due to nearly full employment, some due to federal stimulus), so they're finding ways of getting rid of the money. This is a second order effect from the much too large stimulus in 2020/2021.
The only reason the states are afloat right now is because the federal government gave them hundreds of billions in printed money. So, yeah, it’s printed all the same.
1. Federal reserve makes several trillions in new money and lends it to the US Government.
2. The US Government passes “infrastructure” and “Covid relief” bills that shower billions on states and cities.
If not for this flow of printed money, most of the states would be cutting budgets since 2020.
You know, if there is a world where money isn't printed but people refer to it as printing, then maybe at some point the government will do exactly that because people don't seem to be concerned about the rate at which money is being spent nor do they care if the government does it or not, they just want to complain.
Thank you for posting this! Suburban infrastructure essentially steals from the economically productive areas and gives to the wealthy and unproductive regions
CA HSR is moving ahead. Major infrastructure projects are more difficult and expensive in the US because we have far stronger property rights than China or European nations.
... minus the "HS" part. Last I checked it was on the politically brokered "non-I-5" corridor (a silly, absurd route) and had a proposed SF->LA trip time of over 2.5 hours.
This is a "high speed" train, circa 1975. Current technology, as demonstrated by running trains elsewhere in the world, would make that route in under 2 hours.
Why is stabilizing human beings economic anxiety not useful?
What theory of science dictates infrastructure is the best place to spend it? If the answer is none, it’s a purely social policy and you’re spewing politically correct memory. That infra spend is not an immutable law of reality means there are options other than “poison the sky with expansive vanity projects.”
Even then, there’s plenty of money for both, and human agency available for both. We can stop pretending money is what drives human invention and discovery. It’s politically correct spoken tradition since it’s not an immutable law; how we feel about other economic choices is a range of possibilities, not just the ones we have been raised to speak of
The excess tax revenues was also caused by overly inflated IPOs and more than normal capital gains. At least in CA, if the surplus is large enough the government is legally required to give the money back if not spent.
Gavin Newsom in this case is acting like Robinhood. Taking from the rich and giving to the less well off.
He's taking from the children of the recipients, considering California's current debt load. When you're underwater, a "profit" doesn't mean you're suddenly flush with cash. It's still debt-funded frivolity, which will paid by children.
That's over half the usual budget for California, so no it's not "peanuts". The ability to service debt is a function of the government's resources, not the entire economy. As pointed out, the year was anomalous for California, who usually runs a deficit of over $50,000,000,000.
Seems like this is a case of a compulsive indebted gambler patting himself on the back for a good streak at the tables.
California's surplus came from temporarily increased CGT receipts. That trend will be reversed this year considering the markets, and they'll be back to bleeding 10 figures.
Government debt is not like personal debt. Governments debt is structured and has fixed predictable rates (bonds etc). There's no incentive to pay down debt because the debt holders want long term structured repayment.
The only time government debt is bad is when the government can't make the payments.
A charitable interpretation of the comment above would assume that the taxes being collected are primarily the result of printed money, or at least that the fed's printed money forms a large portion of these revenues which are again being redistributed. It's actually quite sneaky. Print money to stimulate the economy and then tax it back out to redistribute. You just printed the poor into 'wealth', but did it in an incredibly roundabout way that saves all the politicians face.
Yeah in the grand scheme of things, this doesn’t impact inflation all that much, but it does help the people that need it most. Just like increasing the minimum wage to keep up with inflation does.
Over the past year businesses have increased their prices all over the board, you can’t then just simply say “but inflation!!” when you want to help the people with some amount of compensation for this.
If you take it just one step further, the people "that need it most" really only need it in order to instantly donate it to the megacorps with pricing power at ever-increasing prices. The handouts help only in that instant and at the very next clock cycle that money is now in the hands of the megacorps. Printing money and handouts only help the top of the top in the pricing power hierarchy. If you want to actually help people you'd be doing taxes on excess. Everything else ends up in gigantic accumulation of wealth at the top in just a few steps down the game.
From that perspective, anything always ends up in the top of the top of megacorps, and I find it not a very compelling argument to not help people just because they’re at the mercy of megacorps.
You want to tax these megacorps additionally yes, especially if they’re profiting from the current situation. But at the same time, it’s also important to redestribute that wealth towards those who have the biggest problems right now.
With handouts, you only redistribute the wealth for an instant and you need to keep printing to sustain it. On top of that, the stability of this system becomes dependent on active approach of handing out money (i.e. tight dependency on central government).
And I am not saying not to help the poor people. I am saying printing money doesn't help poor people, it helps the rich. If you want to help poor people like I said you can tax the excess, or you can provide a specific minimal food/energy/shelter. But again, handing out money for free only helps the top of top.
As a side note, you know a lot of the poorest people in EM and frontier markets save money in USD either to escape their own inflating currency or as a dollar peg in their country. These people are poor and suffer the inflation in global markets, but they do not benefit from the US handouts. They can never outbid a money printer. And that's in fact the likely cause of the riots across the world in countries that don't have swap lines with the Fed.
But we used taxpayer money to first inject trillions into the top of the economy. And then when the inevitable happens, we can’t just throw our arms in the air “because inflation!” — that’s a great way to make sure that the bottom of the economy will suffer tremendously due to all this.
Because their income hasn’t increased nearly as much as the amount of inflation that occurred.
Then try getting paid outside of civilized society. Unemployment will never be zero. An economy can't be 100% efficient. Taking care of those who cannot find work due to an imperfect system is a part of a civilized society.
Also, it would be inefficient to have an unemployment rate near 0. People in a good job market need to leave bad jobs, and sometimes that means that they are unemployed.
That doesn't make sense though. You can't create energy by printing money. You just redistribute the value of your money. Maybe that's good - not clear to me why it's better to use inflation, which risks destabilizing the currency and punishes people who saved money, rather than straightforward taxes.
But in the Californian case, it's not printing money. The state government doesn't have the ability to make US dollars. The state must balance its budget, and cannot rely on debt the way the federal government does. The inflation checks are only possible because of a giant, historic budget surplus from 2021. Had inflation not gotten this bad, the checks would have still gone out in some other form (earlier in 2022 we were talking about it as a "tax rebate").
Though this action is redistributive, it is explicitly not about printing money. It is about spending excess tax dollars. You may have opinions about taxes in the state, and you may have opinions about redistribution, but overall if the state temporarily has a surplus (ie it shouldn't put this money towards increasing long running programs that will become a burden in future years), shouldn't it give that money back to the citizens in some form?
Complaining about printing money is like complaining about the internal combustion engine in an electric vehicle. This is especially annoying when what people are really asking for is a speed limit. But since everyone keeps talking about the wrong thing nothing will get done just like how an ICE mechanic isn't going to fix your EV.
I never said that it was inflationary in the California case. I don't think it is. As to whether or not the state should send checks to everyone - I don't really know anything about it and so don't have a firm opinion. My intuition is that individuals will likely spend the money better than the state would have, so that's good, and it's probably an indication that taxes are too high if the state has a big surplus.
California doesn't distinguish between capital gains and other income, and both are taxed on a progressive bracket system. In years where lots of rich people realize gains, the state has more income. Plus wage growth.
But Keynes advocated that governments should have surpluses in good times and spend more in bad ones. Normally because the state isn't able to carry a continuing large surplus, this isn't possible; it has to cut in lean years and give rebates otherwise. It's only in this short period of reversal in consecutive years that we can approach that policy. I'm guessing the same checks would have done more good if they could have waited until 2023 or later.
If you create money and give it to people, they spend it. That creates additional taxation. That spending is earned, which is taxed. The earnings are then spent, which is taxed, and so on. Like a stone skipping across a pond.
Do the fairly simple geometric series from that and you'll discover that all money creation generates additional taxation that extinguishes it - to the penny. All that changes with the tax rate is the number of hops before the money impulse disappears.
What you have to do to balance the system is remove some hops elsewhere. That's what threats about interest rate rises are supposed to do. Money then isn't created by loans, or the transaction hops from those loan creation events are fewer.
That reduction is what we call 'saving' and tends to show up in aggregate as a government deficit. The bigger the deficit, the more saving there was and the fewer transaction hops in the economy.
Saving is little more than voluntary taxation. The current approach is to go down the voluntary route rather than the compulsory one - largely because the population won't sanction any further taxes.
If the money used to purchase energy causes a large rise in the government deficit (or a significant reduction in the loan growth rate) then that will 'pay' for it without causing inflation.
Yes but the energy crisis isn't evenly distributed across the world. NA, for example, is still doing relatively well. While Europe is being hit relatively hard by the shortage and will likely have to import from more expensive sources than previous years to make it through the winter.
How would European governments printing more of their own currencies to give handouts to their citizens, resulting in inflation, resulting in their currencies becoming weaker, help buying energy from NA?
The energy has already been paid for since European countries have been overcharged for gas during most of 2022 in order to fill their storage to at least 80% before winter. Energy bills are usually paid by the quarter or by the year—not daily—so in some cases the worst part has yet to reach consumers.
Furthermore, the way the European electricity market works[1], other energy sources are also bid up when the price of gas increases iff this gas is needed to ensure supply in a given hour of the day. So we have been overcharged both directly (gas), mostly indirectly (electricity) and completely indirectly (goods inflation) throughout all of 2022. This is seriously hollowing out the budgets of some European families.
I don't agree that blanket handouts are the solution, but some kind of compensation is needed to those most exposed, otherwise they will sink into poverty.
Not everyone gets the same amount of money, so that poorer people benefit from the scheme while richer people are more affected by the increased inflation.
Rich people are less affected by inflation because they have access to investment opportunities that aren't as affected - for example, I'm sure German billionaires have money in American hedge funds. The middle class are most negatively affected by the tax of inflation because they have enough money that having the value of it reduced by inflation is meaningful, but they don't have sophisticated investment instruments to hedge against inflation.
This takes us back to what I wrote originally - why is inflation the way to do this as opposed to just tax and spend? That is, why not create a specific tax and implement that and use the proceeds to pay for poor people's energy? Money printing is just a dishonest way to sneak a tax in on people who might not recognize it as a tax.
The levers don't do exactly the same things; devaluing currency helps exports, for example.
There's also the political cost. I'm in favour of democracy in the ideal case, but obstructionism looks like a concern in some countries, people buy into lying spin and vote against their own interests, bills have their own cadence, and lawmakers are not always intellectual powerhouses. Case in point: the BoE reacted within hours to reduce the damage done by Liz Truss
>That doesn't make sense though. You can't create energy by printing money.
Think again. You can't create energy by cutting taxes either. The tax cut can only be spent on energy, exacerbating the problem by making wasting energy much cheaper.
A check on the other hand discourages people to buy expensive energy because they could be spending the subsidy on something else that isn't energy constrained.
The problem is that the world is at neoliberal capitalism's end, as predicted by Marx. Basically, in capitalism, you pay for continuing investment (of capital owners) with giving them more property, which is something that cannot continue indefinitely. That internally increases social inequality, and the money will eventually accumulate at the top (in the form of asset price rises).
Capitalism's own solution so far was to create more available properties - more individual debt such as credit cards and mortgages, privatize public goods like health and education, more destruction of ecosystems, selling attention and disrupting work, and the latest fad, cryptocurrencies. But these are only temporary solutions, they do not address the core problem of increasing social inequality.
Likewise, printing money and giving them to the poor (while half of it goes directly to the top, because the decision-makers are only human) is a stopgap solution in the system where most money quickly end up accumulated at the top. It's a desperate attempt by governments to maintain social order.
In the middle of 20th century, the capitalism's tendency to create disparity was somewhat resolved in Keynesian approach, where state "investments" (based on taxation) were basically redistribution of the money back to the bottom, so that the process of accumulation could continue slower and indefinitely. That was eventually abandoned, for ideological reasons (people shouldn't get "free money", and the "private property" is sacrosanct).
However, it is the only known solution. The proper taxation of the rich (and property) is badly needed to long-term stabilize the capitalist system.
One could make an analogy with any other competition. When another competition starts, winners (of the old competition) are usually given the same place at the start as everybody else. This is because without this rule, the competition would quickly demotivate everybody. But this is happening under neoliberalism, and threatens to eventually halt the positives of the capitalist competition.
> The problem is that the world is at neoliberal capitalism's end, as predicted by Marx
Well. Its capitalism's end. Neoliberalism is just an attempt to return to actual capitalism that existed back at the end of the 19th century. Before those pesky regulations, antitrust laws, all those workers' movements and rights for the plebs...
Given that California can't print money, why do you think those checks are "printing money"?
And no, it's not a "sneaky backdoor". It's the government doing what it should do, tighten financial inequality gaps. And preventing unnecessary suffering. We're still a society, we occasionally take care of the weaker people amongst us. (Frankly, not often enough)
And "without real oversight" is... you're aware this is going through the normal process of fund allocation, is reported widely in the press, and is part of the data that voters can take into account next round, no? It has just as much oversight as any other government spending. (Arguably more than some federal programs)
I get that fiscally conservative folks might disagree with this, and we can certainly debate merits. But "printing money" and "without oversight" are empty slogans without basis in fact.
Nowadays everyone prints money, didn't you read internet comments. If I loan you five dollars I have printed five dollars because the contract we signed counts as a certificate of deposit in the minds of these people.
Yes, people are ignoring the second-order effects. Just because California can’t directly print money doesn’t mean they aren’t contributing to the macroeconomic factors leading to the Fed feeling the need to print more money.
Right. One way to combat inflation is to save money. The fed encourages this by increasing the interest rate. If california truly wanted to reduce inflation, it would simply retain those $1000 checks. Taking money out of supply reduces inflation.
California doesn't want to reduce inflation. (It would be of at least questionable legality, too. Because monetary policy lies with the federal government - Article 1, Section 8)
What California does want to do is ensure poorer people aren't bearing the load disproportionately.
Also, while we can certainly argue if this is the best use of those funds, a quick reminder that the size of the US money supply is almost 22 trillion. We're about $6T above 2019 levels. California retaining $10B is not going to have any measurable impact on inflation.
Sounds like a decent recipe for boosting the economy, assuming the supply side capacity is available: injects a bunch of demand, but at the same time, precisely by being a one-time measure, discourages price hikes.
We have printed so much money, the only solution is to... print more?
Yes. Once you start printing money to fix problems, you fall into the pit of always needing to print more. See Zimbabwe’s $100 trillion dollar bill. I have one, it makes a great placemat.
yes. even though technically california doesnt 'print money'. people are more important than economy. the 'redistribution' is happening to help the most vulnerable and that's exactly what surpluses should be used for..seems like a good use of money to me.
I hate it when people make it seem like the economy and the people are two different things.
The economy is the aggregate capability of a society to provide goods and services to people, if the economy collapses the goods and services that are being provided cease to be as well and people are worse off.
Short sighted statements like "people are more important than the economy" is a feel good virtue signaling that is indicative of an inability to think clearly about the consequences of actions and a substitution of emotional reasoning over rational thought.
I wasn’t virtue signalling. Over supply of money will make inflation worse, but constriction would bring down spending.
A labourer making daily wages and supplemented by govt dollars will spend all of it. A millionaire with a few millions in the bank is not going to spend any of it. Especially during an overheated inflationary period. It’s better spent to the most vulnerable to pay for their food, gas and utilities.
This is exactly what needs to be done to keep spending going. It’s spending from a healthy and happy middle class that keeps the economy going. Can’t freeze them out. Not implementing measures like this would collapse the economy.
An economy with hopeless disenfranchised hungry poor majority is exactly the first ingredient in the recipe for revolts and revolutions.
Also..it’s heartless to not share a surplus to people who are suffering. We are a rich country. No one died because someone else got a little extra money to pay their electricity bill or gas.
But you just explained why this causes more inflation. In your words, it was money in the banks of wealthy people, meaning not being spent. Money that isn’t spent doesn’t cause inflation because it’s not competing for goods and services.
By redistributing to poor people, that previously stationary money is now being used to compete for goods, since poor people generally spend all of their money. So more money is now chasing after the same goods, prices have to go up.
It might make people feel good in the short term, but continuing inflation also hurts the poor, and could potentially widen wealth gaps even further since the wealthy are mostly invested in assets which can keep up with inflation, but poor people’s salaries do not keep up very well.
Short term looks like a good move, but it just kicks the can and continues widening the divide of rich and poor
Non wealthy people and poor people spend on necessities. You want the money to be spent on commodity goods and generally traded goods like grain, cotton, utilities etc.
We need healthy enough money supply and sufficient money supply in circulation to keep the economy alive. If anything, this isn’t ‘charity’…it is to ensure minimum money supply to keep the economy healthy and prevent it from collapsing. But not too much to cause inflation. To deal with this, interest rates will go up.
It is more like electrolytes needed to keep the economy upright. It is not a lavish meal at a Michelin starred restaurant.
Also helpful to understand Phillips Curve and relationship between unemployment and inflation.
The govt is trying to bring down inflation to cool the economy after all the excess money supply during pandemic. That was necessary too.
So expect unemployment rates to rise in the short term. This money will help poor people and those looking at unemployment in the coming short term to survive. This is necessary. We still want them to be able to buy food and pay for gas and electricity as the correction goes underway.
Distributing more money is almost certainly unproductive.
During Covid large checks were mailed out. Reddit was full of 'casual investors' throwing money at meme stocks that explained it was 'covid money' and thus didn't matter much to them.
Student loan debt forgiveness is the latest madness.
The end result? Those with the least money (the poor, and those on fixed incomes) are totally hosed. If you can't afford rent at $800, you surely can't afford it at $1400. More handouts only make the problem worse.
The Fed's response (raising interest rates) will make cars and houses out of reach for many.
Vote for politicians of any party who pledge fiscal responsibility. As a litmus test, judge their reactions to government handouts.
> The end result? Those with the least money (the poor, and those on fixed incomes) are totally hosed. If you can't afford rent at $800, you surely can't afford it at $1400. More handouts only make the problem worse.
That's absurd; while a one-off is nowhere near as good as a basic income, a flat "handout" benefits the poor for obvious reasons (at the expense of the rich; there's no free lunch).
> The Fed's response (raising interest rates) will make cars and houses out of reach for many.
Buying cars and houses with money you don't have and hoping you can make up for it in the future is something we never should've normalised. Someone preaching "fiscal responsibility" should see this as a good thing.
How do you expect fiscal responsibility in an economic system where money both embodies purchasing power which is a stock and liquidity which is a flow? Liquidity is a costly service provided by the public, every open shop and business provides liquidity and operating a business even with no customers costs money. This means anyone holding onto money can force others to spend money on providing expensive liquidity which completely eradicates the concept of fiscal responsibility because the holders of money aren't responsible for paying for the liquidity they benefit from.
> But if the main driver of inflation is the demand side, or inflation expectations, history indicates that a painful recession could be the only way to curb inflation.
That's certainly the expected path forward, at least in the circles I associate with.
"When the tide goes out, you find out who's swimming naked" seems a reasonable guess as to what's going to happen. Both at larger bank/investment firm scale and at the individual level.
At an individual level, just how much slack and flexibility do you have in your spending, your finances, your general way of living? If you're a high earner (there are certainly plenty here that would qualify), are you spending that on lots of monthly payments of assorted luxury and stretch items (house, cars, all the other crap you can get loans for)? You're probably going to be in a world of hurt - there's no income so high you can't outspend it, and it's really hard to adjust those payments when the value of money goes down and you need more for the living expenses. Also, those payments don't go away if your job is eliminated.
If you're comfortably pulled back, with either a high savings rate or a high "optional spending" rate, then you should be in far better shape to adapt - and I'll suggest that using some of those resources to help others around you would be useful. Even just coordinating bulk buys of food and other resources is helpful. But the key here is that this allows for flexibility. It's good to be rich, and all that - so don't be stupid about it.
I think, collectively, we're in for a world of hurt. Inflation is high, and energy costs seem to be staggering back up. Europe is going to be a frozen wasteland this winter if it's anything but a warm winter, and the energy costs are already eating businesses alive out there. That's before you get to a possibility this winter, in which money doesn't help, because there's simply no energy to deliver. If the natural gas pipeline to your place are empty, welp. Doesn't help to be able to afford the energy when there's none to buy.
That does imply that you might consider some backup energy solutions for the winter. I'm a fan of kerosene lately. Less annoying to use than propane, and stores almost as well.
The last couple years have broken a lot of things. And we're only just beginning to learn how much is broken, how badly.
I went into college during the dotcom bust. Everyone told me I would be making peanuts. I'm pretty happy where I am.
I've lived my life trying to minimize the financial downsides. I want money for security, not to live the high life. I like my job, and don't feel the need to retire early - I would love to do it until I'm 6 feet under. I make a decent enough income, although not the level of many here. I bought a modest house (700k - hey, it's California) compared to what lenders wanted to lend me (1.3mil).
We could afford our expenses on two minimum wage jobs if need be. And that's with 3 kids.
> We could afford our expenses on two minimum wage jobs if need be. And that's with 3 kids.
Let's assume a $15 minimum wage. The housing one can afford on two such wages is $1,560/mo. On a $700k home, assuming 20% down, to repay the principal alone is $1,556/mo. A mortgage calculator says $3,800/mo once you have interest in there — or 73% of your gross income. And that ignores insurance & taxes. And those 3 kids.
I imagine that the OP probably has savings to fall back on (since they stress financial security), and more equity in the home than just the downpayment— not to mention that if they bought it not so recently (5-10 years back), the home value appreciation has likely been insane to still come out well ahead in even an 2008-esque crash, plus they could have refinanced at 2% fixed 30year rates in 2020-2021 drastically lowing their monthly payments even further, depending on how much equity they had.
Also, California just passed a law requiring minimum wage be $22 in some industries/companies of a certain size (and the next step will likely be rolling that out to all industries and companies, as they did with the $15 minimum wage between 2016-2020)
I experienced the same and I’ve probably enjoyed similar extremely cushy tech career experiences that also aren’t that relevant to a macro discussion but it’s nice to hear individual anecdotes
On the other hand, you've locked in presumably low rates for your debt (close to 0% hasn't been uncommon for years now) and purchased items at pre-inflation levels! So maybe you can parlay some of that leverage off with minimal losses and enjoy the free rate arbitrage for a bit.
Perhaps. I'm pretty well opposed to debt, as I've seen how it can bite people over the years, so I simply don't play those games. I'm far more likely to buy something used and pay a lot less anyway, or, ideally, something with a couple problems that I know how to fix for even less, and then fix it and use it.
The problem I have with debt is that you then have to be able to service it. There are plenty of folks in the FIRE forums who go back and forth on the topic - "To pay off your mortgage or not?" is a holy wars topic. The argument for not paying it off (and arguably taking more on) is that your investments in the market will outperform your cost of the loan, so it's free money. And it works well, for at least some time - but the FIRE movement is largely a post-2008 movement, when all the money sloshing around meant investments go up. Regardless of anything else, investments go up, so put money in them, and while few people suggested going strongly leveraged, the sentiment certainly lurked around the edges.
We'll see how that holds up if the market is cratering around the time one is unemployed. Meanwhile, "Don't have debt, have savings, and live well below your means" has been tested through an awful lot more years of human history than "Put it all in index funds."
I'm certain I've "left money on the table" with my approach, but I also keep my downside risks limited, and should I have reason to really clamp down monthly expenses, I can do so very well.
Where are you at? I ask because I have 2 mortgages and a car loan in the US and 2 are fixed rate for the entire lifetime of the loan and 1 I have 10 years until the ARM starts applying so I'm laughing all the way to the bank.
90% of US mortgages are fixed for the entire loan.
I'm in the US. I certainly could do something like that. I just won't.
I hope it works for you. That's a level of debt-based risk that neither myself nor my wife have any interest in. There have been a lot of people throughout history who thought similar arrangements were "sure things," and they were, up until they weren't and it all came down around their ankles.
We live in a very modest (manufactured, gasp!) home for our income, our "new" car is a decade old, with other vehicles ranging far older (the tractor is about 80), but still maintained in perfectly good condition and they all do exactly what we ask of them. Mostly. One of the Urals got demanding lately.
It's low stress and high slack/flexibility. Those seem useful to us.
> Concern over US natural gas supply is not warranted. At all.
How'd that work for Texas a couple winters ago? Or a decade ago? Supply is more than just what's in the ground - it's the entire infrastructure related to delivering it to the various loads, and we've demonstrated at various points that it's not in as good of shape as people like to assume.
Also, someone is literally blowing up pipelines over in Europe. Don't think US infrastructure is better guarded.
If you don't think it's an issue, great. Hopefully you're right. If you're wrong, hopefully the outages are short lived. Because otherwise people die.
Texas didn't suffer a gas shortage? There was a weather-caused generation capacity crisis, which is a rather different resource. Is that what you're thinking about?
Cold places have pretty robust gas infrastructure, but cannot grow it because of the green people with gas heat who want all new installs to be heat pumps.
2/3 of my debt payments are a sure thing as they are fixed and inflation is also a sure thing as deflation is catastrophic so governments won't allow it and deflation is trivially easy to fix with helicopter money.
The only thing that isn't a sure thing are wages but they have over the long term gone up [0] and when they do go down it is usually only for a few years.
The last one is a risk but I think it is well worth the risk.
> It doesn’t make sense to not buy the best house you can afford.
I heard that a lot in the 2006-2007 era. And plenty of people lost that "best home they could afford" back then. Fortunately, I couldn't afford a four-figure car, much less a house - though some other grad students seemed able to convince someone to offer them loans. No idea how all those worked out, I do hope some of them were able to keep the houses.
I know quite a few people who are able to afford their houses, but wish they'd purchased smaller. A larger house, all other things being equal, will cost more to heat and cool, take more time to clean and maintain, and will generally have far higher carrying costs. You can mitigate some of them, but they're quite a bit more expensive than something smaller, simpler, and cheaper to maintain.
I don't own a house as an investment. I own it as a place to live, with some land to do things outside. And at this point, our "minimum monthly spend" to keep the house climate controlled and lit is pretty darn low. Again, I recognize it's not a particularly popular point of view, especially in the tech circles, but I find "buying a big house as an investment when you don't need it" to be entirely absurd.
I wasn’t saying “you do you” sarcastically. You ultimately decide what you can afford.
Being conservative debt is a valid strategy, but has risks. Buying the house you need at 25 may not be the optimal strategy if you’re going to be there when you’re 35. Bedrooms and school districts may matter more.
In my own case, my wife and I decided that we would send our kids to private schools and wanted to maximize our family time. So we bought a house in an urban area that was perfect for our goals, had a 10 minute commute and much less expensive than a suburban house of similar nature. We borrowed, but not excessively.
Financially, it’s not a high rate of return (probably about 3% annually). My same house in a town with a good school district would have generated a 10% return. But for me, liberating 150 hours of commuting time and not having a big mortgage was valued higher.
Buying a bigger house just allows you to park more of your net worth in real estate. As a diversification it makes sense. But also as you make more money the payment becomes less and less of your monthly income.
It’s not absurd. It’s just a different reason for buying a house.
Real property is an investment ... if you own it. If you don't own the land, property is a liability. That is because you have no idea what the land's value may be on the market at the time you may be forced to liquidate to make payments. More often than not, the value of the land will decrease if you're forced to liquidate. This is a huge risk that goes completely unappreciated by many.
If you own property that you do not use that you rent out for a consistent income stream, then it can be an asset even if you have debt on it. This is because you can easily sell this property in anticipation of hard times (whereas you cannot with a home). And moreover, it should be cashflowing even with the debt service, and anything that produces a real income is an asset. Although, still a risk.
I'm totally in favor of property, but frankly many property 'investors' are not investing. They're either consuming (your current home is a consumable and if an investment, an incredibly speculative one), or flat out speculating (owning property in the hopes appreciation will keep up is actually a bet on monetary policy and the interest rate, not on the actual value of the land / property). Property is only an investment if it makes you money in cash each month.
Also, cars are not a risk-free loan unless you live in an area in which you can accomplish most tasks via walking / public transit / cheap private transit. Most Americans do not. Thus the car is a necessity and the loan ought to be seen as a tax on living in a spread out area. Of course, no one actually thinks about it this way.
> But assets like real property are historically good investments.
This is wrong and might be misleading for some people. Real-estate where you live is certainly a good investment (if you are planning to live there). However, real-estate is a risky investment. I have passed through lots of abandoned commercial and residential buildings now that I'm pretty sure I'm never going to invest in real-estate.
I'm very curious if this will hold with the changing shape of demographic curves with aging populations. Right now in the US, two very large generations - Boomers and Millennials - want houses, and I'm guessing this is a large driving factor in the home supply-demand issues. I wonder what happens once the boomers start seriously downsizing or just dying off in earnest.
There is no fixed rate loan. It's all variable. There is a trader (might be the bank) that is buying variable rate and selling you a fixed rate. If he goes bankrupt, somebody will be holding the bag.
You might want to re-read your terms if the interest rates get much higher.
I read my mortgage and there’s nothing in there that entitles the lender to raise the rate in any circumstances.
The interest-rate risk is on whoever owns the bonds to that ultimately funded the mortgage. The value of those bonds is going down as interest rates rise.
Banks get their liquidity from the Fed. Afaik, this liquidity is sold with variable interest rate (but I might be wrong or there might be some government program for that).
>That does imply that you might consider some backup energy solutions for the winter. I'm a fan of kerosene lately. Less annoying to use than propane, and stores almost as well.
By backup you mean for heating? Can you safely burn kerosene indoors? I thought you would have all sort of pollutants on top of monoxide?
I realized that kerosene heater without exhaust that often used in cooler Japan area is really bad after I bought CO2 meter. CO2 easily go 10000ppm if ventilation is a bit poor (even poor insulation). Kerosene heater with exhaust pipe seems to fine, but now heat pump is generally better option. Still it seems to good backup for not to be death by freeze.
Modern kerosene heaters have a "ventilation sensor" (I don't know what it is, O2 or CO?) so it alerts or stops when the room is not ventilated. Deadly accident isn't popular so it seems that it's somewhat mitigated by the sensor and poorly insulated house, but some heaters were recalled due to CO deadly accident. It's not recommended to use it on modern insulated house.
Those homes are also poorly insulated, and probably let gasses out much more easily than modern well-sealed homes. I didn't see kerosene heaters in new homes in Japan, probably for the same reason.
As such, I would be hesitant to use a kerosene heater in my home without investigating it in much more detail.
(It's a theoretical issue for me as my geographical area has more NG than it can use)
Devil's advocate though, you can order lots of unsafe (and outright fraudulent) items on Amazon. You can often order a "widowmaker" male-to-male power cable, fake UL-certified power strips and UPSs that catch fire, etc.
You can, and people have throughout the last century and a half, both for heat and light. In terms of winter, the fact that kerosene lanterns provide "a bit of light and a lot of heat" is useful - though the light coming off a good cold blast lantern is just wonderful, year round. A nice continuous spectrum, cooler than candles, but still a very nice yellow-orange, with more than enough to read by.
I've been experimenting with them for a while now, and as far as I can tell, a properly burning kerosene lantern doesn't put any measurable particulate in the air, at least as far as PM2.5 or PM10. Run them too high, they'll certainly smoke, but run properly, I can't measure any real difference with the meters I have. They should be burning cleanly.
The same goes for the wick type kerosene heaters - either convection or radiant. They should be burning clean, and if you get any smoke off them, you've got a problem that needs fixing (the good news is that it's almost always either just burning them dry to remove tars from the wick, or at worst replacing the wick).
You shouldn't be getting any carbon monoxide off them either. That's from incomplete combustion, which, again, shouldn't be happening. A properly designed and operating lantern or heater will be feeding a strong draft into the burner. A window slightly open should provide enough venting for a typical unit burning - though I'd have a CO meter around any combustion heat as a normal habit anymore.
If you're burning 1K, you'll get some kerosene odor on startup and shutdown, but it shouldn't be much during operation. However, if you're in the US (perhaps other places too), you can get Klean Heat, which is a kerosene substitute that's somewhat more expensive (~$15/gal vs about $10 for 1K out here), but burns significantly cleaner. It behaves the same, so can burn in the same lanterns, but just burns cleaner all around - less odor, less wick fouling (though that's not usually a big issue with 1K, just the red dyed stuff), etc.
But, yes, I very much do refer to kerosene as a backup for heating. I prefer it over propane - it smells better (propane has a bit of a metallic tang, kerosene is a far warmer smell), and I don't have a pressurized bottle of flammable gas in the house. Kerosene is combustible - not flammable. The flash point of the stuff you should be using is around 140F, which means below that temperature, it doesn't emit enough vapor to ignite in regular air. Gasoline's flash point is -40, give or take, so it will happily generate vapors in regular air looking for a thing to light them of. Especially in the winter, at 40-50F, kerosene is quite safe compared to other heating solutions.
Anyway, it's something to look into. Our energy systems are not in good shape globally, and being able to stay warm with the power grid down and the natural gas empty seems like the sort of thing one might want to consider more lately.
History teaches us that inflation will continue as long as the government keeps printing fiat money with no backing.
For a historical example, the Confederacy had high inflation. The printing press was in Richmond. When Richmond was threatened with a siege, the Confederacy hustled the printing press out to get it to a new, safer location.
Confederate inflation paused during the move.
The reason is pretty simple - the Law of Supply & Demand. The more currency there is flooding the economy, the less value that currency has.
This is a very simplistic viewpoint. One could also argue that Inflation happens when people don't trust that their government will pay back all the money borrowed.
The US govt has been on a spending spree as of late, but hasn't yet bothered to mention how they are going to pay for it.
In 2008/2009, the US govt was also on a spending spree, but did promise to pay the bill eventually. Inflation didn't spike in 2008/2009.
The bottom line is, nobody really KNOWS, we just have guesses. My guess currently fits all the facts, where yours does not, but that doesn't mean my guess is right, but perhaps it's more correct than your version.
My version has lots and lots and LOTS of history backing it up.
Did you know that the US had inflation when on the gold standard during the California and Yukon gold rushes?
Did you know that Spain experienced massive inflation during the period when they were shipping the silver in S. America across the Atlantic?
I could go on and on.
> One could also argue that Inflation happens when people don't trust that their government will pay back all the money borrowed.
This sort of thing happens with private banknotes, which would trade at a discount based on the level of trust. But that is a one-time discount, not a cumulative process.
I agree that there is lots of data that shows your version has some merit, but that doesn't mean it's 100% correct. I know of at least one instance where your version was incorrect(2008/2009). Again, I'm not arguing my version is correct, and I'm not even arguing that your version is completely wrong, because we literally do not know.
Read some John Cochrane[0] if you want a more academic defence of my version(which is where I got it from, I'm certainly not smart enough to have come up with it myself).
> I know of at least one instance where your version was incorrect(2008/2009).
One one hand, we have thousands of years of history with what causes inflation.
On the other hand, we have one instance.
I'd say one has to examine the one counterexample for something missed. (Your cite makes no mention of 2008/2009.) Extraordinary claims require extraordinary evidence.
Recall my other post here about how making loans creates money, and paying the loans back destroys it. Bankruptcy destroys money. I wonder if all the bankruptcies, defaults, haircuts and writedowns removed a vast amount of money from circulation, and the deficit spending simply filled that hole rather than creating more inflation.
>One one hand, we have thousands of years of history with what causes inflation.
Yeah we know that inflation is caused by an insufficient internalisation of liquidity costs on the beneficiaries of liquidity.
This makes them destroy the supply of money that is available for transactions which then forces people to create new transaction available money to replace the loss.
Thousands of years of pre Adam smith history where the concept of macroeconomics did not exist. Obviously a naive implementation of monetary expansion causes price inflation, that doesn’t mean a well implemented monetary expansion does though.
The Law of Supply & Demand is there whether it is recognized or not.
> that doesn’t mean a well implemented monetary expansion does though
Then none of them are well implemented, because all examples of fiat money exhibit endemic inflation. The reason is straightforward - the whole point of a fiat money system is to inflate it.
Incorrect: "One may look to politicians’ statements. Even in the Obama-era “stimulus” spending, the administration emphasized promises of eventual debt reduction. " And I have more to say on it later.
My cite is from a world-class economist, not from some random person on the Internet.
> One one hand, we have thousands of years of history with what causes inflation.
> On the other hand, we have one instance.
Again, you are assuming facts not in evidence, you assume your version of reality is correct, likely because that is what economics text books taught you, because they also assumed it to be the case, these assumptions do not make it true.
Perhaps those thousands of years of history actually agree with my version also. We don't know what people were thinking across those thousands of years of inflation history, it's possible they were thinking our governments(such as they were) were not trusted to pay it back, as generally speaking, governments that go on large spending sprees tend to not pay it back very well. It's hard to be disciplined with money when there is very little incentive to politicians while in office.
There is no rigorous proof of what causes inflation. There are many well-educated guesses and your perspective was the common wisdom for a long time. That doesn't make it true, no matter how much you want it to be.
I'm pretty sure my version is also wrong, but it's at least an interesting perspective rather than "money printers go brrr inflation then always happens".
> Recall my other post here about how making loans creates money, and paying the loans back destroys it.
I don't agree with the second part of this sentence. I completely agree that the banks create money out of thin air when they decide to loan you $100k. But if you pay it back, more money is created as part of the interest payments on that $100k. If you don't pay it back:
> Bankruptcy destroys money.
True.
> I wonder if all the bankruptcies, defaults, haircuts and writedowns removed a vast amount of money from circulation, and the deficit spending simply filled that hole rather than creating more inflation.
The US government made money on it[0]. I'm almost positive there is essentially a zero percent chance of making any of the trillions we spent in 2020 back. We have to pay all that borrowing off somehow, either we raise taxes or we inflate it away. It seems like we are on the inflation train version for now at least.
Though perhaps your comment is also partially true, there was some bankruptcies(one might argue not enough). A quick web search didn't turn up any good data on the amount(s) though and I'm to lazy to do more research on it, but if you have done some, I'd be interested.
> There is no rigorous proof of what causes inflation.
There's no rigorous proof that smoking causes cancer, either. All we have is a lot of correlation.
The historical evidence of printing non-collateralized money corresponding with inflation is overwhelming. It corresponds with gold rushes, and silver rushes. It corresponds with debasing coins by mixing in cheap metals.
Me, I'm going where the evidence leads.
> I completely agree that the banks create money out of thin air when they decide to loan you $100k. But if you pay it back,
It is the inverse operation - destroying it. But of course, the bank creates it again for the next loan.
> more money is created as part of the interest payments on that $100k.
No, it does not. I wish I could create money to pay the interest on my loans, but I can't (at least not legally!). I use existing money to pay them.
Always fantastic to see someone standing up for basic economics here!
My favourite tech-communicable way to consider it is this: Money is like 'points' for prioritising the way people/resources are allocated in the world, somewhat like agile/scrum planning poker. If you give everyone cards with larger points values, you'll still get the same amount of work done in a given sprint, it's just that you'll get an inflated 'sprint velocity' (eg story points implemented in a fortnight).
Monetary inflation is the increase in the money supply. Price inflation is one of the potential symptoms of monetary inflation. Too often people look at just one symptom to gauge the occurrence of the cause. Currently we are experiencing both, but people seem to want to ignore the inflation of the money supply, and scratch our heads over every other variable that affects prices.
The primary difference between 2008 and now with respect to monetary policy is money velocity. Increasing money supply is a necessary but insufficient condition for inflation.
In 2008, much of that money sat uninvested, so it didn’t impact the price of goods. In 2020, most of it got used to buy and invest.
There’s also a tipping point where inflation is self propelled because everyone is used to it so they just proactively raise prices on a regular basis. I experienced this growing up in Brazil in the 80s and 90s. It’s hard for Americans to relate, but essentially the mentality is spend/invest every penny you get before it loses value. Took some creative policy to break the cycle: https://en.m.wikipedia.org/wiki/Plano_Real
> There’s also a tipping point where inflation is self propelled because everyone is used to it so they just proactively raise prices on a regular basis.
This is called cost-push inflation. Unfortunately, that theory doesn't explain where the extra dollars come from.
Why would you expect there to be some unifying theory of inflation? It's an emergent phenomenon resulting from the actions of many individual actors. I'm quite sure the people raising the prices every week had no idea how much cash was in circulation.
Fiat money (or anything that increases the supply of money, like gold rushes) is the common factor with all instances of inflation. There are thousands of years of examples of this.
You're right on one point, the Law of Supply & Demand. It is an emergent property of many individual actions, though each might be completely ignorant of the big picture.
Egyptians used grain money which spoils over time and the grain banks charged the depositors a fee for the liquidity they provide. If you want a stable banking system you are going to have to make depositors pay for the costs they impose onto other people.
I suggest reading up on how banks make money from fractional reserve banking. No need for depositors to pay, and in fact lending money is so lucrative banks will pay the depositors.
One of the reasons to raise price is to discourage people from buying when you have limited stock. Sellers can tell where their supply is coming from, compare it to how much stock they have left, and compare that to normal times. So yeah, they do have such a signal, though it is secondary to the actual reason for the price increase.
AFAIU from reading about the Plano Real and some other cases, the extra dollars come from the central bank being stuck between a rock and a hard place. If they don't print the extra money, then inflation accelerates--a scarcer dollar increases in real value, but non-intuitively this doesn't produce deflation unless you're prepared to hold your ground while the economy and society incinerates in the chaos.
EDIT: I think this is one of the primary phenomenons creating the dilemma for the central bank and government: https://en.wikipedia.org/wiki/Inertial_inflation But IIRC from the Brazil case, informal expectations and pricing strategies in the supply chain (from factory to corner store) were at least as important as contracts.
Why would there need to be any extra dollars? If inflation is a matter of supply and demand of currency, as you say, then shouldn't we expect that a demand-side shift could lead to inflation without any change in the money supply?
Makes sense to me, the thing that matters is not total money but active money. Prices go up because there is the same amount of money, but sellers expect more, and buyers are used to paying more. This can continue by having their proportion of earnings/wealth spent increased which increases total liquid money supply, until they are at capacity (i.e. spending their whole income, selling off assets, etc).
Basically the inverse of people being averse to spending and instead hoarding cash, leading to deflation as prices are lowered to tempt them into spending again.
There is no reason to believe the situation is complex. The value of money is changing because the authority that controls money is changing it.
Nobody understands the economy. But we can be pretty sure that it isn't the economy destroying the value of the dollar, because there is no reason for consistent annual inflation to be happening. If anything, in the absence of money creation, we should be seeing deflation because of technological improvements. Short term wobbles, sure, maybe even sometimes a few straight years of inflation due to exceptional conditions. But that isn't what is happening.
The only thing that can have caused the dollar to lose value consistently is creating new money. Otherwise we'd see it regularly snapping back to normal value with deflation. Which, in my lifetime, I think may have literally never happened.
> History teaches us that inflation will continue as long as the government keeps printing fiat money.
Of course, that is almost a tautology. The devil is in the details. No inflation is bad because the economy stops. High inflation is bad because of erosion of purchasing power and negative impact on nearly every participant in the economy. So what do you do to get that sweet spot of about 1-2% inflation? I'd say raising interest rates was a pretty good start, if a bit late in the game.
> Note that the US had net 0% inflation from 1800-1914, while growing from subsistence farming to superpower.
This is grossly ahistorical: in 1914, 2/3rds of the US lived in abject poverty[1]. Individual farming, including subsistence farming, didn't peak until the 1930s[2]. The US's ascent to superpower status can be traced, at the earliest, to lending programs begun during WWI (and repeated, to fantastic effect, during WWII).
The US's phenomenal ascent in international status and power is directly tied to its monetary policy, a policy that has more or less kept inflation around 2% since 1935[3].
> in 1914, 2/3rds of the US lived in abject poverty[1]
Your cite doesn't support that. Besides, during the 19th century average height increased enormously (a sign of good and consistent nutrition), mortality rates dropped dramatically, life expectancy increased, and the growth of the middle class was spectacular.
When the US entered WW1, the German soldiers were shocked by how tall they were, and how well fed and well supplied they were.
I.e. your claim is completely false.
> The US's phenomenal ascent in international status and power is directly tied to its monetary policy
None of your cites support that, either.
See "Historical Statistics of the United States Colonial Times To 1970, volumes 1 and 2". I think you can download it from archive.org. It's a gold mine.
> Besides, during the 19th century average height increased enormously (a sign of good and consistent nutrition), mortality rates dropped dramatically, life expectancy increased, and the growth of the middle class was spectacular.
Growth is good, but it's a delta: it doesn't mean that the average life was particularly nice by modern standards. The fact that things improved over time is not evidence that they were good at any instant (and indeed, nobody questions that things improved: they clearly had to in order to get to where we are now).
In 1914, the average male life expectancy was 52[1]. That's over 20 years shorter than our current life expectancies.
> When the US entered WW1, the German soldiers were shocked by how tall they were, and how well fed and well supplied they were.
This is a comparative error: the US's military population didn't need to be well fed by objective standards; they only needed to be better fed than the peasants who were press-ganged into the German army.
Nobody is saying that the US was uniquely impoverished by contemporaneous metrics; the claim is that the US was impoverished on an absolute and modern scale, and that said impoverishment declined as the US established domestic and international policies that are inextricably linked to its monetary policy.
0% inflation is incredibly dangerous. Deflation is just about the worst possible thing that can happen to an economy. It instantly kills money market liquidity as real interest rates rise as they hit the lower bond for nominal rates. People stop spending as much as they can since their money will be worth more in the future. So the question is how can we guarantee no deflation. And the only answer is target 1-2% inflation.
By the way the us was in a recession for practically the entirety of the second half of the 19th century, mostly because of absolutely garbage monetary policy.
I don’t know, the concept just makes sense to me intuitively. There are enough weird effects in systems and math when things are at zero that I just can’t tell what would happen. Example, in queueing theory when input rate is equal to output rate under reasonable randomness you get large backlogs. When everything drains at just a few percent over zero it just seems like a better system.
The US also had a civil war during that period. And then repeated brutal boom and bust cycles until Breton Woods.
Dismissing a contrary position as "propaganda" only stifles debate, and you haven't presented an argument against "sweet spots". It's a good mental model for many situations. What makes you think there doesn't exist an optimal inflation rate?
0% inflation is generally not a safe target. In an economy you want to avoid deflation at all costs. If consumers expect future price drops, demand can dip significantly and induce further drops in price (deflationary spiral). Businesses need consistent, predictable demand, else they enact shortsighted, over-reactive responses (e.g. layoffs) which can further exacerbate an economic downturn. See the Japanese financial crisis. Even a small fluctuation into deflationary territory can have long-lasting effects on consumer perception. It's safer (read: insurance policy) to maintain a slightly positive inflation rate so that consumers are encouraged to make purchase decisions promptly when needs arise versus indefinite speculative postponement.
Of course, the "optimal" inflation rate is context-dependent. Your unique economic situation will dictate which inflation trade-offs you end up selecting.
Money is necessary to conduct transactions. If people are incapable of transacting because some people play a hoarding game like with Bitcoin then real people's real basic needs like food or housing won't be met. You will get wholly pointless homelessness.
How do we make sure that money cannot be abused to doom the rest of the economy into an inability to transact? You make people pay for the benefits they receive by holding onto money. People hate free markets, they are against paying for the costs they cause.
Not necessarily. Money is little more than a distributed IOU held from providing past benefit to someone else to be used in exchange for future benefit from someone else. Money records that I did work for you now and in return you will do work for me later, except given that the IOU is recognized in a distributed fashion the work later can also come from other people.
IOUs bring a lot of benefit, but aren't strictly necessary to conduct a transaction. I could work for you now and at the same time you could work for me to provide equal value. Since there is no delay between services rendered there is no need to record that the other party promises to provide a future benefit. The transaction is already complete in the moment.
Demand doesn't disappear. People still want the things they want. They just might not be wiling to pay as much as others would like them to. Lower the prices, and suddenly those people can justify (or even simply afford) satisfing the demand that never went away. People spending leads to more jobs.
As if prices are going to come down. If the companies who have been making record profits refuse to accept making a little less profit and won't lower prices how long will you have to wait to buy something cheaper.
Not at all. The issue of rampant consumerism is mostly orthogonal to issues of overall economic stability. Deflation will certainly reduce consumption, but at the cost of massive societal upheaval by way of extreme unemployment and all of its ill effects.
The reason everybody believes that inflation is good for you is because of persistent government propaganda to sell that idea, because what inflation really is is a tax on your money. That's right, a tax.
Now, if you want to argue that the inflation tax is a reasonable way for the government to raise revenue, ok, but be realistic as to what it is. Inflation isn't good for you any more than taxing you is good for you.
The "deflationary spiral" has empirical evidence from a fair number of financial crises in the 19th and early 20th centuries. It happened. A lot. And it was really destructive when it did.
Nothing of what you said is an argument against the points I made. Where is the error in my reasoning? I literally gave an example of my argument applying to a real life, well studied scenario.
Which they do. The only time in US history where a significant inflationary spike was not followed by deflation was in the long run up (already making it an outlier) in the 1970s through 1980s, and inflation in that period transpired primarily due to wage inflation. As wages are the stickiest of all, you don't get downward movement on price when the tide shifts, you simply see unemployment shoot through the roof.
When fertilizer availability is no longer the most pressing concern facing humanity, something we are unlikely to not be able to resolve in due time, there won't be much reason for prices to persist. There is little to no stickiness here and it tumbles from there.
>I'm amazed that propaganda of a sweet spot gets so heavily embedded into the popular wisdom.
Because that sweet spot is very similar to the benefits liquidity confers to the holder of liquidity. Come on grandpa, please don't tell me all the people "bringing their wares to the market" are doing so at no cost and that the holders of liquidity aren't benefitting from stores optimistically stocking goods.
I've never heard anyone tell me they were going to quit working because the US government wasn't printing money fast enough.
I have heard people tell me they weren't making enough money to cover their expenses on a month-to-month basis as a result of cost increases. These happen to correlate with inflation.
There is no way an economy would stop just because there was no inflation. Would Microsoft suddenly decree that if the US government won't print US dollars, it won't sell you a Windows license key? Even in the case of extreme deflation, it only becomes an issue when you have people trying to do weird things with physical currency like cut a penny into 1/4s and use it to buy different goods.
How much net inflation was there in Europe between the Napoleonic Wars and the start of WWI? Do you think "the economy stops" is a fair description of this time period?
Zero inflation is fine, but a small hiccup would cause it to spiral into deflation. Deflation sounds good in a micro-scale because money gets more valuable. However, this is actually a terrible thing because the only way this can happen is when money gets destroyed through defaults, which is why you only see deflation during a financial crisis.
When technology increases increases productivity and society has a fixed supply of paper money, you'd think you'd see deflation because there are more goods and the same amount of money. However, actually during those periods of times, banks lend out money, which increases the money supply. This is a good thing because they're enabling economic activity that otherwise wouldn't have happened like a loan to start a new business. However, this system is fragile because if depositors lose faith in the bank, everyone will try to withdrawal their money, which is called a bank run. The bank doesn't have enough money because they leant some of it out, so they default and depositors that aren't quick money lose their money. One of the purposes of central banks is to ensure that this doesn't happen.
There is also the problem that if you pay off your debts at a faster rate than people spend off their savings your debt will shrink at the rate others are spending their money, not at the rate you are paying it off. If we expect people to be personally responsible why do we treat them as if they aren't when they do the right thing?
There are some other comments that probably described it better, but as an example: let's say inflation is negative. That means it is good to keep cash. What happens is everyone starts hoarding cash under their mattresses and there is no liquidity around to help exchange goods, and everything slows down.
With a small inflation, there is no incentive to hoard cash, and there is enough liquidity to make sure goods get exchanged without too much delay. At the end of the day that is what an economy is, exchanging goods.
And ... this is exactly what the ecosphere needs right now.
People continuing to consume all the usual necessities as they always have and always will. And consuming less of all the extra wasteful unnecessary stuff that gets pumped out of factories because of a destructive culture of "increasing GDP is good".
Yes this is a great point. I wonder if to achieve that, a back pressure is required in the system that we are just not willing to put up with. Example, cruel warlords keeping the serfs in misery, or hunter gatherer tribes annihilating each other. Or more modern, some central authority allocating resources.
> I wonder if to achieve that, a back pressure is required in the system that we are just not willing to put up with.
By back pressure you mean some kind of negative feedback, I assume.
I think, more precisely, the problem is not that negative feedback is completely missing. The problem is, that technology and societies have implemented (mostly involuntarily so) lots of systems that effectively distribute the entirety of the negative feedback very widely across the members of society.
Like in a shared living situation where some people take great care to clean up after themselves and others do not. As a whole it somehow "works", without cleanliness getting out of hand, but only because some people are doing more than others. This way, those who do not clean up their own dirt, never even learn their real impact on the whole, because it's continuously remedied by others. Their negative feedback is effectively missing, so they get the impression that everything is fine.
On the worldwide scale it's an analogous situation.
Widespread governmental subsidies for energy are one of the biggest issues I see there. They redistribute a big part of production costs across all tax payers and eliminate a big part of negative feedback.
No, I didn't get it either. People will still need food, electricity, gas, clothing. Buildings will need maintenance. Are you saying people will decide to not eat because deflation? Or not fix their broken windows?
In deflation, prices are going down. So I know it will cost me less next week to fix that broken window than doing it today. So I wait a week. But the logic doesn't change - when next week comes, I'll wait another week to get a better price. Apply this across the board, and people mostly just buy what they need. Producers of goods stop producing. R&D disappears. Etc.
Seems more like a good thing you've turned upside down. As long as some R&D has an average payoff that outperforms the rate of deflation, people will be motivated to take the risk. Deflation would disproportionately hurt risky investments, whereas inflation causes worse and worse choices to become increasingly attractive. I'd say we already got way more stupid investments than we needed in the last few decades of low inflation.
Deflation forces real interest rates up which kills investment and immediately lowers gdp. It is unequivocally an awful thing that leads to massive unemployment.
Lowering prices is a good thing for consumers and businesses who need to buy those things. There's nothing "unequivocal" about the argument here. Including the value of speculative investments (good investments will still pay better than real interest rates) or the position of economists as you surely are aware. And by the way those historic periods of massive unemployment had other causes with deflation as a side effect, not the cause. Other times in history had deflation during periods of growth.
They will decide to not eat because the medium of exchange is scarce. Some rich people see their big bank accounts go up in value and keep it there but poor people will keep spending until they have no money. Because the medium of exchange is blocked they can't sell their labor to obtain a medium of exchange which they can then use to buy food.
Deflation is like turning off the internet and no longer being able to pay with your credit card but it also affects paper money. The problem isn't a lack of productivity or a lack of capable workers.
If the medium of exchange didn't act as a gatekeeper people would keep trading in some beautiful purely theoretical economic model via barter.
Why are interests rates as a money sink preferable to the more direct approach of simply sinking money out of supply via tax? They seem to amount to the same thing at the end of the day - siphoning dollars out.
That is also a valid approach but I'm not sure it is more direct. Tax policy is generally only set once a year and only affects tax payers. Interest rates can be tweaked more frequently and (I think) directly impact a larger subset of economic players. That and the Fed doesn't determine tax rates.
Your point about how tax rates are set compared to interest rates is true, but could be changed.
I don't follow the second part though: pretty much everybody pays a significant amount of taxes, if only the likes of sales tax. Far fewer (though of course still many) players have substantial interest income or expenses.
The Federal Reserves implements interest rate increases by selling the bonds that they own (bought in the past) in the market in exchange for cash ("Open Market Operations"). This takes cash out of the hand of the public (in exchange for cash that can be spent in the future). That's about as direct as it gets.
Removing cash in the public's hand via taxation has several drawbacks, as mentioned by other posters. It's a very slow legislative process, because it has much more direct distributional effects (who is going to be taxed?). Additionally, most academic economists believe more taxation reduces real, as opposed to nominal, economic activity ("distortionary effects of taxation").
Why governments don't do monetary policy by fiscal means? Well, because the central bank is the authority on monetary matters, and the congress the authority on fiscal matters. They don't even usually agree on what direction to go. (Things are this way on every democracy.)
But that specific question, nobody would take money out of the economy by fiscal means, even if they could. You would need huge fiscal changes to have the same effect of a small monetary restriction. And you don't do huge fiscal changes, ever.
This way, you'd only be vacuuming dollars held by US entities (citizens, companies), while USD is a global currency held by everyone in the world. This policy would greatly benefit non-US entities, at the cost of US entities.
Do non-US entities tend to have more assets in USD or more debts? I'd assume the former, which means that a US interest rate increase is actually net beneficial to non-US entities.
Interesting. It isn't obvious to me how the Fed(a US org) setting interest rates necessarily affects non-US entities. Could you explain the causal chain?
Have you ever noticed you get raises roughly based on last year's inflation and not an estimation of next year's inflation? When the money printers print the people who touch the new money first get to buy assets before the price inflation occurs. Then, once the new money eventually circulates to the peasants, they get to use it to buy goods and services at the new, higher prices.
Inflation is a wealth transfer from the poor to the wealthy. It is not, by any means, necessary.
Isn't it amazing that Austrian economists completely ignore that providing liquidity creates costs for the providers of liquidity?
Businesses give money value by offering products and services, meanwhile the holder of money expects the business to keep providing this costly service at no cost. In other words, there is a constant flow of free liquidity provisioning services toward the holders of money which makes the providers of liquidity poorer and the holders of liquidity richer if they market that liquidity. After all, money is worth more than the purchasing power it represents, it can buy anything available in the payments network. Money that buys bananas and apples is more valuable than money that only buys apples even if both have the same amount of purchasing power. Since liquidity is paid for by the general enterprising public, the holders who have none of the costs can just loan out and market their liquidity for a price and they get to pretend that they are providing a service, even though they haven't done anything for it in any way.
People who still have a need to transact must now pay the costs of liquidity to someone who doesn't provide it when they borrow money.
The person who borrows money is now stuck with the costs of liquidity even if they spend it. When they spend it, they no longer benefit from liquidity but they must still pay for the liquidity that someone else owns. That person then can lend his liquidity out without paying for it. The end result is that liquidity costs must be paid twice.
This is an endlessly compounding system. Like a pyramid scheme.
Money acts like a perpetuity where the yield is paid out in liquidity which can through borrowing be turned into money. Previous perpetuities are paid by creating new perpetuities.
Very interesting scheme and Austrian economists are even denying the above so they are complicit.
You keep claiming this, but it is fairly obvious that prices can be forced up by factors that have nothing to do with the money supply - most notably, constrained supply in basic raw materials (especially oil and its derivatives) can force virtually all prices up, regardless of the amount of currency available.
1. There's no extra money - poorer people just consume less.
2. Because companies just take all of the difference as extra revenue, and prefer to increase salaries (if not just keep everything as profit) rather than reducing prices.
Note that I'm not claiming that increased money supply doesn't cause inflation. It obviously does. I'm claiming it's not the only cause of inflation. It's sufficient, but not necessary for inflation to happen.
When people consume less, prices drop. Again, it's the Law of Supply & Demand.
In physics, when momentum is not conserved, I don't have to work through the math to show it is wrong. I know it is wrong. When conservation of energy is denied, I know it is wrong. When someone claims a perpetual motion machine, I know it is wrong.
Analogously, when a theory requires denial of the Law of Supply & Demand, I know it's wrong.
This thread is chock full of weird economic theories of every description. The LoS&D is a wonderful tool to easily diagnose false economic theories.
> When people consume less, prices drop. Again, it's the Law of Supply & Demand.
No, they don't: not if supply is inelastic.
The law of supply and demand says that the price of a good will tend to the price at which supply meets demand. If supply has a maximum, so does demand: any change in theoretical demand above that max will do nothing to affect the price.
If the entire economy produces 10 gallons of oil per day, the fact that today 100 people wanted 1 gallon each, while yesterday 1000 people wanted 1 gallon each, will do nothing to affect the price: I'm still only going to sell to the 10 highest bidders. Of course, if suddenly only 9 people are left using oil, I will indeed be forced to lower my price - but until then, lower demand will have no impact.
You seem to be basing your opinions on some other "Law" of Supply and Demand that somehow claims that Supply will always rise to meet Demand. That "Law" is simply false, and you should discard it.
It's not so simple though since there's indirect effects that immediately follow.
1. Everyone consume less. Even rich people have to buy less of something else to pay for the higher-priced gas. So demand goes down elsewhere driving down other prices.
2. If margins or salaries increase then it increases the incentive for competition to enter the market and compete on price.
> Isn't the point of lowering one's lap dance prices to get more customers to buy them?
Of course, that's why they lower prices. But you spent all your money on food, so you don't have any left for a lap dance.
edit: My point is that not all goods are equal. In normal times, if the price of a lap dance is too high I'll find some other entertainment with a price I find reasonable. But when food gets expensive, I still need some.
That's the hope, but it doesn't mean it will happen. There is no law that says you'll find a price point that keeps your business afloat: changing economic conditions can just tank your business; the less critical the good or service is, the more likely it is to happen.
Just because the stripper can no longer afford food doesn't mean that food sellers will be able to lower their price. Supply issues can't be solved by price changes.
Taken to the extreme, people will die of starvation until the population adjusts, so still in the long run demand and supply will meet at the price point.
But the people who were pocketing those higher profits and salaries back when gas prices went down, now do have room to cut prices though and still make money. It can't go both ways.
Anyway starving people still have labor to sell, which they will sell as cheaply as they have to, driving everyone's costs down and allowing them to cut prices after all.
The price of labor isn't the problem, and anyway it has a floor. No one will work for 1 dollar a day, even if it's theoretically still better than 0 (not if bread costs 2 dollars at least - of course there are countries with such low wages).
1. Rich people already have much more income than they consume, they would likely only reduce investments/savings.
2. It takes a very long time to create a new manufacturing business, and it's hard to know how gas prices will evolve in 2-5 years time (which is a decent conservative estimate on when you would be able to start selling your products if you start today).
Again, reducing demand only reduces prices if there is enough supply. If the demand already exceeded supply, then changes in demand don't do anything to price unless and until demand once again drops below supply.
Not to mention, if you think companies use all their funds every year, you're again using a very bizarre economic model. Companies often accrue money as cash savings to be used at later dates, taking it out of the economy until then.
Sure - goods whose production costs are not deeply tied to gas will not go up in price, or at least not as much. For example, software prices or services shouldn't immediately be affected if gas prices go up but the money supply stays relatively the same.
But electricity, gas, consumer goods, food, housing (via construction costs) - these will all go up, and they form the vast majority of consumer spending.
> History teaches us that inflation will continue as long as the government keeps printing fiat money with no backing.
You do realize that the US has had fiat money for decades, right? Including our longest period of low inflation, a run of nearly 4 decades. So it would seem history teaches us the opposite.
"For every complex problem there is an answer that is clear, simple, and wrong." -- H. L. Mencken
> You do realize that the US has had fiat money for decades, right?
Yes, since 1914 when the US switched to fiat money.
> Including our longest period of low inflation, a run of nearly 4 decades
The US had zero net inflation from 1800 to 1914. How much net inflation do you think happened in those 4 decades? What would a 1914 US dollar be worth today?
> The US had zero net inflation from 1800 to 1914.
This is just absurd. Not only is this a period so different than a modern economy that it's not useful for comparison, but during that period it was a roller coaster of inflation and deflation, both of which are terrible for people. Those curious can see the volatility here: https://commons.wikimedia.org/wiki/File:US_Historical_Inflat...
> This is just absurd. Not only is this a period so different than a modern economy that it's not useful for comparison,
I hear that a lot. Nobody is ever able to explain what law of economics changed in 1914. The Law of Supply & Demand was just the same as it always was.
All of the spikes were the result of the US government meddling with the economy (such as bimetalism and other nonsense, see Friedman's "Monetary History of the United States"). Except for the big one, coincidentally coincident with the California gold rush. Or is that a coincidence? Tons of gold flooding into the economy, what would the consequence of that be? Hmmm.
Again, you're just ignoring the fact that our most stable period of low inflation was under fiat money. And that wasn't just true here. Central banks with well-managed money supplies brought price stability to many countries.
I understand that goldbuggery is a religion, which like many religion requires ignoring inconvenient facts. You're welcome to keep proselytizing, but if you do, I'll take my leave.
> the fact that our most stable period of low inflation was under fiat money. And that wasn't just true here. Central banks with well-managed money supplies brought price stability to many countries.
Milton Friedman in "Monetary History of the United States" shows with graphs and charts that the instability was higher under the stabilizing hand of the Fed. What the Fed brought was an upward bias to it.
> I understand that goldbuggery is a religion
All I'm pointing out is the true cause of inflation. The voodoo is all the other theories trying to deny what it is.
As for stability, is that what you call the last year? All under the enlightened hand of the Fed. Prices in the supermarket have often doubled in the last year.
> Central banks with well-managed money supplies brought price stability to many countries.
Have they? Compared to what? Which countries since 1914 did not have a fiat money system?
Ah yes, the religious person cites religious texts:
> Monetary History of the United States
That book covers only through 1960, ending 20 years before the low-inflation era I'm talking about. Friedman retired from teaching before the era even started.
I do enjoy the contention that the laws of economics changed in 1960. Nor does "low" inflation prove that inflation is not caused by running the printing press. And nor is "low" inflation actually low. Going through my dad's estate, I'm reminded of how much cumulative inflation there's been since 1980. A 1980 dollar is worth $3.14 in 2020.
yes but in August 15, 1971 the US stopped using the gold standard.
Ever since then when the Fed needs more money they just printed it.
Reminds me of that scene in Douglas Adams Hitchhiker Guide to the Galaxy
"“Thank you. Since we decided a few weeks ago to adopt the leaf as legal tender, we have, of course, all become immensely rich. [...]
"But we have also," continued the management consultant, "run into a small inflation problem on account of the high level of leaf availability, which means that, I gather, the current going rate has something like three deciduous forests buying on ship's peanut." [...]
"
One wonders when the defoliation stage is going to hit.
This is not obvious at all. 'decades' is a short term in the history of money. It is perfectly reasonable to believe that switching to fiat causes low inflation in the short term but results in long term hurt. I feel if anything, the past few years should have taught us that things that seem easy or prudent in the short term can lead to long-term issues. Why is it such a stretch to believe that about fiat.
Either way I don't think 'decades' should be used as evidence that any monetary policy is good. We can reconsider if we get to centuries.
As an economy expands, it needs more currency to facilitate growth.
A 'very hard currency' would strangle an economy with ugly deflationary issues.
Moreover - with a 'hard currency' the system will fail and collapse when it faces an existential shock such as an internal failure (bank collapse), war, pandemic.
The objective is to provide 'the right' amount of liquidity for the economy as needed, and, during times of crisis to be able to release enough liquidity to see the economy through the crisis.
Yes, the 'price will be paid' in later years for excess liquidity in terms of higher prices, but that's not necessary a bad thing, it's just accounting. It depends on the distortions. If the community accepts that 'yes, resources needed to be diverted to pay for xyz' then that's 'the cost' and it's going to be borne out in higher prices.
And yes, if Central Banks print wily nilly and provide too much supply this will result in hyper inflation.
But fundamentally, this idea that fiat = untenable is completely false.
I have only a layman's understanding of financial markets, so keep that in mind.
The explanation I've heard is that most of the QE in the 2010's was metered out in such a way that the average person wasn't receiving funds and the money wasn't quickly and directly going into the economy. The post 2008 QE purchased troubled assets and freed up institutions to lend money. It could be said that most of that QE money wound up in stocks and assets such as real estate, which is why valuations were going so crazy over the last decade while consumer goods stayed relatively flat.
All of the Covid stimulus, loans, and bailouts were different because so much more of that money went directly into the consumer economy. Price increases were exacerbated because of supply chain disruptions, needing to recoup losses from lock-downs, and the price hikes due to raw materials shortages. There is also a self-fulfilling prophecy that inflation is both higher than reported, and that our officials are lying to us about how bad the problem is. When everyone else is raising prices, it is a lot easier for a business to follow suit.
That's the explanation I've gathered while trying to understand the question and it seems reasonable to me. It may be entirely wrong, however.
You're not entirely wrong, but you're missing a massive piece of the puzzle, a war that is impacting the global markets in multiple very important raw material segments (oil, foodstuffs, various metals, general instability due to war involving a nuclear power in Europe, not to mention the fact that the nuclear power is losing ans it's dictator is starting to sound desperate). When prices of many products go up due to raw materials price booms, you get inflation.
Have you noticed that every investment instrument saw its price go up, and up, no stop, until it had no relation to how much return it would get you, or how much money the people that wanted it for using in a secondary market could spend, and then it kept going up the same way for 2 more decades?
Yep, that's inflation too. But since the money was mostly circulating there, and the official measurements of inflation don't look at investment, it didn't make into the news.
The really good question is why the money was contained there. I don't have a good answer for it.
Stocks/real estate are mostly owned by richer people (and 401ks). There was plenty of inflation in luxury goods. Watches, private jets, art. Prices went through the roof.
Covid boom put money into the hands of regular people, and that -- combined with a supply shock -- made all the difference.
Yes, but it's not easy to understand how wealth can be so concentrated on the hands of the rich that it doesn't impact the "regular people economy".
Rich people buy services, and service providers are regular people. Some of the money always has to disperse, so the impact can only be neutral if there is something with similar intensity concentrating it back.
So? The argument is that inflation always happens when there is fiat printing. We printed a shitload of dollars between 2000-2020, yet inflation was low throughout that period. So the explanation is clearly insufficient.
> The argument is that inflation always happens when there is fiat printing.
The whole point of fiat money is to print excessive amounts of it. It's attractive for governments because they can then spend money buying votes without having to raise taxes (though inflation is a tax). Meanwhile, they blame "speculators" and "profiteers" as scapegoats for the inflation.
> yet inflation was low throughout that period
The cumulative was a lot, and note that there was never any deflation.
The government is sandbagging CPI figures in order to lower its obligations that are tied to the official inflation rate, like Social Security payments. This isn't some underworld conspiracy theory; look at some of the academic discussion around ShadowStats.
If we take home prices, comparing 2000 to 2019 (before the pandemic-related craziness in the real estate market took place), they went up by 85% in that time period[0], compared to 48.5% in the CPI[1].
Compare 2000-2020 on that M2 graph compared to 2020-2022.
Jan 2000 - 4,666.2
Jan 2020 - 15,401.8
An increase of 10,735.6 over 120 months, average monthly increase of 89.46.
Aug 2022 - 21,711.4
An increase of 6,310 over 20 months, average monthly increase of 315.52
M2 grew 3.5x faster on average since 2020 than previously.
I'm not directly stating this is the main or only reason for inflation, but I imagine the rate of increasing the money supply 3.5x faster than before could have some kind of effect.
The price of anything that can be converted to a monthly payment, which is most things in this highly financialized economy, inflates when the interest rate is artificially suppressed. The CPI understates that kind of inflation because it looks at the monthly payment, and not the final price. So there are plenty of things like houses or college degrees that have inflated a lot more than the CPI in that "quite a while". There is no reason to believe that the value of money is immune to the law of supply and demand.
Besides, if you have an argument to make, you can make it without calling somebody an 8th grader.
Because we just went through a massive existential shock with COVID, in which the Fed took on a staggering amount of assets i.e. liquidity - and - we've had material global problems which cause major increase in the cost of goods and fuel.
In 2008 we had a 'banking crisis' but that was an 'accounting crisis' otherwise the economy was normal. We had to re-allocate.
With COVID, we had a real shock to the system, and then lasting shocks due to increased prices.
So both the money printing and regular higher prices are coming back to hit the economy.
I like that you're asking for the mechanics. Many people just repeat their mantras.
If QE led to inflation quickly and in a simple way, we could have known that long ago. We didn't even have to do it ourselves: Japan did the experiment long before we did.
No one wants to talk about the actual problem, and will blame government printing money. What’s different now from any point in the last 12 years is that we are at full employment. Going over that causes the economy to overheat. As a study partner for an economics course put it (he took more economics than I did): too many hands competing for goods, the prices go up.
Right, the thing the Fed is doing by raising rates is increasing unemployment but trying to not come right out and say it. Increasing unemployment decreases demand and therefore prices. A hard recession is how this is going to end IMO.
> Increasing unemployment decreases demand and therefore prices.
said differently (and maybe cynically): the only way to reduce prices is to make people jobless and potentially homeless, destroying families and potentially peoples lives in the process...
maybe i am crazy, but this seems like a really bad way to run an economy?
You’re not crazy and it is bad but that’s how it operates. At the macro scale, the people making these decisions are just looking at percentages on a spreadsheet and turning knobs to get them where they want them.
> History teaches us that inflation will continue as long as the government keeps printing fiat money with no backing.
The government (to be correct we should say: the Federal Reserve) has not been "printing money" for around a year now. Monetary base has actually declined by ~12% in that time:
Issuing governance debt is definitely different from increasing the money supply ("printing money"). Debt can be financed by borrowing from the domestic or foreign private sector or from foreign governments / central banks.
The more currency flooding the economy, the less wealthy the rich people are. Inflation occurs because the owners need to remain wealthy, hence prices go up everywhere. If it were possible for the top few to do with a little less, prices wouldn't have to skyrocket.
> Inflation occurs because the owners need to remain wealthy, hence prices go up everywhere.
The fun thing about HN is I hear all sorts of unique economic theories not found in any econ book.
P.S. If the wealthy (or everyone else) needs more money, and just raising prices will work, why don't they do that anyway? The answer is Supply & Demand, it's the Law, and is in every econ textbook.
> If the wealthy (or everyone else) needs more money, and just raising prices will work, why don't they do that anyway?
companies are constantly raising prices to hit the highest price point customers will tolerate. Normally, when prices get too high too quickly consumers eventually get sticker shock and start to feel ripped off so they stop buying the overpriced good (assuming they have the option), so companies lower prices by a very small amount and a new generation of consumers come into the world where the almost too high price is "normal" since it's all they've known and the whole process repeats and prices just climb and climb which is why everything when your great great grandmother was alive cost a nickle but today you pay using stacks of bills.
Right now though things are pretty messed up because every company had an excuse that let them jack prices up without customers blaming them. Companies said "Supply issues! Don't be mad at us! We're all in this together!" and consumers begrudgingly accepted excessively priced goods because "that's just how it is, extraordinary circumstances" and a generation of consumers now sees those excessive prices are normal. Some companies continue to limit supply, dragging their feet ramping production back up, because they're making money hand over fist and pulling in record profits while consumers are forced to scale back and watch their standard of living decline. Now companies are saying "Don't blame us, it's this damn inflation!" and since consumers are expecting it, they can continue to jack up prices while continuing to make money hand over fist. They don't ever want to lower prices and accept a little less so prices must continue to go up and up just like before, but now it's happening at a rate they couldn't have gotten away with previously.
Companies could accept making a little less profit and lower prices and inflation would drop. They don't want to though because for them greed is the whole of the law and anything less than higher profits and endless growth is failure. Consumers could help by refusing to buy the things they love and have spent their whole lives becoming accustomed to, but they're still traumatized from a global pandemic, they're desperate for normalcy and the goods they were forced to do without for 2+ years and in denial about the fact that their lifestyle is declining and things are only going to get worse.
Right now gas prices are at an all time high, and so are gas profits.
> The answer is Supply & Demand, it's the Law, and is in every econ textbook.
Also, that's Econ 101. Which isn't quite reality, it's idealized for simplicity because it is an introduction to macroeconomics. But I don't want to digress into Austrian vs. Modern theory because neither of us will do justice to that.
> They raise prices all the time because they can.
Why don't they raise the iphone to $10,000?
> Right now gas prices are at an all time high, and so are gas profits.
Have you ever noticed gas pump prices going down? I'm curious as to your explanation for that? Do you notice that pump prices change on a daily basis? What's your explanation for that?
> Right now gas prices are at an all time high, and so are gas profits
Definitely not an all time high, but yes a rapid increase. According to a quick quarterly chart I pulled up, a barrel of oil was last over $100 in June 2014. It spent most of the period 2010-2014 above $80 (it's currently $86). I remember paying > $5/gallon at the pump back then. I see a peak in June 2008 at $140.
Profits are also now coming down, at least according to Exxon's report today:
"(Bloomberg) - Exxon Mobil Corp. gave an early snapshot of its earnings for the third quarter, during which refining margins shrank while profits from natural gas kept climbing.
"The largest US energy company said in a filing Tuesday that margins within its energy-products segment, which includes oil refining, were as much as $2.9 billion lower compared with the second quarter. That segment posted $5.3 billion in net income in the three months through June."
Which prices is Apple raising? Have you gone and reviewed how much Apple's products cost in the 80s and 90s? You might want to do that, quickly, before the laughter gets so loud that you are deafened.
I'm skeptical of that claim since the rich hold more assets than dollars. To the extent inflation hurts the economy then your claim is true but that is a second order affect. All else equal, inflation can simply lead to asset inflation in which case the rich maintain their wealth.
In economics circles inflation is generally considered a tax on the poor who only hold cash and whose wages are slower to rise vs price inflation.
I disagree about framing it as the top few. I recommend you look into Islam's Zakat system for something that actually works, and is fair across the board.
That can't explain the era of extremely low inflation and it can't explain what is happening in Japan.
It also cannot explain the Wörgl emergency money.
The "extremely low inflation era" was also a time of very high inflation in long duration assets. It was an era where we saw one company after the another being valued at over a trillion dollars. It was an era where startups without revenue could get 30bn valuations based on hot air and fanciful renderings.
Printed money has to go somewhere. If it just sits somewhere it doesn't do anything. If it goes to investments you'll see inflation there. If it goes towards goods you'll see prices rise there. For inflation it doesn't matter whether you have a lot of money flowing at a low velocity or a smaller amount of money flowing at a higher velocity. When velocity of money drops because people are worried about the future then you can print money to compensate without producing inflation in either good/services or the stock market/real estate. During a stock mania velocity of money increases and idle money turns into investment money with asset inflation as a consequence.
Wörgl -- economy suffered from too little money in circulation. Printing money fixed it.
Japan -- economy has been stagnant for decades. Printing or borrowing at near 0% is fine for them because idle money doesn't do anything. When the Japanese economy starts growing again and velocity of money increases they'll get inflation, just like everybody else. Having no growth and a flat stock market for 30 years is not a good place to be at.
It's all monetary, but the effects aren't immediate. Prices rise only when it's known the market will support these higher prices, and this price discovery takes time.
Inflation will continue as long as the economy grows. If you want to experience deflation, all you need to do is start shrinking the real economy over the long term, and make everyone else aware of it.
You'll also shut down lending, strangle spending, and remove all incentive to invest, but fortunately, the dragon hoard of cash that one has hoarded will start increasing in real value year over year.
> History teaches us that inflation will continue as long as the government keeps printing fiat money.
That's what you hear a lot, especially these days.
But is it really true? What exactly is the signal path, that leads from more money to a higher inflation?
I guess, there is a fair amount of psychology involved.
I mean it's pretty straightforward right? There are now more dollars in play all after the same amount of goods, each dollar has less purchasing power. Why are you so quick to throw out the simplest explanation?
Because the 'simple straight forward explanation' doesn't make much sense.
As economies grow and expand, they need more money supply to keep prices stable. If you're using 100 tons of Gold as your 'fixed money supply' then you run into deflationary problems.
Also, if there is a crisis in which people get really anti-liquid and tend to hoard and do other bad things, and/or the system needs to allocate resources somewhere fast or else face destruction - then if you only have a big pot of gold split between owners, you are screwed. Mad Max style. If a country is invaded or has a pandemic, most regular levers may not work. But helicopter money can help. It implies an 'unfair' re-balancing of who owns what, but so long as the community at large accepts that, then it's fine. It means a price adjustment for everyone.
Some good questions. The answer isn't simple, but I'll try.
It comes down to how banks work with fractional reserve banking. (To keep this post short, I'll refer you to google if you don't know what it is.) Banks loan out a multiple of their deposits. In other words, banks create money when they make loans. Amazing, isn't it? But, banks don't loan money unless there is collateral. The next part is tricky to understand. If I, Picasso, create a painting I create value. I can use the painting as collateral for a bank loan, i.e. because I created value, I also indirectly created money!
With me so far? Next, what happens when I repay the loan? The money disappears!
If you think about it, you'll see that the money supply, through the blind forces of Supply & Demand, tracks the value in the economy, almost like magic. While the gold it represents can sit buried in a vault somewhere and needn't actually be traded.
Inflation happens when the government prints money that has no collateral, and has no correspondence to added value in the economy and so it dilutes the value of the money that is already in circulation.
> Banks loan out a multiple of their deposits. In other words, banks create money when they make loans. Amazing, isn't it?
I've heard about that, and it's really amazing.
If i understand it correctly, the loan interest i have to pay is money that also does not exist yet, at the point of time, when i get the cash. The bank faces the risk of me not being able to generate (get from others, who potentially also take loans) that extra money, so they demand a collateral as an insurance against that risk.
> Inflation happens when the government prints money that has no collateral, and has no correspondence to added value in the economy and so it dilutes the value of the money that is already in circulation.
What instance decides, if some printed money does or does not have collateral?
Banks retain assets for loans they make. They don't print money.
But imagine this scenario: you deposit $10 at bank A, they loan that $10 to person B, that person B puts their $10 account at Bank C, thank bank loans out that $10 to person D etc..
You can see all of a sudden, $10 turns into $100! or $1000 in assets!
So what we require banks to do is keep a part of the assets they receive. So if they get $100 in deposits, they can only lend out $90 i.e. they have to keep '10% in reserve'.
This means that banks are leveraged at 90%.
It also means that if there is a calamity, and a 'run on the bank' or it loses 10% of it's assets, the bank is wiped out.
So what all of this means is that there is 'leverage' in the system, and it means there is 10x money going into the economy than is released by the Fed. It definitely adds a lot of flexibility to the system. Banks are still responsible for evaluating risk of their loans and paying the price if they fail.
"The interest on the loan" is mostly a function of risk and the cost of that bank managing that money i.e. getting the depositors to loan you the money in the first place.
The OP's definition of 'inflation' is a bit warped.
Inflation is when there's more money than demand for stuff.
If stuff is harder to make or is more rare, prices will go up irrespective of money supply.
If you throw money in the economy for no reason inflation will happen.
But most economies are expanding a bit, and so they need more money in the supply to keep prices stable, which is why we like to have just a bit of money printing.
All money loaned out - even given out by the central banks has collateral. The Fed keeps mostly TBills (Government Debt) and real estate as collateral.
Oh, absolutely they do. That's why currency is called "banknotes". The banks printed them. Each bank printed their own banknotes. You can find their images in numismatics books.
In 1914, the government took over the function of printing banknotes. But the banks still print money. We just call them "cashier's checks", "money orders" and "travelers' checks". But more normally, they simply credit your account with created money.
> If stuff is harder to make or is more rare, prices will go up irrespective of money supply.
That isn't inflation, because extra dollars are not being created. For example, tomatoes going up in price in the store because of crop failure isn't inflation, because more money doesn't appear in your pocket to pay the premium. What happens is you wind up with fewer dollars in your pocket, meaning you buy less of other things, and with the annoying Law of Supply and Demand, the prices of those other things drop.
Listen, you are really confusing yourself and others here.
That banks used to print notes in the past is not relevant in this discussion, when we talk about 'printing money' what we are referring to is how money comes into circulation. Physical bank notes are barely relevant to the equation as it makes up a tiny portion of the money supply, and of course, they are only printed by the Central Bank.
Money comes into circulation when the Central Bank 'buys' TBills off the free market. That's when the Central Bank 'creates' money.
Then, through fractional lending, a considerably larger amount of money ends up getting into the system by way of accounting.
Finally, the 'credit market' - which is really 10x bigger than even money in circulation, and which is the real thing that matters in business, develops like a bubble on top of that.
"That isn't inflation, because extra dollars are not being created."
Yes - it is 100% inflation and you are absolutely spreading false information at that point.
The 'result' could be as simple as 'less of that product is bought' - meaning, we use 'less gas' when gas prices rise - while every other aspect of the economy remains mostly the same. That is 100% inflation.
Aside from 'buying less of the product with price increase' or 'buying less of other stuff' we can also borrow, use savings, buy on credit etc. to adjust for the price inflation - so it's not going to necessarily work out to be some kind of net price levelling in the economy.
Increasing prices = inflation [1]. That's it. It's not necessarily related to money supply.
And finally - as the economy expands, more money needs to be introduced into the system just to keep prices even. This is an example of where there is more money supply and it does not change prices.
> What instance decides, if some printed money does or does not have collateral?
A great question. No actual decision is made, it's just that there are more dollars floating chasing the same value, so the price in dollars gets bid up.
There is a 'decision' made and there is always collateral - at the bank, and even at the Fed.
The 'decision' that might be made, is what kind of assets to accept on the Feds balance sheet.
At a private bank, they can do whatever they want with respect to what kind of assets they accept as collateral, within regulatory requirements. They have capital ratios to uphold, but if they take stupid risks, well they are going to go out of business.
The OP is implying that money is printed out of thin air and that is not what is happening.
Your retort that 'money money, in a system of all other things being equal, will raise prices' - but the implication of 'all other things being equal' is never a reality. Economies are usually growing, in which case, they need more money to keep prices from going down actually, and, there can be external shocks, which we see every decade or so.
The Federal Reserve assumprion of bank's underperforming loans was done in 2008 with funds created out of thin air. The value of the underperforming loans was significantly less than face value, which is why banks could not sell them on the market. The Fed gave full value with magic money it created.
I think you are misunderstanding fractional lending and collateral.
Fractional lending seems a bit odd, but it's not like there is 'no collateral' - rather, there ends up being 'partial collateral'.
As it turns out, that 'partial collateral' is enough - it's actually reasonable thing to do, because the vast majority of loans are repaid, it's not necessary to fully collateralize everything on the whole.
Banks have to have some capital requirements, which means, if they 'screw up' too badly, then they go bankrupt! So they are acting in a capitalist manner and have to be careful about how they lend, and at what rates. If random bank acts irresponsibly, then random bank will go kaput by regular market forces.
Instead of thinking of fractional lending as 'missing money' think of it more like leverage.
Basically - the effect of fractional lending is that it's a 'multiplier' to whatever the Central Bank decides to do.
So it exacerbates effects in one direction or the other but on the whole, it doesn't change the real nature of the system.
The way we manage money is sound.
We need money to expand and contract, and we have good ways to measure that.
The 'danger' of fiat of course is political intervention, or a failure of controls.
We had a broad intervention in 2008 that favoured home owners over others, and there are attempts to use the Central Bank to do 'Social Justice' type things, which I think is very risky.
It's a bit like Nuclear Energy: it's very potent, you just have to watch it responsibly.
Finally - currency should be a 'current' asset, not a store of value. We just want it as a medium of exchange. So as long as it's not shifting too much one way or another, then it should work.
For 'stores of value' there are other things, like real estate etc..
"Inflation happens when the government prints money that has no collateral, and has no correspondence to added value in the economy and so it dilutes the value of the money that is already in circulation. "
This is misleading.
The 'government' does not print money, the Central Bank does. And as you indicate, the bank ultimately creates credit via fractional lending.
'Inflation' happens when the cost of goods rise faster than the money in circulation.
Thus 'inflation' can happen because 'stuff is more costly to make'. Like gas in Europe, is more expensive, not because 'money printing' but 'Russia'.
Also, inflation can feasibly happen without money printing or even a rise in inherent cost of goods, if the economy shifts in a way that ends up in excess cash.
But ultimately, if during normal course of 'growth' if there is no expansion in the monetary base, then you'll have deflation, which has bad externalizes.
So the goal then is to adjust interest rates / print or extract money from the economy so that prices stay roughly flat, with just a tiny bit of inflation. That is a dynamic process, not a static process.
Rather bluntly, a central bank is central economic planning. Central economic planning always falls short of what free markets do. The idea that a central bank is able to control the financial markets better than free market forces is shown to be false (with actual data) by Friedman in "Monetary History of the United States".
> The 'government' does not print money, the Central Bank does.
I said "print money" as a euphemism for what the Fed actually does, which is the same thing, it just doesn't involve doing the old fashioned way. They do it by issuing debt with no collateral.
So why is it that essentially every developed country in the world today has a central bank? How can they all be wrong? If a 100% "free market" solution was more effective than central banking, I would expect at least one of them to have given it a shot and succeeded in doing so.
Also, "A Monetary History of the United States" argues that the Federal Reserve should have done more to combat the Great Depression, not less. How can you think that the book advocates against central economic policy?
I think there is an erroneous understanding/implication in your statement, which is likely leading you to erroneous conclusion.
The Fed is not 'Central Planning' so much as it is actually trying to make the market more 'neutral' in normal cases.
We'll get to the 'crisis' cases in a bit.
If we just had a hard currency, like Gold (which 'feels' neutral) we'd get into trouble, because of deflationary issues. People would treat it like Bitcoin, and as prices fell slightly would be oriented a bit towards 'store of value' as opposed to currency.
The Fed 'targets' just a 'bit above zero' inflation by policy. That is basically 'neutral'.
That is not really 'central planning', it's more like 'central neutralization'.
As for 'crisis' situations, i.e. when the Fed does start to 'intervene' and does things which you might argue are 'central planning' - well - the government in many cases can absolutely do it 'better than free markets' because only the government has the scale to do it.
For example, 'free markets' could have not have created and executed the Highway road system of the 1950s. It was of a scale and scope far, far beyond any economic actor. That required 'strategic vision' on behalf of the government. Now - private contractors actually did the 'building' - which is how we want it because the government doesn't need to hire individual workers. But it's a government project by virtue of scale and other things.
The meltdown of 2008 was a very scary time - if the government did not intervene, the banks would have collapsed, and it would have taken down the entire economy.
It would be like a human having a 'heart attack' - the heart stops - everything stops.
So the government put together a plan and intervened. A lot of it had to do with 'confidence signals' and other things, extra regulation, but it worked.
There is of course the 'Too Big To Fail' argument i.e. moral hazard i.e. banks take on more risk knowing the 'gov will save' us - that said, the worst actors did definitely lose a ton of money. Also - the problem was not just the banks, it was a systemic failure in a number of sectors.
Basically - the US had an economic cancer and no individual organization was going to be able to contend with it.
So -> intervention. Much like a war, or pandemic.
Having a fiat currency allows that opportunity. If it were a 'Gold Based Economy' it would have fallen down like a house of cards.
Like a brick building during a rare earhtquake: brick 'feels' strong like Gold, but an earthquake will ravage it, which is why you need steel reinforcement - the steel can bend and absorb different kind of tensions.
Milton Friedman is wrong.
Yes, when there is hyperinflation, it's probably because some stupid government is printing too much money, but inflation is not just a function of money printing.
Deflation means people who save increase their purchasing power without gambling on stonks. The savers mentality is called low time preference.
Any problems from less consumerism would be felt by junk producers: plastic spinner toys, yet another streaming service, iGadget yearly upgrades. High time preference people are the market for short-lived trash. A currency with disappearing value encourages such consumption because it does not hold value.
Due to technology and manufacturing advances, price decreases (deflation) are natural.
Because sometimes you lose the important details in the generalization. Counter example would be that the dollars created aren't spent depending on how they're distributed. If put under people's mattresses, put into the stock market, or sitting in a savings account, those don't enter circulation and increase the flow of money.
Another example:
A big tech company goes bankrupt, threatening thousands of jobs to disappear.
The gov prints some billions to restore the liquidity of the company, which then recovers.
After saving the company and its employees, those employees get the same salary as before and therefore aren't spending more.
In that case the printing of money did not generate more demand, which could cause the prices to increase, or am i missing something?
That is a bit of an oversimplification. The presence of money is no sufficient, that money must be in circulation. For example, they can print all the money they want, if they just toss it all in a big bank account and never remove it, there will be no inflation.
That was a big reason why printing a lot of money in the past did not contribute to a lot of inflation: most of that money ended up sitting in the accounts of a few big institutions, who then did not end up spending it on anything.
This time around, we both gave that money directly to people (who then spent all of it), but also were dealing with global supply issues, an energy crunch, a food crunch, etc. Everyone had more money to spend, but there were less things to spend it on, leading to dramatic price increases.
You have a sort of a point; what I should have said was, 'The "signal path" is simply having more money in the hands of buyers, which will then necessarily cause an increase in prices.'
A good working definition of inflation is a general increase in prices and a fall in the purchasing value of money. There will generally be inflation when there are fewer goods to purchase or when the money supply increases.
History teaches us that the government, often through good intentions, decreases the supply of available goods. There are many reasons this happens. Recently, people were told to stay at home, and many businesses closed. At the very least, the supply of many goods dropped, and people were at home all shopping online for the same goods - causing prices to rise - inflation.
History also teaches us that the government increases the money supply by printing more money.
It's not an accident that both of those are caused by the government. These are the masses' reasons to have lower regulation, not to give handouts to some but to stop government interference. Not to favor winners and losers but to have just enough regulation - without printing stupid amounts of money to save the economy in the short-term.
Unfortunately, history also shows us that government interference, though possibly well-intended, results in price controls that also cause the same problem - inflation.
A good example of unintended consequences is the proposed ban of US exports of gasoline. The intuition is that will boost supply in the US market, but that intuition fails for large chunks of the country. The East Coast is heavily dependent on imports due to a lack of pipeline capacity and US flagged ships (see Jones Act). So if exports are banned then international market prices go up, and East Coast imports become more expensive. Pockets located near refiners might get cheap gas but most of the population ends up worse off.
"There will generally be inflation when there are fewer goods to purchase or when the money supply increases."
But these seem like entirely different problems. If there's too much money, then you should reduce the money supply by increasing interest rates, stoking job fears, etc.
If there are not enough goods, and the market isn't responding by producing more, you can't solve it by making sure people have less money. Or, you can but you are really make people poorer, not just curbing runaway prices.
Exactly... and it seems like right now it's more because of fewer goods to purchase (less energy supply because of Russia, less goods / workers because of covid), but demand has returned to pre-pandemic levels.
I'm a little worried they're fighting a money supply increase when the problem is a (hopefully relatively temporary) shortage of supply. I think the money printing resulted in some asset bubbles (crypto, real estate, stocks), and raising interest rates has popped it already. But I think inflation will just settle down as we get our energy and supply chains righted, regardless of where interest rates are.
The government rarely if ever controls markets to the point where it causes material price increase for things.
The US government has not taken measures to materially affect the cost of goods imported from China, or gas, for example.
Yes, the Central Bank sometimes creates more liquidity than is required for a given economic cycle, but in most cases, this is due to economic calamity i.e. banking collapse, pandemic, war etc. in which case the resulting inflation is the 'accounting adjustment' made to accomodate for that 'external factor' (i.e. factor external to the regular economy).
A pandemic, banking failure, getting invaded etc. can be the result of government action (I mean, especially if the nation is 'choosing to go to war', as in Vietnam) but not necessarily.
Finally, and importantly, the Central Bank is not the 'government' rather, part of 'governance' - they are very different things and act for different reasons. If the 'government' did control the money printing we would all be in trouble!
I'm not sure for what reason you are being down-voted, but I disagree with your comment on China.
Tarrifs on imported goods are specifically designed to make the cost of goods locally higher.
If a foreign product costs $100 landed, and a locally produced one $120,then adding 20% to the foreign one makes them both the higher price.
This is good news for those in local manufacturing, less-good news for the consumer.
Ultimately a tariff is paid by the consumer[1], and received by the local govt, it is thus really just a consumption tax of sorts, although one that is self imposed by the consumer. The alternative is to "not pay the tax" but instead spend the same money supporting local industry.
The US has had a policy over the last 6 years of adding new tariffs. (if they've been revoked in the last 2, I'm not aware.) This drives up local prices, which is a factor in (not the sole cause of) inflation.
[1] politically this was spun as "China pays the tariff" but this is obviously untrue. There is no incentive for them to do so, and even if they did, it would negate the point of the tariff in the first place, which is to raise local prices to make local businesses more compeditive.
> Money supply increases don’t necessarily lead to inflation[...] Money instead went into an asset price bubble.
In the short term, yes, but this is a precursor to inflation; eventually the inflated asset prices propagate to consumer prices. Some paths are: increased demand (the "wealth effect"), reduced productivity (eg. people retiring with their stock portfolios or quitting jobs to speculate on crypto/real estate), as well as rising rents.
Engineering trains us to analyze full cycles. There are a lot of perpetual motion machines that look promising on the expansion stroke.
Reduced borrowing costs can mask this pressure, as eg. rents remain low when mortgages are cheap, despite high housing prices. But when borrowing costs rise the floodgates are opened. Either the bubble pops and the paper asset "wealth" gets vacuumed away, or else it dumps that growth into consumer prices.
As a brazilian, history teaches that inflation is a pain in the ass.
I lived in hyperinflation when I was a kid.
I rememore that my parents would receive and run to the market in the same day, and buy everything in bulk, because next day, their money would be worth half.
Markets would tag products once or twice a day.
I remember buying an X-men comic that was worth something like 1000 BRC.
Monthly inflation would be beetween 50% - 80%.
Also a lot of the commerce was informal and using barter.
It's something of a pity that hyper-inflation, and inflation, share more-or-less the same name.
Hyper-inflation is bad, and ultimately makes local-money such a poor store of value as to make it useless. People will revert to non-money approaches to trade, or use a different currency for money.
So yeah hyper-inflation is really bad, and (I suspect) what most Americans think of when the word "inflation" is used.
By contrast regular inflation, say in the 3% to 6% band has significant upsides. It promotes exports, leverages borrowings, and so on.
Equally it devalues income for those on a fixed-value pension (probably an excellent lesson to current generations of the value of inflation-linked investments and income) and that sucks. The solution though is not 0% inflation for ever, the solution is better pension plans.
Yes, inflation is "high" at the moment, but it's several orders of magnitude away from hyper-inflation. And the counter to inflation, higher interest rates, is starting to happen.
Inlflation is bad. Specially because is a "tax" that affects the poorest population, that this days the origin is not rare, because the state prints money like crazy, to achieve its goals in the short term.
Unfortunately I leaned on history to make investment decisions during this period of rising inflation. Gold, stocks, and real estate were historically good hedges against inflation and cash holdings should be minimized. But that conventional wisdom has been a bad strategy this time.
As a reminder one ~sure bet is iBonds (the i is for inflation). Last I checked the yield is little shy of 10% and your money only needs to be locked up for 1 year. Too bad there's a $10k annual deposit limit.
Here are a few things about i-bonds that the average joe may not know.
Series I bonds with issue dates prior to February 2003 became eligible for redemption six months from the issue date. Bonds with issue dates of February 2003 and later are eligible for redemption one year from the issue date.
However, if a bond is cashed within the first five years after its issue date, interest earned during the three months prior to cashing will be forfeited. Once a Series I bond is five years old, there is no interest penalty for redemption.
Another problem, you will owe federal tax on the I bond interest when you cash it in.
In general interest on treasury bonds is not taxable at the state level.
I am not sure about local taxes, which have all sorts of one off rules. But the thing most miss about the I bonds is you receive no interest until maturity/cashing it in. So no compound interest.
Technically you are correct, but it is only when you cash them in.
Please see this for other questions.
>3). Tax Deferred - I-bonds do not throw off interest. You only owe tax on the internally compounding interest once the bonds are cashed in, which means you control when you pay tax. Always a good thing!
It’s $10K per tax identifier, so if you’re married you just doubled it. If you have kids, each of them can buy $10K as well (though be sure to understand that you’re permanently transferring the assets to them, you can’t take it back it’s effectively an early inheritance).
You can also buy $10K as a corporation, LLC, or anything else with a tax identifier.
The Econ 101 is the complete opposite. Bonds usually have fixed rates, whereas stock prices are in principal tied to revenues, and nominal revenues should increase with inflation--companies increasing prices is literally how most people experience inflation. But Econ 101 also suggests that in the short term things will be more complex than all that because price adjustments won't be instantaneous. Fear and volatility will create demand for bonds, which could offset to some extent the clearly diminishing nominal value of fixed-rate bonds.
Note that a key factor here isn't inflation, per se, but the rate of change in inflation. From an Econ 101 perspective 2% inflation is no different than 20% inflation if things are otherwise steady-state. Stocks are the better bet because in principal they should respond more quickly to changes in the inflation rate. If inflation is steady, bonds in principal are the simpler, cheaper instrument.
I like your thought process on the "rate of change in inflation" but BND and VTI are both down 15% in the past year when inflation has had the greatest change in decades.
I would have thought BND would have fallen a lot harder considering how much higher new bonds are paying but maybe the market is pretty good at pricing bonds based on their associated risk per length of bond time with inflation?
Depends on the sector. You would expect consumer staples (ie food stuffs) to perform well since higher prices can easily be passed to consumers who can't cut back (hence inflation). You would expect money losing tech stocks to suffer as interest rates (and thereby discount rates) rise.
You would also expect bonds to perform poorly as their prices need to decline to make their yields competitive with those of new bonds issued at higher interest rates. Term loans should outperform since their interest rates are variable, making them safer in a regime of raising/fluctuating interest rates.
Conversely, sometimes US treasuries will outperform if investors are fleeing to a safe haven against potential recision risks. There's always another variable.
I think you have this opposite. Bonds have a fixed nominal return, so if inflation picks up unexpectedly, that nominal return erodes in real (inflation adjusted) terms, so investors flee bonds.
That said, stocks don’t tend to perform well either because of expectations over interest rates increasing to combat inflation and an ensuing recession.
QE and QT aren't really anything new. They're mostly just modernish terms given to old ways of doing things.
What is unprecedented is hitting 0% interest rates nearly everywhere worldwide. When things hit this point, economies are forced to deleverage, to which economists refer to as an 'economic deleveraging'. National economies have gone through deleveragings in the past, and has so far played out in 3-4 ways:
-a period of high inflation (which sometimes lead to the collapse of the currency)
-a period of deflation (either via a bear market, or a rapid crash)
-a long period of almost 0 economic growth (stagnation - AKA 'the soft landing').
-some degree and combination of the above 3 scenarios.
A major aspect of QE is creating artificial demand for USTs (the Fed becomes a buyer), i.e. price support in the wake of the GFC. That is intimately related to the USD as global reserve currency, which is not something there is much historical precedent for.
In the past, reserve currencies died for many compounding reasons. QE is a novel scheme to prolong the USD's life as a reserve currency, and is only possible due to modern financial technology. It's definitely not sustainable and can only prolong the inevitable crash in demand for USTs as faith in Washington continues to wane globally. Kicking the can down the road.
It depends on your admissible vintages for historic precedents. The Bank of Japan has been doing Quantitative Easing for over 20 years and has also extended it to include ETF share purchases.
1. we should gently force a recession. 2. reduction in money supply. 3. this can be achieved through higher interest rates. 4. there will be higher unemployment rates. 5. home prices will fall down and speculation will cool. 6. inflation should be capped as soon as possible.
I am sure America is on the job. For all it's shortcomings, noone had to starve due to bad economic policy in this country and not for decades. Having to file for bankruptcy and living less grand is not the same as starvation death level poverty. And this, btw..still exists in many countries around the world. In America(not speaking about other economies), we'll be fine. It will be weird ride for the next decade, but this isn't bad for America. If we were a corporation, we have sufficient moat.
There's two causes for inflation I think everybody agrees, too little supply and too much demand.
The demand-caused inflation would seem to be self-correcting problem: When things cost more, people buy less of them. Then suppliers will have to lower their prices or at least stop increasing them, if nobody buys their product because of too high prices.
In other words if people having too much money causes inflation, people will soon NOT have too much money, because it is used up by the higher prices.
So the real problem to focus on would seem to be supply-side inflation. How can we produce more cheaper and distribute the products to people cheaper? Isn't that the problem governments should be trying to solve, to get rid of inflation?
> There's two causes for inflation I think everybody agrees, too little supply and too much demand.
Price increases aren't always inflation. As the Federal Reserve Bank of Cleveland published, "Strictly speaking, inflation refers only to a drop in the purchasing power of money that results when a central bank creates more money than its public wants to hold. Inflation manifests itself as a rise in all prices and wages—not just some subset of prices. ... relative-price changes—no matter how uncomfortable they are for consumers or producers—transmit vital information necessary for the efficient allocation of resources throughout any market economy. Inflation, by contrast, contributes no information useful to our consumption, production, or labor choices. If anything, inflation can temporarily distort vital relative-price signals ..."
But isn't inflation measured by some kind of average price index?
If the consumer-price-index goes up we call it inflation whether it's caused by " central bank creating more money than its public wants to hold." or not?
Is it possible to measure "how much money public will want to hold"?
> But isn't inflation measured by some kind of average price index?
CPI (Consumer Price Index) is often used to measure inflation, but is an imperfect measure. First, it only measures the prices of household consumption, not wages, business expenses, etc. Second, as this BLS article says: "The CPI has been criticized for having both an upward bias (overstating inflation) and a downward bias (understating inflation). Much of the criticism asserting an upward bias comes from the academic community. In 1995, Congress, aware of such criticism, commissioned a group of academic economists, led by Michael Boskin, to study and report on the CPI. The resulting study, titled "Toward A More Accurate Measure Of The Cost Of Living" (but often referred to as the Boskin Report), summarized the viewpoint that the CPI was upwardly biased. The report asserted that the CPI overstated inflation because of three main reasons: it omitted consumer substitution, did not fully account for quality change, and failed to properly reflect the addition of new goods. BLS has introduced some methodological changes since the report came out in 1996. Although these changes were intended to make the CPI more accurate, some think that they have introduced a downward bias."
> Is it possible to measure "how much money public will want to hold"?
No, not directly. We can only measure proxies, then debate how useful the proxies are.
The more holistic a metric is, the better a gauge of inflation it is. To the extent it measures relative price changes, rather than total-market price changes (including the price of labor), it may incorporate economic effects other than inflation. One flaw of the CPI for serving as a complete measure of inflation is right there in the name: Consumer Price.
Most people talk about the printing money aspect, and while that's definitely true, it needs to be bought into the context of the covid19 policies that exacerbated the downfall of the economy. Printing money is one thing, but doing that to "cover costs" while also de facto slowing down to the point of stopping the economy is on another level. Add to this the fact that the white collar jobs that "seamlessly" moved to remote positions for people to work from home were kind of a bubble that kept of inflating with no corrections (especially crypto pyramids with no added value in the economy), you end up with this. From there to this day it was basically a matter of inflation spiraling out of control, because the reality is that a lot of green policies, monetary decisions, >new< regulations in the west make it really hard to do anything that's not part of the mentioned bubble.(Which hasn't fully bursted in my opinion, hoping i'm wrong)
And yes, let's also mention the stimulus checks that had more of a bad psychological impact on the working middle class. The total number wasn't that big though, compared to other gov. expenses. Let's not forget, US & Western european countries still have the "luxury" that their economies is more largely composed of industries that functioned during the lockdowns(IT, Entertainment,etc). With the exception of eastern asia, the rest of the world [where most of manufacturing & shipment takes place] did not.
Nothing. The people that understand history aren't in a position of power, and the people in a position in power--most of them, anyway--don't need to remember, it works against them.
It's very much a tale of two dollars, however. The dollar price index plummeted after abolishing the gold standard. Now it has risen substantially, as it did in 2008, to become the safe haven currency that all other countries are hoarding, due to inflation in their own countries. At some point this house of cards will collapse, specifically if the Fed capitulates in its fight against inflation and stops raising interest rates.
There was no lag. You just didn’t see dramatic price increases in consumer goods. But you saw substantial increases in the price of stocks and real estate for instance. Also in healthcare and education.
Now new money is being spent on consumer goods while supply of goods and services have been severely restricted during the corona panic. Of course soaring energy prices is now also contributing.
> This is a question I have never seen these inflation hawks answer: If printing money triggers inflation, why is there a 14 year lag on that effect?
The argument I've heard, though am not well enough equipped to fully analyze, is that the created money was going into overseas accounts as various nations tried to accumulate the global reserve currency - dollars - to purchase oil and other products that were generally traded in dollars. As long as that remained the case, an awful lot of dollars could be printed, spent, and ended up squirreled away elsewhere not really having an impact (velocity of money and such).
Now, though, that arrangement is ending - in no part due to the US abusing our financial system to control what everyone else can or can't do (see Visa's opinions about what industries they'll serve for an example, also SWIFT, global sanctions, etc). So other countries are making other arrangements that don't involve dollars - I'm pretty certain dollars aren't involved in the Russian oil sales to various other countries in their sphere anymore. And any reasonable country that isn't heavily tied to the US has to be figuring out how to move off dollars.
So now those all come home to roost, and combined with the lack of things to buy, we see the nasty inflation we're getting.
I'm not certain how well it holds up if you really dig into it, but there are certainly people answering your question if you actually go looking for how it's being answered.
I do find that they're pretty bad at the whole picture. I'm guessing it has much to do with remembering that "money" isn't at all valuable, "goods and services" are. So this is pretty far from a science; but if there's reasonable "optimism" or more precisely "good churn in economic activity," the effects of inflation will be dampened.
I agree.. I think the excess money goes to two things: speculative assets (i.e. supply constrained), and actual goods and services (not supply constrained... more demand results in more being created).
The money printing of the last x years has arguably resulted in asset price bubbles (housing, stocks, real estate), but didn't cause "inflation" because if e.g. people buy more nintendo switches, nintendo just makes more nintendo switches at the same price.
What happened recently was supply chains / workforces got disrupted by covid (and possibly protectionist trade policies)... and then covid "ended" and demand rebounded to 2019 levels, but supply takes longer to ramp back up. That, coupled with Russia's attack on Ukraine and the decrease in the supply of energy, caused a spike in actual goods/services prices.
Raising interest rates serves to pop the asset bubbles (and already has), but I think only time will solve the supply chain / energy restriction-caused "actual" inflation.
If I could answer that definitively I'd be crowned Chief Economist but one explanation that is frequently posited is the US (and Western Europe to a lesser extent) has effectively exported inflation. US runs a trade deficit but that imbalance is made up for by being the global reserve currency. International transactions (especially oil) are denominated in dollars generating demand. And our trade partners like China invest in dollar denominated assets (ie US treasuries) making up for the trade imbalance.
Since the USD is a safe haven currency it has held up extremely well relative to other currencies recently. The UK just ran into the limit of loose fiscal policy which imo is a commentary on the extent of their decline as a world economic super power and demand for/perceived safety of GBP.
I think a lot of people just assumed that QE 2009-2022 was adding to the money supply, but any impact it had just pales in comparison to covid relief funds, which were $6 trillion in less than two years. Look at this graph of the money supply.
In 2008 lots of money was printed in response to the crisis and there was minimal inflation and the excess was reeled in as the economy came back. Over simplification is a distraction.
Mark Twain once said that “History never repeats itself, but it does often rhyme. We should use the bottom up approach for investing stocks. I don't believe that macro prediction is useful. Nonetheless, we should prepare for the worst because the recession is looming.
I'm no crypto fanboy by any means, but it's hard to not think that, if crypto doesn't completely die out this bear market, it's likely to be at least a somewhat significant factor in all of this.
Not saying it will save us all, but it seems like alternate stores-of-value are likely to be, well, valuable.
Why? What would make it more valuable than other stores of value? Bitcoin is roughly at end-of-2020 valuation. So is the NASDAQ. So is the S&P500. So is the Dow.
In fact, for most other stores of value, "dies out in this bear market" isn't even a consideration - the statement is reflective of a (perceived?) higher volatility of the crypto market.
If this is showing anything, it's that crypto currencies are just as vulnerable to monetary policy as other assets.
If you compare the volatility of common cryptocurrencies with the volatility of pretty much any major currency, crypto is way worse. (E.g., GBP and US inflation are around 9%, this year, but Bitcoin and Ethereum are down by 70%). The most important thing for a store of value is that it actually holds value, but crypto has a poor track record there.
Sure. I'm less going by "history" and more by "first principles." Crypto provably does what it says on the tin to some degree, even if that degree is low. I wouldn't use recent past performance as a strong predictor of immediate future performance; thinking more long term possibilities.
I absolutely can. Venmo and M-Pesa are equivalently young and have proven track records that are easy to evaluate. Because they work!
If you want to make the case that cryptocurrencies deserve to be judged by something other than the absolute clusterfuck they have been so far, you have to make some sort of argument, preferably one with significant data. Otherwise, I think we're in the territory of "what can be asserted without evidence can also be dismissed without evidence".
In 2008/2009 when Bitcoin became a thing, we (IRC dorks) were mining it because of the recession. When 1 Bitcoin = $1 USD, that was a big deal - and when it broke past $5 USD that was an even bigger deal.
Bitcoin was made because of the recession and how poorly interconnected global economies were performing. It was supposed to be currency separated from politics/regional crisis.
I personally didn’t get that from the highlight reels of the mid 70’s and early 80’s.
Mostly it was the total chaos, riots, and unrest.
They were also immediately followed by Reagan, who wasn’t exactly a shining beacon of progressivism.
But there were a lot of changes during that time, many that could be considered progressive, mixed in with (or perhaps the reason behind?) the chaos. A lot of folks don’t like change, after all.
Carter could have ended the soul-sapping, grinding misery of endless gas lines, like Reagan did on his very first day in office, with the stroke of a pen.
Carter had no idea how economics works. The prosperity of the 80's was great.
It was Carter who did most of the deregulation (air travel, trucks, trains — elimination of icc). Reagan switched to a deficit-based fiscalized economy, hollowed out manufacturing, and channeled cash upwards towards the wealthy.
Sure, the “prosperity of the 80's was great” for me — I was getting FAANG scale salary as a new grad to do AI development. But plenty of my friends were on the losing side of that divide (think, “breaking away”) and it wasn’t great for them, and never became great.
The economy has been on a long term trend of requiring more and more training since the start of the Industrial Revolution.
Reagan's two terms saw explosive growth in the computer and software industry.
If you're suggesting that Reagan should have tried protectionism, I suggest it is about as effective as the sanctions put on Russia & Iran to boost their economies.
I’m actually a big fan of Ricardo and free trade. Protectionism is not the only (and a destructive way) to address the dislocation of these kinds of transitions. But the USA of the 80s and 90s took then opposite path.
The national guard doesn't shoot people; that's been democratized to police and private citizens.
The big violent demonstrations are gone. What passes for it these days is a pale shadow.
One "benefit" of the increased inequality is that people making less than the median are too exhausted to demonstrate, much less rebel. Rebellion has always been the act of those who belong, and by excluding more of society there is "peace".
Scare quotes used in case it's not obvious that I don't approve.
Is that meant to be ironic or not? It is a fact that [real] incomes have not risen for decades, and now , at least in europe, we are facing catastrophic consequences
[2] Using the PCE inflation index, which includes energy and food prices: https://fred.stlouisfed.org/series/PCEPI -- I used January 1994 and January 2021 as the reference points.
I have spot checked the data cited there to compare with the Census data...
The 'median' earnings data they cite comes from the BLS 'usual weekly earnings' release.
One can check that release on the bls.gov website. It is labeled "Series Id: LES1252881500". I compared Q1 1994 to Q1 2021, inflation adjusted using the PCE index:
1994: $750
2021: $983
That is an increase of 31.1%. The Census data which I cited previously is annual earnings, not weekly, but it seems relatively consistent with the BLS data, as the Census data showed a growth rate of 34.4%.
In short, both sets of data show relatively consistent income growth over that period.
I gotta say, I should not be surprised at people advocating for inflation. But I am. High inflation has been the boogeyman, foe and underminer of economies world-wide, left-leaning and right-leaning, so I didn't see it coming. But here we are, people advocating for the erosion of purchasing power!
But, if it were a wining combination I guess we can expect Biden to embrace Inflation, Advocate for it and pronounce that he will redouble efforts to accelerate inflation so that we can all look forward to a better economy and better future with High Inflation.
This is WILD. I can't believe my eyes. Despite the Zimbabwe, Brazil, Turkey, etc., experience, people are making the case FOR inflation? My word.
Also, you’re assuming debt has fixed interest rates and asset prices will continue to rise forever. Neither of those things is likely to be true in the medium term (~5 years).
It’s complex. You can’t just look at high inflation in a vacuum without also considering that interest rates will rise (and possibly overcorrect) in response to high inflation.
Housing is pretty big counter-point for this. Everything is fine if you don't need to move, but if you need to you are unlikely to sell for what is left of your capital or be able finance with similar monthly payment. You are locked in your current house...
It’s very different if your debt is in your national currency ( that will loose value if your country turns to shite), or in another currency. US can print money as long as it wants to pay its debts. It may have an impact on the interest rate for future debts, but at least it won’t default on the current ones.
i think this would only work with fixed rate debt which narrows it down to home and, maybe, auto loans. However, there are variable loans for everything (including homes) and they're pushed heavily since there's more profit on a variable rate loan.
Ok. Show me economies that did well with high inflation. Where did that work, where is it working today? Are economists wrong to treat it as an electric third rail?
Inflation is high 'cause China. We are more interconnected and globalized than anytime in the past, thus the past is not a good model.
China is still in lockdown and their output isn't as high as pre-pandemic levels. Everything China makes pervades into everything we do in developed society. From high-tech chips to low-tech plastic stuffs.
Until China decides to open back up, prices will continue to increase. And until then rates will continue to go up to try to incentivize people to save.
I see this alleviating in 2nd half of 2022, thanks to China relaxing Covid restrictions.
> China is still in lockdown and their output isn't as high as pre-pandemic levels.
The vast majority of China is not in lockdown, and Chinese output is above pre-pandemic levels.
China has had one of the highest growth rates of any large economy since the start of the pandemic (2.3% in 2020, when most large economies shrank, and 8.1% in 2021).
That’s certainly one of many factors but the other big one is energy cost due to Russia’s invasion of Ukraine and subsequent sanctions levied by major economies on Russian energy exports.
For the past decades, what were the central banks all over the world doing? Nothing but printing money. Whenever there was a (economical) crisis, the only measure was printing money, *nothing but printing money*. Were the problems resolved ever? Never!!. They event pretended to be innocent by asking "why there were no inflation". Of course, there was no inflation as the design of CPI, the indicator of indicator, was flawed. CPI does not consider price of assets, otherwise sky would be the limit. There were crisis simply because the money went to the people who didn't it that much. Printing much made things worse as most of the printed money went to those didn't need it much, but nonetheless had postponed them a lot.
Such pretending to be dumb game could have being played a lot longer if not the pandemic which made them had no choice but printing money and sending them to those in need. And all of a sudden, those who needed the money most had so much cash they had never imaged before? What were they going to do? For sure spending them all.
Now here is the long *expected* inflation, what are central banks planning to deal with it? Increasing interest rate to where it should be? Seems too hard, let's print more money!