How Inflation Works(finmasters.com)
finmasters.com
How Inflation Works
https://finmasters.com/how-inflation-works/
105 comments
I think you could say Friedman is technically right, if you consider wars which decrease output changing the quantity/output equation.
His philosophy proven again correct in my view. I found Yellen's comments staggering - having to apologize for not seeing inflation coming - after the US increased money supply 40% from 2020-2022.
What other pretty basic economic realities are not being considered by our leaders?
His philosophy proven again correct in my view. I found Yellen's comments staggering - having to apologize for not seeing inflation coming - after the US increased money supply 40% from 2020-2022.
What other pretty basic economic realities are not being considered by our leaders?
> I found Yellen's comments staggering - having to apologize for not seeing inflation coming - after the US increased money supply 40% from 2020-2022.
The problem with central bankers is that they don't have any consequences for their mistakes. No one will lose their job or any detrimental effect on their career. In fact, the system will select for people that have a orthodox view on economics that allows politicians to increase spending, cut people a few thousand dollar checks and give huge handouts to the largest corporations all while obfuscating the actual effects of their policies and robbing future generations of wealth
The problem with central bankers is that they don't have any consequences for their mistakes. No one will lose their job or any detrimental effect on their career. In fact, the system will select for people that have a orthodox view on economics that allows politicians to increase spending, cut people a few thousand dollar checks and give huge handouts to the largest corporations all while obfuscating the actual effects of their policies and robbing future generations of wealth
I think the person you’re responding to is pointing out the intellectual dishonesty (or complete ignorance) of Hellen’s comments about the cause of inflation. Not necessarily the consequences, but yes— the ignorance leads to consequences for all of us
But what of the massive increase in money supply during the 2010s, which didn't cause the same inflation? If "duh, of course there was inflation because you printed money" was the end of it then why this time and not other times?
There are technicalities that affect the interpretation of the numbers. In particular, the "base money supply" was normally considered to be physical cash plus deposits of banks in their accounts at central bank, neither of which traditionally paid interest. But the US Federal Reserve started paying interest on these deposits by banks starting in 2008 (see https://www.federalreserve.gov/monetarypolicy/reserve-balanc...), which means such deposits are not that much different from a short-term government treasury bill, depending on the relative interest rates. So the Federal reserve can now change the effective money supply by changing this rate, not just by creating or destroying base money. There are probably further complications - I'm not an expert on this.
It was nowhere near the same magnitude. 20% in a few weeks [0], with even lower rates than post-2008 and the Fed's balance sheet at all-time highs.
[0] https://fred.stlouisfed.org/series/WM2NS
[0] https://fred.stlouisfed.org/series/WM2NS
Is there some sort of phase shift in the direct causal relationship between printing and inflation? That doesn't make any sense given the one sentence approach to how inflation happens.
I would say yes, there's definitely a delay. The price of the beef in your Big Mac was negotiated years ago. Ongoing supply contracts (which are made when companies feel confident about the prospect of inflation in the economy) probably significantly increase the time it takes to manifest economy-wide inflation.
At the instant of printing money they have not changed underlying economic production, but they have created more dollars in the economy with which people can use to compete to buy things, thereby pushing prices up.
Not sure if you are using the quote in the article as the one sentence definition here.
At the instant of printing money they have not changed underlying economic production, but they have created more dollars in the economy with which people can use to compete to buy things, thereby pushing prices up.
Not sure if you are using the quote in the article as the one sentence definition here.
If there is a many-year delay (to account for the low observed inflation during years of monetary intervention during the 2010s), then why are people blaming today's inflation on printing during the past two years?
My point is that people often claim that inflation is tied very tightly to printing and that the government is full of idiots who should have known that printing would cause high inflation. The post that triggered my comment was the following.
> I found Yellen's comments staggering - having to apologize for not seeing inflation coming - after the US increased money supply 40% from 2020-2022.
> What other pretty basic economic realities are not being considered by our leaders?
Yet it is clearly more complex than this, since simple relationships between printing and inflation do not account for the last decade of observed printing and inflation.
My point is that people often claim that inflation is tied very tightly to printing and that the government is full of idiots who should have known that printing would cause high inflation. The post that triggered my comment was the following.
> I found Yellen's comments staggering - having to apologize for not seeing inflation coming - after the US increased money supply 40% from 2020-2022.
> What other pretty basic economic realities are not being considered by our leaders?
Yet it is clearly more complex than this, since simple relationships between printing and inflation do not account for the last decade of observed printing and inflation.
> My point is that people often claim that inflation is tied very tightly to printing and that the government is full of idiots who should have known that printing would cause high inflation.
Whether the people in government are idiots or not, it almost is always politically expedient to err on the side of printing more money, since politicians and politically appointed bureaucrats typically seem to be more focused on the short term (the next election) until there is uncontrolled inflation. That being said, I don't think we've had a president who had a strong intuition for economics since Eisenhower.
> Yet it is clearly more complex than this, since simple relationships between printing and inflation do not account for the last decade of observed printing and inflation.
How so? We've had inflation for the last decade, and we've had rising wealth inequality on top of consumer inflation (which I consider to be a different type of inflation), which can largely be attributed to increases in the money supply and broken graduated income tax brackets. The central issue here seems to be that you are not differentiating between the magnitude of money printing last time around (which did indeed affect prices throughout the market over the decade) and the unprecedented magnitude during the pandemic.
> If there is a many-year delay (to account for the low observed inflation during years of monetary intervention during the 2010s), then why are people blaming today's inflation on printing during the past two years?
2 years is a long time. While commodities, equities, and real estate started exploding pretty quickly, it took a little over a year for consumer prices to start increasing at an unsettling rate. But just because there is some hysteresis, does not mean it takes 10 years.
Whether the people in government are idiots or not, it almost is always politically expedient to err on the side of printing more money, since politicians and politically appointed bureaucrats typically seem to be more focused on the short term (the next election) until there is uncontrolled inflation. That being said, I don't think we've had a president who had a strong intuition for economics since Eisenhower.
> Yet it is clearly more complex than this, since simple relationships between printing and inflation do not account for the last decade of observed printing and inflation.
How so? We've had inflation for the last decade, and we've had rising wealth inequality on top of consumer inflation (which I consider to be a different type of inflation), which can largely be attributed to increases in the money supply and broken graduated income tax brackets. The central issue here seems to be that you are not differentiating between the magnitude of money printing last time around (which did indeed affect prices throughout the market over the decade) and the unprecedented magnitude during the pandemic.
> If there is a many-year delay (to account for the low observed inflation during years of monetary intervention during the 2010s), then why are people blaming today's inflation on printing during the past two years?
2 years is a long time. While commodities, equities, and real estate started exploding pretty quickly, it took a little over a year for consumer prices to start increasing at an unsettling rate. But just because there is some hysteresis, does not mean it takes 10 years.
It did cause inflation, but governments don't consider every price when calculating it. For instance the headline CPI rate doesn't include financial assets like equities, cryptocurrencies ... because "consumers" don't buy those, right?
If inflation is a property of money itself, why would price increases only be visible in certain areas?
Because the money is injected into the system at certain points and takes time to spread out. Like pouring water at high speed into a pond, it creates waves at the point of entry and even after you turn the water off it takes time to become stable again.
"Classically" CBs inject money into the economy via purchasing financial assets. It gets filtered through banks and financial markets, so it's expected that this is where inflation hits first and hardest. Over time as people cash out of those rising assets the inflation spreads and starts warping the prices of other things like houses, degrees etc.
The sort of inflation we're seeing now that also affects the prices of every day items is primarily due to lockdowns. CBs bought government bonds directly, which they'd been doing for a long time but they did so on a massive scale in order to fund support loans and stimulus cheques. But everything was shut down, so people just deposited those loans into their banks and had nothing to do with them except speculate on stuff like NFTs. Now the world is opening up again that money is getting withdrawn and spent on normal, every day items, some of which are also in short supply for lockdowns and war related reasons.
"Classically" CBs inject money into the economy via purchasing financial assets. It gets filtered through banks and financial markets, so it's expected that this is where inflation hits first and hardest. Over time as people cash out of those rising assets the inflation spreads and starts warping the prices of other things like houses, degrees etc.
The sort of inflation we're seeing now that also affects the prices of every day items is primarily due to lockdowns. CBs bought government bonds directly, which they'd been doing for a long time but they did so on a massive scale in order to fund support loans and stimulus cheques. But everything was shut down, so people just deposited those loans into their banks and had nothing to do with them except speculate on stuff like NFTs. Now the world is opening up again that money is getting withdrawn and spent on normal, every day items, some of which are also in short supply for lockdowns and war related reasons.
> His philosophy proven again correct in my view. I found Yellen's comments staggering - having to apologize for not seeing inflation coming - after the US increased money supply 40% from 2020-2022.
Yellen's comments are not contrary to what Friedman says and reasoning only from money supply is wrong headed. It's money supply & velocity and velocity dropped off a cliff in 2020.
Yellen's comments are not contrary to what Friedman says and reasoning only from money supply is wrong headed. It's money supply & velocity and velocity dropped off a cliff in 2020.
Dont listen to any economist that is also popular enough to qualify as a politician. Entire generations on political discourse have centered around one hacks poor simplification.
“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back” - JMK
Edit: I always thought this was a cool quote, though in this case and many others I tend to agree with Milton Freedman. Perhaps it’s the voices in the air.
Edit: I always thought this was a cool quote, though in this case and many others I tend to agree with Milton Freedman. Perhaps it’s the voices in the air.
Paul Krugman is keeping awfully quiet nowadays
His fax machine must have broke.
> His fax machine must have broke.
This is really getting old. Literally so. It's been over twenty years already. So my first response would be: perhaps get over it?
> I must have tossed it off quickly (at the time I was mainly focused on the Asian financial crisis!), then later conflated it in my memory with the NYT piece. Anyway, I was clearly trying to be provocative, and got it wrong, which happens to all of us sometimes.
* https://www.snopes.com/fact-check/paul-krugman-internets-eff...
My second response would be that he's not as wrong as your probably think he is/was:
> So the first part of Krugman’s prediction was obviously, completely, unequivocally wrong. It turns out that people have a lot to say to each other. More than we ever thought. A total zero on that one. Points to the dunkers.
> The more interesting half of the quote though — and the one that the critics mostly remember — is the second part about the impact on the economy being no greater than the fax machine. This one is completely defensible.
> As Skanda Amarnath, head of research at Employ America, wrote to me, what people see as a major economic impact is really the social impact. From a true data impact, Krugman wasn’t wrong. “Productivity growth has been substantially weaker during the age of the internet,” Amarnath wrote. “The same deceleration is visible in terms of both nominal and real investment in software and even the broadest definition of hardware (information processing equipment). There has been some shifting and cannibalization of activity as a result of retail moving to e-commerce channels, and new media dominating advertising services at the expense of old media, but if we’re talking about macro impact beyond substitution, the burden of proof is with those eager to mock Krugman on this point.”
* https://www.bloomberg.com/news/articles/2021-05-24/paul-krug...
* https://archive.ph/FD6GR
This is really getting old. Literally so. It's been over twenty years already. So my first response would be: perhaps get over it?
> I must have tossed it off quickly (at the time I was mainly focused on the Asian financial crisis!), then later conflated it in my memory with the NYT piece. Anyway, I was clearly trying to be provocative, and got it wrong, which happens to all of us sometimes.
* https://www.snopes.com/fact-check/paul-krugman-internets-eff...
My second response would be that he's not as wrong as your probably think he is/was:
> So the first part of Krugman’s prediction was obviously, completely, unequivocally wrong. It turns out that people have a lot to say to each other. More than we ever thought. A total zero on that one. Points to the dunkers.
> The more interesting half of the quote though — and the one that the critics mostly remember — is the second part about the impact on the economy being no greater than the fax machine. This one is completely defensible.
> As Skanda Amarnath, head of research at Employ America, wrote to me, what people see as a major economic impact is really the social impact. From a true data impact, Krugman wasn’t wrong. “Productivity growth has been substantially weaker during the age of the internet,” Amarnath wrote. “The same deceleration is visible in terms of both nominal and real investment in software and even the broadest definition of hardware (information processing equipment). There has been some shifting and cannibalization of activity as a result of retail moving to e-commerce channels, and new media dominating advertising services at the expense of old media, but if we’re talking about macro impact beyond substitution, the burden of proof is with those eager to mock Krugman on this point.”
* https://www.bloomberg.com/news/articles/2021-05-24/paul-krug...
* https://archive.ph/FD6GR
I am unconvinced.
It is still funny.
It is still funny.
By "quiet" do you mean publishes twice a week:
* https://www.nytimes.com/column/paul-krugman
and tweets regularly:
* https://twitter.com/paulkrugman/
?
* https://www.nytimes.com/column/paul-krugman
and tweets regularly:
* https://twitter.com/paulkrugman/
?
You are right. He is not quiet, he is rationed
Got any particular criticism of the idea being discussed?
You are right that they seem confused about monetary economics and also don't seem to have heard about monetary policy transmission channels. But fyi, mortgages are indeed money - the new money shows up as a balance on an account of the borrower at first, and then as a balance on the account of the house seller. From the perspective of the seller it makes no difference whether that money came from a mortgage or from the buyer's equity.
Maybe it's just a terminological matter. When counting how much money there is, you count the money that the seller now has in their account. You don't also count the amount of the mortgage, which is what I interpreted the statement to mean. Note that the person (or institution) that issued the mortgage now has less money in their account.
Counting the mortgage itself would make sense if the holder of the mortgage regarded it as "just as good as cash", but of course holding a mortgage is not at all equivalent to holding cash. Holding a mortgage is a long-term investment with uncertain return, and limited liquidity, not a money equivalent.
Counting the mortgage itself would make sense if the holder of the mortgage regarded it as "just as good as cash", but of course holding a mortgage is not at all equivalent to holding cash. Holding a mortgage is a long-term investment with uncertain return, and limited liquidity, not a money equivalent.
Checking accounts are included in the money supply, without subtracting mortgages (what's considered 'as good as cash' are the balances of the buyer/seller, not the assets of the 'holder' of the mortgage, which would be the bank), and issuing a bank mortgage definitely increases the money supply (so the bank doesn't have less money, it's created new money):
https://www.federalreserve.gov/releases/h6/current/default.h... (Table 1 footnotes)
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
https://www.imf.org/en/Publications/WP/Issues/2019/12/20/Mon...
But yeah, we can agree that what's counted isn't the mortgage per se, but the balances of the buyer/seller (which came into existence when the mortgage was issued).
https://www.federalreserve.gov/releases/h6/current/default.h... (Table 1 footnotes)
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
https://www.imf.org/en/Publications/WP/Issues/2019/12/20/Mon...
But yeah, we can agree that what's counted isn't the mortgage per se, but the balances of the buyer/seller (which came into existence when the mortgage was issued).
[deleted]
When banks issue mortgages, they don't decrease a number in their own accounts to balance it. The act of creating the mortgage itself creates new money out of thin air, the act of repaying it destroys the money again. This is fractional reserve banking and is how most money is created. It's also why there's a relationship between interest rates and inflation: raise interest rates and borrowing becomes more expensive, so it happens less, so less money is created.
Yes, when banks issue mortgages, they create money. When a non-bank (you, for instance) issues a mortgage, new money isn't created. When counting how much money there is, you count the bank balances, not the mortgages.
But non-banks by and large don't issue mortgages, or if they do they're pseudo-banks that make the loan and then turn around and immediately sell it to a bank.
The countries that did not engage in significant QE are also experiencing significant and similar inflation.
Of course since every country imports a ton of goods.
Even if I had stable wages and production in my country, if suddenly every trade partner was charging me more for my imports (for example due to supply chain constraints), then my inflation would go up.
It is very stupid to just speak for inflation by looking at one country.
Even if I had stable wages and production in my country, if suddenly every trade partner was charging me more for my imports (for example due to supply chain constraints), then my inflation would go up.
It is very stupid to just speak for inflation by looking at one country.
It should be quite possible for one country to have no inflation while other countries do have inflation, if the inflation is caused by monetary policy, not real, global production difficulties.
The exchange rates should just shift continually so that the country that isn't expanding its money supply doesn't experience inflation.
The exchange rates should just shift continually so that the country that isn't expanding its money supply doesn't experience inflation.
So you're saying it's not a monetary phenomenon in the countries without QE.
Which means you admit there's a mechanism for inflation without it being a monetary phenomenon. Which means that it's possible that it's not a monetary phenomenon in the US.
Which means you admit there's a mechanism for inflation without it being a monetary phenomenon. Which means that it's possible that it's not a monetary phenomenon in the US.
This feels like a cop out. If this were just a property of imports and US monetary policy, then should foreign inflation be in proportion to US imports?
Even for US production, if we assemble let’s say motherboards with imported microchips, suddenly our prices went up. It is not because wages were up. Crushing the wages and sending people to unemployment will not solve the problem of imported inflation. Unless you are the sole importer of goods for every exporting economy.
Why would they charge more for the imports because the Fed in another country increased the money supply in that country?
Source? Is this because QE isn’t entirely to blame and there were legitimate supply problems because of the pandemic. Similar to how Friedman explains wars can have an effect on prices that are perceived as temporary inflation?
Friedman believed the Federal Reserve System should ultimately be replaced with a computer program.
EPSTEIN With respect to your saying you would not want to see a central bank, you long ago proposed that we simply pursue a policy of steady growth in a particular monetary aggregate. But wouldn’t that require a central bank to implement?
FRIEDMAN Yes, but I would substitute a computer for it, not a central bank. All you would have to do is have it buy or sell X dollars of securities. It is purely a technical matter.
https://web.archive.org/web/20180923005629/https://www.hoove...
EPSTEIN With respect to your saying you would not want to see a central bank, you long ago proposed that we simply pursue a policy of steady growth in a particular monetary aggregate. But wouldn’t that require a central bank to implement?
FRIEDMAN Yes, but I would substitute a computer for it, not a central bank. All you would have to do is have it buy or sell X dollars of securities. It is purely a technical matter.
https://web.archive.org/web/20180923005629/https://www.hoove...
How is this different from decentralized currency with a fixed/limited quantity? I wonder what Friedman’s opinion would have been in todays Bitcoin/crypto environment.
It's not much different. The primary reason why cryptocurrency aims for a limited supply is to eventually remove the politics around who gets newly created money. Friedman couldn't have imagined cryptocurrency, so had to settle for the next best thing of market interventions that were at least mostly automated, most of the time. This isn't that great because of course someone still controls and programs the computer.
There's a couple of technical reasons Friedman thought the money supply had to keep increasing:
1. he was a subscriber to the deflationary spiral theory, which doesn't make much sense as a concept but has a lot of subscribers in economics
2. dollars and similar currencies have very limited resolution because most payment methods can't handle fractional cents, so if one cent becomes too valuable you start to destroy products and services for which the best price is less than that. Bitcoin doesn't have that problem to anywhere near the same extent because the resolution of the currency is much higher, and the software can all handle very small values.
There's a couple of technical reasons Friedman thought the money supply had to keep increasing:
1. he was a subscriber to the deflationary spiral theory, which doesn't make much sense as a concept but has a lot of subscribers in economics
2. dollars and similar currencies have very limited resolution because most payment methods can't handle fractional cents, so if one cent becomes too valuable you start to destroy products and services for which the best price is less than that. Bitcoin doesn't have that problem to anywhere near the same extent because the resolution of the currency is much higher, and the software can all handle very small values.
It may be what he'd have wanted: something fully automated.
As for the fixed quantity, it's just a property of some coins: other don't have this restriction/feature (depending on how you like it!)
If you think it's a desirable feature, it could also be fully automatized, and not just by a time trend (ex: grow by k% if the number of transactions grow by x%)
As for the fixed quantity, it's just a property of some coins: other don't have this restriction/feature (depending on how you like it!)
If you think it's a desirable feature, it could also be fully automatized, and not just by a time trend (ex: grow by k% if the number of transactions grow by x%)
A major difference is that the algorithms would be designed by economists rather than software engineers.
I watched this video from Friedman just a couple of days ago and found it insightful on the topic of inflation:
https://youtu.be/B_nGEj8wIP0
> resulting from and accompanied by a rise in the quantity of money relative to output.
> It is possible for the general level of prices to increase due to events such as wars that interfere with production
In that case, output shrunk relative to the money supply (or, the money supply grew relative to output).
Milton Friedman's definition is axiomatically correct. Nominal prices rise either because money is worth less (money supply increases) or things have become more expensive to produce (output has fallen).
> It is possible for the general level of prices to increase due to events such as wars that interfere with production
In that case, output shrunk relative to the money supply (or, the money supply grew relative to output).
Milton Friedman's definition is axiomatically correct. Nominal prices rise either because money is worth less (money supply increases) or things have become more expensive to produce (output has fallen).
[deleted]
My problem with how inflation is calculated and spoken about is that there really are two types of inflation. One is an objective price level for the same goods and methods. This one is mostly affected by monetary policy, like Milton Friedman said. If you drop thousands of dollars from the sky, people have more money and are bid up the prices of their purchases.
The other is the "actual" price level people are paying. For instance, if the price of beef goes up 100%, naturally many people would opt to buy less beef and substitute it with pork or chicken. It also takes into account improvements in productivity. For instance, beef produced today requires a lot fewer inputs and a lot less uncertainty than beef produced 10, 20, or 50 years ago. So naturally the real price tends to go down over time.
Politicians prefer the second type of inflation because that's the important kind since its what people are actually spending. Who cares if beef goes up in price, people will just consume more substitutes. The other benefit is that a lot of government expenditures are tied to inflation. So if you can get the reported inflation down means saving trillions of dollars over the next decade.
The problem is that central bankers use the idea of substitutes and improvements in productivity to allow them to print money. This is the same as increasing tax receipts but it goes unnoticed, doesn't have to be voted on and can be blamed on "the market".
I question the whole premise that inflation is good. Why shouldn't things get cheaper over time? Every year we're better at producing beef, so why do we applaud when beef prices go up a little bit? If you want more tax revenue, do it the proper way by increasing tax rates.
What would falling prices look like? Modern economists claim that it would lead to all sorts of problems like people consuming less, opting to wait for prices to come down. But if you look at the most productive sectors and hottest products of our economy, you'll see that they have falling nominal prices. For instance the same iPhone or car will drop in price dramatically if you just wait a year or two. But people still buy new iPhones and cars knowing its a rapidly depreciating asset. They also take out loans to finance these products, knowing full well they'll be paying off a $1000 loan for something that'll be worth $900 in just one year. And if prices for all goods went down over time, that would amount to every worker on a fixed salary essentially getting a raise every year as a dividend for living in a productive prosperous society.
Overall it's all just too convenient for economists and central bankers to claim that slightly rising prices are good for an economy. It allows a backdoor to increased taxation through money printing. It covers up what monetary policy is actually doing. I wrote more about it in a blog post [0]. I'm just not convinced that falling prices are bad. And obviously we know what happens when inflation gets out of control. It means millions fall into poverty, preventable deaths go up and every few years we're arguing about raising the minimum wage or other such distortive measures
https://mleverything.substack.com/p/what-if-prices-went-down...
The other is the "actual" price level people are paying. For instance, if the price of beef goes up 100%, naturally many people would opt to buy less beef and substitute it with pork or chicken. It also takes into account improvements in productivity. For instance, beef produced today requires a lot fewer inputs and a lot less uncertainty than beef produced 10, 20, or 50 years ago. So naturally the real price tends to go down over time.
Politicians prefer the second type of inflation because that's the important kind since its what people are actually spending. Who cares if beef goes up in price, people will just consume more substitutes. The other benefit is that a lot of government expenditures are tied to inflation. So if you can get the reported inflation down means saving trillions of dollars over the next decade.
The problem is that central bankers use the idea of substitutes and improvements in productivity to allow them to print money. This is the same as increasing tax receipts but it goes unnoticed, doesn't have to be voted on and can be blamed on "the market".
I question the whole premise that inflation is good. Why shouldn't things get cheaper over time? Every year we're better at producing beef, so why do we applaud when beef prices go up a little bit? If you want more tax revenue, do it the proper way by increasing tax rates.
What would falling prices look like? Modern economists claim that it would lead to all sorts of problems like people consuming less, opting to wait for prices to come down. But if you look at the most productive sectors and hottest products of our economy, you'll see that they have falling nominal prices. For instance the same iPhone or car will drop in price dramatically if you just wait a year or two. But people still buy new iPhones and cars knowing its a rapidly depreciating asset. They also take out loans to finance these products, knowing full well they'll be paying off a $1000 loan for something that'll be worth $900 in just one year. And if prices for all goods went down over time, that would amount to every worker on a fixed salary essentially getting a raise every year as a dividend for living in a productive prosperous society.
Overall it's all just too convenient for economists and central bankers to claim that slightly rising prices are good for an economy. It allows a backdoor to increased taxation through money printing. It covers up what monetary policy is actually doing. I wrote more about it in a blog post [0]. I'm just not convinced that falling prices are bad. And obviously we know what happens when inflation gets out of control. It means millions fall into poverty, preventable deaths go up and every few years we're arguing about raising the minimum wage or other such distortive measures
https://mleverything.substack.com/p/what-if-prices-went-down...
Inflation is inflation expectation. People (the market) starts behaving differently when they expect rising prices.
Best thing i read on the topic is how the Brazilian hyperinflation was fixed https://text.npr.org/130329523
Once you look at it from this angle most of this starts making a lot more sense. Especially post-Austerity monetary policy
edit: tldr: They invented a new theoretical currency. All prices were each month listed in the actual price in the old currency and the price in the new currency (that didnt exist yet). And each month the new currency was redefined so that stuff still cost the same in the theoretical currency. They did this for a few months till they declared inflation fixed and creating the new currency that had "proofed" its stability the previous months. And Abrakadabra, people believed and inflation was fixed through the introduction of the Brazil Real. Obvious when you think about it, its not called fiat currency for nothing.
>Say, for example, that milk costs 1 URV. On a given day, 1 URV might be worth 10 cruzeiros. A month later, milk would still cost 1 URV. But that 1 URV might be worth 20 cruzeiros.
>The idea was that people would start thinking in URVs -- and stop expecting prices to always go up.
Best thing i read on the topic is how the Brazilian hyperinflation was fixed https://text.npr.org/130329523
Once you look at it from this angle most of this starts making a lot more sense. Especially post-Austerity monetary policy
edit: tldr: They invented a new theoretical currency. All prices were each month listed in the actual price in the old currency and the price in the new currency (that didnt exist yet). And each month the new currency was redefined so that stuff still cost the same in the theoretical currency. They did this for a few months till they declared inflation fixed and creating the new currency that had "proofed" its stability the previous months. And Abrakadabra, people believed and inflation was fixed through the introduction of the Brazil Real. Obvious when you think about it, its not called fiat currency for nothing.
>Say, for example, that milk costs 1 URV. On a given day, 1 URV might be worth 10 cruzeiros. A month later, milk would still cost 1 URV. But that 1 URV might be worth 20 cruzeiros.
>The idea was that people would start thinking in URVs -- and stop expecting prices to always go up.
> Inflation is inflation expectation.
That’s assuming the government is continuing to print money. Without that, inflation is an exponential function that quickly runs into real world limits.
That said why governments are printing money is often a very tricky problem. It can for example be used as a substitute for more obvious taxes in a highly corrupt society.
That’s assuming the government is continuing to print money. Without that, inflation is an exponential function that quickly runs into real world limits.
That said why governments are printing money is often a very tricky problem. It can for example be used as a substitute for more obvious taxes in a highly corrupt society.
I assume you mean "isnt continuing"
But that also doesnt seem to be the case. The question apparently is where that money is going. As long as it remains outside of the real economy it seems to be irrelevant. And even if it starts seeping into the real economy, it seems that the efficient market hypothesis is more of a belief then anything else. Which is no surprise if you realize that market inefficiencies allow you to make enormousness profits. Especially if you need to be a certain size to exploit them
No, I meant inflation can only continue long term while the government prints money.
The problem is suppose an egg costs 10 X today and 20 X in 1 month. Sure in 1 month it might work but in 5 years it’s costing ~1.1 X 10^18 X and there is simply nowhere near enough X for a single transaction of anything.
Which isn’t to say the economy would be better off in the short term. High inflation can be semi stable for long enough to be ruinous.
The problem is suppose an egg costs 10 X today and 20 X in 1 month. Sure in 1 month it might work but in 5 years it’s costing ~1.1 X 10^18 X and there is simply nowhere near enough X for a single transaction of anything.
Which isn’t to say the economy would be better off in the short term. High inflation can be semi stable for long enough to be ruinous.
Money creation also functions via loaning money into existence. As long as people keep loaning, no money printing is necessary.
At the end of 1970, the USA had an annual inflation rate of 5.8% and today, the annual inflation rate is 8.3%. Source:
https://inflationdata.com/inflation/Inflation_Rate/Historica...
That was considered such a problem that Nixon's economic team took some radical actions (wiki)
> "Nixon issued Executive Order 11615 (pursuant to the Economic Stabilization Act of 1970), imposing a 90-day freeze on wages and prices in order to counter inflation. This was the first time the U.S. government had enacted wage and price controls since World War II."
In the current world, there's an additional major factor: exports of refined products (gasoline, diesel, jet fuel) and natural gas from the USA abroad, while very profitable for the refinery operators, are driving up prices domestically. Hence, another radical action that could be taken would be to raise export tariffs or actually ban these exports. This would drive down prices domestically and reduce the knock-on effects that high fuel prices have on delivery of food and other products.
As far as Milton Friedman, that clown was never anything but a propaganda sock puppet for Wall Street, just like Alan Greenspan. Their idiotic theories gave rise to the 2008 economic collapse, and anyone recycling their discredited propaganda at this point in time is only making a fool of themself.
https://inflationdata.com/inflation/Inflation_Rate/Historica...
That was considered such a problem that Nixon's economic team took some radical actions (wiki)
> "Nixon issued Executive Order 11615 (pursuant to the Economic Stabilization Act of 1970), imposing a 90-day freeze on wages and prices in order to counter inflation. This was the first time the U.S. government had enacted wage and price controls since World War II."
In the current world, there's an additional major factor: exports of refined products (gasoline, diesel, jet fuel) and natural gas from the USA abroad, while very profitable for the refinery operators, are driving up prices domestically. Hence, another radical action that could be taken would be to raise export tariffs or actually ban these exports. This would drive down prices domestically and reduce the knock-on effects that high fuel prices have on delivery of food and other products.
As far as Milton Friedman, that clown was never anything but a propaganda sock puppet for Wall Street, just like Alan Greenspan. Their idiotic theories gave rise to the 2008 economic collapse, and anyone recycling their discredited propaganda at this point in time is only making a fool of themself.
A similar topic on the HN front page: "Show HN: A central bank simulator game with a realistic economic model"
https://benoitessiambre.com/macro.html , https://news.ycombinator.com/item?id=31785199
https://benoitessiambre.com/macro.html , https://news.ycombinator.com/item?id=31785199
The text said Innovation drives inflation up! So funny! Actually Innovation drives inflation down: Think when we need to send a letter and now we just send a text message, much less resources included!
Yep, innovation means prices understate the true level of inflation. Eg: If technology reduces costs by 5% and the CPI measures 2%, then the real rate of inflation is at least 7%.
I think in the shorter term innovation does influence inflation a little bit. Like the article stated, if a product is new and offers some uniqe benefit everybody will want to buy it and that will drive demand up. Like first automobiles, internet, cellphones. Probably not a huge influence but not negligible.
The demand of digital cameras is down with new iPhone. Someone buy one new thing and do not on other, this is inflation neutral.
Yeah. I was thinking more about some things that are completely new. My examples aren’t the best.
You'd have sent a tiny fraction of the messages you text now. Plus, you must include the hidden cost of all intermediate machines and infrastructure. I am not sure if it could end with a draw...
On only one interaction maybe you is correct. But not on 1B interactions.
Some great material here, but I think the real cause of inflation is due to the strain of trying to read on a page with too much animation.
This would be a great high school teaching aid.
Deflation is often confused with stabilization. Deflation would have prices returning to their pre-inflation numbers, whereas stabilization simply means that the rate of inflation returns to its previous value while prices remain elevated.
Deflation is the stuff of fairy tales and dreamers. Realists pray for stabilization.
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Deflation is often confused with stabilization. Deflation would have prices returning to their pre-inflation numbers, whereas stabilization simply means that the rate of inflation returns to its previous value while prices remain elevated.
Deflation is the stuff of fairy tales and dreamers. Realists pray for stabilization.
.
Deflation is what technological progres giveth and the guys with the money printer taketh away
Inflation is the expansion of the money supply (eg by money printing). A long term rise in prices (houses, stocks, CPI) is the consequence of inflation, just as a rising water level in a lake is the result of rain. The global economy is like a lake with growing capacity, so prices UNDERSTATE the true rate of inflation.
This is not the common definition (cf. https://en.wikipedia.org/wiki/Inflation), but a narrower one (https://en.wikipedia.org/wiki/Monetary_inflation). Semantic difference, but one that remains a little confusing and harkens back to old economic debates. Focusing on policy causes of price changes is preferred among authors who want to tie inflation only/mostly to central bank actions, but mainstream economics, with Friedman etc., works with a slightly wider model (money supply is a key lever, but other things matter as well).
Defining inflation as rising prices is the newer, MORE narrow definition as measurements such as CPI are capturing the downstream effects of a fundamental cause (creating money).
Inflation is and always has been about changes in the price level. If velocity halves and money supply doubles, there is no additional price level change - so it is not a "fundamental cause."
It's the expansion of the money supply faster than the expansion of the real economic output.
Money supply * velocity faster than real output.
True. And it occurs to me that there's a positive feedback loop there. When inflation starts, people tend to pull their purchases forward in time, if they can - they buy before the price goes up. That increases the velocity, which is inflationary, even if the money supply does not increase any further.
The article states: "Inflation is an economic term that describes a general increase in prices." However, the European Central bank measures inflation in terms of purchasing power of consumption goods and services, not in terms of general increase in prices: https://www.ecb.europa.eu/ecb/educational/hicp/html/index.en...
> Adjusted for inflation the average cost of a movie ticket in the US in 1996 was: $5.46
Huh? Isn’t that not adjusted for inflation?
Huh? Isn’t that not adjusted for inflation?
Why in today’s interconnected economies do we try to solve inflation with internal economy tools (like interest rates)?
If the raise of prices originates from inflated imported prices, why not set import high import taxes to reduce the imports and rejuvenate the local economy?
Why do we have to suffocate our local economy to fight imported inflation ?
If the raise of prices originates from inflated imported prices, why not set import high import taxes to reduce the imports and rejuvenate the local economy?
Why do we have to suffocate our local economy to fight imported inflation ?
Isn’t this what caused the Great Depression?
The basket of goods approach always feels a bit off to me wrt capabilities, however I haven’t seen a compelling alternative.
Yes the sedan I have now also gets me from point a to b with seating for 5 as it did in 1970 but the safety, efficiency, capabilities are all much more advanced.
Less apples to apples and more red delicious to cosmic crisp.
Yes the sedan I have now also gets me from point a to b with seating for 5 as it did in 1970 but the safety, efficiency, capabilities are all much more advanced.
Less apples to apples and more red delicious to cosmic crisp.
At the same time, those extra safety and efficiency capabilities might be offset by the fact that they are much more vehicles on the road and gas prices how much higher than they were in the 1970s. Granted, gas prices in the 1970s might be a bad example. But it’s just very hard to measure added utility in the face of increased requirements of the society around you.
Most commentators I hear point towards excessive spending as the primary cause of inflation, but I've been wondering: Absent supply chain interruptions, how does inflation manifest when price competition punishes the first one to raise prices?
A simple way to think about it:
If everyone suddenly has twice as much money, suppliers will pretty soon run out of goods to sell if they don't raise their prices.
If everyone suddenly has twice as much money, suppliers will pretty soon run out of goods to sell if they don't raise their prices.
At this point I think we might as well admit that inflation is 100% caused by greed.
It's funny because all the theories presented in the article - that inflation is caused by mandatory minimum wage, government regulation and taxes - is exactly what a greedy person would suggest.
It's funny because all the theories presented in the article - that inflation is caused by mandatory minimum wage, government regulation and taxes - is exactly what a greedy person would suggest.
If the grocery stores all suddenly have 10x as many avocados people will pay less for them. The same is true for the grocery store that is buying money with avocados. Nobody considers consumers greedy for paying less when there's a surplus.
True, but the comment implied that people would buy 10x more avocados if their fortune tripled ten times and so a 10x price hike was needed to keep avocados in stock. This is not how eating habits work.
So, under this theory, why did greed increase so much in 2021, after having been mostly dormant for 1-2 decades?
Inflation will also decrease the value of greedy peoples money, so what happened in 2021 was simply that greed got out of control. If you are greedy, the best way to fight inflation is to raise prices and collect more money. Once people stop bying things altogether, greed will dictate that prices come down. It's a lot simpler than what the article gives it credit for.
Not quite sure, but I think you're saying greed didn't change, it just was "set free" for other reasons?
Yes. While we were discussing it, this guy wrote an article that sums it up pretty much perfectly: https://survivingtomorrow.org/inflation-is-soaring-get-ready...
Another hot take on inflation, I think, is https://eand.co/the-economys-crashing-because-we-re-an-indus...
Another hot take on inflation, I think, is https://eand.co/the-economys-crashing-because-we-re-an-indus...
I think if competition punishes a price raiser then the price raise was not due to inflation. If the price raise is due to inflation it shouldn't be possible to undercut (long term) because the value of the money itself has decreased.
Any article on inflation that leaves off consumer expectations of inflation as a source of it isn't really serious about the topic.
If the current inflation is caused by external forces like the war in Russia causing gas prices to increase dramatically and impact everything, are we likely to see a period of deflation in a year or two?
The price inflation on sanctioned goods will only revert after the sanctions are lifted. Sanctions tend to last a very long time, so it seems like it’ll unlikely any time soon.
Would love to see the war brought to ruzzia, not to Ukraine.
I would not. I wanted this war to end before it started and I lement that many of my friends and family have now become blood thirsty warmongers. They see it as a chance to finally be a part or something fashionable and state sanctioned. An opportunity to openly hate where so much other hate is forbidden.
I worry that we’re blindly and foolishly waking into a preventable WW3.
I worry that we’re blindly and foolishly waking into a preventable WW3.
The nationalism that's become out of vogue in the West is finally expressable through Ukraine. "Slava Ukraini!"
Still, no war in ruzzia, as in mikkergp's nonchalant statement.
That there is a difference between ruzzia and Ukraine and ruzzia is denying this is the whole point of the affair.
Beside, you can't bring the war to ruzzia, everybody knows, they will get away with their war crimes. They have nukes and they give a shit, plain and simple.
Realpolitik.
That there is a difference between ruzzia and Ukraine and ruzzia is denying this is the whole point of the affair.
Beside, you can't bring the war to ruzzia, everybody knows, they will get away with their war crimes. They have nukes and they give a shit, plain and simple.
Realpolitik.
Oh, I missed that, I read it as war in Ukraine. I'm guessing calling it the 'war in Russia' is an attempt at political correctness. Similar to calling Russia
'ruzzia'. I think my brain automatically converted both to the point I didn't notice either.
> I think my brain automatically converted both to the point I didn't notice either.
So, there is a difference. Hopefully, some strong emotional biases have just affected your brain and not also your I.
So, there is a difference. Hopefully, some strong emotional biases have just affected your brain and not also your I.
I find it difficult to follow your statement. Is that German grammar? I presume you're suggesting I'm under the influence of Russian propaganda.
Actually I suggested, you demand a more rational approach regarding the ruzzian invasion of a souvereign Nation and at the same time imply things because of emotional bias.
I would say this is impossible to predict since is very much related to how the government & society would react.
Did you see the inflation going down drastically between the period of july 2014 and jan 2016? This is not about the oil only!
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You could have captured more of the inflation in fuel prices by saying "If Biden had not campaigned on stopping US oil production"...
Keep in mind that the sovereign individuals of the United States have only permitted congress the ability to coin gold and silver, and that legal tender "laws" are criminal.
I have every right to make "Hitovst Nickels", and you have every right to not accept them. The crime comes with the gun in the room forcing you to accept them.
"Dollar" is a term that includes silver. When corrupt US government debased the currency, it was no longer a dollar, but counterfeit. FRNs are not dollars. No fiat currency is a dollar."
People, scam artist or no, should be free to create whatever currency they want.. it's the forcing others to accept it that is a crime.
I have every right to make "Hitovst Nickels", and you have every right to not accept them. The crime comes with the gun in the room forcing you to accept them.
"Dollar" is a term that includes silver. When corrupt US government debased the currency, it was no longer a dollar, but counterfeit. FRNs are not dollars. No fiat currency is a dollar."
People, scam artist or no, should be free to create whatever currency they want.. it's the forcing others to accept it that is a crime.
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Now, Milton Friedman may have slightly exaggerated (or at least it's easy to interpret what he said in an exaggerated way). It is possible for the general level of prices to increase due to events such as wars that interfere with production, rather than because the money supply was increased, and that may be a current contributor to inflation. But mostly it's the government creating money. Deliberately. Inflation isn't something that "just happens". It's a deliberate policy choice by government.