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U.S. inflation rate rises to 13-year high of 5.4% (cbc.ca)
214 points by awnird 11 days ago | hide | past | favorite | 410 comments

The article was only a couple sentences.

For a little bit more context (and breakdown of categories) check out the bls.gov report:


Thanks for posting the url. You start looking at the numbers on a sub level and its not as shocking. 12 month change.

Gasoline (all types) 42.7% - Huge dip when the pandemic happened now its back to pre covid prices.

Natural gas (piped) 21.1% - Same issue.

Used cars and trucks 31.9% - New cars are being made because of a ship shortage.

Meats, poultry, fish, and eggs 8.0% - a labor problem because its hard to get that many people to work in spaces like that and not get sick.

I'm sorry, but this is just wrong. Natural gas prices are higher than I've ever seen them, only comparable to one very cold winter year. This is not just a return to pre-Covid prices, this is due to government policy. Same with crude oil prices. Just look at the five year chart for NG1:


Zoom the chart out a bit more (https://www.marketwatch.com/investing/future/ng.1). 2009 and 2014 see higher prices than we're at now.

This is because of the shale revolution, so you can't go back that far. They're different eras. As for 2014, it was because of the polar vortex. The current high prices are in the summer.


"Highest in five years" didn't have quite the doomsday ring to it, eh?

There's a lot of idle capacity ready to go right now, but the energy companies are enjoying the higher prices. https://www.texasmonthly.com/news-politics/natural-gas-price...

Five years is not the only thing -- it's also summer prices, whereas the other peaks were during very cold winters. Natural gas is very very seasonal, so winter gas and summer gas are different commodities almost.

Production is higher than ever before. Anyone can write any article that they wish. The only public data available right now from the EIA is a little lagged, but keep an eye on the September number when it is available.


As you say, much of the low gas prices that have occurred in recent memory is due to fracking. Those of us who are a bit older remember when natural gas used to be much higher than we're currently seeing, even before adjusting for inflation.

The energy companies used to also ramp up production in areas like the Permian Basin as soon as oil/gas reached certain thresholds. They are generally being much more disciplined right now because of uncertainty about the pandemic. From that perspective, the prices are more indicative of the "post-pandemic" economic recovery than inflation. If there was less uncertainty about the pandemic recovery, they would be more likely to invest in additional drilling and the price would come down from current levels. They just don't want to be caught ramping up production while seeing a simultaneous pandemic-driven downturn in demand.

Ah well, as for 2021, it was because of the ongoing global pandemic.

Just look at the personal savings rate. It shot up from less than 10% to over 30% and now back down. This was the stimulus checks which people pocketed and used to buy financial assets. That's another form of inflation but the "good" kind that us rich capital holders like. Eventually this money will re-enter the market and push up prices for every day goods.

Also official inflation rate isn't based on a fixed basket of goods, but changes. For instance, if chicken becomes more expensive, they weigh beef more. But pretty much anyone that's been to a restaurant in the last 6 months can tell you that prices are up a lot more than 5%. I guess just eat out less, right?


> I guess just eat out less, right?


Adjusting behavior based on increasing prices (or, alternately, increasing wages) is normal.

That's fine, but I don't want my inflation measure to make those decisions for me because its obviously gamed. Just tell me how much stuff costs relative to the past.

It's not obvious that it is gamed.

In the short-term these adjustments feel wrong. But at what point does a no-adjustment inflation measure stop measuring inflation?

Buggy whips and hats are not in current inflation measures. Long ago, computers and airline tickets weren't in inflation measures. When did "eating at restaurants" become enough of a thing that it became part of inflation measurement? Restaurants have existed a really long time, no? Ancient Romans had "fast food".

Zoom out and think about it. Entire product categories come and go from our daily lives. Is there any possible method for understanding "how much stuff costs relative to the past" that doesn't look janky in the short run? This is a hard problem.

FYI - there are 100 or more different CPI series that are published. The news reports on a single one - the one that applies to the largest number of people in the US. You may find that a different one is more applicable to your particular circumstance.

Adding trillions to the money supply, of course, has no impact whatsoever?

People understand that inflation is a function of both money supply and velocity right?

Well I guess no, as almost every comment on this thread seems to have no idea.


Money supply, velocity, and GDP growth*

Just wanted to add, if all else is held equal amount those factors, growth in gdp, without and subsequent changes in the money supply or velocity, would lead to deflation.

> Money supply, velocity, and GDP growth

consumer price level should be proportional to Money supply × velocity ÷ (real GDP + value of net consumer imports)


Price Level = Money Supply * Velocity / Real GDP

If you improve real output without an increase in money supply or velocity, things'll get cheaper.

Economists would argue that the 'printed' money is actually reserves at the central bank, and thus has no impact on price levels. I myself am less certain about the overall dynamics.

The article was only a couple sentences.

It has been updated. This is quite common with breaking news, to put up a placeholder with basic information while the article is being written.

heaven forbid they wait 30 minutes or so to get it complete and right.

There are multiple factors driving this. Yes QE and welfare checks are driving consumer spending, mainly on durable goods, but there are some compounding factors.

One is that commodity prices crashed last year in some important categories. As these prices recover that translates into a bump in inflation now. Energy prices are also shooting up. Another is that there's an ongoing supply crisis for key inputs. Microchips is an obvious one we read about constantly. I'm sure most of you have read about container ships queueing up at ports, so supply lines are choked at the moment. There's a lorry driver shortage here in Europe as well.

So commodity and energy prices up, wages are also up and there's a labour shortage, consumer spending up and supply down equals inflation.

Frankly having endured well over 5% inflation for almost the entire first half of my life I'm not panicking. A lot of these effects are short to medium term. The pandemic was always going to have economic repercussions and if it's just a year or two of inflation we will have to take the hit, cushioned by those welfare cheques and increased household savings through the pandemic. The pain was always going to come in one form or another.

For those that do not believe the consumer prices are that bad or have increased that much, take a look at this historical graph from the official BLS.gov website[0]. Over the last 10 years the Consumer Price Index (CPI) has been holding steady at around 2%. This year we've doubled that. How about going back 21 years? Nope, the CPI still fluctuates around 2% give or take. The last time we saw a consumer price index value this high or higher was 30 years ago!

I was a teenager the last time we had a CPI this high so for all of my adult life it has been a fairly consistent metric to factor into my household budgeting. Now I'm forced to make conscious decisions on how to prioritize my family's spending. To me personally, this is a big issue.

So, while I appreciate the perspective people have that try to look at the bright side of these numbers, we must admit - regardless of one's political leaning or optimistic outlook - consumer prices have risen to the highest amounts in three decades.

[0] https://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=p...

>The last time we saw a consumer price index value this high or higher was 30 years ago!

Yes, but from 1968 until 1991 there were 24 months out of 276 when the CPI was lower than today. Perhaps what is remarkable isn't that inflation is so high today, but that it has been so low for so long.

What if prices didn't go up, but down reflecting a more productive prosperous society?

Imagine everything getting cheaper every year. Every year you'd see your rent and food bill go down. No more arguing about bumping the minimum wage or the middle class being left behind. Everyone would get richer by default.

Of course this is highly unpopular with economists. They'll tell you no one would buy anything if things got cheaper. But some things do get cheaper every year, mainly technology. You can wait a year and buy that new TV you want at a 10% discount, but that doesn't stop us from purchasing it today.

But of course stopping inflation would mean not printing trillions of dollars and giving them to large banks, so obviously thats a no-go


> Of course this is highly unpopular with economists. They'll tell you no one would buy anything if things got cheaper.

No, they'll tell you that minor sector-specific disruptions that would, in an inflationary economy, be met with localized temporary real pay cuts via static nominal wages instead (because of the psychological difference between nominal pay cuts and static pay, even if the real pay change is the same) be met instead with massive job losses with ripple effects throughout the economy in a deflationary system making the economy more volatile, with deeper more frequent downturns, and more painful transitions as demand shifts across sectors.

Deferred purchases is more of a concern economists have with transitory deflation than persistent, planned, systemic deflation.

Ah yes, and the real price of your mortgage and student loan payments would go up every year, sounds like paradise.

How do you figure? Homes would go down in price, but your mortgage would stay the same. It's kind of like how people finance cars, even though the value of their car is going down while they're paying down the price of a brand new car.

> How do you figure?

Assuming amortization with fixed nominal payments, the real (adjusted for CPI) price if the payments goes up over time with deflation, because the buying power sacrificed to the payments increases.

In a deflationary environment, the real amount oustanding on your mortgage goes up.

Perhaps, but likewise the home itself is likely to be much cheaper and so a smaller loan is needed, if any.

You can't just get a smaller loan every year.

How much of this is due to supply chain issues? Your linked graph already went down a bit. My butcher and managers at my grocery store blame their suppliers staffing issues due to Covid. Pork went way up early on due to Covid. What happens once more companies enforce vaccination policies?

To me, the evidence is that much of the inflation remains due to supply chain issues.

If you look at things like shelter, which shouldn't be impacted by supply chain, the prices are up - but still substantially below what they would be based on the pre-pandemic trend.

That's a good question and I would have to defer to an economist or someone better trained in these issues to say one way or another for sure (or maybe even "yes, but..."). My armchair opinion is the supply chain issues definitely have an impact just like how the 42% increase in fuel prices have a downstream effect on the fuel prices which affects the supply chain, etc etc...

Some follow-up questions that immediately come to my mind are: (1) How does the average U.S. consumer think about supply chain questions? (2) How much more are the prices felt by the average U.S. consumer if I'm feeling them at my income level? (3) Will this translate to a shift in a more fiscally conservative mindset by voters in the upcoming round of elections?

I've not seen any hard numbers but I would assume that the average HN reader (like my spouse and I) are more educated and earn more money than the average U.S. consumer. Please correct me if that is wrong, though! Going with that assumption however, my gut tells me that while we are relatively insulated from these CPI/inflation increases, the average consumer isn't and the financial impact to the average consumer is more of an existential threat. However - and this is not a knock on anyone at all because I really enjoy discussing supply chain questions too - I'm getting concerned that the majority of people in the country less fortunate than me do not have the luxury/privilege to have the same discussions. Since, at this point, these types of questions and discussions could probably be fairly be classified as academic at our level, it's very much real and not academic to those less fortunate.

But please forgive that moralizing tangent! Just typing out these questions, concerns and thoughts as they come to me while I'm sitting here having my second cup of coffee and getting through my first round of meetings for the day. Hopefully nothing I said offended you or anyone else here and might even stimulate further conversation and fresh viewpoints or perspectives on these issues. :)

At the end of the day, there are two underlying problems, I think.

One is that the supply chain and shipping world is just completely bottlenecked and screwed up, some of it is COVID related disruptions (airlines not flying for a long time, shippers/dock workers not working, etc), some is residual shocks from the Ever Given (which pushed a massive "bubble" into the normal flow of containers/etc - which is creating weird paradoxical effects all across the supply chain as it suddenly becomes very important or not important at all to hustle on specific parts of the chain), etc.

The other is that we just killed 700k people in the US alone, a disproportionate number of whom were "frontline" workers - the people at your grocery store and fast food places. Yeah a lot were seniors but of the ones who weren't, a ton of them were frontline workers. And that's just creating a massive labor shortage. In a sense this is also a preview of what the "send 'em home" policies certain political groups push for would look like.

Vaccination policies are another log on that fire but frankly I don't think it's the grocery store workers who are the ones digging in their heels about getting vaccinated, it's the karens who are their customers. I think it's a comparatively small effect compared to the above two, but it's still yet another compounding effect.

The supply chain was very "just in time" and disruptions to that supply chain can have surprisingly long-term effects before the ripples finally smoothed out - even if COVID had disappeared you are probably talking "at least several years" to return to normal, in the global shipping chain, and in certain long-leadtime supply chains like electronics. And really we are not even past the part where ripples are still getting created, due to the general labor shortages. Again though, we tell workers to have a 6 month supply of all expenses just in case "something unexpected" happens, and yet these JIT policies have been the darling of the business world. This is the downside, something big happens and they don't have any slack in their production chains. The companies that planned ahead and had a "6 month emergency supply" of computer chips aren't having problems as bad as the companies who were living paycheck-to-paycheck (or supplytruck-to-supplytruck).

That is misinformation. According to the UFCW union, 456 of their 1.3M members have died of COVID-19. While those deaths are tragic, it's only 0.04% and had no significant impact on the workforce. To put it in context, the COVID-19 death rate for grocery workers is actually lower than the US population as a whole. And many of the workers who died were infected outside the workplace.


I encourage everyone to get vaccinated if they can, but vaccinated customers also transmit the virus. There is only a limited and temporary reduction in transmission risk.


Anecdotally I have loads of friends buying all kinds of stuff with their insane pandemic checks These comments are far too verbose for a phenomenon this simple: print money, people buy stuff, it gets more expensive

>buying all kinds of stuff with their insane pandemic checks

When is this meme going to stop? How is a couple of $1200 checks over the course of 6 months enough to let people buy every home on the market all of the sudden?

You are mistaken. People have been (I believe it stopped now everywhere) $600 PER WEEK in addition to unemployment, AND the two stimulus checks of ~$2000 total, one of which you referred to. And on top of that, many people have stopped paying their rent due to the "eviction moratorium" that has left property owners with nothing but likely un-collectable debt.

As someone who has also remained essentially totally unaffected like most or at least a large part of us here probably, I can tell you that there is a whole set of consequences lurking in the shadows that many people are not even been aware of, largely because it has been intentionally obscured in hopes that it will all just go away … or something.

There is also the Child Tax Credit.

"$3,000 to $3,600 per child for nearly all working families The Child Tax Credit in the American Rescue Plan provides the largest child tax credit ever and historic relief to the most working families ever."


Plus the fraud. I know in some neighborhoods almost everyone is getting "their $10K small business loan", sharing tips on group chat about how to lie on the forms.

You know that? Here’s the tip line: https://coronavirus.house.gov/contact/tip-line

I hate to chuckle, but you should start mentally adjusting to the fact that the rule of law is at best a selectively enforced thing at this point. I suspect that these many instances of fraud may even be used as leverage against people whenever it may be needed. I say that because I know that kind of thing is done and I would do exactly that if it ever came up. Anyone who has fraudulently taken any of those "loans" is not totally compromised to run or not to run for office or to hold certain positions or say certain things.

What do you mean? Who cares who did what wrong thing, it would all depend on which news about it the media, twitter, and facebook decide to suppress or amplify, wouldn't it?

Can you not think back to a couple of instances of people running for pretty high offices when that was the case?

It's already been reported, and little enforcement. https://www.bloomberg.com/news/features/2020-10-29/small-bus...

The eviction moratorium ended, so did the $600/week.

Presumably we should start to see a big deflation, and an oversupply of available housing as a result if this theory is right.

Well the money is already in the economy now, the only way you see deflation is if that reverses, not just stops. You're probably right that as evictions begin to happen there will be a reduction in housing costs, so that is good. But as far as the new money circulating, the inflation rate might just go back to normal but the inflation that already happened is probably here to stay.

But those checks were issued in the face of a massive spike in unemployment so they were just filling part of the gap left by missing wages.

Crucially, they exceeded the gap left by missing wages. Poverty in the U.S. actually fell last year.

Not sure which stat you are referring to, but if they are lumping child poverty in the general aggregate then a significant portion of that relief comes from the expanded Child Tax Credit.


I'm probably conflating the effects. Thanks for the correction.

> couple of $1200 checks

100s of millions of checks, amounting to trillions of dollars. This is economics 101 that directly printing the money increases inflation. These kind of money accumulates in the hands of few and the market had been quick to act on concentrating the $1200 checks.

I'm not saying it's not due to these stimulus measures, but I think the economics 101 lesson is kind of refuted by a decade of quantitative easing, which did not cause significant consumer price inflation. The specifics of where you point the money spigot matter, it's more subtle than print money == inflation in today's highly complex economy.

This stimulus is different from QE in the sense that it went directly to consumers. QE never went directly to consumers, but instead stayed with banks. Personally, I think you can see QE's inflationary effect in both the stock and housing market, but that's just me.

Yea I have heard that argument, and I kind of buy it, but to a certain degree it still surprises me that different kinds of inflations can stay compartmentalized for so long.

For example I benefited handsomely from the asset inflation in the stock market, and used some of my proceeds for consumer spending. My relatives benefited from inflated housing prices, sold their house and are now living it up in their retirement.

Why doesn't more 'leakage' like this take place over a decade?

Not according to our Economic Overlords in the Fed and Treasury who still, even today, believe 100% of the inflation is about supply chain bottle necks, not their irresponsible money printing

When anti-vaxxers are asked to trust the science and listen to the experts, they are simultaneously being asked to ignore inflation by economists and different experts.

How do you convince someone that one group of experts is telling the truth?

Simple: remind them that one group of people are scientists, and the other aren’t.

Economics isn’t a hard science. The system is too complex to create theories and test them, so every theory is tested in the production environment of the (usually poor) peoples lives that these things effect.

And hey wouldn’t you know: the rich elites who make up the economists who propose these absurd ideas like “velocity of money” also end up being in the same class as the ones who make billions or trillions of dollars off of their economic theories.

The US government has made over $3.4 trillion in budgetary outlays in response to the pandemic. It comes in many forms, not just $1,200 checks.

$3.4 trillion is a lot of money to add to the economy in 2 years.

Seriously, I’d genuinely like to understand this more.

As the previous comment said, all I see around me are people buying new cars (for MSRP+) and overpriced homes. My home value went up 32%. And yet the market is “ extremely hot”. And no, lower APR won’t make up for 30% base price increase, that math does not add up.

My family gets “extra” $550 for kids (that’s gonna be missing in my next tax credit). Other than that - HOW are so many people affording so much now???

From my limited understanding, I think the general financial system with the banks lending large amounts of money and people accepting it because of very low interest rates contributes massively. There is a lot of extra cash floating around with unemployment checks, stimulus checks, tax credits, as well as easy credit, which means that mortgages increase, people's home value increases, they sell and push it up. Then people are spending more money on stocks, which means stock values go up, people believe they are richer because of the paper value of stocks, homes, etc. There has been a large amount of hype around all of these, eventually it comes crashing down and someone is left holding the bag with whatever position they were in.

You forget upper middle class saved a bunch of money during lockdown (no travel, no dining out, no commuter expenses etc), along with having IPOs or other investments increase in value.

It's not that money is abundant, it's that debt is cheap.

The Paycheck Protection Program handed nearly every business in American hundreds of thousands to millions of dollars in loans (at 0.50% APR), then immediately forgave them.

The $1200 checks are nothing by comparison. Everyone American got a month rent paid for by the government, but the privileged "business owners" got and entire house paid for, with enough left over to buy their entire family new cars.

I know a few business owners who received these checks and in their cases, A) they weren't nearly that much, B) they (helped) cover expenses, like paying rent and employees (the majority of their costs). I would expect the vast majority of non-fraudulent PPP ended up in the hands of employees first, for rent second, and to business owners pockets third (or not at all in many cases, e.g. plenty of places went out of business).

> The $1200 checks are nothing by comparison.

By what measure exactly? The total expenditure for those was >800 billion, which I believe is more than the total expenditure for the PPP.

There are public records of PPP payouts. There is no shortage of BS on it too. There are pages and pages of million dollar+ loans in my neck of the woods.

A local pizza joint took home a quarter million dollars. Local two-person investment firm: $260k. Family member of mine bragging about record revenues & so much work: 300k. Two places I used to work (who are bragging on LI about having too much work so are hiring like mad, one of which uses mostly offshore workers) $1.7MM and $1.1MM. Big local property management company benefiting from outrageous rents: $2MM. Several staffing companies $10MM!! That might be the max, there are lots of $10MM companies on the list.

And there are countless 1 person LLCs that took home $20k+. Go put in your ZIP, sort by least number of employers and look at how many individuals where handed out five figures. Bunches of them around me were lawyers and accountants.

> The total expenditure for those was >800 billion, which I believe is more than the total expenditure for the PPP.

Barely, they were both around $800 billion. Just one went to every American, while the other went to the Business Class (who also received those stimulus checks, btw).

This is key. Around here a bunch of small construction firms took PPP loans despite having a full pipeline of work. The housing construction boom continued unbated despite the pandemic.

Where I live everyone got money from unemployment and then months later the state sent letters to people about "overpayment". And its for large amounts of money like $20,000+.

I have friends and neighbors that took advantage of it. Seems like everyone spent their 'stimmy' on a camper or raising a truck

The stimulus checks, boosted unemployment, and PPP loans were funded by the money printer. That's trillions in new money.

The housing market dynamic has been (not enough) building for decades.

Another example of grade-school economics - cherry pick a couple of points and draw a stick figure - proved!

Let me try: more money in circulation means sales volume goes up, so prices fall (according to actual economic theory).

Or: folks have more money so live healthier, increasing productivity and using fewer healthcare resources, so the economy benefits.

It's easy! Just throw out some money-sounding words and make the rest up.

> Let me try: more money in circulation means sales volume goes up, so prices fall (according to actual economic theory).

Only true under certain circumstances. In general, when Demand increases, and Supply doesn't increase to match, prices go up.

That may happen longer term, but the problem is supply at the moment is not able to grow to meet the increased demand. Just look at all the articles about container ships queueing up at ports, and companies unable to hire enough workers, chip shortages brining manufacturing lines to a halt, energy price spikes.

There's proving to be a significant drag on capacity at the same time as the burst in demand. So it's not just QE driving this, but it's certainly a factor.

> Let me try: more money in circulation means sales volume goes up, so prices fall (according to actual economic theory).

Not according to any economic theory I've heard of.

If consumer incomes rises then the demand curve should shift to the left. This will move the intersection of the supply and demand curves to a point where both quantity supplied and price are higher.

Except when supply is flexible. Manufacturing in higher volume will reduce cost.

No, it's not easy. But we do know that increasing the money supply faster than economic growth creates inflation. We also know that inflation helps the rich and hurts the poor since it inflates asset prices faster than wages. And guess who owns most of the assets.

The actual issue here is the Fed helicopter dumping into asset markets dwarfed stimulus checks to individuals. That is why it makes no sense to blame it on stimulus checks. The CARES Act allocated $560 billion in individual relief checks. The Fed asset purchases for 2020 is the $3.4 trillion number. That's more than 6 times as much.

> for a phenomenon this simple

While what you describe might be one factor contributing to higher inflation, it certainly isn't the only one.

Supply chain pipeline bubbles are likely another.

Unbridled dollar printing and massive govt. debt probably contributes as well.

The US quickly losing ground as a superpower thereby undermining the status of the USD as a reserve currency probably a factor.

etc ...

There is no way the euro or the yuan will take over anytime soon.

> There is no way the euro or the yuan will take over anytime soon.

Who said anything about taking over?

A world without a reserve currency will be a much better place to live.

I haven't really kept up, but haven't those essentially stopped now, leaving only regular unemployment? I am curious what that will cause because I have heard conflicting information on whether people saved their money or spent it all, not to mention people who have just stopped paying their rent … a whole other ticking time bomb.

What is the best financial strategy in the case of inflation? Invest money so you don't have it sitting in a bank account? Spend it on big ticket items as they may hold their value better than the cash? Simply try to reduce costs?

Don't go buying big ticket items. Whatever is causing them to cost more is usually specific to the item. For all electronics and vehicles, it's chip shortages, which won't last forever, so all you're doing is buying something you don't need now when the price will go back down to normal in two years. You're buying high, selling low, which is the exact opposite of what you want to do. Strategies relying on predicting prices relies on you actual predicting them. This is a historical inflation rate. To take advantage of it, you'd have had to make big ticket purchases before it happened.

The best thing you can do right now is refinance any long-term debt you have to a lower fixed rate, and possibly try to find whatever appreciating assets are still cheaply priced, i.e. low cap value stocks or something. But good luck there. Blue chips have been destroying everything for years and there way to know when the insanity will stop or if it will ever stop. The only sure thing is locking in low interest on things you have to borrow for anyway, or for anything you just want to maintain constant value on rather than looking for gains, buy TIPS. The only way those ever lose value is if the entire government collapses, at which point anything else you own other than seeds and bullets and land becomes just as worthless.

If you have relatively secure employment and think your employer will raise wages in line with inflation, now is an incredibly good time to get a mortgage.


Mind explaining the lol here? I would love to know the counterargument to the mortgage comment.

Here it is: If inflation continues to rise, interest rates will rise too. If interest rate increases x2, house prices will fall proportionally. So you might end up owning more to the bank than you house is worth in the market.

If your income rises significantly in dollar terms, you can easily pay off your mortgage, and stay living in your house? If you are forced to sell in the dip you are in trouble, but most people I know buy houses with the expectation of living there for decades.

That's true if you have a full-term fixed rate mortgage. In some countries, like Canada, those are not available.

Only 37% of homeowners stay for more than 10 years in the same house.

They're probably referring to the inflated housing bubble that's currently hanging above the country.

There are many views on this and it is important to form your own opinion. From personal study and conversations with other investors: (1) stocks that correlate with inflation (e.g. some banks and utilities, inflation-adjusted REITs), (2) companies with high-growth prospects (e.g. late-stage yet still privately-held companies) - these are much higher risk, but worth putting a small percentage here over a long time horizon.

Buy lots of real estate with high leverage and fixed interest rates.

I don't think there is a best strategy.

Equities do well in mildly inflationary environments, but when everyone is talking about inflation is when the Fed is most likely to make contractionary signaling, causing equities to drop.

I would focus on just investing in ETFs and not trying to time the market.

so the absolute worst is cash in something like a savings/checking account. You're interest rate will be less than 1/2% so in this case you're losing ~5% per year. You're best bet is low fee index funds that mirror the entire US market. VTSAX through Vanguard is a great choice. Your money now keeps it's purchasing power b/c you no longer own money, you own stocks and when prices go up stocks are just another good that also goes up in price so your dollars now track inflation.

As I said elsewhere, I think this is transitory. (Caused by printing money + Covid-related drop in output, both of which should stop.) So I wouldn't set up a long-term investment strategy based on this.

I might think about tweaking my investment strategy for the next year based on this, but not longer term.

Note well: I am not an investment advisor, and this is not investment advice. This is some guy on the internet who thinks he knows what he's talking about, but may well not.

Buying OTM Call LEAPS!

Who cares if inflation is 5.4% or the money supply increases 40% when your ROI is 10,000%

Everyone worries about hyperinflation bread lines from 100 years ago when they need to look at what the capital class of the time was able to do: help wealth inequality by making it wider! Stocks went to the moon long before the Apollo!

Personal risk tolerance.

Hyperinflation and general subsequent economic destruction was actually a great equalizer, in Europe at least. Many big fortunes were obliterated, but the average worker living paycheck to paycheck was not really much worse off.

Trying to find the source for this, i think it was Piketty in Capital in the 21st century.

The differences between then and now are very important too:

Now we have continental monetary unions, with transcontinental coordinated monetary policy, spearheaded by diplomatic relations as well as alumni from the same institutions implementing the monetary policy in every union.

Every major currency is increasing in supply similar proportions, masking imbalances and largely preventing the possibility of capital flight as there is no alternative for the size of capital that would need to find a new home. So all thats left are just assets, at any price.

I-bonds are better, currently yielding 3.54% (limit $10k/person/year) This blog post is projecting that the rate might increase to above 7% for I-bonds next month, if that is the case then wait until November to buy them: https://tipswatch.com/2021/10/13/inflation-report-sets-i-bon...

At this point, wouldn't they have already priced in the inflation? that is, you have to pay more for the right to those inflation-adjusted interest rates.

Well, the idea is that you would have bought those some time ago when everyone was discussing whether or not inflation was a real risk, a transitory one or just a rumor. TIPS are better as a long-term inflation hedge, not a short-term one.

I suppose investment managers can employ a variety of other tactics to protect against US inflation, including FX, commodities, picking stocks with low exposure to inflation / proven ability to pass-through rising input costs to customers, alternative currencies like gold or BTC (though in that case you're really just trading inflation risk for other arguably less well understood risks) and more.

Inflation currently is only relevant for those that cannot borrow cheaply. If you can borrow cheaply ( i.e. below inflation rate ), borrow and buy assets.

Bitcoin ;)

Borrow at a fixed interest rate.


For 2020 they never hit target of 2%, they are deciding to run inflation hot by leaving stimulus and interest rates low. The idea is to more or less bring everything back to normal target.

The problem:


There's about 40% locked in. The fed thinks they have this under control but they certainly do not.

Love when the y-axis starts at 18500.

Eurozone is at 3.4. But as inflation is the result of pandemic related production halts, the BCE is asking too wait for the shock to pass before taking measures that may weak the economy.

There is this weird idea I can't wrap my head around that is very popular that if you explain why something is happening, that means it is somehow not happening.

This has to be one of the most clear cases of this phenomenon I've seen. Inflation is rising prices [1]. There is no requirement in the definition of inflation that it just be ambiently "happening" for no reason. Inflation always has some reason or other. That doesn't mean it's not happening. If the prices are going up because of government insolvency, it's inflation. If prices are going up because aliens are ordering all stores at raygunpoint to raise prices, it's inflation. If there's a global pandemic and everyone response with massive economic interventions and the result is rising prices, it's inflation. If prices rise this month, but we think that the reasons are probably transitory and they'll go back down next month, that's still inflation, simply followed by deflation next month. If prices rise because of second-order effects of interest rates being dropped to zero by the central bank, that's inflation. If the prices rise because the moon is in the seventh house and Jupiter has aligned with Mars, that's inflation.

It's fine and valuable to ask about the reasons why inflation is occurring, but the answer does not add or diminish it in the slightest.

They're not waiting for the "shock to pass", they're trying to make sure you don't find out something that you are going to use to decide they're not doing a good job. This is purely political, not economic.

[1]: And whatever other details you like. I'm not too worried about exactly which definition you plug into this post, it holds regardless for any sensible definition.

How you get this:

>if you explain why something is happening, that means it is somehow not happening.

from this:

>the BCE is asking too wait for the shock to pass before taking measures that may weak the economy.

is unclear.

Generally, inflation is a rather noisy signal to respond to, and the tools at your disposal (as a central banker) are powerful, but have a significant time lag. So you really don't want to be reacting to every transient uptick. You should be watching for long- and medium-term trends, such as structural inflation because of fundamental constraints your economy is coming up against, things like demographics, long-term infrastructure deficits, etc.

Can this COVID-related logistics crunch be long-lasting enough to warrant a response from a central bank? Maybe, but it's not at all clear.

The measure exists, whether or not there is a "shock to pass".

"inflation is a rather noisy signal to respond to"

The measure exists, whether or not it is "noisy".

Besides, we're past "transient uptick" here anyhow. That was an argument for three months ago.

"Can this COVID-related logistics crunch be long-lasting enough to warrant a response from a central bank?"

Inflation exists and can be measured. Whether a central bank wants to respond to it is always a separate question. COVID has not suddenly made it a separate question.

Don't let people get away with this. You must not let them conflate in your head a measure with its cause. You must keep them separate or you're going to get snowed.

"Well, yes, the web page takes 28 seconds to load, but it's because we do several hundred database queries that are really slow, we do it in a slow language, we pull in dozens of unnecessary third party libraries and also our server is underprovisioned." How much faster does the web page load because you've explained why the web page takes a long time to load?

Moreover, let me explicitly state I'm not trying to ascribe any particular cause to the inflation measure myself. I'm just advocating for, don't let them somehow "explain away" the measure with the very cause of the measure. It's a very cute trick, but don't let them do it. It isn't being done for your benefit.

Let's use another example to explain why your thinking is incomplete: temperature versus global warming. Just because it's a bit chilly today, it does not mean that global warming isn't real.

The time constants of the underlying effect matter, even if you have high variance in shorter time scales.

So, your thesis is that if it's cold today, the weather channels shouldn't report it, because telling people it's cold today will lead to people coming to wrong conclusions about global warming?

The measure exists. Hiding it does not make the measure stop existing. The fact that it's cold today "because of a polar vortex" does not make my house any warmer.

This is really basic stuff. You must be able to keep these things separate if you want to be able to think rationally. You must be able to accept that there is data that does not seem to agree with the final conclusion. You are all asserting that it is good and proper to let the conclusions mix back into the source data, and advocating that it is good to do so. This is not rational, and it is not good and proper. Any conclusion you've drawn via such a methodology ought to be re-examined.

Seeing such vigorous, spirited, and numerous defenses of systematically muddied thinking on HN is a bit odd.

I certainly wasn't suggesting that we should stop measuring instantaneous CPI / inflation. We should -- it's the only way that the bigger macro trend becomes visible over time.

My entire comment was: Don't miss the forest for the trees. It's the same as driving a car: Instantaneous velocity matters, but so do averages. The economy operates at timescales that are both micro (e.g. high-frequency trading) and macro (e.g. 5-year & 10-year plans).

Inflation has an instantaneous measurement aspect (i.e. CPI) and a longer-trend macro component. Only time will tell if today's inflation is transitory (as the Fed would like us to believe) or part of a bigger shift. But it's impossible to suss out the bigger underlying trend right now, given that we're in the middle of a giant, covid-induced supply-chain bullwhip:


> "Well, yes, the web page takes 28 seconds to load, but it's because we do several hundred database queries that are really slow, we do it in a slow language, we pull in dozens of unnecessary third party libraries and also our server is underprovisioned." How much faster does the web page load because you've explained why the web page takes a long time to load?

As I understand this issue, your metaphor would be different. Something like "Yes, the web page takes 28 seconds to load, but right now our provider is having allocation issues and we aren't getting the resources we have allocated. Let's wait to see if that gets fixed soon before spending time on researching and over-optimizing things, we might end up losing more than we gain if the latency is indeed due to the provider".

I think you're missing the point even though you laid out all the necessary facts. Before reporting a big inflation number and potentially causing panic or altering behavior, they believe (or hope) that the next months will have lower or even deflation so that they can average out to something more normal. Brought to an extreme, imagine waiting 50 years to be able to say "aha, see, inflation only averaged 3% from 2021-2071" even though there was a big spike in the first year.

> Besides, we're past "transient uptick" here anyhow. That was an argument for three months ago.

Why? I am no real economist, but my common sense based armchair economics would think that post-covid-mess inflation peak would take at least a year or two, maybe even more, not a couple of months? There are, after all, real supply (chain) issues to be sorted, which takes time, and which cause increasing prices.

"A year or two" is not a "transient uptick". It's real inflation at that point.

"What’s also apparent from her vantage point is that supply uncertainties, disruptions, and inflationary forces are here for the foreseeable future, perhaps into 2023. But how things play out this month, one of two peak seasons each year for goods, will be crucial in determining how long these shortages last and which companies are able to adapt." https://www.bloomberg.com/news/features/2021-09-16/supply-ch...

> Can this COVID-related logistics crunch be long-lasting enough to warrant a response from a central bank? Maybe, but it's not at all clear.

No, but if they are just using the supply crunch as cover to ignore the consequences of prolonged ultra low interest rates along with direct stimulus payments, there could be a huge problem down the line.

We really should have raised rates when times were good.

When were times all that good? The stock market was doing well, but I don't remember seeing great comments about wages until this year.

Supposedly we were booking a few years ago but still need low interest rates to juice the economy. But you might be right, we might not have ever recovered from 2008 and have just been running off low interest rates since then. If that’s the case, we are most definitely screwed.

Real wages have been stagnant or declining for most professions since the 70s. Coincidentally, interest rates have been declining over the same period. Could it be that as capital becomes cheaper, companies are less willing to pay for labor? :thinking:

> There is this weird idea I can't wrap my head around that is very popular that if you explain why something is happening, that means it is somehow not happening....

> It's fine and valuable to ask about the reasons why inflation is occurring, but the answer does not add or diminish it in the slightest.

The issue isn't if it's happening or not, it's what to do about it. If you act before the "why" is determined, you might do more harm than good.

IIRC, the last set of actions used to get inflation under control was to engineer a multi-year recession. If this is a self-limited blip, we probably don't want to do that.

> They're not waiting for the "shock to pass", they're trying to make sure you don't find out something that you are going to use to decide they're not doing a good job. This is purely political, not economic.

What evidence do you have for that? That kind of baseless speculation (that's assumed to be true) is the root of conspiracy theories.

Understanding why something is happening is essential to deciding what, if anything to do about it. If your customer can't access your site due to a momentary network glitch, i.e. a transient issue, then you're not going to worry about it much. If many of your customers can't access your site and you've determined the network is fine, then you're going to look into doing something about it. So it's not just "explaining away" inflation. The Central Banks are keenly interested in whether this is a transient issue not warranting action or whether this is something for which they need to take action.

> There is this weird idea I can't wrap my head around that is very popular that if you explain why something is happening, that means it is somehow not happening.

It's that the reason matters.

If I ask "Why is my finger hurting?" and the answer is "because I got a paper cut this morning", I don't really have to take action. It'll resolve on its own.

If the answer is "because a badger is gnawing on it", immediate action to resolve the issue is necessary.

It’s because our society has been trained to be risk averse so we don’t challenge traditional power memes. “Keep calm, carry on.” Thought ending slogans are what we’re weened on.

Mens biology predisposes them to anxious rage and we avoid it to avoid making daddy mad.

We won’t do anything to avoid the cost impact to the poor because it will cost the rich.

The biology of our politics is really well understood.

But I get it; it’s more fun to pretend you live in your own multiverse conjuring ad hoc explanations for everything.

This has nothing to do with abstract constructs you can’t name. That’s just a byproduct of you not having embedded muscle memory to announce one.

This forum really enjoys thinking it’s onto something millions of humans that came before have never considered while conjuring ideas within very similar social constraints as the last generation (especially in typical office life). Same old biology + new words != new insights.

I’m not one for tradition, and believing there’s something more to it all is a human tradition going back to our beginning.

In a political context, it’s always humans doing human stuff and that should be constrained to protect the freedom of humans being human.

It’s only in the abstract sciences are new ideas being created. I’m really tired of these articles about economics when “political capture by aristocrats” is enough to explain most of the issues.

It's the same diagnostic but the cause if different. Raising the interest rate to lower the inflation has a big impact in unemployment and in the whole economy. If the fed thinks the inflation is caused by a temporary supply shortage, then I agree that there's no need to mess with the interest rate. More unemployment now might be worse than a bit of inflation for one or two years.

They would raise interest rates, not the tax rate.

Sorry, not a native english speaker. I have edited the comment.

NP, but it wouldn't necessarily be a language problem to assume the government would raise taxes to work against inflation. It would work to some degree (taking money out of the economy, increasing monetary friction), but that approach isn't politically feasible in most countries. Instead, most countries rely on interest rates and public spending (which might involve printing more money).

It seems more like you're the one imposing politics on it. Everyone knows the inflation is occurring, the debates are all around what to do about it and those debates all depend on why the inflation is occurring. Right now those in control think that the inflation is a short, steep spike due to the costs of stopping and then restarting a global economy based on JIT inventories and so we shouldn't let it affect policy. Aka it comes much closer to the alien raygun and Jupiter alignment scenarios in your comment (in the sense that they are unavoidable realities that policy can't change), neither of which we would think to raise rates or cut public assistance to prevent.

> It's fine and valuable to ask about the reasons why inflation is occurring, but the answer does not add or diminish it in the slightest.

Of course it does. Prices going up by 5% rather than the usual 2% over a particular time period is a fluctuation in variables, not a catastrophe. The "why" and "what next" is where the catastrophe might exist. If the central bank doesn't have a clue why it's happening that might be a cause for concern. If the reason why it's happening is because the government's only revenue stream is the printing press, that's a massive problem: the present inflation rate is the tip of the iceberg. If the reason why it's happening is because the central bank which normally keeps inflation at a consistent level has decided to hold off on interest rate rises to prioritise the economy recovering from a pandemic (perhaps also believing the factors driving the inflation are short term), above-usual inflation is a detail, and not even a surprising one.

No one is saying inflation is not happening, they're saying hold off on taking action to address this particular type of inflation.

It's like if you have a tumor, but it's not cancerous, then there is no reason to prescribe anti-cancer medication. Of course it's still a tumor, but understanding why that tumor exists determines whether and how you deal with it.

One common misconception (not saying you are making it) about inflation is that it means rising prices. In fact, it is a theoretical construct about the rise of the general price level = a decrease in the value of money. All we have are proxies (CPI) for this construct and it is often really hard to know if a change in the proxy actually means a change in the general price level or just a change of relative prices as a result of eg. supply shocks.

So sure, a month where CPI starts to increase faster could mean that inflation is speeding up, but it could also just be a result of changes to the real economy that influence the prices of things in the CPI basket. In that sense, something that might look like an increase in the price level might end up being just an adjustment of relative prices (that might readjust after supply issues have been fixed).

In economics there's the difference between transient inflation and core inflation (I think this is what GP alludes to).

Really simplified: Core inflation happens when most market participants think inflation is here to stay and act accordingly. Transient inflation is caused for different reasons, a current example was the supply shock that led to the rise and subsequent fall in lumber prices.

The distinction is important because in the current case there is a simple, one-time cause for the transient inflation: The disruption caused by Covid and is rippling through the layers of the economy. Most participants know this and therefore won't fear perpetual price rises, thus core inflation is pretty unlikely to occur.

> It's fine and valuable to ask about the reasons why inflation is occurring, but the answer does not add or diminish it in the slightest.

The answer is key because that's what informs central banks and policy makers about what to do about it. That's why it's so important to try to understand why something is happening: So that you may do something about it.

For instance here in the UK petrol (for cars) and gas (for heating) prices have shot up which will feed in inflation numbers. Does that mean interest rates should go up to calm things down? No, because the reasons for this inflation are unrelated and most likely short term.

Inflation is measured. But the controversy is about the policy proposals to address it (if any). The people saying "no urgent action needed" are not saying "prices literally aren't moving" but are instead saying that they expect high inflation to subside without policy intervention.

If, for example, inflation was caused by the alignment of the planets then it'd be foolish to try to curb it by hiking rates and cutting social welfare.

> as inflation is the result of pandemic related production halts

Is it? It's way more probably that having 40% of our Dollars being created in the last 12 months is the actual root cause.

Ref: https://fred.stlouisfed.org/series/M1SL

The "Money Supply Equals Inflation" crowd have been wrong as they could possibly be for the last 15 years, but are a glutton for punishment.

They're out in force in this thread.

But as inflation is the result of pandemic related production halts

It would be nice if that was true, but it is unclear if it is. It looks like it accounts for some of the inflation, but whether it is 20% is 80% of it is unknown.

Yeah but wait for the Eurozone to explode higher with Natural Gas costs this winter...

So I recently had a realization that the money the US government spends has absolutely no relation to the money the government receives they can spend whatever they want in any quantity they want.

The only barrier is inflation; however that instead means that taxes at the federal level have nothing to do with income or revenue but only inflation control. So the IRS should be the Internal Inflation Control Service.

I am still working on the full implications of that understanding but it has definitely changed the way I look at things.

EDIT: Updated to make clear I am discussing the US government, not governments in general.

EDIT EDIT: To make clear I think this is a bad thing, it is a lever that the more powerful in society have the ability to pull, in order to move wealth from the lower class to themselves as inflation is generally only positive for the asset owning class.

While an interesting perspective, this is inaccurate.

The US government has more leeway than most other countries in the world to spend higher amounts. There is a theory that has not been accepted by a majority of economists (Modern Monetary Theory) that governments can spend without impact.

The counter theory (which I prescribe to) is that the US government has more leeway to increase their debt burden higher than most countries as a function of being the global reserve currency (and having a long track record, federal reserve separated from political power and a mostly functioning democracy). That has given a bit more tolerance to their higher debt load as well economists have forever underestimated the end point at which that would create problems (also they misunderstood the benefits the US had accrued as a function of aforementioned features of the Union). We are still within the tolerable range. However this misstep by economist has created space for MMT to get traction amongst those who do not understand the economy but need a mechanism to finance their ideas. I believe it can work for a little while but it certainly gets closer to a dangerous situation.

Higher inflation (~>4%) just erodes the power of our dollar and increases costs throughout the supply chain.

The IRS has nothing to do with monetary supply, they only collect taxes on behalf of the people of the country. Monetary supply is controlled by the Federal Reserve and is completely separate.

Based on your comments about the IRS/monetary supply I believe this you should do a full read up on how our monetary system works (not being rude, just want educated conversation here and don't want you to fall victim to poor sources of information/conspiracy theories).

It is true that the US gov can print and spend whatever it wants, but that ability will only last as long as the dollar is the global reserve currency. Confidence can be broken very quickly.

Because we can borrow money at an interest rate lower than inflation. Most other countries with a AAA credit rating can also, even if they're not on USD.

But this is a result of the pandemic and shouldn't be taken as a direct indicator of economy health. We haven't had something of this magnitude in almost 100 years, and so far we've fared MUCH better than the 30s.

> and so far we've fared MUCH better than the 30s.

There was an entire decade between the Spanish influenza pandemic and the beginning of the depression - it's not obvious to me why we should already presume to have mastered economic effects that trailed the historical "equivalent" by a decade

> because we can borrow at an interest rate lower than inflation.

I don’t think you understand what it means for the inflation rate to be above the return rate of promissory notes, but the only incentive to buy such notes is to prop the system with the belief this is temporary—otherwise, by definition, you are just throwing money away (sans considerations of ownership).

This is a super odd comment.

The way the fed control interest rates is through it’s buying of federal debt (through “new” dollars). We can borrow cheaper than inflation because the feds just print new dollars.

And during the 30’s the strategy was not “spend our way out” but rather “cut back spending”. Different strategy so not sure why you’re saying we’re doing better - that would imply the same strategy is working better?

> But this is a result of the pandemic and shouldn't be taken as a direct indicator of economy health.

I don't follow the logic here. Suppose a pandemic wipes out 50% of the world population. The economy would collapse. You wouldn't say what you said if that happened.

The health of an economy is affected by real world occurrences, it is in fact nothing more than a measure of the aggregate cumulative things happening in the world. A shock is a shock no matter what causes it, crises are crises precisely because something unexpected caused them.

> we've fared MUCH better than the 30s.

Didn't it take years to feel the effects of the 1929 crash (just as it _may_ with our current crisis), and didn't FDR's Keynesian economic polices actually make things worse, albeit while providing hope of recovery to those affected? What might have actually got us out of that decade long slump towards the end?

I am also hopeful that it won't be as bad this time around, and who's to say since we're all still in the middle of this.

No, the US gov has been on this spending trajectory since well before the pandemic.

Confidence can be ... enforced.

(looks in the direction of an aircraft carrier)

So said every empire in history that ruined themselves economically before declining militarily.

Really? Other than attacking some microscopic nobody what can you do to any decent size military power without getting bloody nose in return?

> Confidence can be ... enforced.

Not at the scale of a planet, especially when the US is neither the economic nor the military powerhouse it once was.

The US is still the comparative military powerhouse of the planet in every way but raw troop count.

A nation can launch a nuke from a carrier, a silo, a submarine, a mobile platform. Those aren't used right now, obviously.

Carrier groups are the current state-of-the-art for regional modern warfare. They aren't for invasion, but are useful for activity suppression and area control (derived from air superiority). The US has 11 nuclear powered aircraft carriers with 2 more on the way. The next largest fleet is China with 2 + 3 lesser ships they call carriers (but they are more like troop carriers, battleships, depending on how you want to classify them) with 2 more aircraft carriers on the way.

The US still has a ridiculous amount of weaponry that can cause a lot of destruction even when wielded poorly.

The US has the biggest military budget by far. Also the most aggressive.

> The US has the biggest army by far.

No, it doesn't. Active military China and India are bigger. Active + Reserve military, China, India, Russia, Taiwan, and Vietnam are bigger. Active + Reserve military + Paramilitary, North Korea and Vietnam are bigger.

Sorry I had to clarify that I meant in terms of budget, not headcount.

They don't have the military power to occupy Europe in the event the ECB decides to offload its dollar reserves and buy oil in Euros, never mind the will to do so.

> The US has the biggest army by far. Also the most aggressive.

Fat lot of good it did them in Afghanistan, Iraq and Vietnam.

Most of the developed world doesn't use the usd as a reserve currency, it may he popular among failed states or developing countries but not by far for developed nations.

USD still dominates foreign exchange reserves:


No bank can operate on the international market without USD. Therefore the US can impose any regulation it wants on those banks. Look at the two largest banks in Switzerland. UBS and Credit Suisse both use the USD as their primary currency. Not much Switzerland left in those two banks other than their location.

So what happens when your currency is no longer a reserve currency? After all, currencies don't exist in a vacuum.

Are you not then highly constrained in your currency creation ability? I would think there might be disastrous implications for foreign trade, upon which the U.S. economy is extremely dependent.

Additionally, does this not imply a significant shift in private property rights (possibly to the degree of being unconstitutional)? MMT seems to imply near complete control of the economy of by a central authority.

Is there not a major problem with the timing and syncing of inflation (money creation) and deflation (via taxation)? The velocity of transactions and thus the velocity of inflation seems to be far, far greater than the velocity of tax transactions. What's more, our ability to measure inflation is very slow, incomplete, and politicized. There is also no consensus on how to do it. For evidence of this, just go look at the different published inflation numbers and dig into what does and does not get included and the measurement methodologies.

> So I recently had a realization that the money the government spends has absolutely no relation to the money the government receives

This might be true in the short run, or even over one lifetime that started in in the 1940s, but it may not true in the long run. Ray Dalio has some interesting thoughts on short and long term debt cycles and their relation to money.

While this is not totally false, this way of understanding monetary theory, 'Modern Monetary Theory' is not accepted by economics.

While conceptually it is not false, many of the conclusion this school builds on this is not very accurate.

It is much better to separate fiscal and monetary. The monetary policy has one job, the fiscal policy has another.

The monetary policy should be based on rules and targets, and not just be in the hands of politicians to crank up spending whenever they feel like it.

There is a reason this was separated in the first place.

In addition to inflation control, if you accept the classic story that “we tax so we can spend” is wrong (for the US at least, perhaps also to some degree for other currencies with monetary sovereignty) then I feel we need to consider that taxation and expenditure are tools of not just monetary but social policy.

For instance, how does taxation play a role in keeping the most productive people in society producing, motivated, and feeling like they’re getting fairly rewarded, without them say checking out for “less challenging” work or making enough to retire early?

I suspect at some level, consciously, intuitively, or perhaps just accidentally (and the US seems a bit exceptional here to e.g. Canada, UK, Australia, NZ) that housing policy is similarly supported by an idea that the productive middle class and upper working class are kept as active participants in society by some sort of debt-fuelled hedonic treadmill. From what I understand other sources of debt (student debt, new cars etc.) play a greater role in the US.

This is of course in addition to and balanced against all other monetary sinks / rents, e.g. utility bills, literal house rent, health costs etc.

And being a dynamic system, it’s hard to model outcomes, e.g. would cutting income taxes liberate workers to put a bit extra away and perhaps invest extra hours in overtime or a side gig, or would it just serve to give temporary wage pressure relief to companies who are already refusing to fairly pay workers while allowing easier wealth extraction by rent-seekers?

I find it a bit interesting we aren’t having more discussions about employment vs capital taxation, especially now that we’re seeing both escalating (rich getting richer) and broadening (a wider class of “rich” getting richer) inequality. I suspect historically there was little awareness/interest in your extremely wealthy growing their portfolios, but it becomes a bit more interesting when there’s eg a lottery around “the bank of Mum and Dad” or simply which specific year you were born (relative to eg the GFC) fuelling extremely different outcomes for people with otherwise similar backgrounds, capability, class, and contributions to society.

" the most productive people "

How are you defining productive here?

Good question.

Something like “produces the most highly valued outputs per hour of worked input” which should roughly correlate with wages with the assumption that if those inputs are easily interchanged then there will be more competition and the output value will fall. I’m sure there are good exceptions, but I’m not sure they’re material to the argument that taxation to some degree influences social mobility and participation.

Perhaps I’m also considering situations in which there is a close link between labour and output, and where those outputs are deemed necessary for society (eg doctors, tradespeople), even where perhaps there may not be high productivity multipliers in the same ways there are at somewhere like Netflix.

So in my mind I’m thinking what role is taxation playing to keep electricians, plumbers, doctors, and software developers working for as long as they can without retiring (ie maximising their consumer value without compromising their productive value).

I’m trying to put aside a value judgement about what I feel taxation policy _should_ be doing around this subject, but broadly I feel there’s a modern lens of alienation here in which control of means of production is perhaps less important than control of means of consumption.

For anyone trying to google: this is modern monetary theory.

AKA, “wishful thinking”.

This is actually a big part of Modern Monetary theory: From the wikipedia page

  ...the primary risk once the economy reaches full 
  employment is inflation, which can be addressed by 
  gathering taxes...

MMT is the climate change denial of economics. No one in the mainstream believes it to be true.

I think you're correct in the vacuous sense that money is fungible. Investors who purchased US treasures ("the debt") don't care whether they're getting taxpayer dollars or dollars that on paper exist because we minted a trillion dollar coin. They got dollars either way, and what they care about is how valuable those dollars are ("inflation")

But in this MMT world, tracking US debt is still valuable (think of it as a measure of how much money was printed, which correlates through some unknown economic function to inflation).

Either way, all the bad things that happen with printing money can be reframed as "bad because inflation" if you want them to. E.g. we print infinite money to pay off debts denominated in foreign currencies, which blows out the exchange rate and results in hyperinflation; yep, that's an inflation problem, check!

There's really one big variable and it's interest rates. In the 70s stagflation era, we had very high interest rates. Government debt came with a heavy dose of debt service. Currently rates are super low. We can accrue way more debt and still not be burdened with a lot of interest payments. Debt service as a percentage of GDP is about half of what it was in 1991 and trending downwards:


Debt is the backbone of society and post-feudal national power.

In this era in the US, inflation is the only meaningful form of taxation, as the ability of the national government to explicitly tax is essentially gone.

>"as the ability of the national government to explicitly tax is essentially gone."

Where did it go? Last time I remember I still pay taxes

Your Realization is call MMT, it is a terrible theory of economics and will likely be the downfall of the US Dollar and other Fiat Currencies if it continues to become more popular

It seems like it would be borderline impossible politically to raise taxes at a time when inflation is high.

It's not that simple in the US. They currently have this thing where there's a legal limit on how much the federal government can borrow, and it takes an act of Congress to raise it. So there is also a political barrier to borrowing more money.

Inflation is also positive for those in large amounts of debt since their debt is “worth less”.

But it becomes harder to take on new debt as lenders require higher interest rates and are generally more selective with loans.

Printing money is one way to get inflation.

The 2021 supply chain disruption is another. Goods can't be purchased in the quantities people want them, so the ones that are available become more expensive.

Its almost as if the US an run a trade deficit with these US dollars and demand 'tribute' from the exporter nations and they can't do much about it.

Have you read Kelton's “The Deficit Myth“

That only applies to the US, most countries has to balance their budget.

Not really. Most of the countries run a budget with a huge deficit or debt.

USA is not even in the top 10 when you look at the debt by GDP ratio.


EDIT: Just so clarify, first list on the linked page is irrelevant, scroll down to the list of countries ordered by debt to GDP ratio.

> https://worldpopulationreview.com/countries/countries-by-nat...

What is really interesting in this list is not the top of it, which, like another comment noted, contains mostly places you wouldn't want to live in, but rather the bottom (ie countries with tiny debt to gdp ratio).

It's a strange mix of basic hellholes (countries that no one wants to lend money to), and some of the highest standard of living in the world (Switzerland, etc...).

Being eleventh out of almost two hundred countries suggests that "most of the countries", as you're saying, are better at balancing their budget than the US, not the opposite.

No, I didn't say anything about who is “better”, I just said that most of the countries run huge deficits and have huge debts, which is what the list shows.

Whether that debt is at 100% or 50% of the GDP doesn't really matter, both are huge by my definition.

> Whether that debt is at 100% or 50% of the GDP doesn't really matter, both are huge by my definition.

"Whether I'm being paid $100k or $50k doesn't really matter, both salaries are huge by my definition."

I'm quite sure that international lenders don't look at it this way.


You blame nationalism, but we very much don't know where the US is heading. Japan has maintained massive debt for decades, but the US is very different from Japan, so what exactly happens to us remains to be seen.

Also, most of the large European countries are more or less in the same boat as the US debt-wise, so it's not like the American case is particularly special in that regard.

> so what exactly happens to us remains to be seen.


The only unknown is how long it'll take to happen not what will happen. And that applies to both the US and Japan.

Don't be coy, Nostradamus, tell us the future.

No need to insult op. There are plenty of example of what happens when economies are deep in debt. All you need is a basic google search and sticking your head out of the “patriotic” chocolate jar.

Oh look, american whataboutism. How the tables have turned. If you cant tell what japan has been going through since the 90s then you should probably read a bit more before commenting on hm. The US (i cant talk for the whole of America) is indeed different from Japan. I am not sure a certain population category will endure stagnation for a long time, and the standard of living is already well below that of Japanese counterparts. I mean the us already had a failed coup, and i cant even begin to think what the future will look like if it ends up like japan in terms of growth. Which is not bad but as you pointed out the us is different but not in a good sense. Regarding european countries…yeah whataboutism wont help you.

As honored as I am that you made a throwaway specific to a perceived logically fallacy of mine, pointing out an objectively factual similarity-to-peers isn't an example of whataboutism.

Why? Most countries are also currency issuers. The major exception is the Eurozone, and those countries can still run deficits.

Because the US Dollar is the predominant world reserve currency, and has continued to be through several significant shocks to the system. In 2008 it looked like the EU had a chance to significantly adjust that balance in favor of the Euro, but the EU went down the austerity path in handling member states problems, which slowed their recovery, and made the US Dollar still the least bad option on the table.

Because of this dynamic, the rules end up being different for countries like the US. I wish more economic research went into this end of things to try to study the boundaries and nuances of this altered reality. But, instead we're still stuck interacting with the world mostly through the lens of neoclassical models. Which, if I'm being frank, are basically to economics what the lobotomy was to neurology.

> So I recently had a realization that the money the US government spends has absolutely no relation to the money the government receives

You're correct.

As a matter of fact, it has gotten to the point where I believe the US could do away with taxes entirely and borrow the entire budget ... it wouldn't make much of a difference.

I remember that came up in my income tax class in law school. I don't remember if the professor suggested it as an interesting thing to consider, or if it was in some of the optional supplementary reading he recommended (if so, most likely Chirelstein's book on federal income taxation [1]).

Suppose under a conventional tax system there is some total W available and the government takes 10% of that in taxes. Then you end up with the government has 0.1 W and everyone else has 0.9 W.

The government ends up with 1/10th of the money, and people's purchasing power is reduced by 10%.

If instead of taking 10% of W, the government prints new money equal to 11.11...% of W, increasing the total money to 1.111... W, you end with the government has 0.111... W and everyone else has W.

As with the conventional taxation case, the government ends up with 1/10th of the money, and people's purchasing power is reduced by 10%.

It is just that the 10% reduction in purchasing power comes from prices rising instead of money being directly taken, but at the end of the day it means pretty much the same thing as far as how much you can now buy goes.

The big plus for this approach is that it is ridiculously simple. No need for filings or dealing with collections and handling tax evaders.

A big minus is that constant significant inflation is pretty damned annoying. Merchants have to keep updating prices, employers have to keep raising wages, and you have to keep dealing with larger and larger amounts.

It also probably wouldn't reduce bureaucracy as much as you might hope. Many of the things governments currently encourage or discourage through tax deductions, tax credits, and tax penalties they would still want to do. They'd just have to change to grants and fees/fines.

Still, it is an interesting idea to think about.

[1] https://www.amazon.com/Federal-Income-Taxation-Concepts-Insi...

It would make a huge difference in certain areas.

First it would function as a flat tax, not a progressive one, assuming everyone holds dollars. But they don't, disproportionately wealthy people hedge against dollars with other assets and poor people don't, so practically it would function as a regressive tax.

Unless poor people catch on and stop holding dollars. This would lead to a demand crisis with the currency. Remember, the only way a government can effectively dictate the currency of an economy is to create artificial demand for it by requiring taxes be paid in it. Without that, and with a highly inflationary currency, people will dodge "taxes" by simply not holding dollars.

The relationship between government revenue and spending has a broken relationship, yes, but the conclusion is that at this point the government taxes to keep demand for the currency and to massage certain numbers, in particular the inflation rate, deficit and employment numbers, to maintain faith in the economic system. It doesn't actually need the money, but it does need to take the money.

Hopefully this will finally show that Paul Krugman is a hack. At this point do the exact opposite of everything he says.



"By 2005 or so, it will become clear that the Internet’s impact on the economy has been no greater than the fax machine’s."

He's shown himself to be a hack for decades.

The backstory gets even worse for Krugman, as he pathetically tried to respond to this: https://www.snopes.com/fact-check/paul-krugman-internets-eff...

Nothing will change. He has been a charlatan for most of his career, writing article after article that turns out to be complete wrong, yet he still has a job (and a following?)


1. yes, inflation has spiked first due to stimulus and now to supply chain disruption, also triggered by the pandemic changing consumption patterns faster than suppliers could adapt. These will hopefully subside if COVID doesn't get worse e.g. vaccines/therapies stay ahead of the inevitable new variants.

2. yes, "transitory" is meaningless if it continues long enough. Specifically, the scary part about inflation is when market participants raise prices expecting future inflation, crushing consumers who can't capture higher wages at the same pace. IMHO we're not quite there yet, and prices are tumbling when supply-demand has returned to equilibrium, e.g. lumber.

3. anybody who pontificates as much as Krugman is bound to make lots of mistakes. IMHO the issue is with the publisher's need to create exciting headlines, i.e. that's on us for listening to newspaper columnists (I've largely stopped). Hit rates go up when you can choose your battles and sit on your hands the rest of the time. Less excusable to me are the guys who can sit on their hands but still put their feet in their mouths, e.g. Dimon, Buffett, etc. One of these days, the masses will wake up and realize that these old emperors aren't wearing clothes. (e.g. look at Buffett's 10 year return...)

kind thoughts welcome.

> anybody who pontificates as much as Krugman is bound to make lots of mistakes

Krugman does not "pontificate".

Krugman has an agenda, which he tries his effing best to implement through his notoriety.

He is measurably a complete hack : his prediction track record is worse than flipping a coin, and only time will tell the amount of long term damage politician listening to his delusions will inflict to the country.

What is the agenda?

Well, his column is titled "The Conscience of a Liberal". That's how he identifies himself - as a liberal. Not as an economist, as a liberal. (He's liberal in the pre-woke sense - government should spend more to fix everything.)

You can a liberal and an economist, they aren't mutually exclusive as you suggest. Economics has many different schools of thought.

I don't suggest that they're exclusive. But his column is first and foremost that of a liberal, not that of an economist.

I mean you are reading into the title of the column.

I've read enough of the columns that no, I'm pretty sure I'm not.

> He's liberal in the pre-woke sense - government should spend more to fix everything

Couldn't have put it better.

> What is the agenda?

Krugman is a socialist first and a Keynesian second.

His goal is basically a nanny state, the prelude to full-blown socialism and massive loss of individual freedoms.

And we're unfortunately almost there.

We are not even close to that my friend. How does this have any relation to a "Nanny" state, and which individual freedoms are you worried about?

> Krugman is a socialist first and a Keynesian second.

Yeah, no. Krugman might be a socialist by the broadest conceivable definition, but only because by that definition Keynesianism can itself be seen as a bourgeois socialism.

How does this have baring on this article? Are you just out to try and take down Krugman? Are you targeting Krugman because he works at NYT? Feels like a bit of a hit from the right/libertarian wing here.

I will posit that almost every individual who makes future predictions on anything related to humanity is going to make some serious mistakes. That and our economy is beyond the capability for any people (or machines) on our planet to fully understand all the impacts maybe only the large flows. It's highly dynamic made up of many intelligent (and unintelligent) actors and national groups with sophisticated needs/wants.

Let's not try and take down economists for trying to help understand the economy when they clearly do understand it at a greater level then most people.

I also don't necessarily just put all my trust at the feet of any individual who says they know the future - thats a huge red flag.

From a Bayesian perspective, someone who's been wrong again and again and again may eventually be right (like a broken clock being right once per day) but I'd say it's unlikely.

You may consider that an ad-honimem attack, I see that as providing vital contextual information to help readers update their priors.

It is an ad-hominem attack and Krugman isn't even mentioned in the article. Clearly OP has an agenda and it is to target Krugman (and I see other people jumping on board). Disappointing thats all.

This is what happens when you get ideologically and publicly tied to a certain talking point that you argue it into the extreme.

Time to change the basket of goods again so we can hide the true inflation rate.

My uncertainty comes from not knowing whether the technicians servicing the machine of the economy actually have the understanding and ability to always be able to fix it.

I don't know if they are working on a diesel motor, complex but fully serviceable, or if they are working on a black box, doing ritualistic tapping and prodding that seems to usually correlate with outputs.

If they knew what they were doing, they wouldn't be shocked that we're headed for stagflation after a series of failed predictions about the inflation being short term and the supply chain fixing itself in months rather than years.

I'm not surprised. I wonder how many folks really buy into FEDs argument that this is temporary, that's why they won't change the unmaintainable interest rates the US has been keeping artificially low.

We'll have another year to come, of even higher inflation and some people will still be talking about "supply chain" problems created 2 years ago. Just watch. I'd take any bet I can afford about this.

FED knows that if it hikes up 0.5% interest rates a few times, markets will melt, unemployment to 40%+ and a big civil war will happen.

Except a few US companies that can really make money without much debt(like tech companies), almost all of the rest are walking zombies. So many suburban cities in America are 100% bankrupt being kept alive by policies which should be temporary, such as this Biden's infrastructure package.

You can hide some dust under the carpet only up to a certain point. Citizens let politicians do it until it's out of control. I don't believe it's a mistake solely done by politicians and the FED, but rather, the average american citizen consuming and owning shit to a unmaintainable degree.

> FED knows that if it hikes up 0.5% interest rates a few times, markets will melt, unemployment to 40%+ and a big civil war will happen.

The media is harming people's perceptions of reality, and I feel like this has really accelerated in the last decade or two.

It's worrying.

Who would have thought printing Trillions of US dollars for pandemic relief would circulate more money in the market and lead to inflation?!

Not saying a government shouldn't provide relief during a pandemic, just stating that it sounded obvious to me rather than alarming.

Its far more concerning to remember that the US Federal Reserve cannot combat this round of inflation using the prime interest rate, as it never fully abandoned QE or Quantitative Easing from 2008.

since the corporate lending market is now saturated with low or no interest loans, any attempt to raise interest rates at all will likely trigger a massive recession. this is called the corporate debt bubble


EDIT: this is due to the QE taper failure of 2012 as a point of evidence as it alone resulted in a 700 point market crash that forced the fed to reverse course immediately.


the fed is therefore stuck hammering news outlets and the government with hopeful rhetoric about "transient" inflation that will somehow clear up after Covid, despite rising unemployment, underemployment, lingering state debt from the covid crisis, and back-rent payments still due by millions of americans who will likely declare bankruptcy at some point.

EDIT: Generally, bankruptcy is a positive influence on the economy. It allows consumers to find a way out of massive debt so they can once again start engaging in the economy through buying goods, services and large-scale assets such as vehicles and real estate. unfortunately personal bankruptcy stokes a permanent US underclass that are denied rental housing in nearly every market. Bankruptcy is also prohibitively expensive for many americans to formally declare, and so the debt remains in an unserviceable limbo on books (eventually becoming an unseen toxic asset.) Bankruptcy can also factor into your employment screening.

and this doesnt even begin to touch supply chain constraints like the semiconductor shortage and the ongoing international shipping gridlock, ergo most of what we're seeing now is the Fed treading water until a major recession inevitably hits.

> any attempt to raise interest rates at all will likely trigger a massive recession. this is called the corporate debt bubble

It's a continua. If we raised rates 0.00001% it clearly wouldn't "trigger a recession", if we raised rates to 25%, it would.

Powell has shown himself to be an effective chairman, I doubt the fed will trigger a recession with rates.

You're correct, but I think missing part of the point.

The point was not "raising interest rates at any level will trigger a recession" but rather "raising interest levels an amount capable of combating inflation will trigger a recession".

A 0.00001% hike may not cause a recession, but it also wouldn't affect inflation.

Interesting, I don't actually think there's much ambiguity in the statement "any attempt to raise interest rates at all."

I'd defer to the OP to state what they really meant, but your response comes across more as a trivial semantic "gotcha" than an actual reasoned response.* If you actually think they meant raising rates by a trivial amount, even though history doesn't indicate that is a tack likely taken, then, yes, you are technically correct.

*Since you are a self-described consequentialist, it may be just that you feel what was stated is all that matters and not what was intended

Quoting the CBO: "Growth of Net Interest Outlays. In CBO’s most recent projections, the cumulative deficit from 2021 through 2030 totals nearly $13 trillion. Borrowing to finance that deficit—at a time when interest rates are expected to rise—would cause net interest payments as a percentage of GDP to increase over that period, from 1.4 percent to 2.2 percent, which is generally in line with the 50-year average of 2.0 percent. Over the long term, interest rates are projected to rise further, and the amount of debt issued is projected to grow, causing net outlays for interest to increase to about 8 percent of GDP by 2050."

I don't believe the current rate of increase is anything close to what was projected.

Also, the chart on debt held by the public is very interesting. Raising rates has some big impacts, even small changes.

source: https://www.cbo.gov/publication/56910

> Its far more concerning to remember that the US Federal Reserve cannot combat this round of inflation using the prime interest rate, as it never fully abandoned QE or Quantitative Easing from 2008.

The Fed stopped buying in 2014, held the assets for a few years, and they started going away in 2018:

* https://fred.stlouisfed.org/series/WALCL

* https://fred.stlouisfed.org/series/TREAST

> Its far more concerning to remember that the US Federal Reserve cannot combat this round of inflation using the prime interest rate, as it never fully abandoned QE or Quantitative Easing from 2008.

Not only can it, but more importantly it can fight it without interest rates by gradually unwinding the remaining QE (which it is likely to do, starting either next month or December, from current indications)

> since the corporate lending market is now saturated with low or no interest loans, any attempt to raise interest rates at all will likely trigger a massive recession

Well, no not “any attempt at all”, but its probably true that the effect of any interest rate hike on slowing the overall economy and demand will be greater than it otherwise would be, for any given size of rate hike.

But that's positive for ability to fight inflation with interest rates, as it means each quarter-point increase in the rate target will have more effect on slowing inflation than it otherwise would, and that fewer of them should be necessary, even before considering the effect of QE unwinding which will start before rate increases.

The big risk here is that the fed is going to keep treading water until we fall off the upcoming cliff into another depression.

Where if they would just be honest with people today, sure we will have a recession but that is preferred to depression or economic collapse which is where all of this is heading

> the fed is therefore stuck hammering news outlets and the government with hopeful rhetoric about "transient" inflation that will somehow clear up after Covid, despite rising unemployment, underemployment

These are demand side factors that would work against inflation (but also aren’t happening; unemployment and underemployment are dropping, though still above pre-pandemic levels.)

> and back-rent payments still due by millions of americans who will likely declare bankruptcy at some point.

What does this have to do with inflation?

>What does this have to do with inflation?

Part of the inflation rate is housing, in many regions there are still blocks on evictions, foreclosures, etc.

This reduces inventory and increases prices. Evictions and Forclosures are critical to the market, if a person can just stay put and not pay rent it is a double whammy for inflation as they will use their rent money on other things increasing demand where supply is restricted (aka inflation) and their housing unit is removed from the supply also increasing inflation

> Part of the inflation rate is housing, in many regions there are still blocks on evictions, foreclosures, etc.

That's...not what was cited.

I am asking about back rent payments due and bankruptcy potential which is what was cited upthread.

But the rent money not paid by the tenant, is not recieved by the landlord so while tenant will spend more the landlord will be spend less, the net change is zero, no?

That would only be the case if the LandLord spent it on the same things. They would not

The LandLord would use the money to pay Plumbers, landscapers, and/or invest some of the money, and/or build more housing units

The Tenant would use it to Paydown other debt, buy a Graphics card, or other things in the consumer market.

Can you go one level deeper- why would raising interest rates trigger a recession?

Imagine you're a business with 5 million dollars in revolving debt, at a 2% interest rate. You have $100k in debt service costs.

If interest rates go up to 5%, you have $250k in service costs. Most businesses operate close to break-even (in efficient markets), and many will immediately go under. If businesses go under, that triggers a recession cycle: Those businesses lay off employees, who stop buying, driving down revenue for everyone else. People anticipating layoffs/furloughs/etc. stop buying. Hiring goes down too, since businesses start planning for rough times.

People buying on credit (anyone with a credit card debt) also find purchasing much more expensive, together with higher bills on existing debt.

A whole bunch of business opportunities also disappear in a poof of smoke. If a business has even a 1% expected real return, and interest rates are zero, it makes sense to borrow money to start that business (especially if inflation is also high, giving effective negative interest rates). If a business has an expected 1% return and interest rates are 12%, then I'm bleeding money. For these kinds of opportunities, think less SV startup, and more just normal businesses (e.g. I buy something and sell it a month or two later).

All of this piles on to form a recession.

So commercial debt is mostly variable not fixed rate?

My understanding bonds are mostly fixed rate. Their price on market can vary though. But unlike let's say mortages they are more often refinanced. And when that happens the rates can change.

> Most businesses operate close to break-even (in efficient markets), and many will immediately go under.

Then they are not managing risk properly and actually need to go under.

I'm not even sure that its true to a meaningful degree - at least in the US, large businesses dominate economically and are quite profitable (much better than "break even"). Microsoft, Berkshire Hathaway, JP Morgan - they are not going to "go under" if interest rates go up 0.25%, even though they all use corporate debt.

I don’t fully understand why, but in general stocks tend to fall when interest rates rise.

Investopedia chalks much of it up to psychology and… higher rates means less lending means less spending means less earnings. https://www.investopedia.com/investing/how-interest-rates-af...

Look at the formula for discounted cash flow. It's a widely used valuation model and applies to lots of companies, especially those in the growth phase where current market cap is largely dependent on expected cash flow far into the future.


Notice the denominator in the series - (1+r)^n where r = interest rates and n = number of years out. The more r rises, the more terms at the end of the series drop out because they're so close to zero. So that effectively means a company that's getting its value from cash flow 10+ years from now loses a lot of its value if interest rates are rising.

Because investment in stocks competes with investment in government bonds. At just 1% increase in bond interest, trillions of investment dollar will flow from stocks to bonds. Many people, especially retired, would prefer a safe 2% return over 7% return with occasional 50% crash (as in 2000 and 2008).

> stocks tend to fall when interest rates rise.


stocks tend to fall when interest rates rise unexpectedly.

many actual interest rate increases are followed by stocks rallying because a larger rate increase was expected & priced in.

> many actual interest rate increases are followed by stocks rallying because a larger rate increase was expected & priced in.

Right, but that just means more than 100% of the fall due to the rate increase occurred earlier when it was anticipated, so the rate increase still caused the fall, in effect.

The expectation caused the fall. It's possible to even have an expectation of a rate increase and then not have any at all.

The US government and corporations borrow money at the prime interest rate plus some margin. Right now, US corporations have borrowed the maximum they possibly can. If the interest rates on that debt go up, many corporations will immediately go bankrupt. The US government also has a debt ceiling it is refusing to raise, which may mean that the US government itself may become insolvent faster with an increase in interest rates.

> If the interest rates on that debt go up, many corporations will immediately go bankrupt.

Interest rates on 10 year debt have gone up about 0.75% in the past year or so already (based on US 10 year treasuries, a common benchmark). They currently are at about 1.5%, a little below the average for the past decade of around 2%.

I'm curious which companies, specifically, you think will "immediately" go bankrupt if interest rates come back up to 2% - a rate they were paying as recently as 2 years ago.

> If the interest rates on that debt go up, many corporations will immediately go bankrupt

Do you know which rates are the ones the Fed sets?

These threads always bring out the people who don't understand how the economy works.

Ah fun, a baseless ad hominem attack.

The feds sets the prime rate which then works its way down into the corporate markets. Corporations right now are borrowing at 1 or 2% interest rates, but if the fed rate goes to 5% then those corporations will have to roll over their existing debt at 5 or 6%.

BTW, I majored in finance in college and worked at Merrill Lynch. 12 years ago I started my own company and have 200 full-time employees. I think I know a little bit about how the economy works.

> The feds sets the prime rate


The Fed sets the target for the Federal Funds Rate (currently, as a range target, used to be a single rate target), which is an interbank lending rate, but don't actually set that actual rate (but it is usually very close to or within the target range.)

Currently, the actual Fed Funds Rate is 0.25%, the target range is 0-0.25.

The prime rate, a measure of available commercial rates, is set by banks lending decisions. It is pretty invariably higher than the Fed Funds Rate; currently, its 3.25%.

> if the fed rate goes to 5%

...it would be an enormous jump from the lowest its ever been to the highest since before the 2009 crisis.

You are correct on all points. I know the Fed sets the targets and can't always get what they want, but effectively in recent past they have set the general direction of these rates. I was trying to oversimplify.

>The feds sets the prime rate...

Just to clarify, the Fed doesn't directly set the prime rate, though it does have influence on it:

>...Although the Federal Reserve has no direct role in setting the prime rate, many banks choose to set their prime rates based partly on the target level of the federal funds rate--the rate that banks charge each other for short-term loans--established by the Federal Open Market Committee.


> BTW, I majored in finance in college and worked at Merrill Lynch

As an intern, yes? I know enough people working sell-side to know that it doesn't give you an intimate understanding of the economy, and certainly not after an internship.

> Corporations right now are borrowing at 1 or 2% interest rates, but if the fed rate goes to 5% then those corporations will have to roll over their existing debt at 5 or 6%.

Fair enough. I don't think we will be seeing 5% anytime soon, nor do I think that will be necessary for a price level increase largely driven by disruption to real output due to the pandemic.

It weirds me out that this is a considered a controversial opinion instead of common sense.

Give people money during pandemic, people feel less pressure to work. Less people who want/need to work, wages rise to attract more people. Companies have higher wage bills, they raise prices to compensate. Hey presto, inflation.

There's also a secondary feedback loop of people buying more stuff with their payouts and the increased demand translating into higher prices, but this hit various sectors of the economy really unevenly, where wage inflation seems to be very widespread.

Even common sense needs to be validated though. There are always "common sense" solutions that end up being wrong, often because they are an overly simplistic model.

There was an interesting outcome of some states stopping benefits because common sense said that would make people more pressured to go back to work. This was essentially a large-scale economics experiment.

"25% of the workers who lost their benefits in June had gone back to work by August. Now, in states that left the benefits in place, 21% of unemployed people found jobs. So there was only a four percentage point difference when these benefits went away...And what this means is those states that ended benefits early, they turned down billions of dollars in federal unemployment aid, and it ended up backfiring for their local economies."[1]

The "common sense" solution to helping their economy may have actually hurt their economy.

[1] https://www.npr.org/transcripts/1034965231

That 4% difference is absolutely massive. Further, these benefits have to be paid by someone somewhere. These benefits are being paid by all the rest of us in the form of inflation eating way our income.

We could probably debate whether 4% is "massive" in the context of COVID unemployment levels, but I'll sidestep that because I don't think it will actually resolve anything.

What I think is the better question is whether that 4% dip was better for the respective economies in the context of the aid they had to give up. It seems to me it probably wasn't a good tradeoff if the goal was to improve the economy.

I also understand it may be a moral argument rather than an economic one, but that's another one that could probably be debated without resolution.

>These benefits are being paid by all the rest of us in the form of inflation eating way our income.

I agree, but that's also the price to be paid by living in a society. We could just remove all safety nets whatsoever and deal with whatever instability results, but I don't think that's in most people's best interest. The point of the discussion is finding the right balance that provides a moral yet stable economy.

> I agree, but that's also the price to be paid by living in a society.

I really dislike this point.

I keep seeing it as a justification for more government control, typically without real justification.

> We could just remove all safety nets whatsoever and deal with whatever instability results, but I don't think that's in most people's best interest.

Has welfare been in some way proven to increase stability? Seattle, Portland, and SF all have strong welfare programs, but they seem to me to currently be much less stable than other cities.

The larger context is that society is a give and take. I have an old, likely out-of-print, book called "Your Rugged Constitution" that I got from an old Marine. What I like about that book is that it frames each part of the Constitution, not just in terms of what one gets from the government but also what one is expected to give up. I get concerned when people only focus on one side of that equation.

I don't think it should be used as a catch-all, but as a reasoned and balanced approach. It may be used as a justification for "government control", but hopefully people recognize that there is an expectation for something to be received in terms of what was given. It's up to society to determine whether that's a good trade, not to automatically disregard the option because of some "government control" boogeyman.

Take the Fed which is such a big part of this discussion. Society gives the Fed certain levers to affect the economy and monetary policy. In return, society gets more stabilized unemployment and inflation to limit boom/bust cycles. Society has determined that is a reasonable tradeoff. Likewise, we give the Congress the ability to levy taxes and in exchange we expect to be provided common defense and general welfare.

>Has welfare been in some way proven to increase stability? Seattle, Portland, and SF all have strong welfare programs, but they seem to me to currently be much less stable than other cities.

It gets harder to study because of the larger number of confounding factors as you get to larger groups (city, state, or federal levels). There's certainly evidence that social safety nets provide stability at the family level and evidence that safety nets like unemployment insurance enhance stability as well.

I expect inflation to remain high for a while, and I think concerns about it (if not for self-fulfilling psychological, which are very real and significant) are overblown. I think this stimulus, and the resulting inflation, DID help the economy, relative to the alternatives. The critical thing was to avoid structural damage:

- Businesses going under

- People losing jobs

- Mortgages going under

... and so on. All of this DOES directly impact the productive output of the economy.

Inflation does distort the economy a little bit. It makes some of us poorer (those with cash), some of us richer (those with debt), and leaves some neutral (this with hard assets). But I think this distortion pales relative to the alternative.

Business is going under is actually a good thing. It frees up market space for new entrepreneurs and new businesses to be able to get going and make newer better offerings. The last two recessions all of the big companies have been bailed out, which means that we have the same bad practices and bad CEOs still in charge of our economy. Let them go bankrupt and then we will have fresh ground for entrepreneurs to flourish.

>Let them go bankrupt and then we will have fresh ground for entrepreneurs to flourish.

I agree to this in some contexts, but I also think it's sometimes used with too broad of a brush. It seems to ignore the time lag that means sometimes things can get really bad before they get better. Sure, allowing banks and automotive manufacturers to go under could create "fresh ground for entrepreneurs to flourish." But it could also create decades of depression/recession effects before that flourishing happens. We're currently seeinng the supply chain effects that people didn't really anticipate well. As someone from the rust belt, there are an awful lot of tangentially related manufacturers who will also go away with the automotive sector, which has ripple effects in a ton of other industries. Protracted economic depressions tend to create "fresh ground" for despots to "flourish" as well.

> That 4% difference is absolutely massive.

4% of the entire workforce is massive.

4% of unemployed workers who were previously receiving unemployment benefits is irrelevant.

If you zoom out, you'll see that the biggest drops in unemployment benefits weren't in the 2021Q2, they were in 2020Q4.


> Give people money during pandemic, people feel less pressure to work. Less people who want to work, wages rise to attract more people.

I feel that depicting the current scenario as a sudden global reluctance to work because people are getting benefits is a gross misrepresentation of the facts, and one which is rooted in the old moralist notion that poverty is tied to laziness.

The truth of the matter is that the year-long lockdown enabled workers to reconsider their life priorities and their professional choices, and those stuck in awful jobs with awful working conditions decided to reconsider their options.

To illustrate the fact that "giving people money" is not the key factor here, keep in mind that priviledges workers, such as handsomely paid software engineers working for FAANGs, started quitting in droves due to working conditions, and right now we are seeing these same FAANGs scrambling to contain this hemorrhaging. FAANG-caliber engineers don't just quit their job because the government started passing on handouts.

The service sector imposes exceptionally abusive and poorly-paid working conditions, thus no wonder they are having problems attracting workers without doing any soul-searching and addressing their problems.

Giving money to both corporations and to individuals destroys the motivation of both to do better. When corporations go bankrupt, it seems like a sad event, but in reality it is clearing market room for new entries to be able to start up and take share. Instead of allowing corporations to go bankrupt in the 2007 market crash and in the 2020 market crash, we have given them massive government handouts. This shuts down entrepreneurs and make sure that walking dead corporations keep going with their terrible practices.

The same thing happens when you give individuals handouts, whether those handouts be in the form of pandemic aid, welfare, or social security. They're less motivated to work and often just don't.

Get out of here with that rational nonsense! The government will fix all the problems by doing the same thing that caused them.

Sorry, couldnt help myself. Completely agree. The motivation to participate in most markets has been sapped by handouts on a massive scale. No business is too big to fail. If a business fails it is their own fault. Allowing businesses to fail regardless of the economic impact is a necessity for the economy to function. One business fails and a handful jump in to compete for the open space.

Get out of here with that rational nonsense! The market will fix all the problems by doing the same thing that caused them.

Sorry, couldn't help myself. Completely disagree. The free market continually makes bad decisions. And the term "free market" never meant an un-fettered market free of government influence and control.

> "free market" never meant an un-fettered market free of government influence and control.

What could it even mean then?

You could maybe make a case that people don't mean a totally free market when arguing using the term, but that's about the degree of freedom. Free market literally means people trading goods and services without coercion.

Free market originated as a term with Adam Smith in regards to free of rents and privileges.

"For classical economists such as Adam Smith, the term free market does not necessarily refer to a market free from government interference, but rather free from all forms of economic privilege, monopolies and artificial scarcities.[1] This implies that economic rents, i.e. profits generated from a lack of perfect competition, must be reduced or eliminated as much as possible through free competition."


Naturally, the term has taken on differing meanings, some useful, some not. The idea itself, of a market free from government influence and control is a pipe dream that has never, and will never exist.

To you it means trade without coercion. To others it means less taxes (a type of coercion). To yet others it means no regulations (yet another type of coercion). This just doesn't exist in any economy. Taxes, regulation, permits, all are a form of economic coercion. It's just used as a cudgel by those who stand to gain or lose the most with a particular regulation or tax policy.

> Giving money to both corporations and to individuals destroys the motivation of both to do better.

No, it really doesn't. At most, this represents a one-time-only bump in disposable income, which you either spend to meet your immediate needs, save it up, or blowin up on whatever tickles your fancy.

A one-time bump in disposable income does not change anyone's drive, determination, or professionalism.

If that assertion had any bearing on reality, all companies which hand out hiring bonuses to new hires or pay any sort of bonus would be seeing determined workers turning into slackers overnight, which makes absolutely no sense at all.

>They're less motivated to work and often just don't.

This is most impactful if you think money is the sole motivation for working. The fact that the U.S. has the highest volunteer/charity rate while one of the highest average work week rates for industrial countries seems to indicate otherwise.

> reconsider their options.

What are the options for minimum/lower wage workers? They still need money for food and shelter.

The ability for low wage workers to decide "this job is not worth it" was only made possible by the increased government unemployment benefit and stimulus.

I absolutely believe that if given the choice of getting over $1200/month on unemployment versus making the same but working, most people would choose not working. That seems so intuitive to me.

>I absolutely believe that if given the choice of getting over $1200/month on unemployment versus making the same but working, most people would choose not working. That seems so intuitive to me.

This seems to be a rational choice to me as well if you define work as "shit I don't want to be doing". If you were paid $1200 a week for playing with puppies, you probably wouldn't mind going back.

I think what the OP was alluding to was that it caused people to evaluate the nature of work. I'm not saying it's a purely rational decision, but probably a largely emotional one. When your norm is working a miserable job and you are given a reprieve from it, emotionally it may be that much harder to return.

One of the software engineers that I respect the most was bussing tables a few years ago.

I think it's less about "reconsidering life priorities" as it's simply breathing room. If you have $0 in the bank and are hustling 3 minimum-wage jobs to feed your kids, it's financially extremely difficult to break the cycle, unless there's a windfall like a stimulus check.

I generally agree with you, but I think that your example of FAANG workers is bad given what's happened to equity prices in the last 2 years.

FAANG workers probably made a boatload, I know my friends at Google did.

I probably need to add this to the start for context; I say the following not because I don't think people should earn more, but rather that it's bad, rather than good increases in wages, which will be eaten up by inflation almost immediately at this pace.

I just saw a notice on a fast-ish food place saying they will pay $3 more per hour than the last wage. So not only is poaching happening, this inflation is being baked in. For context that is ~$6,240 more annualized or $520 per month.

On the contrary, good wage increases would come from a restriction of the labor supply through things like a decrease in immigration. What is happening though is that the labor pool is now being flooded with quite literally millions of unskilled laborers on the southern border and soon enough even high skill sectors like tech will be flooded with foreign tech workers if the ruling class is able to pull it off and places like India and China, etc. don't put a stop to it in order to retain their talent rather than letting the US ruling class profit from their people.

Unfortunately, any proposal to reduce immigration is seen as morally evil.

The reason why it is "controversial" is because people believe we did the same thing in 2010, and no inflation occurred.

Very broadly this is true, M2 peaked at 10% in 2008 and was 6% for most of the decade but the actual transmission of this into the real economy was impaired. So you have to actually understand how monetary policy is being transmitted.

But what has just happened is evidence that this lesson wasn't learned because the view seemed to be that inflation is impossible...not that we need to look at transmission more carefully. M2 growth YoY is running at 25%, federal spending is clearly leaking into the money supply, on top of supply issues...it is going to be tricky to resolve fast (even if you don't consider the political pressure the Fed is clearly under, the willingness to trade inflation for lower unemployment...that is what this comes down to, can your politicians take the pain? It is very clear there is no capacity for pain in the US).

In 2010, "quantitative easing" meant plowing a whole lot of money into various financial assets, which is a very different kettle of fish from giving people cash handouts.

Yes, that is what I meant by the transmission (indeed, there was a huge difference between QE in 2010 and QE in 2014). There is also a huge difference in QE now, and 2010. Each time the structure changes and the impact on transmission changes (because the Fed had no idea how QE was supposed to work, and apparently still doesn't appear to know precisely). A key point is that QE in 2010 primarily worked through portfolio composition, not directly on money supply.

Similarly, giving people cash handouts is not necessarily inflationary either (it happens all the time anyway, food stamps, unemployment benefits) because cash handouts don't necessarily increase the money supply. The issue is that transmission appears to have changed in a very subtle way (this isn't just occurring in the US either) where you have fiscal policy seeming to leak through to the money supply (something that a significant proportion of politicians think is impossible atm).

Given that pandemic relief has ended and in fact ended a while ago in a lot of the country while inflation has kept up would imply this isn't true.

The fact that people "bought" stuff that is nonetheless still stuck off the coast waiting to be unloaded suggests that the listed price paid is not the actual market price (if you had any expectations of receiving things quickly like you would have in 2019.) Likewise for anyone who had a plumber come to their house do work, paying 30% more and waiting a week for service.

Prices seem to be sticky, so it's not that surprising that it takes some time for higher prices to work their way into all facets of economic life.

Thank God for the meme stocks and crypto. Otherwise we could have seen all the money jump into commodities or trying to corner markets or other goods.

> It weirds me out that this is a considered a controversial opinion instead of common sense.

A lot of people think it is "common sense" that raising the minimum wage will decrease employment because of higher labour costs, but that link is… tenuous… at best:

> In pioneering work from the early 1990s, David Card analysed some central questions in labour economics – such as the effects of a minimum wage, immigration and education – using this approach. The results of these studies challenged conventional wisdom and led to new research, to which Card has continued to make important contributions. Overall, we now have a considerably better understanding of how the labour market operates than we did 30 years ago.

* https://www.nobelprize.org/prizes/economic-sciences/2021/pop...

Sure, total common sense if you forget about velocity effects and changes in consumer behavior.

Good thing we have economists whose job is to not forget about those things.

You’re pretty smug about “velocity of money” there. Also you appear to not understand that economics isn’t a hard science where there is some rigid consensus.

Some (many? Most?) economists think that this “modern monetary theory” stuff is suicidal. It looks to me like they’re being proven right.

Your comment seems to imply that the MMT set is actually directing policy, rather than being in favor for a smaller subset of progressive politicians.

The fed isn’t run by Stephanie Kelton. We are still living through one of the most disruptive periods in modern economic history, seeing moderately elevated inflation in this context doesn’t mean the sky is falling.

> Some (many? Most?) economists think that this “modern monetary theory” stuff is suicidal. It looks to me like they’re being proven right.

You have no idea what you are talking about if you think that the Fed's actions are based off of a fringe heterodox theory like MMT.

> economics isn’t a hard science where there is some rigid consensus.

Oh, guess that gives you license to make up whatever theory you want then, my bad.

Not going to continue replying.

“velocity of money” long predates and has little connection to MMT.

I can't quite tell if you are being sarcastic. I also can't quite settle on what is more concerning, if you are serious it implies that you think economists are just ranchers that herd their cattle at a whim, or that you think they will be able to exert those powers flawlessly and in self-less ways without screwing it up like all other instances of command/planned economies in human history.

Neither, I certainly don't think they execute flawlessly/without screwing up.

I'm making the much more defensible claim that if we took you and the GP commentator and put you in charge of the Fed, the economy would go into a recession.

> Good thing we have economists whose job is to not forget about those things.

Because authority!

Aka argumentum ad verecundiam.

Yeah, I'm sure we'll get better results if we put the "Velocity is fake" dude in charge of the Fed.

Velocity is fake.

Money is valued according to totalStuff / totalMoney. If there is one item of food left on the entire planet, everybody is about to starve to death. If you print enough money to quadruple the supply of money, everybody will still starve to death, and the item of food is effectively costs 4x the number of dollars. You can argue the cost is already infinite in such a scenario, so 4x infinity is still infinity, nevertheless, abstractly if everybody owns a Corolla, then you 100x the money supply, the Corollas do not turn into Ferraris. Houses do not get built out of thin air. Real things have real value when given effort by real people, and money is abstractly a layer above that. Printing money does not print food, mine metals, or construct aircraft. If it DID, we could colonize the entire universe by simply leaving the printer on for long enough.

It's not common sense that printing money "causes" inflation, it's directly given by the ratio of money to real things. Printing IS inflation. Again, if printing was NOT inflation, then printing would increase REAL value and we would colonize the entire universe by printing.

Back to velocity. You temporarily tricked some people. They go and buy food instead of dying. Now there's less food in reserve. Now food is more expensive. This converges the price to the amount printed as in the above logic. So where did we get this free interim benefit where starvers can buy things? Prices weren't initially raised, so the people that would've had more food incorrectly gave it to other people for less than they should have until the adjustments kicked in. Therefore, printing money can have the effect have stealing from businesses if they're slow to react. Or, printing money can have the effect of stealing from everybody that's not that business if the printed money goes right to that business. Give an asset company 500 trillion dollars and suddenly every house in America is spoken for. There's no "inflation" depending on which idiot you ask, but everybody who doesn't own that company will die of weather or infinite rent -> starvation soon enough.

At the end of the day, printed money is only fair if given to everybody equally, which is equivalent to doing absolutely nothing in a world where business immediately adjust prices in response to the fake change in money supply. Otherwise it's trickery against the interests of people who set prices incorrectly, and especially against people incapable of setting prices because they are mere "consumers", unless all printed money goes only to consumers, but then it still solves nothing by definition of consumer.

What the above is alluding to is that being a consumer rather than a producer by definition means they have no or negative value. A farmer adds value, a waiter subtracts value. More people are alive because a farmer can feed himself and others, whereas a waiter is replaced by a dude walking 12 feet and getting his own food, or skipping the restaurant entirely and cooking himself with stuff he or the farmer grew. Every business that isn't multiplying food output, healthcare output, etc. vs. their cost is effectively a drain. Restaurants would have to bring enough "joy" (utility) to make up for the drain that simply shuffling food around inefficiently and placing it on oval plates next to candles in dark rooms and charging 70 unitless (if it's marked at all) currency thingies for a leaf of non-GMO vegan-enhanced anti-racist triple-vaccinated gluten-free organic hydroponic soy lettuce. While I typed that, 500 Africans starved to death.

The modern economy is just a ruse that tricks people into having "jobs" rather than owning all of America's farmland (Bill Gates).

The fix is four fold: 1. become a farmer 2. end Bill Gates ... legally 3. end BlackRock et al ... legally 4. end the fed ... legally

edit: Six fold: 5. end all central banks 6. end all central-central banks

>Give people money during pandemic, people feel less pressure to work.

It lets people stay home more to prevent the contagion from spreading... but it is not the good life. It might help buy groceries or pay a bill or two, not much more than that.

> wages rise to attract more people

Has this actually happened in the last year?

We've been "giving" (I know, it's not technically that) billions to rich people for decades and it hasn't done anything to inflation. So it's reasonable to wonder if that still holds when everyone gets the cash.

My theory is that rich people save it, and poor people spend it; so here we are.

> My theory is that rich people save it, and poor people spend it; so here we are.

Supposedly this money is being dumped on conservative investments which are actually worsening the whole economy, such as the massive inflow of institutional investments in real estate which is behind the astronomical real estate prices in some cities.

The rich all competed for assets and it was reflected in asset prices.

It probably wouldn't have been as bad if the time before it and time after it is similarly inflated.

If it was a one-off 2T expense, it probably wouldn't be as noticeable as the every growing hockey stick of Keynesian economics (funding expensive mandatory social programs).

They moved on from Keynesian economics a long time ago, today it is all about MMT i.e Magical Monetary Thinking errrr... Modern Monetary Theory

> They moved on from Keynesian economics a long time ago

This 100%. Keynesian economics sees debt as temporary to be used to fight a war or stimulate the economy during a depression, with the expectation that the debt is paid down during the good times. This is what the U.S. did during World War 2. They ran up a huge debt to fight the war then paid it back down in the prosperous years following the war.

Modern Monetary Theory on the other hand is the philosophy of a six year old who asks daddy why the government can't just print more money to buy stuff.

I’m not really sure that you understand MMT. MMT isn’t about giving out a free pass to print money, it simply states that deficits are the primary driver of inflation rather than changes in the money supply. That’s not the same thing as giving out a free pass, in fact, it’s proponents would state that in the face of rising inflation one should reduce budget deficits.

> deficits are the primary driver of inflation rather than changes in the money supply

MMT "theorists" will say different things every time you ask them.

I doubt many of them would say this though, because it's pretty obviously on-face wrong.

It seems clear that you have very little respect for the MMT set. But I haven’t seen anything to suggest they’d disagree with my characterization. I wonder where you draw your understanding of MMT because from my view the theory is fairly straightforward: money creation happens when the government spends, and is taken out when it raises taxes. The purpose of central banks is to provide financial stability.

> from my view the theory is fairly straightforward

But as you've stated it, the "theory" is on-face wrong.

Money isn't created when the government spends because it borrows from private credit markets when it spends, taking money out of circulation.

Money is created by monetary policy, not fiscal policy.

I don't necessarily disrespect MMT, I just have trouble tying people down to making a specific claim. Either they are saying something obvious and not at all contrary to mainstream economics, or they are making claims that I think are wrong - but I have trouble pinning down any particular claims.

I think the crux of the disagreement is the order of events.

MMT proponents would not character bond issuance as something that takes money out of circulation per se. It is only when that money is taxed back out of the economy that money is removed.

In this construction central bank policy and government budgets both do play a role, the question is what comes first. When governments runs deficits, it signals the central bank to print money.

TBF, we never really _paid_ off the WW2 debt.

We started to use GDP vs Debt as the measurement tool to avoid actually paying off debt instead of endlessly servicing it. It didn't take much time to convince our 6-year-old selves that we could just endlessly service more debt when GDP grows and to grow more GDP. Obviously there's no bad if taking debt causes GDP to grow, and GDP will always grow, so debt should always grow, because more GDP!

> Modern Monetary Theory on the other hand is the philosophy of a six year old who asks daddy why the government can't just print more money to buy stuff.

MMT is just “fiat money isn't commodity money, so fiscal constraints are historical cosplay rather than fundamental reality. The real constraint on so-called ‘fiscal’ activity is purely monetary.”

No part of the descriptive element of MMT is in actual serious dispute by orthodox economics. Orthodox economists just tend to prefer the policy behavior that occurs with c the cosplay of fiscal rather than purely monetary constraints. Which is fine—frankly, I think Congress does a bad enough job with fiscal policy when monetary policy is hived off and given to the Fed, so I can see some naive policy responses to the realities embraced by MMT that would be counterproductive. OTOH, acknowledging the realities instead of trying or bury them because their are some obvious bad potential responses is necessary to have the discussion that gets to policy that incorporates reality well.

What do you call the period from 1971-2019 when the government printed lots of money with no intention of paying it back, but only handed it out to the upper class? From my fiscally conservative Austrian perspective, MMT is actually an improvement - by creating direct price inflation (as opposed to just asset inflation that nobody dares to call real inflation), it forces the Fed to put the brakes on the printing press.

> MMT is actually an improvement - by creating direct price inflation

MMT doesn't create price inflation, it acknowledges that monetary effects (like inflation and deflation) are the only real constraints on government finances when spending its own fiat, and that requiring debt financing for net spending is a farcical result of pretending fiat is resource-limited commodity currency, and encourages abandoning that kind of fiscal fiction in favor of expressly considering monetary effects in setting the kind of policy that has historically been called “fiscal”.

I agree with you - MMT mostly just acknowledges the dynamic that has already been in place for the past 50 years, ultimately letting the government regain the power to spend money where it deems fit (eg infrastructure), rather than being bound by this "lending" facade that mainly directs new money to the financial industry.

What I mean by it causing price inflation is that money directly spent (especially on social welfare programs) tends to flow to consumers within one or two hops, where it will directly bid up the CPI. Whereas money that is "loaned" tends to linger in the financial economy and mainly causes asset inflation (which only eventually, maybe, causes price inflation). By making the economic feedback loop shorter, MMT makes the results of monetary inflation more apparent, and from an Austrian perspective this is a good thing.

I'm an Austrian myself, and that's an interesting take on MMT I hadn't considered. I'll have to noodle on that one for a bit.

This is a common misunderstanding. As a percentage of GDP, debt did go down. But the US government didn't actually paydown the debt. The debt notional more or less stayed the same. The ratio decreased due to GDP growth and inflation.


> The ratio decreased due to GDP growth and inflation.

Inflation, the magic silver bullet that makes a countrys' debt disappear.

At whose expense is of course the question.

It’s so convenient that the everybody was confused about economics, and actually the really good economics is that politicians can and SHOULD spend money on whatever they want!

You have no idea what you are talking about.

> Who would have thought printing Trillions of US dollars for pandemic relief would circulate more money in the market and lead to inflation?!

Plenty of folks thought (a) we needed to spend lots of money on relief, (b) this would cause a spike in inflation, and (c) this is fine:

* https://www.nytimes.com/2021/02/07/opinion/covid-biden-econo...

* https://www.piie.com/blogs/realtime-economic-issues-watch/in...

A 12-18 months spike in inflation is worse than the alternative, not spending not enough and the economy stagnate for years like it did post-2008:

> I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”

* https://krugman.blogs.nytimes.com/2009/01/06/stimulus-arithm...

> Who would have thought printing Trillions of US dollars for pandemic relief would circulate more money in the market and lead to inflation?!

Pretty much everybody, as that was precisely (in comparison to the expected course without it) the intent.

That eventually stimulus of all kinds would have to be reeled back in to control inflation was also expected.

The exact timing and course of the rebound in both the general economy and inflation was less predictable, and widely understood as such.

> Not saying a government shouldn't provide relief during a pandemic, just stating that it sounded obvious to me rather than alarming.

It shouldn't be considered overly alarming, in broad monetary terms, in the short term, the question is whether appropriate steps are taken to prevent it from becoming alarming, on the broad monetary front, and whether appropriate steps are taken to address acute harms on the distributional front.

Most people here seem more concerned about the first question and less or unconcerned about the second.

A trillion dollars is basically a 12mo-18mo of GDP growth for the USA. And it was handed out in a year where GDP fell by 600 billion.

Those are not comparable other than that the GDP growth you reference IS that trillion dollars you also reference, and then some. It's essentially like switching to buying everything on credit card to keep up the facade to your friends that nothing has changed, in spite of the fact that your business is bankrupt/you lost your job. The GDP will still go up because you are buying things, but that does not change the fact that taking on one trillion dollars in debt or embezzling one trillion dollars from shareholders of your company is a good idea.

My somewhat-uneducated opinion has been that this was not due to pandemic relief, but due to long-term inflation pressure that the economy stopped being able to absorb as a result of the pandemic, and/or wasn't being measured (because it was being reflected in real estate, commodities, and securities).

As you say, they created a bunch of money. But also, we have less stuff (because when all those people who weren't working, they weren't doing whatever they normally did, and so there's missing output in the economy). So, more money and less stuff, and what do you know, we have inflation. This is my complete lack of surprise.

But, if we stop creating more extra money, and if people can return to work, then it should be transitory. I don't see reason why we should expect 5% inflation every year going forward.

Government should NOT provide relief. They didn't even discuss alternative solutions. One time taxes would have been a possible alternative.

EDIT: relief in terms of QE.

> Government should NOT provide relief.

Why? Isn't this one of the very core responsibilities of a government? Otherwise what would be the point of having a government to begin with?

> They didn't even discuss alternative solutions.

Which solutions do you have in mind? I mean, you mentioned QE and arguably QE has been going on for a decade or so.

> Otherwise what would be the point of having a government to begin with?

You tell me. It seems the reasons keep expanding.

Ostensibly governments were initially for defense of a nation. People even resisted the creation of the US federal government. Unfortunately even then there were financiers willing to lend against future taxation for the expense of qwelling dissent.

In these conversations consent of the governed, and the source of the 'relief' is never considered.

>Ostensibly governments were initially for defense of a nation.

Can you elaborate on this conclusion? At least in the U.S., the Constitution explicitly defines responsibilities of the government that go beyond national defense.

One-time taxes is the alternative I suggested. That's what they did in parts of Europe after WW2. QE is not a valid option in my opinion.

> One-time taxes is the alternative I suggested. That's what they did in parts of Europe after WW2.

Why do you believe that creating/increasing taxes all on itself will address the problem caused by a) economic stagnation, b) workers seeing themselves out of a job and without a paycheck?

I'm not sure if I understand your question. I simply suggest that people should be paid using one time tax income by the state instead of being paid by newly printed money. Of course the taxes need to be targeted at people who have enough money to pay it and not at people who need it.

The printing is part of it, but not all of it. The commercial credit that amplifies the money in circulation is a major factor. This is itself driven by the amount of money available to leverage against with fractional lending.

Don't you have to eliminate supply chain issues before you can confidently assert "printing trillions of US dollars for pandemic relief" is the primary cause?

Also driven by skyrocketing energy costs.

Maybe if we had a pipeline, to move fuel in a more efficient way....

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