I think this is quite similar to this analysis of the effects of the more recent supply chain issues on US inflation and the Phillips curve: https://bankunderground.co.uk/2023/07/05/did-supply-constrai... There's a lot of technical details on how they measured this exactly, but the rough conclusion is that supply chain constraints steepen the Philips curve and cause monetary policy to have a much greater effect on inflation than it normally would, rather than having less effect as bank economists apparently wrongly thought in the 1970s.
This probably shouldn't be a surprise - after all, if the oil or other basic things needed to increase production isn't there, there's no way for the expansion in production that would be needed to stop an increase in money supply from being inflationary to happen. Yet even now, there seems to be a widespread popular belief that because the cause of inflation is supply side, there's no reason for central banks to raise interest rates and they're just making things worse for no reason by doing so.
Sort of my take. Oil supplies increased exponentially till about 1970 and then that stopped right as the big cohort of post WWII children entered adulthood.
I read a heterodox economist who argues that standard economists are wrong in that they believe that the energy contribution to GDP is a few percent. When he says it's closer to 100%. Which makes sense, if you assume unlike economists that fossil fuel energy is a primary non-substitutable supply constrained resource.
Belief of mine, the transition to solar and wind is resulting in renewed growth in energy supplies. At the same time population growth is stalling.
I decided to sell stock to install a large solar array. My theory is that I'm investing in securities to smooth out my retirement. Investing in the solar panels divorces me from wild swings in electrical pricing as well as providing my daily electrical needs.
I reasoned that securities that are based on societal organizations are harder to predict than my energy needs or the sunshine.
I think there is also an efficiency in developing the electricity as close to the need as possible.
That's hedge for sure in that you're minimizing your downside risks. A friend has a large array, a battery, an electric car and no gas appliances. During the big wind events where PG&E cut off everyone's power didn't effect him at all. He has a mortgage and a water bill basically. He said their is this feeling of being free from all that.
Thinking of it in binary terms (substitutable or not) doesn't make a lot of sense to me. It seems pretty clear that some energy substitutions are easier than others, and we've gotten better at the easier ones.
Posting this will inevitably lead to present day comparisons.
I kind of want to get ahead of the curve here and ask any HNers who were old enough to be working and spending money at the time what it was like. Would be valuable to hear present day comparisons from people who've experienced both.
I was just coming into adulthood. Not working yet, but privy to some of the financial calculations that my parents were making.
It was hard to figure out what was a good economic idea. A bond with a 14% interest rate? Sounds great... but it's not, if inflation is 12% and you have to pay income tax on the gains, and it's worse if inflation heads to 14%. But what's better?
I imagine that the rest of it wasn't any easier. Does it make sense to invest in that new factory? I imagine that it's hard to get an answer you're sure of when inflation is going crazy.
People who weren't there are shocked at 7% inflation for a year. I'm like "meh". The Fed is on top of it. They aren't over-reacting, and they aren't ignoring it. And, a Fed rate of 5%? I remember when it went to 20%.
Now get off my lawn. (Wow, do I feel old making this post.)
We are probably close in age and what I remember was that everybody in our Central Pennsylvania town was more or less equal. The janitors at Bethlehem Steel were making good wages and people were investing extra money instead of spending it.
The 1980 election between Jimmy Carter, Ronald Reagan, and John Anderson was a big turning point. George H.W. Bush was running against Reagan for the Republican nomination. Reagan's economic policy was described as voodoo economics by Bush.
Once Reagan was elected it was like a light switch was flipped and a portion of the town became rich and the Bethlehem Steel closed and there was a slow decline in the blue collar class.
My first job in industry with my new physics degree was as a “Scientist I”, which paid $9000 per year in the late sixties. Shortly later, I bought a new Alfa Romeo for $5000. Outside my budget, but I really wanted one and never regretted it.
By 1970, I had moved to the mid-Peninsula at double the salary.
The fed has successfully redefined the word “inflation” to mean “an increase in cost”, which conveniently leaves room to blame others for rising prices.
The original meaning of “inflation” was “an increase in currency supply”. Debasing the currency supply is why the dollar is worth less and everything costs more. It is the result of deficit spending.
During the past few decades, inflationary forces of deficit spending were offset by deflationary forces of globalization (everything became cheaper as we moved all production to China and other countries).
Now we are seeing the effects of that offset being removed.
> Now we are seeing the effects of that offset being removed.
You realize that inflation is back at baseline, right? Were those effects added back to the economy somehow and I missed it?
I remain amazed that people continue this argument: the "transient" camp was correct. Inflation came, for largely the reasons that the boring economists[1] said, and went away, likewise. No one is going to be able to claim to have a good numeric model on this stuff (feedback systems are hard), but if nothing else the "Here is a Simple Rule to Explain Economics that Confirms all your Priors" rhetoric should be ejected, right?
[1] As opposed to the partisan axe grinders. Next time, maybe believe the tweedy professors in preference to the talking heads?
I don't think economists or politicians every properly defines transitory in this context, though the concept was used as a marketing play to paint a picture of prices coming back down.
We saw that in very limited cases, but prices broadly are still higher than before and it isn't realistic to expect prices to comeback down The only real argument is if we compare against absolute highs in price shocks due to panic toilet paper buying, baby formula production issues, etc.
So... none of that is correct. "Inflation" is a growth exponent, not an absolute measure of prices. No one ever promised "prices would come down", because that would be deflation (a negative exponent).
Inflation is just a rescaling. Everyone loves to say it's not, but it is. Prices are higher and wages are higher and assets values are higher. It all happens together, though not in perfect lockstep.
If people wanted to complain about real (where "real" means "inflation-corrected") wages falling, they would be screaming about it, because that would be terrible. Except that real wages are INCREASING and have been pretty steadily all through the inflation burst.
Last US CPI report was 3.7% YoY and a little better than that in seasonally-adjusted monthly numbers. That's well inside one standard deviation of the historical average (which is something like 2.9% I think). There's space for yelling about specifics within the economics community, but the current conditions are absolutely not consistent with a description of "high inflation" that matches the rhetoric being deployed above.
My division says 28% higher than historical average? Are you trying to cite a different number? Look, seriously, please stop: inflation is not high. Period. It's in a range that we would have considered perfectly normal at almost any time in the last hundred years.
The only reason people are bent out of shape about it is that it was high, briefly, for about 11-13 months or so, and they internalized the debate about it based on a partisan frame that's very difficult to escape. But please try.
I think this is now unprovable. "Transient" and "transitory" were never given a precise definition by the central bankers who began using those terms, but when around 2021 when the term was being used by the Fed, it was used in context to refer to inflation that returns to target by itself, without requiring a hawkish policy intervention by the Fed. As the Fed has now strongly intervened, it's almost impossible to investigate the counterfactual of whether inflation would have returned to 2% without their having done so.
> Federal Reserve Chair Jerome Powell suggested Thursday that inflation will pick up in the coming months but that it would likely prove temporary and not enough for the Fed to alter its record-low interest rate policies.[...] “We think our current policy stance is appropriate,” Powell said.[...] Once price declines that occurred about a year ago when the pandemic began are removed from the year-over-year calculations, inflation will temporarily rise. But the Fed won’t see either of those trends as worrisome increases that would force them to change their policies, Powell said. “If we do see what we believe is likely a transitory increase in inflation, where longer-term inflation expectations are broadly stable, I expect that we will be patient” about making any changes, he said. Higher inflation is unlikely to persist, Powell said, because most consumers and businesses expect mild prices gains, and therefore will keep their prices and wage demands in check. [1] (March 4, 2021)
> Powell: "Overall inflation remains below our 2 percent longer run objective. Over the next few months, 12 month measures of inflation will move up as the very low readings from March and April of last year fall out of the calculation. Beyond these base effects, we could also see upward pressure on prices if spending rebounds quickly as the economy continues to reopen, particularly if supply belt bottlenecks limit how quickly production can respond in the near term. However, these one-time increases in prices are likely to have only transient effects on inflation. The median inflation projection of FOMC participants is 2.4% this year and declines to 2% next year before moving back up by the end of 2023.[...] With inflation running persistently below 2% we will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time and longer term inflation expectations remain well anchored at 2%. We expect to maintain an accommodative stance of monetary policy until these employment and inflation outcomes are achieved. With regard to interest rates, we continue to expect it will be appropriate to maintain the current 0 to 1/4% target range for the federal funds rate until the labor market conditions have reached levels consistent with the committee's assessment of maximum employment and inflation has risen to 2% and is on track to exceed 2% for some time. I would note that a transitory rise in inflation above 2%, as seems likely to occur this year, would not meet this standard." [2] (March 17, 2021)
> Powell, however, downplayed concerns that these trends could trigger sustained high inflation. He said he expects supply bottlenecks to cause only temporary price increases. “An episode of one-time price increases as the economy reopens is not likely to lead to persistent year-over-year inflation into the future,” he said. Clogged supply chains won’t affect Fed policy, Powell said, because “they’re temporary and expected to resolve themselves.” [3] (April 28, 2021)
> While much of Wall Street is ringing alarms about out-of-control inflation, Federal Reserve Chair Jerome Powell and his colleagues are expressing confidence in a more benign outlook. Acceleration in U.S. price growth this year will have “only transitory effects on underlying inflation,” Fed Vice Chair Richard Clarida said Wednesday, playing down that consumer prices climbed in April by the most since 2009. Governor Lael Brainard said the day before that officials should be “patient though the transitory surge.” Powell has made the same argument. While policy makers expect the Fed’s preferred measure of inflation to rise to around 2.4 per cent this year as the economy reopens and the pandemic recedes, they forecast it to return to their 2% goal for 2022. [4] (May 13, 2021)
> I think this is now unprovable. "Transient" and "transitory" were never given a precise definition
It was low. Then it was high. Now it's "slightly above average". That seems like a good enough definition to any reasonable person not otherwise polluted by an agenda. You can cherry pick areas where the illuminati were wrong, because you can always do that. But they were, well, less wrong than you were. So that's something, right?
The contention I responded to upthread was that we were somehow in a new historical era of high inflation, owing to a particular set of partisan policy arguments. And that's wrong. Period. We aren't. We just aren't, and you can see that too, right?
I wasn't cherry picking; those quotes weren't to show that they were wrong, but rather to back up my claim regarding the sense in which they used "transitory" and "transient" to mean inflation that was brief enough that policy action would not be required. Nor do I have any opinion on US partisan policy arguments, as long as it doesn't involve bailouts for overleveraged institutions.
And no, that definition is too simple. There are several camps here, and several ways to be wrong:
A) Inflation will be transitory, therefore, we don't need to worry about it, and the Fed can keep interest rates low.
B) Inflation will be transitory, because even if it starts getting out of hand, monetary policy will take appropriate action to bring it back to target, no matter how painful.
C) Inflation will not be transitory unless central banks take unprecedented action. I don't know if they will do that or not, but they should.
D) Inflation will not be transitory, because central banks aren't going to tighten monetary policy. It would be too painful. Because they will keep real interest rates negative, inflation will continue.
E) Inflation will not be transitory, regardless of what monetary policy does in response. We're on the path to never-ending Argentinian-style inflation.
---
As the quotes (and the bond market) show, (A) was the common view among institutions in 2021, including central banks, and a lot of the pushback against inflation being "transitory" was in opposition to this view. The usage of "transitory" to justify continuing stimulative monetary policy indicates that Jerome Powell was firmly in camp (A) until at least late 2021. This was very concerning to many people who thought that inflation was much stronger than the central bank anticipated, and monetary tightening would be needed, and this is what drove most of the agitated commentary saying "they're wrong about it being transitory!", including mine. The Fed appears to have eventually come around to that view, right or wrong. It is now difficult to disentangle (A), (B), and (C), because between 2021 and now, monetary policy pulled an abrupt U-turn that roughly coincided with the start of disinflation, which all the (B), (C), (D), and (E) camps were pushing for. (D) and (E) are arguably disproven by the data, unless we see another big round of inflation. But since many of the "inflation is not transitory" voices were in camps (B) and (C), those viewpoints are not unsupported by the data so far.
I, for one, was never in camp (E), but I was in camp (D) until the Fed eventually changed my mind.
This seems self-contradictory. If inflation is caused by an increase in the money supply, why would lower prices counteract it? It's not like cheap goods reduce the money supply.
Inflation is measured by looking at basket of goods. If you increase money supply, but replace expensive goods in the basket with cheap imported goods, inflations stays low. It is not to say there are no effects on the economy.
I.e., lower priced goods don't counteract the effects of increased money supply, they counteract the effect of increased money supply on the measurement of inflation.
A plane provides lift while flying which then counter-acts gravity pushing it down - it stays at the same altitude. Increasing money supply & lower prices can happen at the same time.
Though, my understanding is that the post-pandemic inflation was driven by (A) a supply crunch [1], & (B) increased profit taking [2]. For (A), recall that boats were queued up off of LA with a months long backlog - there just wasn't the stuff available for people to buy. For (B), see [2] as a reference which states corporate profit contributed "a lot" to inflation in 2021
Then (C), a war broke out with a major energy producer as one of the participants. This pushes global prices up, particular energy prices which then increase transport and all other costs.
As far as (D), money printing; my understanding is that really is yet to be seen what kind of impact that would have and it will take some hindsight to know. It looks to me like this point is overall a subject of active debate (so, we don't really know the impact of money printing just yet).
It's not just the increase of the money supply. It's the increase of the money supply faster than the "stuff" of the economy increases.
Globalization didn't just make stuff cheaper. Supply and demand says that the price would not go down (regardless of the cost of manufacturing) if there wasn't more of it than there had been. Globalization increased the "stuff" part of the economy.
> It's not just the increase of the money supply. It's the increase of the money supply faster than the "stuff" of the economy increases.
This. Inflation always is too much money chasing too few goods. Secular shortages give you too few goods. Loose monetary policy (or fiscal policy) give you too much money. (A tight monetary policy can immunize effects of a loose fiscal policy - if there is institutional will.)
> The S&P 500. You think that bull run was really just because of the goods and services made? Hell no, it was QE and LIRP.
We've had bull runs ("bubbles"?) in previous years/decades without QE or LIRP/ZIRP: the 1990s for one. We've even had them with non-fiat, fixed money supplies: see 1920s Wall Street during the Gold Standard. Also canal mania and railroad mania.
The price of gold has skyrocketed since the good economy years of the 1990s. Heavy deficit spending, in this latest era, began during the Bush Admin, post 9/11. That's another dead giveaway. Gold is overwhelmingly priced in USD and it began to shoot up rapidly with the Bush deficits, and it has never gone back down to anything near those levels. As they destroy the USD over time, gold will gradually set new higher highs (with some moves backwards occasionally).
You can also see the USD destruction during the Bush years, when you look at the GDP, priced in dollars, of other economies. Their GDP figures soar at dramatic rates when set in USD, because of how much damage is being done to that specific currency. So for example the Czech economy went from $67b in 2001, to $156b for 2006; now does anyone actually believe their economy grew by ~132% in five years? It did not, that's the dollar destruction in action (and you can see that exact same thing in most non-US economies at that exact same time; it represents the USD losing enormous value).
> The price of gold has skyrocketed since the good economy years of the 1990s. Heavy deficit spending, in this latest era, began during the Bush Admin, post 9/11.
There was huge deficit spending under Reagan, and gold remained flat. There was little deficit spending under Clinton (who managed to create a US budget surplus), and gold remained flat. No correlation in either direction there.
There was huge deficit spending for the Bush years of 2001-2008, and yet gold didn't really jump in his first term, though it did rise in his second.
Gold went up in Obama's first term, but tanked in his second—even with QE and its supposed "Money printer go brrrr" effects. People were complaining that the 2% inflation target was too low during and after Obama (and into Trump's administration) because of concerns about ZIRP and ZLB:
Personally, over the course of 40+ years of various monetary rate and fiscal spending policies, I see zero correlation between them and the price of gold. I think it's better to look at behaviour finance (and animal spirits) for the reasons for the changes in gold prices.
That's really impossible to say, we simply don't know what the economy would have looked like without the deficit spending.
With the large budget imbalances we've seen recently it seems reasonable to expect that increase in the money supply and new demand to have some impact of the economy. If it didn't, I'd argue we need to fundamentally rethink the core concepts of economics all together.
Now whether the spending was a larger than the impact of wars I have no idea. I'd also be very suspicious of any research that attempts to model such a drastic alternate reality and come up with any meaningful comparison.
No appreciable inflation? Just look at the stock market, art, and any other asset class pursued by the wealthy.
It wasn't until the pandemic and some of the money was sent to poor and middle class people that the prices in the grocery store rose. However, long before that the price of the grocery store market cap had inflated.
> It's becoming increasingly clear that pumping water into a lake is not, in fact, the main driver of flooding.
> Just look at the recent past. We've been pumping water into the lake since 08 without any appreciable flooding.
> Then the dam broke and BOOM! floodings rocket double digits.
The war-induced shortages may be the proximate cause of inflation, but maybe it wasn't a good idea to keep pumping that water in the first place, in particular, with the knowledge that dams always break sooner or later anyway.
> The original meaning of “inflation” was “an increase in currency supply”.
Can you provide a source for this? It seems like an overly monetarist view to me: trying to be assertive about the cause rather than just describing the phenomenon.
>Monetary sense of "enlargement of prices" (originally by an increase in the amount of money in circulation) first recorded 1838 in American English.
I also found this pdf from the Federal Reserve Bank of Cleveland called On the Origin and Evolution of the Word Inflation[2] that goes into more detail.
This is a completely idiosyncratic definition that is advocated for by followers of midcentury economists like Mises.
The standard definition of inflation is an increase in the general price level. Of course the size money supply and inflation are related, but they're not synonymous.
Ya, I would imagine if you increased productivity without an increase in monitary supply you'd create deflation. Of course real economic activity is more varied than that so it gets complicated quick.
> The original meaning of “inflation” was “an increase in currency supply”. Debasing the currency supply is why the dollar is worth less and everything costs more. It is the result of deficit spending.
Japan enters the chat
Japan has been increasing the money supply for decades and yet the inflation rate has remained flat and gone negative more that once:
Further, you're talking like inflation is entirely bad. While inflation that is "too high" (for some value of "high") is not something most folks want (as was re-learned recently), what's the alternative?
Negative inflation rates (deflation) is generally worse (as was learned during the Great Depression).
And having zero inflation means having a perfect balance between the supply of money and the current demand needed to run the economy (which is impossible). Having a fix supply of money (like with the Gold Standard), or too little of it, prevents economic growth (as was also learned during the Great Depression):
There's no evidence that inflation now or in the last decade has anything to do with deficit spending. It's a favorite talking point of reactionaries because it feels so close to individual finances, but it's far more disconnected. This inflation is primarily caused by global speculative asset/supply changes in world trade markets.
A speculative asset bubble can create its own money supply through private borrowing backed by the paper value of those assets.
To use housing as an example, as housing prices rise on paper, banks can approve ever larger mortgages to purchasers of those houses, which can drive the prices still higher, and so on. This borrowing temporarily creates new money in the system, independently of any action from the government or central bank. This loop can only persist temporarily, but temporarily can last a long time.
So that's where the money for the current run up in asset prices came from? It didn't come -- even a little -- from the almost free money central banks have been handing out for the past 15 years?
(I only said it can, I didn't say it necessarily did this time! I think it's a mix and may depend in part on what country you're in and the specific assets in question.)
Central bank free money certainly can tie into it and IMO almost definitely did. Speculative asset bubbles seem to happen more easily in low interest rate environments, and bubbles can be halted early by responsible government / monetary policy. (Or conversely, allowed or encouraged to continue for far too long by irresponsible policy). Speculation on something money-adjacent, like gold or bitcoin, can happen in anticipation of future government money printing that may or may not happen. Anticipation of official or unofficial government backstops of financial institutions or pension funds can also create moral hazards that incentivize private lending into a speculative asset bubble without due risk management.
But bubbles can also apparently happen all on their own.
(And of course an increase in asset prices can also be caused by a genuine increase in the fundamental value or productivity of those assets, which hopefully has occurred to some extent over 15 years of hard work, so it's not all speculation.)
Money supply wasn't fixed after Bretton Woods. The exchange rate of paper to gold was fixed. That didn't stop the Federal Reserve from issuing more certificates than there was gold to back it. The roaring 20s were due to an increase in money supply. The '29 crash came after a contraction of the money supply.
Uncertainties in the continued supply were driving up the price of futures.
It’s not “let’s bet some free money on the price of gas increasing”. It’s “we need to secure enough gas to keep the factory running next year, let’s buy as much as we can at any price we can reasonably turn a profit at”.
I was referring to the commodities market. The stuff you need to keep your factory running.
I agree with you that the financial economy is largely divorced from actual stuff, which is why pumping money into it doesn’t lead to rising prices of stuff, just rising prices of financial instruments.
That’s the key here. Increasing the money supply should lead to increase in prices if and only if it is spent on stuff. If it’s squirreled away in complex financial instruments, we just call it “amazing returns”
I don't see how you can increase the money supply faster than population growth and not have price increases eventually. When money supply increases manifest via the debt markets, cheap dollars will flood into markets that are typically financed (e.g., houses.) When people see those 'amazing returns' over a prolonged period of time, they feel wealthy and are willing to spend more and spend more freely on goods and services.
You pump more money into the system and businesses are gonna try to capture as much of it as they can. Money isn't stagnant and it will be permeate its way throughout the entire economy regardless of what it was originally spent on.
No that’s wrong. That refers to the money made by issuing actual currency, but that’s not how the money supply is regulated. Most of the money is created by banks and other private entities though fractional reserve lending, not actual currency printing.
"On the Origin and Evolution of the Word Inflation" [0]
But even this paper explains that the word was well into its evolution during the 19th century, before the Fed existed:
>By the late nineteenth century, however, the distinction between “currency” and “money” was becoming blurred.
>At the turn of the century, economists tended to refer to any circulating medium as money, and any change in the circulating medium relative to trade needs as an inflation of money. But this shift in meaning introduced another problem. Although it is easy to determine the amount of currency relative to the stock of a precious metal, how does one know when the amount of the circulating medium exceeds “trade needs”?
>Economists appear to have reached a definitional crossroads during the first
several decades of the twentieth century. Presumably, because they could be certain of the “excessiveness” of the circulating medium only by its effect on the price level, the notions of an inflated currency and prices became inextricably linked.
It’s amazing how definitively everyone speaks about economic theory, yet intelligent people come to wildly different conclusions. That should make you wonder how definitive you should be.
My belief is that inflation at the macro level is always caused by an increase in the money supply, but this also causes debate because the money supply can increase through multiple mechanisms. One is bank lending, another is money printing. The latest inflationary period was caused by money printing - literally dropping money from the helicopter into everyone’s bank account. This is why increasing interest rates hasn’t slowed inflation quickly, because consumers still have a lot of free money handed out to them rather than loans.
This is, to be blunt, nonsense. Virtually every economics textbook is going to take pains to explain how those two definitions are effectively identical. You can't have one without the other. Can you cite a reasonable explanation for the perspective you're trying to push? No one thinks this way outside of partisan news media, and even then no one tries to make points with this level of specificity (precisely because it doesn't make sense).
And no, it's not about "deficit spending", which is a delta between government spending and government revenue. Money supply has very little to do with the former and quite literally nothing to do with the latter.
Government spending puts money into the economy and taxation takes it out. Sure interest rates affect inflation too through loans and GDP affects the other side, but government deficits are a big part of inflation.
> government deficits are a big part of inflation.
If they are then you could show me a correlation where periods of high deficits correlate with high inflation. You can't, because if anything the opposite is clearly true over the past 30-40 years.
Jumping to declare that this is true now is a bit much, don't you think? Especially since deficit spending hasn't changed trajectory over the past two years as inflation dropped.
Again, this is partisan economics. You're repeating stuff that you heard from people with an axe to grind. It's just not correct.
Deficit spending has dropped tremendously the last couple years, almost perfectly mirroring inflation: https://i.imgur.com/OhHSukq.png
Historically there admittedly hasn't been such a trend, but historically we've never printed as much money as we did in 2020 before. I never said it was the only factor. It's also clouded by the fact that if what I'm saying is true, deficit spending is a great course of action when other factors push inflation down.
I'm just intuiting stuff from the basics. I haven't really heard anyone opinionate either way on this before, but how could adding 25% more money to the economy not create inflation?
"Inflation is monetary phenomenom" is a quote by Friedman. That he said it that way shows that it was defined as a rise in prices well before he linked the two.
> The fed has successfully redefined the word “inflation” to mean “an increase in cost”, which conveniently leaves room to blame others for rising prices.
This was not the Fed (entirely), but the entire economic profession as a whole as the dismal science learned more about how things worked. This 1997 paper form the Federal Reserve Bank of Cleveland goes over the development history:
This was in response to a better understanding, going back to (at least) Keynes' General Theory of 1936, that the quantity theory of money was not very useful in the first place:
> By referring to inflation as a condition of “too much money,” economists were forced to struggle with the operational issue of “how much is too much?” The quantity theory offered a clear answer to that question: Too much money is an in- crease in the money stock that is accom- panied by a rise in the general price level. In other words, an inflated money supply will reveal itself through its effect on the price level. When Keynesian economic theory challenged the direct link between money and the price level, inflation lost its association with money and came to be chiefly under- stood as a condition of prices.
As even the Monetarist's monetarist, Milton Friedman, stated himself (Financial Times (UK), 7 June 2003):
> The use of quantity of money as a target has not been a success. I'm not sure I would as of today push it as hard as I once did.
Not even during the 1980 heydays of right-wing economic thinking under Thatcher and Reagan did anyone bother with monetarism, certainly Paul Volcker didn't. A few chapters on this in Samuelson Friedman by Nicholas Wapshott:
The book goes over the history of human transactions from hunter gatherer to modern day and how currency or a ‘ledger’ has played a role in those transactions as civilization has progressed.
The topic of inflation for hundreds of years and currency debasement is covered in detail and a common theme throughout the entire book.
Overall I’d recommend the book, Lyn is a great writer. The end is definitely Bitcoin heavy but I still enjoyed it ( I do not own any cryptocurrency ).
I'd really like some prominent economist or business magnate to simplify big monetary concepts for the general public like:
"Fiat inflation simply happens when many people ask for more money for their goods or services over time. We want this to happen so that people do not hoard money, because we create it when people take on debt.
If a small number of people hoard money that doesn't lose value, total economies and their movement of money from one person to another are dictated by primarily by the larger number of people creating debt."
Then we can all stop having conversations like "let's increase or not increase minimum wage," because we will all collectively have a better understanding of what it is that we're receiving for our labor and how that effects businesses in our neighborhood, their employees, and abroad.
The bricks were laid for untethering from gold long before 1971. The cynic in me thinks that was the plan of the bankers that came up with Bretton Woods in the first place. "Give us all your gold and we will give you paper, we plomise we will always honor the exchange of paper back to gold."
One of the original plans at that meeting was a new world reserve currency, but they gave up control to the American dollar because the USA had control of 2/3 of the world's gold and refused to support the idea of the "bancor"
The one thing this is correct about is that continuing Bretton Woods past 1971 would lower the gap between economic productivity and wages... because both of them would have collapsed after the US depletes all its gold reserves.
I really do not understand why most people seem to think deficit spending is not the cause of inflation. Print a bunch of money and make a lot of people millionaires either on paper or realized gains. Why would their attempt to acquire anything scarce, like desirable houses, not cause the price of said asset to go up? Sure, it may take a while due to different kinds of inertia in the system and un equal rise in different asset classes and goods. But surely it should at some point rise prices. Why is this a surprise? If I am wrong, why am I wrong?
It's not the only cause. Money is (pretty much) created whenever anyone borrows.
It just so happens that the government is a very, very large borrower. But people taking out mortgages, student loans, car loans also increase the money supply.
It's like matter and antimatter. When a loan is made, a combination of debt and money is created. When the loan is repaid, the debt and money delete each other. (With fees, interest, and defaults causing a transfer one way or the other). I think bankruptcy deletes the debt but keeps the money, too (not sure about that).
More debt in the system == More money in the system.
So fluctuations in currency value definitely are more complex, but money supply increase is the only thing I know of that would lead to a basically monotonic decrease in the value of the currency, which is what we observe. Can you provide any other examples?
I was wondering why you were conflating deficit spending with increasing the money supply, then realized it was the comment that I had replied to that did that. I was focusing on the assertion that there’s some clear, simple link between deficit spending and inflation even though the empirical evidence suggests otherwise.
>> I really do not understand why most people seem to think deficit spending is not the cause of inflation. Print a bunch of money and make a lot of people millionaires either on paper or realized gains
If the government finances deficit spending through printing money, the link to inflation is clear. Printing money to finance a deficit doesn't cause inflation, it IS inflation.
But you can also finance a deficit by borrowing money rather than printing money. The link between borrowing to finance a deficit and inflation is less clear. Milton Friedman said that:
"One effect is upward pressure on interest rates, and hence, given the Federal Reserve’s unfortunate propensity to operate through interest rates, higher monetary growth. In addition, by reducing private incentives to work, save and engage in productive ventures and by crowding out private investment, high government spending inhibits economic growth so that any given rate of monetary growth produces a higher rate of inflation."
But other economists disagree, as economists tend to do, and as others have pointed out, there have been periods in the US of huge increases in borrowing during periods of decreasing inflation.
> I really do not understand why most people seem to think deficit spending is not the cause of inflation.
For one, because Japan has been deficit spending for over two decades and not only is its inflation rate extremely low, it has gone negative on multiple occasions:
In the 1980s there was huge deficit spending during the Reagan years, and yet inflation tanked (thanks Volcker). There was deficit spending during the Bush43 years, and yet inflation was flat.
> Why would their attempt to acquire anything scarce, like desirable houses, not cause the price of said asset to go up?
Because most of the time, especially in recent years/decades, money is just sitting around doing nothing:
What most money-supply-inflation people get wrong is outlined in this good analogy by Cullen Roche:
> But also – why do so many people insist that inflation is an increase in the money supply? This makes zero sense. Here’s why – our economy is mostly a credit based economy. So, if I take out a loan for $100,000 then the money supply has technically increased by $100,000. But what if I don’t actually tap has technically increased by $100,000. But what if I don’t actually tap that loan? What if I borrow the money because, for instance, house prices just went up 25% and I want to have some cash around for emergencies? This doesn’t tell us anything about prices, living standards or really anything. But this is what so much of the money supply represents – money that has been issued and is just sitting around unused. Why is this useful? It’s like calculating your weight changes by counting how much food you have in your refrigerator. No. That’s potential calories consumed and potential weight gain. The amount of food in your fridge tells you little about your future weight changes just like the amount of money in the economy tells us little about the actual price changes in the economy.
So there's deficit spending, so there's a money supply increase: so what? What is the money doing? It turns out mostly nothing (notwithstanding people going a bit crazy post-pandemic recently—though there's geopolitical effects too (thank Russia)).
“Went aren’t you saving for retirement? You could be a multimillionaire!”
1. I’ll only be a millionaire because of inflation over my lifetime.
2. Social Security is less than a decade from insolvency, just as a generation with huge swaths of people with few savings is retiring. Meaning, something will change and it’s safe enough to wait and see.
3. Saving for retirement is a luxury reserved for the folks who don’t live paycheck to paycheck. For those who do, would their savings even be enough to matter?
4. Most pensions and retirement savings accounts use the stock market to beat inflation. Maybe it’s just me, but I am extremely bearish on the stock market for the next four decades. You’re seriously telling me we’ll make it four decades without a major war, pandemic, famine, etc; and if we do, we won’t have a basic income system in place? Unlikely to me.
Those who do nothing and depend on the government to help them will not do better than those who at least try to take care of themselves. They will almost always do worse.
Not trust the stock market, or at least not that much? Diversify - something like Total Stock plus Total Bond.
Then I'll still have UBI and Social Security. And, since a wealth tax will almost certainly be less than 100%, I'll still be better off for having saved, even if not as much better off as I expected.
I'm not doubting you, but I would love to have more evidence on that insolvency thing.
I'm Gen X, and my rule of thumb is that whatever nice thing there is, I will be there just in time to watch the Boomers pull up the ladder behind them. A bit like the drinking age dropping to eighteen, then, when they had aged out of it, voting it right back up to twenty-one.
> 1. I’ll only be a millionaire because of inflation over my lifetime.
First, statistically speaking, you might only have a couple of years between statutory retirement age and some sort of an "old-age" illness that will diminish your ability to pursue hobbies, travel, and so on. All the stuff you've been putting off for later... you might not be able to do, and you will regret that.
Retirement savings will allow you to retire earlier, and they will allow you to maintain higher "velocity" after - because many of these things we're putting off do cost money to pursue.
Just as importantly, though, savings buy you peace of mind. You're no longer as stressed about day-to-day challenges, like conflicts at work, an uncertain economic outlook, or a leaky roof.
Plus, on a typical tech salary, you can certainly hit 1-2 million in retirement savings in today's money, and there are investment vehicles that offset inflation with relatively modest risk.
> 2. Social Security is less than a decade from insolvency,
People have been saying this for the past four decades. But even if it does go insolvent, do you expect government retirement benefits to suddenly become a lot more comfortable than they currently are?
> 3. Saving for retirement is a luxury reserved for the folks who don’t live paycheck to paycheck. For those who do, would their savings even be enough to matter?
If you live paycheck-to-paycheck, you can't save, by definition. The question is whether you need to live paycheck-to-paycheck. For most people on HN, the answer is a resounding "no."
> 4. Most pensions and retirement savings accounts use the stock market to beat inflation. Maybe it’s just me, but I am extremely bearish on the stock market for the next four decades.
You don't need to "beat" inflation. You just need to match it. People invest into risky stocks because they want their savings to grow faster than inflation, but you certainly don't have to. You can buy corporate or municipal bonds, you can bet on commodities, you can buy real estate, you can go for collectibles, you can buy gold bars if you want to. You can invest in a friend's business.
Finally, the whole talk of "the market" is a distraction. Unless you're buying index funds, you can choose specific companies that you're not bearish on. They might not beat market returns in a good year, but if your goal is to have confidence in your choices, it's a sound plan.
This probably shouldn't be a surprise - after all, if the oil or other basic things needed to increase production isn't there, there's no way for the expansion in production that would be needed to stop an increase in money supply from being inflationary to happen. Yet even now, there seems to be a widespread popular belief that because the cause of inflation is supply side, there's no reason for central banks to raise interest rates and they're just making things worse for no reason by doing so.