Today no one seems to care about inflation in Europe or in the US. It seems to be a subject confined to economists that every day people don’t care about, if they even understand the concept (no one under 50 has really witnessed it in their adult life). So people are all for unlimited money printing.
It is interesting to find old articles and read what people cared about at the time. Inflation was often a top concern, and politicians running their campaign on curbing it. Some old movies also refer to it (that stolen money which will melts away while you await behind bars).
Our current complacency in term of budget deficits and monetary policy will wake up that sleeping dragon.
I've been thinking about this topic more and more, and the more I study it, the more I realize how incredibly rich of a subject it is.
For example, I used to assume that monetary inflation was instant and automatic. Double the money supply overnight, and everyone will double their prices and incomes overnight too, as though all that happened was a substitution of variables.
Later I understood that it's not that simple. First, the new money doesn't get distribution in proportion to how much people own, so savings get halved. Second, contracts denoted in dollars don't get adjusted, so debts and purchase orders get cheaper, accounts receivable become worth less, and so on.
And lastly, prices aren't updated automatically by some perfectly objective value calculation. They're held in place by a combination of supply and demand, competitive forces, price elasticity, psychology, and collective expectations.
So the inflation can apply instantly in some markets but it can also take years for those changes to propagate into various other markets.
And even once the money supply stops increasing, inflation can keep going all on its own accord, once expectations become fixed. This happened in Japan in the '60s and '70s where unions demanded 5% annual wage increases to keep up with the inflation caused by every industry getting 5% annual price increases caused by union wage increases...
Right now it seems like the new money is going straight into asset prices, and that will probably remain the case until either asset holders start selling their assets to consume an absurd amount of food and gasoline, or the high price of assets starts to weigh heavily on the cost of production.
Inflation is just the realization that your balance sheet doesn't match reality. The reason it is delayed is that people can flee into the balance sheet and refuse to interact with the real economy for years. Hyperinflation is what happens when the real economy is gone. Moderate inflation is what happens when the balance sheet is slightly off. Extremely low inflation or deflation is what happens when people pretend that there is no such thing as the real economy. Think of gold or Bitcoin. All hail the balance sheet!
The funny thing about inflation is that if it is high enough to "sting" (2-5%) then people notice the missing wealth in the real world and create it to the best of their ability.
The fact that the money isn't moving, that it isn't entering the real economy is one of the greatest mistakes made by the central bank which is prevented from doing so and the government which refuses to do it for petty ideological reasons.
> This happened in Japan in the '60s and '70s where unions demanded 5% annual wage increases to keep up with the inflation caused by every industry getting 5% annual price increases caused by union wage increases...
As a gov contractor, I'm seeing this first-hand. Inflation has been tame my whole career in this industry - 2% or 3% / year; therefore, contracts of fixed length have built-in rate increases of similar percentages, and raises trickle down from there.
Most companies will give you raises a bit less than what they're getting each year in increased rates themselves - it's how they increase their own growth and executive bonuses. This can go on for a long time - 5-10 years before the employee will really notice they're falling behind peers who've just been hired or general market rates if they were to jump shit.
But when real inflation is running 7%-10%, the wage disparities between new hires & contracts and existing employees & contracts become evident quickly. For example, I'm discovering that new engineers with far less experience and talent are being hired on for $20K - $40K more than I make, all else equal.
Which forces me to start looking for new employment or ask management for a raise, neither of which is desirable.
and on the day you need to buy groceries, bitcoin suddenly tanks 50%, leaving you with scraps to live off, or you hold out eating food until the price recovers.
Right. If you double the money supply by dropping interest rates, the people with the new money are the credit worthy people who can afford to take out new debt(though mostly companies). The things that those people demand are what rises in prices. This is the Cantillion Effect, basic supply and demand flows.
Since the people who can take out new debt are wealthy, the things that the wealthy buy go up. They don't need more apples, so the demand for apples stays the same, and the prices of apples stays the same. Instead they take that debt and pour it into the market(mostly buybacks) and other savings. So we don't end up seeing consumer prices change much.
Each person is attempting to maximize their long-term utility, and so long as inflation stays in check their best option is to keep it in the market growing ever more. Money is useless if you can't eventually spend it for utility. Each billionaire/company is planning what to do with their wealth. Some will create rockets, others will fund disease research hoping to get their name into the history books. It's always and will always be about the utility.
Like the Martingale Betting System has shown, you can not remove the risk by shifting the betting sizes around. As the money supply increase more "energy" is added to the system. It becomes harder and harder to control it. As it increases, the power of each individual to effect the entire system increases. In the 1970's the richest person had $6B, now the richest person has $177B, an increase of 30 times. By 2170 the richest person could have 30x that.
If there is a reason to believe that selling their stocks will yield greater utility, then the wealthy would figure it out, and the first person who acts would win(like what happened with the banks handling Archegos), second would do worse, most would get wiped out, including all the non-wealthy. It would be like a dam collapsing all at once. Sometimes all it takes for the dam to burst is a small trickle. But all that energy was always being stored in the reservoir.
But you better believe that the Fed understands this, and is doing everything in their power to keep the system under control. The problem is though, they need for investments to be the biggest long-term utility creator, but that only increases the energy. The more they keep it going, the more unstable it becomes.
And borrowing money to spend on consumables like apples is clearly risky borrowing. How will you pay it back once you've eaten the apples? So the lender is very strict and the rates are high.
When you borrow money for an asset, it looks safe. You aren't spending money you don't have. You haven't really spent anything; you can always sell the asset to repay your debt! And in the meantime, you reap the gains as the asset goes up. So mortgages are cheap and the lender works hard to help you qualify.
But like you say the risk can only be shuffled into bigger gambles, not removed. You can't make risk-free money by borrowing money cheaply to buy growing assets forever. If the assets are increasingly bought with debt, then their price will correlate inversely with the cost of borrowing.
So right when borrowing gets expensive and you want to sell your assets to pay back your debts, the asset price also drops because everyone else is doing the same thing. It's very hard to de-risk because almost every asset ends up correlated to the same thing: the debt that people are buying those assets with.
I do believe the Fed understands this (and more relevant to me, the Bank of Canada). They know the game they're playing, and I think they're very good at it. And they know the psychology.
They believe the economy will be better off with a period of transient inflation that levels off, because it will get oversized debts down. They're hoping they can hold off on rate increases before that happens, so that rates don't go up until debts are under control. And they're hoping the lenders will go along with it.
Here in Canada we're seeing pseudo interest rate increases via the "stress test", where you have to prove you can afford a 5.8% mortgage in order to get a 2% mortgage, because the government needs to keep debt servicing costs low as they inflate them away without incentivizing everyone to load up on even more of them. That net doesn't catch everybody, but it should protect the most vulnerable. It's a very delicate balancing act. I don't know if it will work.
> (no one under 50 has really witnessed it in their adult life)
Akhem, there are places outside America. I still have the postage stamps for 100,000 monetary units from the late 1980’s and early 1990’s Yugoslavia in my mom’s basement somewhere.
My parents’ tales of ridiculous mass inflation have been etched into my brain. I was too young to remember, but the spectre loomed large. Especially in the mid 1990’s when the rest of Yugoslavia set the world record for monthly inflation that still stands today. Luckily we were our own country with our own money by then.
Zimbabwe could have implemented a land value tax on farmland to achieve its goals to undo colonization, instead they violently drove farmers away and then they could no longer feed themselves. Zimbabwe was just another victim of Marxism, to be more precise anti colonial Marxism.
Imagine if the president of the USA decided to solve the homeless problem of the black population by pointing guns at white homeowners and forcibly dragging them out of town. It's clearly unsustainable.
There might be truly disgusting capitalists like martin shkreli on this planet but they don't attack you directly, they merely deny you your fair share of the wealth you have created.
People don't care about inflation specifically, but they do care about how it is affecting them. For example, lots of people seem worried about getting priced out of buying a home these days, which inflation has certainly contributed to in a big way.
Its cheap credit that drives up home prices. Historically low interest rates are driving historically high home values. We are currently in some kind of home price bubble which will change when interest rates change. Zillow and recent sales say the value of my home is up 20% in 9 months.
Last year a dozen donuts at the local family run shop was $9, this year it is $12. My daughter's specialist doctor raised the cost of an office visit by 30% this year. The cost of a burrito at my favorite spot is up 25% in two years. I could go on. I care about inflation, and it is real.
People can afford those absurd home prices. The bigger problem is that the previous owner of the land gets to extract a huge chunk of your labor by simply by owning the land.
Value is still shifting somewhere. Lower rates can force you to borrow more total value to outbid your peers, allowing the bank to extract the same or more value out of you. Same with taxes entering the equation.
I don't reckon any monetary distortions benefit the common people. Society benefits from money being a reflection of labor as much as possible. Everything else is extraction of value.
In Canada at least, primary residences are capital-gains exempt.
Mortgage payments are typically almost constant with respect to interest rates, because the monthly payment is what tends to climb to whatever value the market will bear. Instead, the home value itself goes up and down inversely with rates, such that the monthly payment remains approximately unaffected by a rate cut.
Probably because inflation has never been particularly bad post-QE. We had inflation north of 10% in the 70s, it’s averaged a couple of percent in the last two decades.
Also, despite what the Fed probably wants you to think, QE is not money printing, it is a duration swap between different forms of existing money.
When the Fed does quantitative easing, they swap bank reserves for bonds held by banks. These bonds are economically equivalent to money which cannot be spent until a certain date, so the Fed is effectively just bringing this date forward.
You see, you can't pay rent or buy groceries with bank reserves but they sure do make it easier for banks to lend money. Someone has to borrow money before it can be spent.
I would also like to mention that the fiscal stimulus by the Biden administration had the intended/usual effect. You know, the thing that QE couldn't create: inflation. If there is an effective tool then the defective tool that distorts the economy can be thrown away.
These low rates only seem to help the wealthy, and prop up an overvalued stock market.
While the wealthy see their stocks skyrocketing, the poor and middle class just see higher living costs. I guess if you can afford a house the low interest rates are nice?
In the 90's I used to get $400 a year on my sweaty cd wad. (I can't afford to gamble with stocks.)
The other day I took out a few thousand from my cd, and was concerned about the early withdrawal which is tied to current interest accumulation. The fee was 49 cents.
Personally, I feel the reason the fed tax rate is so low is because Powell knows this stock market is truly a house of cards. Most business are way overvalued. He's scared to death
it will crash on a scale that won't be as bad as '29, but the wealthy will lose most of their cash.
I have never seen a bull market go on for this long.
Almost in every other I have watched the professional stock boys wait until the last retail investor put in his last dime, and they pull all their money out.
I felt it was doing to implode a few moths ago with all the NFT's, and glamour puss celebrity SPAC's being pimped, but no.
I feel if that hastily put together, nebulous, pork filled 2700 pages, infrastructure bill, which seems like it will basically be a gift to contractors (like Ghilotti Family syndicate types). It will produce very few union blue collar jobs that will not last. If it does pass we might not see a big stock market crash for a bit longer, but it's coming.
Instead of the Infrastructure bill, I would rather see a Basic Income. Poor people who didn't work got nothing out of the pandemic money. Homeless got nothing out of the handout.
Let's do the infrastructure spending when we have a clue to where the money is going?
Ok--to those who can't afford to lose money, get your money out of those overvalued stocks.
The crash is coming.
(Sorry about the rant. I have watched the stock market decimate the little guys over the years. The wealthy slowly pull out, but the retail investor gets whacked.)
> I wish the fed would raise interest rates
...
> The crash is coming.
i have heard it said raising interest rates would actually be the instigator of a huge crunch/crash
reason being that for the last 10 years or so, companies all over have been soaking up "cheap" capital from what is basically basically zero interest loans
these debts are what is keeping those companies floating/alive, and if rates were increased even a bit, it could be devastating by causing a quick succession of bankruptcies (supposedly this was why trump was so angry at the fed for pondering raising the rate)
anyways, im not an expert, but it seemed plausible...
Most folks are in mortgage and consumer debt and have little wealth. Higher inflation mostly impacts people with wealth.
Look at what’s happening now. Lower income folks are getting life changing payments of just a few thousand dollars in the US that is causing increase in services costs.
Wealthy people own assets that keep up with inflation. They may have 10% in cash which doesn’t keep up with inflation but in general most of their holdings either keep up or outperform inflation. Poor people have wages that don’t keep up with inflation unless they start job hopping. The poor are typically more affected by inflation than the rich.
Those who have borrowed money benefit from inflation though. If you have student loans or a mortgage, high inflation can work to effectively reduce how much you owe if salaries/wages go up with inflation.
For example, inflation typically triggers interest rate increases. If your debt is fixed rate that's fine, but if it's not, it might get more expensive more quickly than you expected, and your wage increase might not cover it.
>no one under 50 has really witnessed it in their adult life
I had a car loan in the early 21st century, and the rate was about 6%. It didn't seem that bad at the time. I think I remember when the bank paid 4% on savings accounts in the 80s or 90s.
That's not to say inflation was very high in my lifetime, but it took a long time for people to get really complacent that it wasn't coming back, and super low (or negative) interest rates are quite recent.
It's only been about 40 years since 30-year mortgage rates were over 18%. Someone in their 40s may not remember it first hand, but they probably have a sense from the older generation that is a thing that happened.
> no one under 50 has really witnessed it in their adult life
The inflation rates aren't too bad, but $10k can't get you a (very lowend) new car anymore, like it did when I graduated. Speaking of graduation, looking ahead to college prices for my kid, sticker prices are easily the price of a whole 4 year degree when I went for every year.
If we include my childhood, arcade games used to be a quarter; the last arcade I was in, even Pac-Man was 50 cents, let alone the dollar or two dollar games that were more modern.
Well, while the printing machines were running, the zeitgeist was fully occupied with Covid-19, BLM, a short episode of anti-Asian racism toward the end, Trump's vulgar attitude, ...
Now that the harm is done and the money circulating, the media is slowly starting to shine some light on the topic.
Although that could push one toward conspiracy theories, as per Hanlon's razor we shall not attribute to malice that which can be adequately explained by stupidity. The media probably just got distracted as we all were.
Maybe in the west, but us from ex Yugoslavia and other comunist/socailist(the bad kind) countries, do care about inflation.
And I suspect economists are manipulating how they calculate inflation, since I am creature of habit and mostly buy and consume same things for the past 15 years.
Prices are going up significantly. Some of it might be due to global shipping increase, but over all my total spending on consumables has increased to between 15% and 20% in the past 2 years.
Perhaps inflation was a concern in an economic system where 1) A physical commodity (Gold) was the store of value, and 2) Debt was not easily accessible.
Neither of these are true anymore and inflation now will be a reflection of true scarcity of a good / service (e.g., housing) as opposed to the transaction costs associated with procuring it...
It is interesting to find old articles and read what people cared about at the time. Inflation was often a top concern, and politicians running their campaign on curbing it. Some old movies also refer to it (that stolen money which will melts away while you await behind bars).
Our current complacency in term of budget deficits and monetary policy will wake up that sleeping dragon.