Inflation is at a 40 year high. What can history teach us?

https://yarn.pranshum.com/

by pranshum • 4 years ago

198 524 4 years ago

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seydor7• 4 years ago

Weren't the high inflation years also some of the most progressive, with some of the lowest inequality in recent decades?

missedthecue3• 4 years ago

Who wants the poor to be poorer so long as the rich are a little less rich? How is that a good thing?

seydor7• 4 years ago

Is that meant to be ironic or not? It is a fact that [real] incomes have not risen for decades, and now , at least in europe, we are facing catastrophic consequences

https://www.newyorker.com/news/john-cassidy/pikettys-inequal...

lazide4• 4 years ago

I personally didn’t get that from the highlight reels of the mid 70’s and early 80’s.

Mostly it was the total chaos, riots, and unrest.

They were also immediately followed by Reagan, who wasn’t exactly a shining beacon of progressivism.

But there were a lot of changes during that time, many that could be considered progressive, mixed in with (or perhaps the reason behind?) the chaos. A lot of folks don’t like change, after all.

seydor7• 4 years ago

total chaos, riots, and unrest

looks like we come full circle

digdugdirk• 4 years ago

... As opposed to the chaos, riots, and unrest that was the 60's?

gumby6• 4 years ago

They were also immediately followed by Reagan, who wasn’t exactly a shining beacon of progressivism.

Reagan benefited from Volker, and Carter chose Volker knowing that it would probably cost him re-election.

Reagan then squandered the benefit, but is now worshipped as some sort of prelapsarian god. Let's hope the US can slough off that nonsense soon.

WalterBright38• 4 years ago

Mostly it was the total chaos, riots, and unrest.

Total nonsense. Source: I lived through the 70s.

mc325• 4 years ago

I gotta say, I should not be surprised at people advocating for inflation. But I am. High inflation has been the boogeyman, foe and underminer of economies world-wide, left-leaning and right-leaning, so I didn't see it coming. But here we are, people advocating for the erosion of purchasing power!

But, if it were a wining combination I guess we can expect Biden to embrace Inflation, Advocate for it and pronounce that he will redouble efforts to accelerate inflation so that we can all look forward to a better economy and better future with High Inflation.

This is WILD. I can't believe my eyes. Despite the Zimbabwe, Brazil, Turkey, etc., experience, people are making the case FOR inflation? My word.

avgcorrection3• 4 years ago

You are not saying anything.

ForHackernews3• 4 years ago

Assuming wages rise (they are), debtors benefit from inflation as their debts become less onerous in real dollar terms.

Most Americans are debtors.

bequanna2• 4 years ago

I don’t understand your second paragraph.

Are you saying: “If inflation is good, Biden will support more of it”?

nsxwolf• 4 years ago

Print lotsa money, get lotsa inflation.

ForHackernews3• 4 years ago

Yes, but why now?

They have been printing money for a long time.

This is a question I have never seen these inflation hawks answer: If printing money triggers inflation, why is there a 14 year lag on that effect?

bsaul2• 4 years ago

It took a bit of time to compensate the destruction of value that occurred in 2008.

joycian3• 4 years ago

Balance of payments.

Syonyk7• 4 years ago

This is a question I have never seen these inflation hawks answer: If printing money triggers inflation, why is there a 14 year lag on that effect?

The argument I've heard, though am not well enough equipped to fully analyze, is that the created money was going into overseas accounts as various nations tried to accumulate the global reserve currency - dollars - to purchase oil and other products that were generally traded in dollars. As long as that remained the case, an awful lot of dollars could be printed, spent, and ended up squirreled away elsewhere not really having an impact (velocity of money and such).

Now, though, that arrangement is ending - in no part due to the US abusing our financial system to control what everyone else can or can't do (see Visa's opinions about what industries they'll serve for an example, also SWIFT, global sanctions, etc). So other countries are making other arrangements that don't involve dollars - I'm pretty certain dollars aren't involved in the Russian oil sales to various other countries in their sphere anymore. And any reasonable country that isn't heavily tied to the US has to be figuring out how to move off dollars.

So now those all come home to roost, and combined with the lack of things to buy, we see the nasty inflation we're getting.

I'm not certain how well it holds up if you really dig into it, but there are certainly people answering your question if you actually go looking for how it's being answered.

jrm45• 4 years ago

I do find that they're pretty bad at the whole picture. I'm guessing it has much to do with remembering that "money" isn't at all valuable, "goods and services" are. So this is pretty far from a science; but if there's reasonable "optimism" or more precisely "good churn in economic activity," the effects of inflation will be dampened.

merely-unlikely6• 4 years ago

If I could answer that definitively I'd be crowned Chief Economist but one explanation that is frequently posited is the US (and Western Europe to a lesser extent) has effectively exported inflation. US runs a trade deficit but that imbalance is made up for by being the global reserve currency. International transactions (especially oil) are denominated in dollars generating demand. And our trade partners like China invest in dollar denominated assets (ie US treasuries) making up for the trade imbalance.

Since the USD is a safe haven currency it has held up extremely well relative to other currencies recently. The UK just ran into the limit of loose fiscal policy which imo is a commentary on the extent of their decline as a world economic super power and demand for/perceived safety of GBP.

patricius• 4 years ago

There was no lag. You just didn’t see dramatic price increases in consumer goods. But you saw substantial increases in the price of stocks and real estate for instance. Also in healthcare and education.

Now new money is being spent on consumer goods while supply of goods and services have been severely restricted during the corona panic. Of course soaring energy prices is now also contributing.

mixmastamyk4• 4 years ago

1) There has been inflation, but partly hidden from everyday folks.

2) They turned up the printing 10x.

zhoujianfu2• 4 years ago

I agree.. I think the excess money goes to two things: speculative assets (i.e. supply constrained), and actual goods and services (not supply constrained... more demand results in more being created).

The money printing of the last x years has arguably resulted in asset price bubbles (housing, stocks, real estate), but didn't cause "inflation" because if e.g. people buy more nintendo switches, nintendo just makes more nintendo switches at the same price.

What happened recently was supply chains / workforces got disrupted by covid (and possibly protectionist trade policies)... and then covid "ended" and demand rebounded to 2019 levels, but supply takes longer to ramp back up. That, coupled with Russia's attack on Ukraine and the decrease in the supply of energy, caused a spike in actual goods/services prices.

Raising interest rates serves to pop the asset bubbles (and already has), but I think only time will solve the supply chain / energy restriction-caused "actual" inflation.

missedthecue3• 4 years ago

I think a lot of people just assumed that QE 2009-2022 was adding to the money supply, but any impact it had just pales in comparison to covid relief funds, which were $6 trillion in less than two years. Look at this graph of the money supply.

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

mc325• 4 years ago

Apparently the history of Weimar, Zimbabwe and Turkey don't provide proof enough that high inflation is bad.

seydor7• 4 years ago

theres a difference between high inflation and hyperinflation. which developed country had hyperinflation? (even turkey doesnt have it)

m0llusk4• 4 years ago

In 2008 lots of money was printed in response to the crisis and there was minimal inflation and the excess was reeled in as the economy came back. Over simplification is a distraction.

DoingIsLearning2• 4 years ago

Is there a historic precedent for Quantitive Easing?

Is there a historic precedent for Quantitive Tightening?

We have been at it since 2008 that means there is little historic data to draw any preemption from, we are on unchartered waters at this point.

joycian3• 4 years ago

Not that uncharted, perhaps. You can look up the Amsterdam banking crisis of 1763.

https://en.m.wikipedia.org/wiki/Amsterdam_banking_crisis_of_...

pphysch• 4 years ago

A major aspect of QE is creating artificial demand for USTs (the Fed becomes a buyer), i.e. price support in the wake of the GFC. That is intimately related to the USD as global reserve currency, which is not something there is much historical precedent for.

In the past, reserve currencies died for many compounding reasons. QE is a novel scheme to prolong the USD's life as a reserve currency, and is only possible due to modern financial technology. It's definitely not sustainable and can only prolong the inevitable crash in demand for USTs as faith in Washington continues to wane globally. Kicking the can down the road.

blevin• 4 years ago

It depends on your admissible vintages for historic precedents. The Bank of Japan has been doing Quantitative Easing for over 20 years and has also extended it to include ETF share purchases.

Rury• 4 years ago

QE and QT aren't really anything new. They're mostly just modernish terms given to old ways of doing things.

What is unprecedented is hitting 0% interest rates nearly everywhere worldwide. When things hit this point, economies are forced to deleverage, to which economists refer to as an 'economic deleveraging'. National economies have gone through deleveragings in the past, and has so far played out in 3-4 ways:

-a period of high inflation (which sometimes lead to the collapse of the currency)

-a period of deflation (either via a bear market, or a rapid crash)

-a long period of almost 0 economic growth (stagnation - AKA 'the soft landing').

-some degree and combination of the above 3 scenarios.

WalterBright38• 4 years ago

History teaches us that inflation will continue as long as the government keeps printing fiat money with no backing.

For a historical example, the Confederacy had high inflation. The printing press was in Richmond. When Richmond was threatened with a siege, the Confederacy hustled the printing press out to get it to a new, safer location.

Confederate inflation paused during the move.

The reason is pretty simple - the Law of Supply & Demand. The more currency there is flooding the economy, the less value that currency has.

foobarian5• 4 years ago

History teaches us that inflation will continue as long as the government keeps printing fiat money.

Of course, that is almost a tautology. The devil is in the details. No inflation is bad because the economy stops. High inflation is bad because of erosion of purchasing power and negative impact on nearly every participant in the economy. So what do you do to get that sweet spot of about 1-2% inflation? I'd say raising interest rates was a pretty good start, if a bit late in the game.

kelseyfrog2• 4 years ago

Why are interests rates as a money sink preferable to the more direct approach of simply sinking money out of supply via tax? They seem to amount to the same thing at the end of the day - siphoning dollars out.

ryanisnan• 4 years ago

I'm not very versed in economics, but can you explain "No inflation is bad because the economy stops."?

virissimo• 4 years ago

No inflation is bad because the economy stops.

How much net inflation was there in Europe between the Napoleonic Wars and the start of WWI? Do you think "the economy stops" is a fair description of this time period?

WalterBright38• 4 years ago

Of course, that is almost a tautology

Inflation lags the money printing, so it isn't a tautology.

So what do you do to get that sweet spot of about 1-2% inflation?

I'm amazed that propaganda of a sweet spot gets so heavily embedded into the popular wisdom.

If there is a sweet spot for inflation, it's 0%.

Note that the US had net 0% inflation from 1800-1914, while growing from subsistence farming to superpower.

sidewndr464• 4 years ago

I've never heard anyone tell me they were going to quit working because the US government wasn't printing money fast enough.

I have heard people tell me they weren't making enough money to cover their expenses on a month-to-month basis as a result of cost increases. These happen to correlate with inflation.

There is no way an economy would stop just because there was no inflation. Would Microsoft suddenly decree that if the US government won't print US dollars, it won't sell you a Windows license key? Even in the case of extreme deflation, it only becomes an issue when you have people trying to do weird things with physical currency like cut a penny into 1/4s and use it to buy different goods.

Consultant324522• 4 years ago

Have you ever noticed you get raises roughly based on last year's inflation and not an estimation of next year's inflation? When the money printers print the people who touch the new money first get to buy assets before the price inflation occurs. Then, once the new money eventually circulates to the peasants, they get to use it to buy goods and services at the new, higher prices.

Inflation is a wealth transfer from the poor to the wealthy. It is not, by any means, necessary.

https://mises.org/wire/inflation-its-wealth-redistribution-s...

ForHackernews3• 4 years ago

Ok, but why now? Why not 14 years ago, or 10 years ago, or 5 years ago? We've been in a zero-interest-rate, QE world for quite a while.

Somehow I do not think it is as trivial as your 8th grade econ textbook might suggest.

rnernento2• 4 years ago

I don't think you realize just how much of the money has been printed in the last 2 years.

See fed balance sheet over time: https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

See M2 over time: https://fred.stlouisfed.org/series/M2SL

7speter• 4 years ago

No one wants to talk about the actual problem, and will blame government printing money. What’s different now from any point in the last 12 years is that we are at full employment. Going over that causes the economy to overheat. As a study partner for an economics course put it (he took more economics than I did): too many hands competing for goods, the prices go up.

joycian3• 4 years ago

I like that you're asking for the mechanics. Many people just repeat their mantras.

If QE led to inflation quickly and in a simple way, we could have known that long ago. We didn't even have to do it ourselves: Japan did the experiment long before we did.

If you know, please explain it to me.

prottog2• 4 years ago

The price of anything that can be converted to a monthly payment, which is most things in this highly financialized economy, inflates when the interest rate is artificially suppressed. The CPI understates that kind of inflation because it looks at the monthly payment, and not the final price. So there are plenty of things like houses or college degrees that have inflated a lot more than the CPI in that "quite a while". There is no reason to believe that the value of money is immune to the law of supply and demand.

Besides, if you have an argument to make, you can make it without calling somebody an 8th grader.

BitwiseFool• 4 years ago

I have only a layman's understanding of financial markets, so keep that in mind.

The explanation I've heard is that most of the QE in the 2010's was metered out in such a way that the average person wasn't receiving funds and the money wasn't quickly and directly going into the economy. The post 2008 QE purchased troubled assets and freed up institutions to lend money. It could be said that most of that QE money wound up in stocks and assets such as real estate, which is why valuations were going so crazy over the last decade while consumer goods stayed relatively flat.

All of the Covid stimulus, loans, and bailouts were different because so much more of that money went directly into the consumer economy. Price increases were exacerbated because of supply chain disruptions, needing to recoup losses from lock-downs, and the price hikes due to raw materials shortages. There is also a self-fulfilling prophecy that inflation is both higher than reported, and that our officials are lying to us about how bad the problem is. When everyone else is raising prices, it is a lot easier for a business to follow suit.

That's the explanation I've gathered while trying to understand the question and it seems reasonable to me. It may be entirely wrong, however.

jollybean9• 4 years ago

Because we just went through a massive existential shock with COVID, in which the Fed took on a staggering amount of assets i.e. liquidity - and - we've had material global problems which cause major increase in the cost of goods and fuel.

In 2008 we had a 'banking crisis' but that was an 'accounting crisis' otherwise the economy was normal. We had to re-allocate.

With COVID, we had a real shock to the system, and then lasting shocks due to increased prices.

So both the money printing and regular higher prices are coming back to hit the economy.

marcosdumay4• 4 years ago

Have you noticed that every investment instrument saw its price go up, and up, no stop, until it had no relation to how much return it would get you, or how much money the people that wanted it for using in a secondary market could spend, and then it kept going up the same way for 2 more decades?

Yep, that's inflation too. But since the money was mostly circulating there, and the official measurements of inflation don't look at investment, it didn't make into the news.

The really good question is why the money was contained there. I don't have a good answer for it.

lagrange774• 4 years ago

History teaches us that inflation will continue as long as the government keeps printing fiat money.

That's what you hear a lot, especially these days.

But is it really true? What exactly is the signal path, that leads from more money to a higher inflation? I guess, there is a fair amount of psychology involved.

rnernento2• 4 years ago

I mean it's pretty straightforward right? There are now more dollars in play all after the same amount of goods, each dollar has less purchasing power. Why are you so quick to throw out the simplest explanation?

nichohel2• 4 years ago

The "signal path" is simply the presence of more money, which means that purchasers have more money to pay.

zie8• 4 years ago

This is a very simplistic viewpoint. One could also argue that Inflation happens when people don't trust that their government will pay back all the money borrowed.

The US govt has been on a spending spree as of late, but hasn't yet bothered to mention how they are going to pay for it.

In 2008/2009, the US govt was also on a spending spree, but did promise to pay the bill eventually. Inflation didn't spike in 2008/2009.

The bottom line is, nobody really KNOWS, we just have guesses. My guess currently fits all the facts, where yours does not, but that doesn't mean my guess is right, but perhaps it's more correct than your version.

dasil0032• 4 years ago

There’s also a tipping point where inflation is self propelled because everyone is used to it so they just proactively raise prices on a regular basis. I experienced this growing up in Brazil in the 80s and 90s. It’s hard for Americans to relate, but essentially the mentality is spend/invest every penny you get before it loses value. Took some creative policy to break the cycle: https://en.m.wikipedia.org/wiki/Plano_Real

jnwatson• 4 years ago

We have very educated guesses.

The primary difference between 2008 and now with respect to monetary policy is money velocity. Increasing money supply is a necessary but insufficient condition for inflation.

In 2008, much of that money sat uninvested, so it didn’t impact the price of goods. In 2020, most of it got used to buy and invest.

WalterBright38• 4 years ago

perhaps it's more correct than your version.

My version has lots and lots and LOTS of history backing it up.

Did you know that the US had inflation when on the gold standard during the California and Yukon gold rushes?

Did you know that Spain experienced massive inflation during the period when they were shipping the silver in S. America across the Atlantic?

I could go on and on.

One could also argue that Inflation happens when people don't trust that their government will pay back all the money borrowed.

This sort of thing happens with private banknotes, which would trade at a discount based on the level of trust. But that is a one-time discount, not a cumulative process.

W3cUYxYwmXb5c• 4 years ago

Monetary inflation is the increase in the money supply. Price inflation is one of the potential symptoms of monetary inflation. Too often people look at just one symptom to gauge the occurrence of the cause. Currently we are experiencing both, but people seem to want to ignore the inflation of the money supply, and scratch our heads over every other variable that affects prices.

roenxi• 4 years ago

There is no reason to believe the situation is complex. The value of money is changing because the authority that controls money is changing it.

Nobody understands the economy. But we can be pretty sure that it isn't the economy destroying the value of the dollar, because there is no reason for consistent annual inflation to be happening. If anything, in the absence of money creation, we should be seeing deflation because of technological improvements. Short term wobbles, sure, maybe even sometimes a few straight years of inflation due to exceptional conditions. But that isn't what is happening.

The only thing that can have caused the dollar to lose value consistently is creating new money. Otherwise we'd see it regularly snapping back to normal value with deflation. Which, in my lifetime, I think may have literally never happened.

tsimionescu9• 4 years ago

You keep claiming this, but it is fairly obvious that prices can be forced up by factors that have nothing to do with the money supply - most notably, constrained supply in basic raw materials (especially oil and its derivatives) can force virtually all prices up, regardless of the amount of currency available.

WalterBright38• 4 years ago

Since you know all the obvious answers, try these on:

1. Where does all the money come from to pay for increased gas prices?

2. When gas prices go down (and they often do go down by multiples), why doesn't deflation happen?

marcosdumay4• 4 years ago

Not all prices at the same time.

sbf5013• 4 years ago

The more currency flooding the economy, the less wealthy the rich people are. Inflation occurs because the owners need to remain wealthy, hence prices go up everywhere. If it were possible for the top few to do with a little less, prices wouldn't have to skyrocket.

seer-zig• 4 years ago

I disagree about framing it as the top few. I recommend you look into Islam's Zakat system for something that actually works, and is fair across the board.

merely-unlikely6• 4 years ago

I'm skeptical of that claim since the rich hold more assets than dollars. To the extent inflation hurts the economy then your claim is true but that is a second order affect. All else equal, inflation can simply lead to asset inflation in which case the rich maintain their wealth.

In economics circles inflation is generally considered a tax on the poor who only hold cash and whose wages are slower to rise vs price inflation.

WalterBright38• 4 years ago

Inflation occurs because the owners need to remain wealthy, hence prices go up everywhere.

The fun thing about HN is I hear all sorts of unique economic theories not found in any econ book.

P.S. If the wealthy (or everyone else) needs more money, and just raising prices will work, why don't they do that anyway? The answer is Supply & Demand, it's the Law, and is in every econ textbook.

jollybean9• 4 years ago

No - this is completely false.

As an economy expands, it needs more currency to facilitate growth.

A 'very hard currency' would strangle an economy with ugly deflationary issues.

Moreover - with a 'hard currency' the system will fail and collapse when it faces an existential shock such as an internal failure (bank collapse), war, pandemic.

The objective is to provide 'the right' amount of liquidity for the economy as needed, and, during times of crisis to be able to release enough liquidity to see the economy through the crisis.

Yes, the 'price will be paid' in later years for excess liquidity in terms of higher prices, but that's not necessary a bad thing, it's just accounting. It depends on the distortions. If the community accepts that 'yes, resources needed to be diverted to pay for xyz' then that's 'the cost' and it's going to be borne out in higher prices.

And yes, if Central Banks print wily nilly and provide too much supply this will result in hyper inflation.

But fundamentally, this idea that fiat = untenable is completely false.

WalterBright38• 4 years ago

A 'very hard currency' would strangle an economy with ugly deflationary issues.

https://news.ycombinator.com/item?id=33087419

wpietri7• 4 years ago

History teaches us that inflation will continue as long as the government keeps printing fiat money with no backing.

You do realize that the US has had fiat money for decades, right? Including our longest period of low inflation, a run of nearly 4 decades. So it would seem history teaches us the opposite.

"For every complex problem there is an answer that is clear, simple, and wrong." -- H. L. Mencken

WalterBright38• 4 years ago

You do realize that the US has had fiat money for decades, right?

Yes, since 1914 when the US switched to fiat money.

Including our longest period of low inflation, a run of nearly 4 decades

The US had zero net inflation from 1800 to 1914. How much net inflation do you think happened in those 4 decades? What would a 1914 US dollar be worth today?

I'll help you out. $29.92

https://www.usinflationcalculator.com/

anon2915• 4 years ago

This is not obvious at all. 'decades' is a short term in the history of money. It is perfectly reasonable to believe that switching to fiat causes low inflation in the short term but results in long term hurt. I feel if anything, the past few years should have taught us that things that seem easy or prudent in the short term can lead to long-term issues. Why is it such a stretch to believe that about fiat.

Either way I don't think 'decades' should be used as evidence that any monetary policy is good. We can reconsider if we get to centuries.

boole18545• 4 years ago

History teaches us that inflation will continue as long as the government keeps printing fiat money with no backing.

The government (to be correct we should say: the Federal Reserve) has not been "printing money" for around a year now. Monetary base has actually declined by ~12% in that time:

https://fred.stlouisfed.org/graph/?g=UrKo

WalterBright38• 4 years ago

Issuing debt is the same thing.

vkou• 4 years ago

Inflation will continue as long as the economy grows. If you want to experience deflation, all you need to do is start shrinking the real economy over the long term, and make everyone else aware of it.

You'll also shut down lending, strangle spending, and remove all incentive to invest, but fortunately, the dragon hoard of cash that one has hoarded will start increasing in real value year over year.

JamesianP7• 4 years ago

You can also cause deflation by increasing productivity, which happens in a growing economy. More competition finds more efficient ways to produce.

imtringued16• 4 years ago

That can't explain the era of extremely low inflation and it can't explain what is happening in Japan. It also cannot explain the Wörgl emergency money.

gizmo2• 4 years ago

The "extremely low inflation era" was also a time of very high inflation in long duration assets. It was an era where we saw one company after the another being valued at over a trillion dollars. It was an era where startups without revenue could get 30bn valuations based on hot air and fanciful renderings.

Printed money has to go somewhere. If it just sits somewhere it doesn't do anything. If it goes to investments you'll see inflation there. If it goes towards goods you'll see prices rise there. For inflation it doesn't matter whether you have a lot of money flowing at a low velocity or a smaller amount of money flowing at a higher velocity. When velocity of money drops because people are worried about the future then you can print money to compensate without producing inflation in either good/services or the stock market/real estate. During a stock mania velocity of money increases and idle money turns into investment money with asset inflation as a consequence.

Wörgl -- economy suffered from too little money in circulation. Printing money fixed it.

Japan -- economy has been stagnant for decades. Printing or borrowing at near 0% is fine for them because idle money doesn't do anything. When the Japanese economy starts growing again and velocity of money increases they'll get inflation, just like everybody else. Having no growth and a flat stock market for 30 years is not a good place to be at.

It's all monetary, but the effects aren't immediate. Prices rise only when it's known the market will support these higher prices, and this price discovery takes time.

compumike• 4 years ago

It may also help to see the cumulative inflation picture: https://totalrealreturns.com/s/USDOLLAR?normalize=end (disclosure: my side project)

The 1974 and 1980 peaks from the article correspond to the steeper slope regions in those same years on my graph. (I'm plotting 1/[CPI-U price level], while the article is plotting d/dt [CPI-U price level])

On my y-axis is the purchasing power of a US dollar, relative to current level. So when the y-axis shows 9.813 on 1962-10-04, this means that sixty years ago, a one-dollar bill would buy a basket of goods that today would cost $9.813.

It certainly "feels scary" when the purchasing power is eroding quickly (i.e. a fast-declining slope on my purchasing power graph, or a peak on the article's year-over-year derivative graph).

All data from BLS: https://www.bls.gov/news.release/cpi.nr0.htm

rdtwo2• 4 years ago

Yeah but that’s not the whole picture… in 1962 the ford truck was $2000 now is around 40,000 so while a new one is better you still have to earn 2x as much to get the most basic one available

zeckalpha• 4 years ago

They also last much longer

tcbawo• 4 years ago

I think a new 2022 Ford F-150 will run closer to $60k.

mrb2• 4 years ago

When I go to ford.com and look at their basic truck, the 2023 Maverick, I see "starting at $22,195". So if a 1962 truck truly sold for $2000, the inflation seems to account for entirely the price increase. And I'm pretty sure everyone will agree a 2023 Maverick is superior to a 1962 F-100 in every conceivable aspect.

Housing and healthcare are better examples of goods or services whose prices have increased faster than CPI-U.

washywashy• 4 years ago

And most people rarely need a pickup truck for its specifically design utility. They likely just want a safer car which is essentially an arms race at that point. I think less pickup trucks on the road would be a good thing considering how the majority of people drive.

arcticbull• 4 years ago

You can't just pick one single item and consider it 'representative' of inflation. [1] Some things cost more than they used to, some less. Cars happen to have tracked very well.

[1] https://ritholtz.com/wp-content/uploads/2018/02/pricechanges...

zie8• 4 years ago

I haven't dug into everything you are doing, but the biggest flaw I see seems to be that you assume Cash returns 0% nominal, i.e. that there is no return for holding cash. That is only true if you hide it under your mattress(and no deflation happens). Most people do not hide money under their mattress anymore, especially if they have large amounts of it. They put it in a bank account or in a MMF or some other interest producing place.

Since 1972, Cash has a real return of 0.53% (inflation adjusted):

https://www.portfoliovisualizer.com/backtest-asset-class-all...

xapata3• 4 years ago

Yep, always need to pick your risk-free asset for comparison.

consp• 4 years ago

Doesn't that practically mean the rich get richer and the poor stay poor? If it would be net 0 everything would stay the same?

collegeburner• 4 years ago

nice site you built. where did you source the data?

RayVR• 4 years ago

Great stuff!

This is a nice demonstration of the variability of inflation and how under-trend we have been for many years. There was a strong push from some monetary policy people to move toward a longer term, average inflation targeting that would make the Fed have symmetric reaction functions to upside and downside inflation while attempting to keep a longer term average as the goal.

One interesting explanation for high inflation during the 1970s to early 1980s was that the monetary system and supply of real assets had to adjust to a massive influx of working age adults (babyboomers). A second wave from that population event started to enter the workforce over the last ten years. It might be interesting to normalize the data here against the size of the workforce.

Gibbon1• 4 years ago

My partial theory is oil production grew exponentially up till a bit after 1970. And before that the US had outstripped domestic supply and started having to import oil.

And you are right boomers household formation increased demand for stuff.

filoeleven• 4 years ago

I had no idea that kids in 1962 were spending $100 on one piece of licorice. Kinda puts the “millennials and their avocado toast” thing in perspective, huh?

Syonyk7• 4 years ago

But if the main driver of inflation is the demand side, or inflation expectations, history indicates that a painful recession could be the only way to curb inflation.

That's certainly the expected path forward, at least in the circles I associate with.

"When the tide goes out, you find out who's swimming naked" seems a reasonable guess as to what's going to happen. Both at larger bank/investment firm scale and at the individual level.

At an individual level, just how much slack and flexibility do you have in your spending, your finances, your general way of living? If you're a high earner (there are certainly plenty here that would qualify), are you spending that on lots of monthly payments of assorted luxury and stretch items (house, cars, all the other crap you can get loans for)? You're probably going to be in a world of hurt - there's no income so high you can't outspend it, and it's really hard to adjust those payments when the value of money goes down and you need more for the living expenses. Also, those payments don't go away if your job is eliminated.

If you're comfortably pulled back, with either a high savings rate or a high "optional spending" rate, then you should be in far better shape to adapt - and I'll suggest that using some of those resources to help others around you would be useful. Even just coordinating bulk buys of food and other resources is helpful. But the key here is that this allows for flexibility. It's good to be rich, and all that - so don't be stupid about it.

I think, collectively, we're in for a world of hurt. Inflation is high, and energy costs seem to be staggering back up. Europe is going to be a frozen wasteland this winter if it's anything but a warm winter, and the energy costs are already eating businesses alive out there. That's before you get to a possibility this winter, in which money doesn't help, because there's simply no energy to deliver. If the natural gas pipeline to your place are empty, welp. Doesn't help to be able to afford the energy when there's none to buy.

That does imply that you might consider some backup energy solutions for the winter. I'm a fan of kerosene lately. Less annoying to use than propane, and stores almost as well.

The last couple years have broken a lot of things. And we're only just beginning to learn how much is broken, how badly.

DoingIsLearning2• 4 years ago

That does imply that you might consider some backup energy solutions for the winter. I'm a fan of kerosene lately. Less annoying to use than propane, and stores almost as well.

By backup you mean for heating? Can you safely burn kerosene indoors? I thought you would have all sort of pollutants on top of monoxide?

Syonyk7• 4 years ago

Heating and light, yes.

You can, and people have throughout the last century and a half, both for heat and light. In terms of winter, the fact that kerosene lanterns provide "a bit of light and a lot of heat" is useful - though the light coming off a good cold blast lantern is just wonderful, year round. A nice continuous spectrum, cooler than candles, but still a very nice yellow-orange, with more than enough to read by.

I've been experimenting with them for a while now, and as far as I can tell, a properly burning kerosene lantern doesn't put any measurable particulate in the air, at least as far as PM2.5 or PM10. Run them too high, they'll certainly smoke, but run properly, I can't measure any real difference with the meters I have. They should be burning cleanly.

The same goes for the wick type kerosene heaters - either convection or radiant. They should be burning clean, and if you get any smoke off them, you've got a problem that needs fixing (the good news is that it's almost always either just burning them dry to remove tars from the wick, or at worst replacing the wick).

You shouldn't be getting any carbon monoxide off them either. That's from incomplete combustion, which, again, shouldn't be happening. A properly designed and operating lantern or heater will be feeding a strong draft into the burner. A window slightly open should provide enough venting for a typical unit burning - though I'd have a CO meter around any combustion heat as a normal habit anymore.

If you're burning 1K, you'll get some kerosene odor on startup and shutdown, but it shouldn't be much during operation. However, if you're in the US (perhaps other places too), you can get Klean Heat, which is a kerosene substitute that's somewhat more expensive (~$15/gal vs about $10 for 1K out here), but burns significantly cleaner. It behaves the same, so can burn in the same lanterns, but just burns cleaner all around - less odor, less wick fouling (though that's not usually a big issue with 1K, just the red dyed stuff), etc.

But, yes, I very much do refer to kerosene as a backup for heating. I prefer it over propane - it smells better (propane has a bit of a metallic tang, kerosene is a far warmer smell), and I don't have a pressurized bottle of flammable gas in the house. Kerosene is combustible - not flammable. The flash point of the stuff you should be using is around 140F, which means below that temperature, it doesn't emit enough vapor to ignite in regular air. Gasoline's flash point is -40, give or take, so it will happily generate vapors in regular air looking for a thing to light them of. Especially in the winter, at 40-50F, kerosene is quite safe compared to other heating solutions.

Anyway, it's something to look into. Our energy systems are not in good shape globally, and being able to stay warm with the power grid down and the natural gas empty seems like the sort of thing one might want to consider more lately.

lmm3• 4 years ago

"Safely" is relative, but here in Japan kerosene heaters are totally normal in older homes.

WaxProlix• 4 years ago

On the other hand, you've locked in presumably low rates for your debt (close to 0% hasn't been uncommon for years now) and purchased items at pre-inflation levels! So maybe you can parlay some of that leverage off with minimal losses and enjoy the free rate arbitrage for a bit.

Syonyk7• 4 years ago

Perhaps. I'm pretty well opposed to debt, as I've seen how it can bite people over the years, so I simply don't play those games. I'm far more likely to buy something used and pay a lot less anyway, or, ideally, something with a couple problems that I know how to fix for even less, and then fix it and use it.

The problem I have with debt is that you then have to be able to service it. There are plenty of folks in the FIRE forums who go back and forth on the topic - "To pay off your mortgage or not?" is a holy wars topic. The argument for not paying it off (and arguably taking more on) is that your investments in the market will outperform your cost of the loan, so it's free money. And it works well, for at least some time - but the FIRE movement is largely a post-2008 movement, when all the money sloshing around meant investments go up. Regardless of anything else, investments go up, so put money in them, and while few people suggested going strongly leveraged, the sentiment certainly lurked around the edges.

We'll see how that holds up if the market is cratering around the time one is unemployed. Meanwhile, "Don't have debt, have savings, and live well below your means" has been tested through an awful lot more years of human history than "Put it all in index funds."

I'm certain I've "left money on the table" with my approach, but I also keep my downside risks limited, and should I have reason to really clamp down monthly expenses, I can do so very well.

mrep3• 4 years ago

Where are you at? I ask because I have 2 mortgages and a car loan in the US and 2 are fixed rate for the entire lifetime of the loan and 1 I have 10 years until the ARM starts applying so I'm laughing all the way to the bank.

90% of US mortgages are fixed for the entire loan.

Syonyk7• 4 years ago

I'm in the US. I certainly could do something like that. I just won't.

I hope it works for you. That's a level of debt-based risk that neither myself nor my wife have any interest in. There have been a lot of people throughout history who thought similar arrangements were "sure things," and they were, up until they weren't and it all came down around their ankles.

We live in a very modest (manufactured, gasp!) home for our income, our "new" car is a decade old, with other vehicles ranging far older (the tractor is about 80), but still maintained in perfectly good condition and they all do exactly what we ask of them. Mostly. One of the Urals got demanding lately.

It's low stress and high slack/flexibility. Those seem useful to us.

senectus13• 4 years ago

In Australia I don't think I've ever seen an ability to fix 100% of a mortgage.

We tend to fix about 75% and variable the remaining.

csomar3• 4 years ago

There is no fixed rate loan. It's all variable. There is a trader (might be the bank) that is buying variable rate and selling you a fixed rate. If he goes bankrupt, somebody will be holding the bag.

You might want to re-read your terms if the interest rates get much higher.

bcrosby95• 4 years ago

I went into college during the dotcom bust. Everyone told me I would be making peanuts. I'm pretty happy where I am.

I've lived my life trying to minimize the financial downsides. I want money for security, not to live the high life. I like my job, and don't feel the need to retire early - I would love to do it until I'm 6 feet under. I make a decent enough income, although not the level of many here. I bought a modest house (700k - hey, it's California) compared to what lenders wanted to lend me (1.3mil).

We could afford our expenses on two minimum wage jobs if need be. And that's with 3 kids.

wahnfrieden• 4 years ago

I experienced the same and I’ve probably enjoyed similar extremely cushy tech career experiences that also aren’t that relevant to a macro discussion but it’s nice to hear individual anecdotes

deathanatos• 4 years ago

We could afford our expenses on two minimum wage jobs if need be. And that's with 3 kids.

Let's assume a $15 minimum wage. The housing one can afford on two such wages is $1,560/mo. On a $700k home, assuming 20% down, to repay the principal alone is $1,556/mo. A mortgage calculator says $3,800/mo once you have interest in there — or 73% of your gross income. And that ignores insurance & taxes. And those 3 kids.

anon2915• 4 years ago

if it's anything but a warm winter,

I guess they should hope that their green technologies didn't work enough to curb global warming or something. What a messed up situation.

ospzfmbbzr• 4 years ago

That previous inflation highs were also created intentionally?

sbf5013• 4 years ago

Nothing. The people that understand history aren't in a position of power, and the people in a position in power--most of them, anyway--don't need to remember, it works against them.

jrm45• 4 years ago

I'm no crypto fanboy by any means, but it's hard to not think that, if crypto doesn't completely die out this bear market, it's likely to be at least a somewhat significant factor in all of this.

Not saying it will save us all, but it seems like alternate stores-of-value are likely to be, well, valuable.

groby_b3• 4 years ago

Why? What would make it more valuable than other stores of value? Bitcoin is roughly at end-of-2020 valuation. So is the NASDAQ. So is the S&P500. So is the Dow.

In fact, for most other stores of value, "dies out in this bear market" isn't even a consideration - the statement is reflective of a (perceived?) higher volatility of the crypto market.

If this is showing anything, it's that crypto currencies are just as vulnerable to monetary policy as other assets.

jrm45• 4 years ago

The thing that makes anything valuable, which is people who believe that it's valuable? Markets aren't rational.

Like I said, I'm not using recent past performance to try to make predictions. I'm more considering first principles et al.

wpietri7• 4 years ago

If you compare the volatility of common cryptocurrencies with the volatility of pretty much any major currency, crypto is way worse. (E.g., GBP and US inflation are around 9%, this year, but Bitcoin and Ethereum are down by 70%). The most important thing for a store of value is that it actually holds value, but crypto has a poor track record there.

jrm45• 4 years ago

Sure. I'm less going by "history" and more by "first principles." Crypto provably does what it says on the tin to some degree, even if that degree is low. I wouldn't use recent past performance as a strong predictor of immediate future performance; thinking more long term possibilities.

seydor7• 4 years ago

Maybe we don't want people to store their wealth forever. Imagine having the same billionaires running the world for centuries.

bubblematrix• 4 years ago

In 2008/2009 when Bitcoin became a thing, we (IRC dorks) were mining it because of the recession. When 1 Bitcoin = $1 USD, that was a big deal - and when it broke past $5 USD that was an even bigger deal.

Bitcoin was made because of the recession and how poorly interconnected global economies were performing. It was supposed to be currency separated from politics/regional crisis.

beerdoggie• 4 years ago

In California, people fitting certain economic criteria are now being issued $1000 checks for inflation relief. This is beyond ludicrous.

We have printed so much money, the only solution is to... print more?

It's almost like it is all a sneaky backdoor to letting the government redistribute wealth without real oversight...

groby_b3• 4 years ago

Given that California can't print money, why do you think those checks are "printing money"?

And no, it's not a "sneaky backdoor". It's the government doing what it should do, tighten financial inequality gaps. And preventing unnecessary suffering. We're still a society, we occasionally take care of the weaker people amongst us. (Frankly, not often enough)

And "without real oversight" is... you're aware this is going through the normal process of fund allocation, is reported widely in the press, and is part of the data that voters can take into account next round, no? It has just as much oversight as any other government spending. (Arguably more than some federal programs)

I get that fiscally conservative folks might disagree with this, and we can certainly debate merits. But "printing money" and "without oversight" are empty slogans without basis in fact.

petilon• 4 years ago

They may not be printing money, but they are propping up inflation by giving people free money for compensating for inflation.

commandlinefan• 4 years ago

the government doing what it should do, tighten financial inequality gaps

No, that’s really, really not what the government should be doing.

imtringued16• 4 years ago

Nowadays everyone prints money, didn't you read internet comments. If I loan you five dollars I have printed five dollars because the contract we signed counts as a certificate of deposit in the minds of these people.

jedberg• 4 years ago

It should be noted that California cannot print money. It is simply redistributing what it's residents already have.

wins32767• 4 years ago

California doesn't print money, the Federal Reserve does. California is required to balance its budget by law, like every state but Vermont. Nearly every state has more money than normal right now (some of it from high tax revenues due to nearly full employment, some due to federal stimulus), so they're finding ways of getting rid of the money. This is a second order effect from the much too large stimulus in 2020/2021.

Negitivefrags• 4 years ago

You would think that there would be something more useful to do with the money, like fixing the infrastructure.

bushbaba2• 4 years ago

The excess tax revenues was also caused by overly inflated IPOs and more than normal capital gains. At least in CA, if the surplus is large enough the government is legally required to give the money back if not spent.

Gavin Newsom in this case is acting like Robinhood. Taking from the rich and giving to the less well off.

anon2915• 4 years ago

A charitable interpretation of the comment above would assume that the taxes being collected are primarily the result of printed money, or at least that the fed's printed money forms a large portion of these revenues which are again being redistributed. It's actually quite sneaky. Print money to stimulate the economy and then tax it back out to redistribute. You just printed the poor into 'wealth', but did it in an incredibly roundabout way that saves all the politicians face.

nostromo• 4 years ago

The only reason the states are afloat right now is because the federal government gave them hundreds of billions in printed money. So, yeah, it’s printed all the same.

1. Federal reserve makes several trillions in new money and lends it to the US Government.

2. The US Government passes “infrastructure” and “Covid relief” bills that shower billions on states and cities.

If not for this flow of printed money, most of the states would be cutting budgets since 2020.

So, yeah, a lot of it is printed.

jelliclesfarm4• 4 years ago

yes. even though technically california doesnt 'print money'. people are more important than economy. the 'redistribution' is happening to help the most vulnerable and that's exactly what surpluses should be used for..seems like a good use of money to me.

buscoquadnary• 4 years ago

I hate it when people make it seem like the economy and the people are two different things.

The economy is the aggregate capability of a society to provide goods and services to people, if the economy collapses the goods and services that are being provided cease to be as well and people are worse off.

Short sighted statements like "people are more important than the economy" is a feel good virtue signaling that is indicative of an inability to think clearly about the consequences of actions and a substitution of emotional reasoning over rational thought.

RickJWagner• 4 years ago

Distributing more money is almost certainly unproductive.

During Covid large checks were mailed out. Reddit was full of 'casual investors' throwing money at meme stocks that explained it was 'covid money' and thus didn't matter much to them.

Student loan debt forgiveness is the latest madness.

The end result? Those with the least money (the poor, and those on fixed incomes) are totally hosed. If you can't afford rent at $800, you surely can't afford it at $1400. More handouts only make the problem worse.

The Fed's response (raising interest rates) will make cars and houses out of reach for many.

Vote for politicians of any party who pledge fiscal responsibility. As a litmus test, judge their reactions to government handouts.

lmm3• 4 years ago

The end result? Those with the least money (the poor, and those on fixed incomes) are totally hosed. If you can't afford rent at $800, you surely can't afford it at $1400. More handouts only make the problem worse.

That's absurd; while a one-off is nowhere near as good as a basic income, a flat "handout" benefits the poor for obvious reasons (at the expense of the rich; there's no free lunch).

The Fed's response (raising interest rates) will make cars and houses out of reach for many.

Buying cars and houses with money you don't have and hoping you can make up for it in the future is something we never should've normalised. Someone preaching "fiscal responsibility" should see this as a good thing.

rightbyte2• 4 years ago

Handing out free money decreases the value of money for those that have money. The poor have hardly any money to be hit by inflation.

unity10012• 4 years ago

In California, people fitting certain economic criteria are now being issued $1000 checks for inflation relief. This is beyond ludicrous.

Its not. Its happening in Europe too. Its a way to try to get people through the winter and avoid the energy crisis impacting ordinary people.

That's what a government should do - take care of its people during extraordinary times.

stingraycharles3• 4 years ago

Yeah in the grand scheme of things, this doesn’t impact inflation all that much, but it does help the people that need it most. Just like increasing the minimum wage to keep up with inflation does.

Over the past year businesses have increased their prices all over the board, you can’t then just simply say “but inflation!!” when you want to help the people with some amount of compensation for this.

ALittleLight4• 4 years ago

That doesn't make sense though. You can't create energy by printing money. You just redistribute the value of your money. Maybe that's good - not clear to me why it's better to use inflation, which risks destabilizing the currency and punishes people who saved money, rather than straightforward taxes.

beebmam• 4 years ago

Wealth is redistributed all the time, it's called taxation.

fulafel• 4 years ago

Income transfers generally don't imply printing money, they can be funded by eg taxes from a higher income part of population.

abeppu3• 4 years ago

Elsewhere in this subthread I pointed out that California is not printing money; it's spending surplus from 2021. California cannot print money bc we use US dollars and not CA dollars.

But I think a more interesting aspect of this is the cynical way language around the same idea has changed. The Franchise Tax Board is calling them a "tax refund", though your "refund" is based on your income being low, rather than your tax bill having been high. But the press has certainly been cooperative in calling them "inflation relief" recently, though the program was planned before inflation rose to the top of so many people's list of concerns. Politically, Newsome wants as much credit as possible for handing back a windfall of taxpayer money that came in mostly because of economic conditions he did not create and taxes that he did not introduce.

https://www.ftb.ca.gov/about-ftb/newsroom/middle-class-tax-r...

0xy4• 4 years ago

In this case they're using debt, because while they may have had a surplus in a single calendar year, they're still over $150bn in debt. So it isn't spending surplus, because they're massively underwater and a "profit" is meaningless.

grecy2• 4 years ago

We have printed so much money, the only solution is to... print more?

Yes. Once you start printing money to fix problems, you fall into the pit of always needing to print more. See Zimbabwe’s $100 trillion dollar bill. I have one, it makes a great placemat.

Aeolun• 4 years ago

Giving people a one-time bonus never made sense to me. They’ll feel rich, spend it all, and be back in their previous situation next month.

atq21193• 4 years ago

Sounds like a decent recipe for boosting the economy, assuming the supply side capacity is available: injects a bunch of demand, but at the same time, precisely by being a one-time measure, discourages price hikes.

m0llusk4• 4 years ago

Limited available evidence shows that people are extremely conservative with spending windfalls with much of it going to pay down debt.

IncRnd3• 4 years ago

A good working definition of inflation is a general increase in prices and a fall in the purchasing value of money. There will generally be inflation when there are fewer goods to purchase or when the money supply increases.

History teaches us that the government, often through good intentions, decreases the supply of available goods. There are many reasons this happens. Recently, people were told to stay at home, and many businesses closed. At the very least, the supply of many goods dropped, and people were at home all shopping online for the same goods - causing prices to rise - inflation.

History also teaches us that the government increases the money supply by printing more money.

It's not an accident that both of those are caused by the government. These are the masses' reasons to have lower regulation, not to give handouts to some but to stop government interference. Not to favor winners and losers but to have just enough regulation - without printing stupid amounts of money to save the economy in the short-term.

Unfortunately, history also shows us that government interference, though possibly well-intended, results in price controls that also cause the same problem - inflation.

merely-unlikely6• 4 years ago

A good example of unintended consequences is the proposed ban of US exports of gasoline. The intuition is that will boost supply in the US market, but that intuition fails for large chunks of the country. The East Coast is heavily dependent on imports due to a lack of pipeline capacity and US flagged ships (see Jones Act). So if exports are banned then international market prices go up, and East Coast imports become more expensive. Pockets located near refiners might get cheap gas but most of the population ends up worse off.

jollybean9• 4 years ago

I'm wary that this is a problematic articulation.

The government rarely if ever controls markets to the point where it causes material price increase for things.

The US government has not taken measures to materially affect the cost of goods imported from China, or gas, for example.

Yes, the Central Bank sometimes creates more liquidity than is required for a given economic cycle, but in most cases, this is due to economic calamity i.e. banking collapse, pandemic, war etc. in which case the resulting inflation is the 'accounting adjustment' made to accomodate for that 'external factor' (i.e. factor external to the regular economy).

A pandemic, banking failure, getting invaded etc. can be the result of government action (I mean, especially if the nation is 'choosing to go to war', as in Vietnam) but not necessarily.

Finally, and importantly, the Central Bank is not the 'government' rather, part of 'governance' - they are very different things and act for different reasons. If the 'government' did control the money printing we would all be in trouble!

bruce5112• 4 years ago

I'm not sure for what reason you are being down-voted, but I disagree with your comment on China.

Tarrifs on imported goods are specifically designed to make the cost of goods locally higher.

If a foreign product costs $100 landed, and a locally produced one $120,then adding 20% to the foreign one makes them both the higher price.

This is good news for those in local manufacturing, less-good news for the consumer.

Ultimately a tariff is paid by the consumer[1], and received by the local govt, it is thus really just a consumption tax of sorts, although one that is self imposed by the consumer. The alternative is to "not pay the tax" but instead spend the same money supporting local industry.

The US has had a policy over the last 6 years of adding new tariffs. (if they've been revoked in the last 2, I'm not aware.) This drives up local prices, which is a factor in (not the sole cause of) inflation.

[1] politically this was spun as "China pays the tariff" but this is obviously untrue. There is no incentive for them to do so, and even if they did, it would negate the point of the tariff in the first place, which is to raise local prices to make local businesses more compeditive.

jacknews2• 4 years ago

"There will generally be inflation when there are fewer goods to purchase or when the money supply increases."

But these seem like entirely different problems. If there's too much money, then you should reduce the money supply by increasing interest rates, stoking job fears, etc.

If there are not enough goods, and the market isn't responding by producing more, you can't solve it by making sure people have less money. Or, you can but you are really make people poorer, not just curbing runaway prices.

zhoujianfu2• 4 years ago

Exactly... and it seems like right now it's more because of fewer goods to purchase (less energy supply because of Russia, less goods / workers because of covid), but demand has returned to pre-pandemic levels.

I'm a little worried they're fighting a money supply increase when the problem is a (hopefully relatively temporary) shortage of supply. I think the money printing resulted in some asset bubbles (crypto, real estate, stocks), and raising interest rates has popped it already. But I think inflation will just settle down as we get our energy and supply chains righted, regardless of where interest rates are.

jacknews2• 4 years ago

Put into much better words than I managed: https://timharford.com/2022/10/what-we-keep-getting-wrong-ab...

legulere• 4 years ago

Money supply increases don’t necessarily lead to inflation. They only do when there’s more consumer spending on products.

In the recent low interest rate period, that didn’t really happen. Money instead went into an asset price bubble.

What we need to do to curb inflation is to lower consumption. The best point where to do that is the rich with their excessive consumption.

jbay808• 4 years ago

Money supply increases don’t necessarily lead to inflation[...] Money instead went into an asset price bubble.

In the short term, yes, but this is a precursor to inflation; eventually the inflated asset prices propagate to consumer prices. Some paths are: increased demand (the "wealth effect"), reduced productivity (eg. people retiring with their stock portfolios or quitting jobs to speculate on crypto/real estate), as well as rising rents.

Engineering trains us to analyze full cycles. There are a lot of perpetual motion machines that look promising on the expansion stroke.

Reduced borrowing costs can mask this pressure, as eg. rents remain low when mortgages are cheap, despite high housing prices. But when borrowing costs rise the floodgates are opened. Either the bubble pops and the paper asset "wealth" gets vacuumed away, or else it dumps that growth into consumer prices.

sebow• 4 years ago

Most people talk about the printing money aspect, and while that's definitely true, it needs to be bought into the context of the covid19 policies that exacerbated the downfall of the economy. Printing money is one thing, but doing that to "cover costs" while also de facto slowing down to the point of stopping the economy is on another level. Add to this the fact that the white collar jobs that "seamlessly" moved to remote positions for people to work from home were kind of a bubble that kept of inflating with no corrections (especially crypto pyramids with no added value in the economy), you end up with this. From there to this day it was basically a matter of inflation spiraling out of control, because the reality is that a lot of green policies, monetary decisions, >new< regulations in the west make it really hard to do anything that's not part of the mentioned bubble.(Which hasn't fully bursted in my opinion, hoping i'm wrong)

And yes, let's also mention the stimulus checks that had more of a bad psychological impact on the working middle class. The total number wasn't that big though, compared to other gov. expenses. Let's not forget, US & Western european countries still have the "luxury" that their economies is more largely composed of industries that functioned during the lockdowns(IT, Entertainment,etc). With the exception of eastern asia, the rest of the world [where most of manufacturing & shipment takes place] did not.

JohnJamesRambo• 4 years ago

What I’m seeing here is three spikes caused or exacerbated by fossil fuels. I wish we would get past the “burning stuff” era.

Madmallard2• 4 years ago

I'm disabled and in California. I don't exactly have the physical means to manual labor.

Am I just screwed in coming years?

missedthecue3• 4 years ago

Why is manual labor your only option?

Madmallard2• 4 years ago

I mean if the disability stuff gets killed by inflation and chaos ensues and people need subsistence

sometimeshuman• 4 years ago

Unfortunately I leaned on history to make investment decisions during this period of rising inflation. Gold, stocks, and real estate were historically good hedges against inflation and cash holdings should be minimized. But that conventional wisdom has been a bad strategy this time.

As a reminder one ~sure bet is iBonds (the i is for inflation). Last I checked the yield is little shy of 10% and your money only needs to be locked up for 1 year. Too bad there's a $10k annual deposit limit.

go_elmo• 4 years ago

Afaik inflation devaluates stock relative to bonds and its small 101 of economics but Im no expert

voisin• 4 years ago

I think you have this opposite. Bonds have a fixed nominal return, so if inflation picks up unexpectedly, that nominal return erodes in real (inflation adjusted) terms, so investors flee bonds.

That said, stocks don’t tend to perform well either because of expectations over interest rates increasing to combat inflation and an ensuing recession.

wahern2• 4 years ago

The Econ 101 is the complete opposite. Bonds usually have fixed rates, whereas stock prices are in principal tied to revenues, and nominal revenues should increase with inflation--companies increasing prices is literally how most people experience inflation. But Econ 101 also suggests that in the short term things will be more complex than all that because price adjustments won't be instantaneous. Fear and volatility will create demand for bonds, which could offset to some extent the clearly diminishing nominal value of fixed-rate bonds.

Note that a key factor here isn't inflation, per se, but the rate of change in inflation. From an Econ 101 perspective 2% inflation is no different than 20% inflation if things are otherwise steady-state. Stocks are the better bet because in principal they should respond more quickly to changes in the inflation rate. If inflation is steady, bonds in principal are the simpler, cheaper instrument.

merely-unlikely6• 4 years ago

Depends on the sector. You would expect consumer staples (ie food stuffs) to perform well since higher prices can easily be passed to consumers who can't cut back (hence inflation). You would expect money losing tech stocks to suffer as interest rates (and thereby discount rates) rise.

You would also expect bonds to perform poorly as their prices need to decline to make their yields competitive with those of new bonds issued at higher interest rates. Term loans should outperform since their interest rates are variable, making them safer in a regime of raising/fluctuating interest rates.

Conversely, sometimes US treasuries will outperform if investors are fleeing to a safe haven against potential recision risks. There's always another variable.

koolba• 4 years ago

Too bad there's a $10k annual deposit limit.

It’s $10K per tax identifier, so if you’re married you just doubled it. If you have kids, each of them can buy $10K as well (though be sure to understand that you’re permanently transferring the assets to them, you can’t take it back it’s effectively an early inheritance).

You can also buy $10K as a corporation, LLC, or anything else with a tax identifier.

btbuildem• 4 years ago

So you could technically open N LLCs and stick $10k in each of them?

bob_theslob6462• 4 years ago

Here are a few things about i-bonds that the average joe may not know.

Series I bonds with issue dates prior to February 2003 became eligible for redemption six months from the issue date. Bonds with issue dates of February 2003 and later are eligible for redemption one year from the issue date.

However, if a bond is cashed within the first five years after its issue date, interest earned during the three months prior to cashing will be forfeited. Once a Series I bond is five years old, there is no interest penalty for redemption.

Another problem, you will owe federal tax on the I bond interest when you cash it in.

In general interest on treasury bonds is not taxable at the state level. I am not sure about local taxes, which have all sorts of one off rules. But the thing most miss about the I bonds is you receive no interest until maturity/cashing it in. So no compound interest.

Hope that helps!

goldfish3• 4 years ago

But the thing most miss about the I bonds is you receive no interest until maturity/cashing it in. So no compound interest.

That's incorrect. I bonds compound semi-annually.

https://www.treasurydirect.gov/savings-bonds/i-bonds/i-bonds...

jelliclesfarm4• 4 years ago

1. we should gently force a recession. 2. reduction in money supply. 3. this can be achieved through higher interest rates. 4. there will be higher unemployment rates. 5. home prices will fall down and speculation will cool. 6. inflation should be capped as soon as possible.

I am sure America is on the job. For all it's shortcomings, noone had to starve due to bad economic policy in this country and not for decades. Having to file for bankruptcy and living less grand is not the same as starvation death level poverty. And this, btw..still exists in many countries around the world. In America(not speaking about other economies), we'll be fine. It will be weird ride for the next decade, but this isn't bad for America. If we were a corporation, we have sufficient moat.

major5052• 4 years ago

As a brazilian, history teaches that inflation is a pain in the ass.

I lived in hyperinflation when I was a kid. I rememore that my parents would receive and run to the market in the same day, and buy everything in bulk, because next day, their money would be worth half.

Markets would tag products once or twice a day.

I remember buying an X-men comic that was worth something like 1000 BRC.

Monthly inflation would be beetween 50% - 80%.

Also a lot of the commerce was informal and using barter.

bruce5112• 4 years ago

It's something of a pity that hyper-inflation, and inflation, share more-or-less the same name.

Hyper-inflation is bad, and ultimately makes local-money such a poor store of value as to make it useless. People will revert to non-money approaches to trade, or use a different currency for money.

So yeah hyper-inflation is really bad, and (I suspect) what most Americans think of when the word "inflation" is used.

By contrast regular inflation, say in the 3% to 6% band has significant upsides. It promotes exports, leverages borrowings, and so on.

Equally it devalues income for those on a fixed-value pension (probably an excellent lesson to current generations of the value of inflation-linked investments and income) and that sucks. The solution though is not 0% inflation for ever, the solution is better pension plans.

Yes, inflation is "high" at the moment, but it's several orders of magnitude away from hyper-inflation. And the counter to inflation, higher interest rates, is starting to happen.

major5052• 4 years ago

Inlflation is bad. Specially because is a "tax" that affects the poorest population, that this days the origin is not rare, because the state prints money like crazy, to achieve its goals in the short term.

michaelcao2• 4 years ago

Mark Twain once said that “History never repeats itself, but it does often rhyme. We should use the bottom up approach for investing stocks. I don't believe that macro prediction is useful. Nonetheless, we should prepare for the worst because the recession is looming.

lowercased2• 4 years ago

I'm not sure Mark Twain actually said all that... :)

michaelcao2• 4 years ago

I mean Mark Twain said “History never repeats itself, but it does often rhyme".

bushbaba2• 4 years ago

Let's be real. We are currently IN a recession.

galaxyLogic2• 4 years ago

There's two causes for inflation I think everybody agrees, too little supply and too much demand.

The demand-caused inflation would seem to be self-correcting problem: When things cost more, people buy less of them. Then suppliers will have to lower their prices or at least stop increasing them, if nobody buys their product because of too high prices.

In other words if people having too much money causes inflation, people will soon NOT have too much money, because it is used up by the higher prices.

So the real problem to focus on would seem to be supply-side inflation. How can we produce more cheaper and distribute the products to people cheaper? Isn't that the problem governments should be trying to solve, to get rid of inflation?

Helmut10001• 4 years ago

How can we produce more cheaper and distribute the products to people cheaper?

Please replace cheaper with sustainable, otherwise the world will be flooded with even more plastic.

xapata3• 4 years ago

There's two causes for inflation I think everybody agrees, too little supply and too much demand.

Price increases aren't always inflation. As the Federal Reserve Bank of Cleveland published, "Strictly speaking, inflation refers only to a drop in the purchasing power of money that results when a central bank creates more money than its public wants to hold. Inflation manifests itself as a rise in all prices and wages—not just some subset of prices. ... relative-price changes—no matter how uncomfortable they are for consumers or producers—transmit vital information necessary for the efficient allocation of resources throughout any market economy. Inflation, by contrast, contributes no information useful to our consumption, production, or labor choices. If anything, inflation can temporarily distort vital relative-price signals ..."

https://www.clevelandfed.org/en/newsroom-and-events/publicat...

galaxyLogic2• 4 years ago

But isn't inflation measured by some kind of average price index?

If the consumer-price-index goes up we call it inflation whether it's caused by " central bank creating more money than its public wants to hold." or not?

Is it possible to measure "how much money public will want to hold"?

mise_en_place• 4 years ago

It's very much a tale of two dollars, however. The dollar price index plummeted after abolishing the gold standard. Now it has risen substantially, as it did in 2008, to become the safe haven currency that all other countries are hoarding, due to inflation in their own countries. At some point this house of cards will collapse, specifically if the Fed capitulates in its fight against inflation and stops raising interest rates.

sumedh2• 4 years ago

to become the safe haven currency that all other countries are hoarding

Probably because most of the oil is traded in dollars.

entropicgravity• 4 years ago

History teaches us, don't let interest rates go below 2.5%.

perryizgr8• 4 years ago

Print trillions and trillions of dollars.

I wonder whatever could have caused this unprecedented inflation?

dandare• 4 years ago

One thing I would like to understand is how much is this related/cause by the 2008 financial crisis and the quantitative easing policies.

mrjin• 4 years ago

The only thing we learnt from history was that *we learn nothing from the history*.

For the past decades, what were the central banks all over the world doing? Nothing but printing money. Whenever there was a (economical) crisis, the only measure was printing money, *nothing but printing money*. Were the problems resolved ever? Never!!. They event pretended to be innocent by asking "why there were no inflation". Of course, there was no inflation as the design of CPI, the indicator of indicator, was flawed. CPI does not consider price of assets, otherwise sky would be the limit. There were crisis simply because the money went to the people who didn't it that much. Printing much made things worse as most of the printed money went to those didn't need it much, but nonetheless had postponed them a lot.

Such pretending to be dumb game could have being played a lot longer if not the pandemic which made them had no choice but printing money and sending them to those in need. And all of a sudden, those who needed the money most had so much cash they had never imaged before? What were they going to do? For sure spending them all.

Now here is the long *expected* inflation, what are central banks planning to deal with it? Increasing interest rate to where it should be? Seems too hard, let's print more money!

gitfan862• 4 years ago

At this point the fed seems to be saying that those days are over, they will continue to increase rates until inflation hits 2%. Obviously this cannot go on forever because it becomes impossible to service the debt and you have to print money to pay it off. But it gives you more time and prevents hyper-inflation and we can hope that by then AI and other technological advances have made what we consider "economics" mostly irrelevant.

diordiderot2• 4 years ago

because it becomes impossible to service the debt

Those companies should have made more responsible financial decisions.

suoduandao23• 4 years ago

we can hope that by then AI and other technological advances have made what we consider "economics" mostly irrelevant.

Is there a serious hope that AGI will invent a replicator soon after coming online? It seems likeliest to me that if a greater-than-human intelligence comes online it won't have a circumvention for the laws of thermodynamics and there still won't be such a thing as a free lunch.

m0llusk4• 4 years ago

This is clearly an oversimplification because the crisis of 2008 was met with extreme money printing which did not cause a burst of inflation and was reeled in with relative ease as the economy restored itself. If money printing were the variable then it should cause inflation every time but it does not.

suoduandao23• 4 years ago

I think the GP is saying, 2008's money printing did cause a burst of inflation in stocks, which would have otherwise fallen even further. Measuring CPI by excluding assets like growth stocks hides the true effect of this money printing by glossing over what most already wealthy spend money on.

pjmorris• 4 years ago

The extreme money printing (look at the Fed's balance sheet before and after 2008 [0]) showed up as inflation in house prices, which have ballooned in relation to wage income. This was done for the explicit purpose of keeping the biggest lenders flush (see Timothy Geithner's comments about 'deeply unfair', e.g. [1]) and is exactly what the GP is describing.

[0] https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

[1] https://www.pbs.org/newshour/show/geithner

chasd005• 4 years ago

The money printing in 2008/9 was in response to a deflationary spiral. It didn’t cause inflation because it was mopped up by the deflationary conditions.

randomdata3• 4 years ago

because the crisis of 2008 was met with extreme money printing which did not cause a burst of inflation

The inflation was very much visible in the places where the people who received the money spend their money (i.e. Wall Street). The money never made its way to Main Street, so naturally there would be no price pressure found there.

This time around the money was distributed to Main Street.

pas2• 4 years ago

CPI has asset components, like housing.

Central banks have one universal lever, and they use it. (This is by design, so it can be mostly independent.) The responsibility is on the fiscal side to spend it on shit that actually matters.

Sending people money without means testing is dumb, but politics in this age is dumb.

Unfortunately harping half-truths about central banking won't help with the situation :/

Your comment completely ignores the supply side of inflation, ie. food & energy prices. Ie. there's a war between the food and fossil faucets of Europe.

See also the whole baby formula debacle (sustained government intervention reduced the market to a very fragile one, and lobbying and protectionism prevents imports to the US), see the perverse incentives in low-paying logistics sectors (the big ports are all owned by local governments, and they are shit at responding to supply-and-demand, and trucking is of course completely fucked because the liability is shifted to the drivers while the profit is nicely shifted off of their hands, due to a relative large pool of potential new drivers to fleece).

simonebrunozzi• 4 years ago

Most of the spike in energy costs for the consumers is caused primarily by how energy markets are designed, not by hikes in gas prices (which could only justify a small part of the price hike).

See this long, but well explained, video on the topic [0].

[0] https://www.youtube.com/watch?v=NicE0-N9ux0

lumb63• 4 years ago

Neglecting issues due to the war in Ukraine, a lot of the “supply side issues” are not totally isolated from central bank policy, QE, and stimulus. The use of QE and stimulus increased demand, while simultaneously, government policy decreased supply. Now, supply is (mostly) recovered, but demand still remains elevated. Supply can’t keep up, because its target is too high.

This is why we see talk from the Federal Reserve about how consumers will “feel pain” - the only way to reduce demand is to reduce employment or wages, to a level that the supply chain is capable of keeping up with. The Fed press conferences are really interesting to watch as they make this very clear - we are really looking at an “imbalance between supply and demand” due in part to all of economic, social, and political factors.

Also, regarding the CPI not reflecting asset prices: the CPI does not include any measure of equity prices, for instance. Since so many rely on equities to fund their retirement, an increase in equity prices is a meaningful inflation. If the price of the S&P 500 for instance is higher due to an asset bubble, it decreases my ability to purchase shares of it. The increase in equity prices we see is really inflation of equities, but never branded as such. We call it “return on investment”, because the people talking about it are mostly those who already own equities, not those looking to buy them. It’s the same reason as why homeowners dislike seeing home prices increase, while homebuyers enjoy it.

I’ll also mention that the CPI has a lot of other bunk practices in it. For instance, “hedonistic adjustment”. A (slightly conspiratorial) site called ShadowStats computes a modified CPI that uses older CPI methodology (before the meaning of inflation was redefined to show lower inflation) that currently sits at 17 or so percent.

anonu• 4 years ago

Inflation is high 'cause China. We are more interconnected and globalized than anytime in the past, thus the past is not a good model.

China is still in lockdown and their output isn't as high as pre-pandemic levels. Everything China makes pervades into everything we do in developed society. From high-tech chips to low-tech plastic stuffs.

Until China decides to open back up, prices will continue to increase. And until then rates will continue to go up to try to incentivize people to save.

I see this alleviating in 2nd half of 2022, thanks to China relaxing Covid restrictions.

ericmay• 4 years ago

That’s certainly one of many factors but the other big one is energy cost due to Russia’s invasion of Ukraine and subsequent sanctions levied by major economies on Russian energy exports.

DiogenesKynikos• 4 years ago

China is still in lockdown and their output isn't as high as pre-pandemic levels.

The vast majority of China is not in lockdown, and Chinese output is above pre-pandemic levels.

China has had one of the highest growth rates of any large economy since the start of the pandemic (2.3% in 2020, when most large economies shrank, and 8.1% in 2021).

mouzogu• 4 years ago

i'm pretty tired of living in a world where the cost of everything is constantly going up, and everything is going further and further out of reach

this has been the norm pretty much 20 years, i hope we will get some kind of reset to level the playing field

dkrich• 4 years ago

The most dangerous thing that can happen to an advanced economy is credit markets grinding to a halt. It was the panic of 1907 that created the federal reserve in the first place.

Over the ensuing decades there was a very awkward path to eventually figuring out that at the moments where a complete halt to credit markets looks imminent, the fed should step in and release the jam. What we’ve learned is that just the knowledge of the fed being able to just print and buy any debt and that they would do so caused major crises to be avoided (2008 and 2020).

The problem recently has been that this fed is simply incompetent. They do not form their own opinions and simply follow what the prevailing narrative dictates. If it’s consensus that rates should not be lifted, they just coast through those meetings towing the same line and continuing to buy bonds.

Then one day the narrative shifts and concern starts to grow over fed policy. So the fed suddenly reverses course and announces sudden rate hikes. When it turns out that cpi moves slower than the fed hoped, the pressure to intervene grows.

Now the consensus is that the fed should be making multiple 75-100 bps hikes so that’s what they do.

The question now is will the narrative shift fast enough for them to not end up going too far the other way.

I sincerely hope the next fed chair is someone who understands the relationship between credit markets and the economy and the need at times for the fed to be the lender of last resort, but also understands that the fed should be an independent entity capable of forming its own policy and having the courage to ignore what market pundits say should be done. The Fed’s mandate is not to make Wall Street happy.

drchiu• 4 years ago

This is perhaps one of the best explanation of the dynamics between the fed and the market as it actually happens.

If I recall, those fed chairs tend to be Wall St alumni unfortunately.

blagie3• 4 years ago

I'm kind of inclined to agree.

We want to avoid structural damage: Lost jobs, bankrupt businesses, lost mortgages, and so on. Structural damage leads to loss of real productivity, and real harm to people's lives. The only way I knew to get through COVID shutdowns was to devalue currency by about as much as we've done.

I didn't mind the short-term money printing, and I expected inflation to result. The inflation is painful, but the alternative is much more painful. My income buys less than it did two years ago, but I'm thankful I have a job. I was even more thankful when jobs were easy to come by. If my employer went under or I lost my job, I'd be profoundly unhappy.

The right approach now would be to accept a dollar is worth less than it was before, and to give an honest estimate of how much less.

Aggressively trying to control inflation by raising interest rates is a lost cause, and will do a lot of real harm. The outcome here seems to be that rather than mitigating the harm of COVID shutdowns, we've delayed them, and did a lot more harm along the way.

caeril• 4 years ago

We want to avoid structural damage: Lost jobs, bankrupt businesses

Completely incorrect. If the jobs and businesses in question existed only due to speculative excess, they shouldn't exist. Easy money generates what David Graeber would call "Bullshit Jobs", that contribute anywhere from zero to negative real value production.

We want these businesses liquidated and the employees out on the street, to pursue work that actually contributes to society.

The trick is to somehow limit the collateral damage to businesses that do produce real value. I don't think that's a problem that's been solved.

rsync2• 4 years ago

"We want to avoid structural damage: Lost jobs, bankrupt businesses, lost mortgages, and so on."

I disagree - I think what we need is a constant, low, background level of structural damage - which includes lost jobs and especially bankrupt businesses.

I grow increasingly fond of the forest fire / controlled burns analogy:

We have come to realize that preventing, or extinguishing, every wildland fire causes a dangerous level of fuels to slowly build up, eventually erupting in an unstoppable conflagration that destroys much more than the sum of the fuel overload.

Preventing recessions and keeping business firms afloat that would otherwise fail without easy loan rollover - that's the financial equivalent of refusing to maintain fuel loads with controlled burns.

Eventually the dead fuels (zombie business firms) will overwhelm all firefighting efforts (QE ? Negative interest rates ?) and will take down a much larger portion of the economy than otherwise would have failed along the way ...

naijaboiler• 4 years ago

Spoken very fairly. For a central banker, it's either high inflation or high unemployment. Strangely enough, they prefer the latter. Inflation affects everybody mildly, a recession affects the unlucky few that lose their jobs very badly

davidork• 4 years ago

war is probably coming.

pulketo• 4 years ago

do not mess with the russians?

WizzyWezzy• 4 years ago

Corporate profite is at a 50 year high. What does that teach us?

Inflation is at a 40 year high. What can history teach us?

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