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Have we been thinking about inflation all wrong?

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Re: Have we been thinking about inflation all wrong?

#101

Post by xyzzyz »

mise_en_place wrote: post #41

Inflation favors the debtor, while deflation favors the saver. Obviously the world's largest debtor (US govt) will consider inflation to be desirable and necessary. Otherwise it would lead to a sovereign debt crisis if there are positive real interest rates leading to a US govt default. Keep an eye on the Fed, especially before the midterm elections. The Biden administration will put an extreme amount of pressure to…

Inflation only favors the debtor if he doesn’t have to take on more debt. USG has a lot of short term debt it needs to continuously roll over. If inflation persists, the yields will go up, so USG will roll over the current low interest rate debt to new high interest rate debt. Given how much debt it has, the service payments will skyrocket: at 130% debt to GDP ratio, and at 27% tax to GDP ratio, each 1 percentage point increase in yields translates to additional 1.3% worth of GDP going to debt service payments, which is around 5% of total government spending.

That means that if current inflation persists, and the bond investors will expect 7% inflation instead of 2% inflation, they’ll demand bond yields to be at least 5 percentage points higher. This will make the debt service payments go from current 6% of the budget to nearly 1/3rd of it, a tremendous increase. This will only increase fiscal pressure on the government, making it less credit worthy, which will push yields even higher.

No, if you’re indebted above your head with mostly short term debt, inflation does not make you happy.

Re: Have we been thinking about inflation all wrong?

#102

Post by jaymicha »

trhway wrote: post #80
sneeze-slayer wrote: post #33

Rampant inflation is a problem. The inflation seen now in many places is not quite there. 7% is higher than we would like, but if the alternative is to have shrinking GDP and massive unemployment, I would rather have some inflation. In the US at least, a lot of the raise in the US CPI is due to rising energy costs (predicted months ago due to cold winter in Asia), used and new cars (the infamous chip shortages), and…

> 7% is higher than we would like, but if the alternative is to have shrinking GDP and massive unemployment, I would rather have some inflation. The alternative is to have typical 2-3% of inflation and correspondingly the typical 2-3% of GDP growth with healthy labor market. The 7% inflation does get you that 7% GDP growth we're seeing and red hot labor market, yet it is just a temporary effect, like a shot of stimul…

I'm not sure this is true - the base case seems to be the Eurozone, the countries of which intervened in their economies enough to forestall a depression, but not to the extent that the US did. Eurozone inflation is just a notch above 5%, unemployment rate right about 7%. In the US it's 7% and 4% respectively. In effect, the US traded a ~2% rise in yearly inflation for a ~3% reduction in unemployment. Reasonable people can disagree on whether that was a good trade, but to say that we could have just "skipped" all the COVID disruptions and maintained low inflation, low unemployment and typical GDP growth strikes me as fantasy land. There wasn't any magical economic policy prescription that would make everything "normal".

Re: Have we been thinking about inflation all wrong?

#103

Post by guiye »

TremendousJudge wrote: post #83
baragiola wrote: post #31

Trust me, you don't want inflation. Source: Argentinian

Hah, but this time _they_ have the dollar printer. They can actually take the convertibility of 1 dollar = 1 dollar all the way to the stratosphere if they want. Greetings from a fellow neighbor

yeah, today with 1 dollar you can buy a beer, then next year will cost you 2 dollars ;)

Re: Have we been thinking about inflation all wrong?

#104

Post by mrtksn »

mdavis6890 wrote: post #12

The thing to keep in mind is that what really matters is stuff : The goods and services that add economic value to our lives, like shoes, houses, food, sports games, accounting services, haircuts, etc. Also called the metaphorical "pie." Inflation is bad to the extent that it causes the total stuff we produce to go down or to become more poorly distributed, and good to the extent that it does the opposite. And a shri…

Sure, money is simply IOUs that we use as intermediary so that we can trade stuff and services and the number doesn't really matter as long as it is useful to facilitate the the stuff and services exchange.

However, there are many things lost as that number is adjusted.

Firstly, conventionally wedges and B2B contracts and prices are adjusted periodically for practical reasons. If the inflation is %50yoy, that means at the end of the year the money paid and received would be way off, which means people are not compensated fairly. People can't really function in an environment of ever changing prices and wedges, they can but it's very inefficient because everything becomes short term. Companies may have ways to cope with it but people who opted out for a simple life where they do their job and enjoy their lives get screwed over which causes social problems.

Secondly, there's a reason why flipping burgers in the USA buys you an iPhone in 2 weeks but doing exactly the same job in Bangladesh it will take you many months and part of it is the nature and role of the western money, especially the USD but also EUR, GBP etc. If the monetary system that pretty much runs the world gets screwed things can get real fair real fast and fairness is not always meritocratic.

Thirdly, most people don't have access or understanding of instruments to preserve their wealth. In high inflation countries, people simply pour their money into items and property the moment they receive it. It creates society with bad habits.

Re: Have we been thinking about inflation all wrong?

#105

Post by yoyar »

Inflation of the money supply leads to prices that end up higher than they otherwise would have been.

This does not necessarily mean nominally higher prices.

This is a distinction that leads people to say things like: Obama did it and prices didn't go up. With the implication that it might be ok to inflate to infinity.

Re: Have we been thinking about inflation all wrong?

#106

Post by uticus »

> If inflation were allowed to run a bit higher, it could deliver a long-overdue win for young people who have had to face a combination of stagnant wages and rising housing costs.

My understanding is that inflation hurts fixed income, especially the elderly who don't have the advantage of young people where they can change jobs or absorb risk as readily.

If that's true, then the "wrongness" of inflation has been pinpointed - it's ethically wrong to financially hurt our elderly.

Re: Have we been thinking about inflation all wrong?

#107

Post by dandanua »

kkoncevicius wrote: post #21

The best one-sentence description of inflation I've heard is: inflation is a hidden tax on savings. People who save money are hurt the most. It's as if the newly printed money is generated by taking a bit from anyone according to how much cash he/she has stored away.

It's a tax on cash savings. It's what poor people hold. Rich people save in other ways. They also use huge loans. So that inflation can be advantageous for them.

Re: Have we been thinking about inflation all wrong?

#108

Post by namdnay »

uticus wrote: post #106

> If inflation were allowed to run a bit higher, it could deliver a long-overdue win for young people who have had to face a combination of stagnant wages and rising housing costs. My understanding is that inflation hurts fixed income, especially the elderly who don't have the advantage of young people where they can change jobs or absorb risk as readily. If that's true, then the "wrongness" of inflation has been pin…

> it's ethically wrong to financially hurt our elderly.

Why would it be more wrong to hurt the elderly than the young? The elderly are far wealthier

Re: Have we been thinking about inflation all wrong?

#109

Post by peteradio »

mdavis6890 wrote: post #85
ren_engineer wrote: post #61

Earlier quoted context omitted.

>I agree with being focused on production, as long as it's production driven by actual customer needs this has always been an interesting question to me, because in theory companies like Facebook are worth hundreds of billions despite making many people miserable and actually lowering productivity by wasting time. Basically part of the sin economy, things like gambling and drugs. All bring in lots of money but we'd a…

In 1000 years people will see most of our current internet the same way we see the pyramids at Giza, and they will wonder why we spent so much effort on something with no obvious value.

And then they find all the porn and it starts to make sense.

Re: Have we been thinking about inflation all wrong?

#110

Post by glenstein »

dragontamer wrote: post #76
opportune wrote: post #68

Earlier quoted context omitted.

Poor people can benefit from inflation in the sense of it wiping out debt or spurning wage inflation/decreasing wealth inequality

> wiping out debt Do poor people have access to severe amounts of debt? The #1 source of debt in the USA seems to be the home mortgage, and #2 is probably the car-loan after that. Poor people don't have access to home mortgages because they can't afford it: they're in the renter class. So all inflation does is increase the price of rents to them. Car loans are also somewhat difficult for people with low credit scores…

I would add medical debt, student loans, credit card debt.
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