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Have we been thinking about inflation all wrong?

thewalrus.ca

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Re: Have we been thinking about inflation all wrong?

#431

Post by jdasdf »

quadrangle wrote: post #354
didericis wrote: post #343

Earlier quoted context omitted.

Austrian theories appeal to me/seem correct beyond just a kernel, but I’d consider myself an amateur/haven’t read enough to be confident about my opinion. Specifically, the emphasis on relative value seems correct, the emphasis on the importance of keeping pricing signals pure/unaffected by artificial monetary supply changes to effectively allocate resources seems correct, the argument that market incentives exist fo…

Austrian economics is all anti-empirical say-so internally-consistent models that aren't tested against reality. Traditional economics is stuff that claims to be more empirical but fails to do so and focuses almost entirely on official stats and on its own versions of models that aren't tested against reality. The whole field of economics is overall messed up. It's insular, arrogant, and extremely resistant to outsid…

That's not really a good argument though because there are 2 definitions of inflation which are often confused due to the fact that they have the same name, and can lead to the same results. One is "the generalized increase in prices" and the other is "The increase of the money supply".

If you understand that those 2 things are inflation, but not the same thing, then you can see why there's some issues calling an increase in prices that isn't the result of an increase in the money supply "inflation", and vice versa.

This gets worse when you realize that an increase in the money supply can (but is not guaranteed) to cause an increase in prices. Like the professor says "The key driver of inflation is not just how much money exists in the world; it's what are people doing with that money."

What he's really saying here is that "The key driver of (general increase in prices) is not just (increase of the money supply) but what are people doing with that (increase of the money supply)".

You can have inflation even with a reducing money supply, for example when production decreases, or when velocity of money is higher.

In fact this brings me to another point that really irks me, which is that M2 and above are arguably not even money in the first place. They are better described as liquidity, and calling them money simply increases confusion with actual money.

By making that distinction clear, this dual definition of inflation becomes clearer since it becomes obvious that an increase in liquidity (willingness and ability to spend) can increase prices, regardless of whether the actual liquid (money) has increased.

Just like a pipe, you can pump more stuff out by either increasing pressure (increasing money) or making the pipe have less friction (liquidity).

Re: Have we been thinking about inflation all wrong?

#432

Post by specialist »

zozbot234 wrote: post #129
jbay808 wrote: post #57

When it starts to get really burdensome to keep your promises, the idea of breaking them gets really attractive. But that doesn't come for free. It costs credibility. The cost of central banks breaking their inflation-control commitment when inflation starts running hot, is that the market starts pricing in their unwillingness to raise interest rates. This fuels a whole bunch of other inflation feedback loops, and th…

Yup. The kernel of truth behind Austrian theories of macroeconomics/the business cycle is that interest-rate based policy setting is inherently an unstable system. If the central bank makes policy errors that fail to stabilize the underlying target (whether inflation, nominal income, exchange rates, whatever) the whole system starts spiraling away from that unstable equilibrium point, and the subsequently needed corr…

Tangentially:

> unstable equilibrium point

Is anyone looking at economics thru the lenses of chaos theory (complex adaptive systems), control theory, or cybernetics? I've foraged a bit, no joy, but really don't know where to start looking.

I only ask because...

Anthropologist David Graeber's book Debt: The First 5000 Years muses about the fragility of market based systems. Like maybe capitalism contains the seeds of its own destruction. Hence the recurrence of debt forgiveness, jubilees, and revolutions throughout recorded history. Seen from this angle, it sure does seem like some kind of debt crisis always has a role in social upheaval.

With economics simulations (modeling) attaining ever more fidelity, it occurred to me they'll inevitably hit "butterfly effect" type phenomenon.

Further, what if Graeber is more than right. What if "capitalism" can never be stable? What if market equilibriums will always collapse?

That insight would have huge impact on public policy. Instead of trying to keep things afloat indefinitely, we'd anticipate and plan ahead for the endless series of resets.

Proactive instead of reactive.

Because it sure does seem (to this noob) like crisis and resets are the norm.

I'm not saying that real life is just a weirder instance of Dwarf Fortress.

But given how hard it is to design stable and predictable closed world game economies, what hope do we have to do better with human economies?

Re: Have we been thinking about inflation all wrong?

#433

Post by bryanlarsen »

nostrademons wrote: post #177
bryanlarsen wrote: post #94

Earlier quoted context omitted.

> It's now much higher and very evidently out of control. Monthly inflation is slowing, and is at an annualized 4.8%. We had a big spike in the summer/fall that's still showing up in our annual figures, but inflation itself is coming under control. https://news.ycombinator.com/item?id=30289147

0.6% monthly inflation annualized isn't 4.8%. Not really sure how you got 4.8%, but the computation you want is 1.006^12 = 1.0744, about 7.4% (which also happens to match the annualized figures).

A year has 8 months, doesn't it?

Re: Have we been thinking about inflation all wrong?

#434

Post by coryrc »

jessaustin wrote: post #422
coryrc wrote: post #419

Earlier quoted context omitted.

Graph housing and health care prices. Maybe low inflation was a lie all along.

OK, sure, let's assume inflation has been understated this whole time. (That might even be true!) Do you suggest that it's less understated now? If not, we still don't see the simple relation suggested upthread between inflation and a hypothetical "incorrect" Fed policy, since Fed policy has been pedal-to-the-metal for a long time.

I think the current reported inflation is related to notable supply (eg ICs) or demand (eg home improvement) changes, as a first order cause. But why do so many have excessive money to burn on increasing demand? Because asset prices are propped up with Fed dollars and no-interest loans.

Re: Have we been thinking about inflation all wrong?

#435

Post by sleepingadmin »

imtringued wrote: post #256
sleepingadmin wrote: post #66

The walrus being a far-left MMT proposing place wrote this when inflation was at 3.5% or so. It's now much higher and very evidently out of control. The article quotes Mark Carney, as if he were on their side. BoE under Carney have raised interest rates twice: https://tradingeconomics.com/united-kingdom/interest-rate and that hasn't even dented inflation. https://tradingeconomics.com/united-kingdom/inflation-cpi I be…

Inflation is never out of control, the only thing that is out of control is our desire to deny reality. You can stop inflation at any point with a negative interest rate. The moment you do that you can start increasing reserve requirements, if you are ambitious you can go all the way to 100%.

>Inflation is never out of control, the only thing that is out of control is our desire to deny reality.

This is great news for commie countries like Venezuela and Cuba whose currencies have collapsed and are worthless.

>You can stop inflation at any point with a negative interest rate. The moment you do that you can start increasing reserve requirements, if you are ambitious you can go all the way to 100%.

How does that work? You want to remove our fractional banking reserve? I want to know much more!

Re: Have we been thinking about inflation all wrong?

#436

Post by sleepingadmin »

bryanlarsen wrote: post #94
sleepingadmin wrote: post #66

The walrus being a far-left MMT proposing place wrote this when inflation was at 3.5% or so. It's now much higher and very evidently out of control. The article quotes Mark Carney, as if he were on their side. BoE under Carney have raised interest rates twice: https://tradingeconomics.com/united-kingdom/interest-rate and that hasn't even dented inflation. https://tradingeconomics.com/united-kingdom/inflation-cpi I be…

> It's now much higher and very evidently out of control. Monthly inflation is slowing, and is at an annualized 4.8%. We had a big spike in the summer/fall that's still showing up in our annual figures, but inflation itself is coming under control. https://news.ycombinator.com/item?id=30289147

>Monthly inflation is slowing, and is at an annualized 4.8%. We had a big spike in the summer/fall that's still showing up in our annual figures, but inflation itself is coming under control.

https://tradingeconomics.com/united-states/inflation-rate-mo...

Maybe that would have been believable in August. No way I can look at that graph and say it's slowing.

https://tradingeconomics.com/united-states/inflation-cpi

That's a gigantic 7.5%. A butt puckering 7.5%.

Re: Have we been thinking about inflation all wrong?

#437

Post by sleepingadmin »

neilwilson wrote: post #406
sleepingadmin wrote: post #66

The walrus being a far-left MMT proposing place wrote this when inflation was at 3.5% or so. It's now much higher and very evidently out of control. The article quotes Mark Carney, as if he were on their side. BoE under Carney have raised interest rates twice: https://tradingeconomics.com/united-kingdom/interest-rate and that hasn't even dented inflation. https://tradingeconomics.com/united-kingdom/inflation-cpi I be…

"It's now much higher and very evidently out of control." Only to those that fixate on changing prices as though they should never happen and are a mortal sin. In reality price is just the market allocating scarce resources to those who can make better use of them. There's no magic here. We're making less stuff because people have thrown sand in the works due to bureaucratic government restrictions. So who gets to lo…

>Only to those that fixate on changing prices as though they should never happen and are a mortal sin.

Inflation is a requirement of a healthy economy. How much is important to debate and should be politically an option to tinker with. Though I suspect many would be afraid to touch it. MMT politicians are more than welcome to jump into the seat if they garner enough support from democracy.

>When you start critiquing MMT, always best to understand the source material first, rather then getting your view from Twitter et al. They don't understand what MMT is saying either.

There's also a reason why MMT died a horrible death in the last several months. The Twitter critiques were right.

In fact I will go so far as to say they were MORE THAN right. The predictions they made that make MMT look bad were under predicted. MMT reality is so much worse.

Re: Have we been thinking about inflation all wrong?

#438

Post by flavius29663 »

MSM wrote: post #336
flavius29663 wrote: post #207

Earlier quoted context omitted.

I don't understand this bickering about Trump signing the checks, I got a check from Biden as well, with his signature.

Him signing the check doesn't matter to me either way. However, there's some irony in the fact that we got money, printed out of nowhere, signed by the previous president, and yet there are people that act like inflation is solely a "current administration" problem.

The first stimulus was needed, the second was so-so, the third was just unnecessary and just a way for democrats some money themselves.

Re: Have we been thinking about inflation all wrong?

#439

Post by tombert »

whakim wrote: post #145
tombert wrote: post #35

Earlier quoted context omitted.

Wouldn't most billionaires have most of their money in real estate and the stock market (e.g. with index funds or hedge funds or something of that ilk)? It probably was especially true in 2020, when it was so cheap to get into the stock market and the bailouts made it seem like inflation was inevitable [1]. I would think that most poorer people don't have stock portfolios filled with DIA or QQQ shares; the poorer peo…

It depends, because different types of assets respond differently to inflation. The wealthier you are, the more likely you are to have more esoteric investments. The bottom 50% of the wealth distribution in most countries (including the United States) own almost no assets (including cash in savings accounts) and are often debtors, so they may find that inflation reduces their debts to a greater degree than their savi…

I think this assumes that wages keep up with inflation, which has not traditionally been the case for low-wage workers (or even high-wage workers for that matter).

Re: Have we been thinking about inflation all wrong?

#440

Post by flavius29663 »

rhacker wrote: post #377
diob wrote: post #230

Earlier quoted context omitted.

This seems like an alarmist take, the truth is wages haven't been going up much and yet inflation was occurring regardless. What caused inflation then? Why do folks only ever worry about inflation when it comes to increasing the bottom wages?

They haven't? All I have been hearing for the last 2 years are minimum wage going to 15, and now 18 is the next target.

Minimum wage is de-facto 15, with Amazon offering at least that everywhere. Now we see additional requests for increase. This will never stop. The problem is not with the minimum wage amount, it's with helping people getting off of that, minimum wage should be a temporary stopgap in a person's life. Living on minimum wage sucks hard, no matter the amount. If you increase it, you will only have more people living on minimum wage, struggling to make ends meet. At 7.25, a person doing 20 was fine. Now at 15, a person doing 20 is struggling.
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