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

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

#121

Post by marcosdumay »

ForHackernews wrote: post #24
WalterBright wrote: post #15

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…

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.

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.

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

#122

Post by WalterBright »

sbf501 wrote: post #48
WalterBright wrote: post #15

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…

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.

> 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.

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

#123

Post by wpietri »

WalterBright wrote: post #106
wpietri wrote: post #86

Earlier quoted context omitted.

> 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

> 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/

> The US had zero net inflation from 1800 to 1914.

This is just absurd. Not only is this a period so different than a modern economy that it's not useful for comparison, but during that period it was a roller coaster of inflation and deflation, both of which are terrible for people. Those curious can see the volatility here: https://commons.wikimedia.org/wiki/File:US_Historical_Inflat...

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

#124

Post by WaxProlix »

Syonyk wrote: post #21

> 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 t…

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.

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

#125

Post by WalterBright »

jollybean wrote: post #67
rnernento wrote: post #45

Earlier quoted context omitted.

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?

Because the 'simple straight forward explanation' doesn't make much sense. As economies grow and expand, they need more money supply to keep prices stable. If you're using 100 tons of Gold as your 'fixed money supply' then you run into deflationary problems. Also, if there is a crisis in which people get really anti-liquid and tend to hoard and do other bad things, and/or the system needs to allocate resources somewh…

Some good questions. The answer isn't simple, but I'll try.

It comes down to how banks work with fractional reserve banking. (To keep this post short, I'll refer you to google if you don't know what it is.) Banks loan out a multiple of their deposits. In other words, banks create money when they make loans. Amazing, isn't it? But, banks don't loan money unless there is collateral. The next part is tricky to understand. If I, Picasso, create a painting I create value. I can use the painting as collateral for a bank loan, i.e. because I created value, I also indirectly created money!

With me so far? Next, what happens when I repay the loan? The money disappears!

If you think about it, you'll see that the money supply, through the blind forces of Supply & Demand, tracks the value in the economy, almost like magic. While the gold it represents can sit buried in a vault somewhere and needn't actually be traded.

Inflation happens when the government prints money that has no collateral, and has no correspondence to added value in the economy and so it dilutes the value of the money that is already in circulation.

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

#126

Post by gumby »

WalterBright wrote: post #53
gumby wrote: post #30

Earlier quoted context omitted.

> 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.

Carter could have ended the soul-sapping, grinding misery of endless gas lines, like Reagan did on his very first day in office, with the stroke of a pen. Carter had no idea how economics works. The prosperity of the 80's was great.

It was Carter who did most of the deregulation (air travel, trucks, trains — elimination of icc). Reagan switched to a deficit-based fiscalized economy, hollowed out manufacturing, and channeled cash upwards towards the wealthy.

Sure, the “prosperity of the 80's was great” for me — I was getting FAANG scale salary as a new grad to do AI development. But plenty of my friends were on the losing side of that divide (think, “breaking away”) and it wasn’t great for them, and never became great.

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

#127

Post by WalterBright »

gumby wrote: post #126
WalterBright wrote: post #53

Earlier quoted context omitted.

Carter could have ended the soul-sapping, grinding misery of endless gas lines, like Reagan did on his very first day in office, with the stroke of a pen. Carter had no idea how economics works. The prosperity of the 80's was great.

It was Carter who did most of the deregulation (air travel, trucks, trains — elimination of icc). Reagan switched to a deficit-based fiscalized economy, hollowed out manufacturing, and channeled cash upwards towards the wealthy. Sure, the “prosperity of the 80's was great” for me — I was getting FAANG scale salary as a new grad to do AI development. But plenty of my friends were on the losing side of that divide (thi…

Carter didn't deregulate the gas, which was a huge drag on the economy as everyone had to wait hours in line for gas.

> Reagan switched to a deficit-based fiscalized economy,

That was caused by the Democrat-controlled Congress. Reagan tried to get a balanced budget, and Congress stymied him every time.

> hollowed out manufacturing, and channeled cash upwards towards the wealthy.

That's just propaganda.

> “breaking away”

is a fictional movie. Please use factual references.

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

#128

Post by Syonyk »

WaxProlix wrote: post #124
Syonyk wrote: post #21

> 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 t…

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.

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.

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

#129

Post by mrep »

Syonyk wrote: post #21

> 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 t…

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.

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

#130

Post by voisin »

go_elmo wrote: post #115
sometimeshuman wrote: post #98

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…

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

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.

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