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What the Great Inflation (1965-1982) taught us

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Re: What the Great Inflation (1965-1982) taught us

#11

Post by jnwatson »

galaxyLogic wrote: post #4

If inflation is caused by people having too much money then it is a self-correcting problem because as prices go up people will no longer have as much money. Soon enough they will not have too much money at all. So what is the real problem with inflation? Is it the economic inequality it brings to those who have to live on fixed income? I've been following the discussion on US TV and it seems they are saying we need…

Inflation isn’t caused by too much money. It is caused by too much money velocity. That’s why the last huge injection of money in 2008 didn’t cause inflation. Folks sat on their money and didn’t spend it.

Raising interest rates isn’t about causing unemployment (directly at least). It is about causing capital investment to be less lucrative than tying the money up in treasuries, reducing money velocity.

Re: What the Great Inflation (1965-1982) taught us

#12

Post by pcai »

jnwatson wrote: post #11
galaxyLogic wrote: post #4

If inflation is caused by people having too much money then it is a self-correcting problem because as prices go up people will no longer have as much money. Soon enough they will not have too much money at all. So what is the real problem with inflation? Is it the economic inequality it brings to those who have to live on fixed income? I've been following the discussion on US TV and it seems they are saying we need…

Inflation isn’t caused by too much money. It is caused by too much money velocity. That’s why the last huge injection of money in 2008 didn’t cause inflation. Folks sat on their money and didn’t spend it. Raising interest rates isn’t about causing unemployment (directly at least). It is about causing capital investment to be less lucrative than tying the money up in treasuries, reducing money velocity.

spot on about money velocity.

in addition to capital investment there's also a lot of impact by manipulating current consumption that responds to interest rates - like the housing market, which is mostly consumption.

Re: What the Great Inflation (1965-1982) taught us

#13

Post by raydiatian »

bfung wrote: post #7
galaxyLogic wrote: post #4

If inflation is caused by people having too much money then it is a self-correcting problem because as prices go up people will no longer have as much money. Soon enough they will not have too much money at all. So what is the real problem with inflation? Is it the economic inequality it brings to those who have to live on fixed income? I've been following the discussion on US TV and it seems they are saying we need…

> it is a self-correcting problem because as prices go up people will no longer have as much money. It’s not as simple as that, and thinking about the second and third order follow-ons is important. History has taught us it goes something like this: 1. People have more money, so the majority spend it (instead of saving it). 2. Companies, seeing more demand, but can’t expand supply as quickly, raise prices. 3. People…

I haven’t studied Econ too much, but I know differential equations. Is there any economic theory suggesting a stable curve that doesn’t oscillate around the mean (but rather tightens up right onto the “mean” whatever that is) is desirable? I get we’re also talking planet scale complexity, and it’s not like that can just be baked in overnight.

Re: What the Great Inflation (1965-1982) taught us

#14

Post by mudrockbestgirl »

galaxyLogic wrote: post #4

If inflation is caused by people having too much money then it is a self-correcting problem because as prices go up people will no longer have as much money. Soon enough they will not have too much money at all. So what is the real problem with inflation? Is it the economic inequality it brings to those who have to live on fixed income? I've been following the discussion on US TV and it seems they are saying we need…

> So what is the real problem with inflation? Is it the economic inequality it brings to those who have to live on fixed income?

Yes, that's part of it. Inflation is a race. It's not a problem for whoever gets access to the newly created money first. It's a tax on people who have fixed income (or cash reserves) of some kind, because they will be the last group the new money flows to. It's not about the increase in money supply, which doesn't really matter because the market will adjust prices, it's about how the newly created money flows through the economy.

Re: What the Great Inflation (1965-1982) taught us

#15

Post by terminalcommand »

paulpauper wrote: post #9
foobiekr wrote: post #5

Earlier quoted context omitted.

1965 is a commonly picked start date because it is the worst time in the last 100+ years to retire with a self-funded portfolio. It’s commonly used in the FIRE community to check withdrawal plans.

It depends on your individual consumption preferences. Just because the CPI is 7%/year does not mean you are losing 7%. If you have $1 million in cash and your expenses are $40k/year and CPI goes up 10%, then all you need is to invest the $960,000 in fixed income to negate the increase of $4k due to inflation, which is easily doable. If you are taking that $1 million and buying only energy or only food with it, then…

Another perspective, we have 83.45 %/year CPI inflation in Turkey. This is the official number an independent research group of academics claim it is nearing 200%. The official interest rate is 10.5%/year. You get maximum 20-25%/year interest on savings accounts. Real estate market and rents go up 220%/year (by the official numbers).

Before doing FIRE purchase your own home or sign a really long term lease with upfront payment and no increases, inflation caused by corruption (as in my country's case) wreaks havoc on savings. It is simply not possible to invest in anything that can keep up with the inflation, you get poorer by the day.

Re: What the Great Inflation (1965-1982) taught us

#16

Post by saghm »

bfung wrote: post #7
galaxyLogic wrote: post #4

If inflation is caused by people having too much money then it is a self-correcting problem because as prices go up people will no longer have as much money. Soon enough they will not have too much money at all. So what is the real problem with inflation? Is it the economic inequality it brings to those who have to live on fixed income? I've been following the discussion on US TV and it seems they are saying we need…

> it is a self-correcting problem because as prices go up people will no longer have as much money. It’s not as simple as that, and thinking about the second and third order follow-ons is important. History has taught us it goes something like this: 1. People have more money, so the majority spend it (instead of saving it). 2. Companies, seeing more demand, but can’t expand supply as quickly, raise prices. 3. People…

> For example, when companies can produce a good at a rate X, they can up prices at rate 1.05X. But suddenly, they run out of resources and can only produce at constant, instead of rate X, but continue to raise prices due to “projected” demand.

> You have to break the cycle somewhere, and it’s painful no matter where you start, from unemployment or raise taxes or add regulations.

I know your explanation is simplified, but as you describe it, it seems like the obvious solution is to just stop raising the prices? I feel like there must be something more complicated at play, because "we need more unemployment so that the companies don't have to stop raising their prices due to incorrect predictions" is ridiculous.

Re: What the Great Inflation (1965-1982) taught us

#17

Post by barry-cotter »

raydiatian wrote: post #13
bfung wrote: post #7

Earlier quoted context omitted.

> it is a self-correcting problem because as prices go up people will no longer have as much money. It’s not as simple as that, and thinking about the second and third order follow-ons is important. History has taught us it goes something like this: 1. People have more money, so the majority spend it (instead of saving it). 2. Companies, seeing more demand, but can’t expand supply as quickly, raise prices. 3. People…

I haven’t studied Econ too much, but I know differential equations. Is there any economic theory suggesting a stable curve that doesn’t oscillate around the mean (but rather tightens up right onto the “mean” whatever that is) is desirable? I get we’re also talking planet scale complexity, and it’s not like that can just be baked in overnight.

The costs of inflation are mostly in surprise, adjustment, monitoring or uncertainty. A stable rate puts all of those at or near zero. High, stable, predictable inflation would be better than usually low but unstable inflation. For a perfectly fine introduction to why inflation is bad see the link below.

https://quickonomics.com/the-costs-of-inflation/#:~:text=The...

Re: What the Great Inflation (1965-1982) taught us

#18

Post by barry-cotter »

pcai wrote: post #8
galaxyLogic wrote: post #4

If inflation is caused by people having too much money then it is a self-correcting problem because as prices go up people will no longer have as much money. Soon enough they will not have too much money at all. So what is the real problem with inflation? Is it the economic inequality it brings to those who have to live on fixed income? I've been following the discussion on US TV and it seems they are saying we need…

inflation is only initially caused by money supply. once inflation expectations become embedded, it becomes a self-reinforcing perpetual motion machine. e.g. imagine you negotiate a 13% raise because inflation was 13% last year (btw so did everyone else). congrats - everyone just guaranteed that they will have enough money to create 13% inflation next year, when the cycle will repeat unemployment solves this because…

> it becomes a self-reinforcing perpetual motion machine.

Only until expectations catch up with the reality of the money supply. If there isn’t enough money in the business’s account to pay that 13% raise people get fired or the contract gets renegotiated, or the business goes under.

Re: What the Great Inflation (1965-1982) taught us

#20

Post by reducesuffering »

terminalcommand wrote: post #15
paulpauper wrote: post #9

Earlier quoted context omitted.

It depends on your individual consumption preferences. Just because the CPI is 7%/year does not mean you are losing 7%. If you have $1 million in cash and your expenses are $40k/year and CPI goes up 10%, then all you need is to invest the $960,000 in fixed income to negate the increase of $4k due to inflation, which is easily doable. If you are taking that $1 million and buying only energy or only food with it, then…

Another perspective, we have 83.45 %/year CPI inflation in Turkey. This is the official number an independent research group of academics claim it is nearing 200%. The official interest rate is 10.5%/year. You get maximum 20-25%/year interest on savings accounts. Real estate market and rents go up 220%/year (by the official numbers). Before doing FIRE purchase your own home or sign a really long term lease with upfro…

Yes, it is underappreciated in urban circles how much owning physical assets (land, reliable fuel-efficient vehicles, fruit trees, tools, wood for construction & heat) help weather rough times. They're very frequent in history, but a scant memory for many in the west. Digital IOU assets will not completely cut it.
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