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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

#21

Post by rembicilious »

saghm wrote: post #16
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…

> 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…

It seems like capping prices would cap inflation, but I can’t think of any great mechanism to accomplish such a cap. Central bank interest rates and taxes are controlled by relatively few people. Prices are controlled by hundreds of thousands of people.

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

#22

Post by rightbyte »

nyokodo wrote: post #6
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…

> People will then have even less money after paying the grocery and gas-bills. Precisely. The less money people have the lower prices have to go for sales to be possible so increased unemployment is a downward force on prices but isn’t all that successful right now when there’s also a massive skilled labor shortage in the vicinity of record expansions of the money supply.

Instead of forcing some people into unemployment wouldn't raising taxes a little bit on everyone have the same effect?

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

#23

Post by lordnacho »

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…

The problem is not that prices keep going up, is that they do so unevenly among various goods and services. This adds a dimension of instability that makes it hard to decide what to do for everyone.

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

#24

Post by BizyDev »

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…

Certainly what you point out is probably part of the problem but it is, in my opinion, certainly not the biggest part.

For me, current inflation is caused by the fact that people have too much money the do not need and they invest it instead of buying goods.

This leads too more speculation on everything, stocks, cryptos, energy, real estate and even staple foods.

In the last 10 years every of those indexes has gone massively up. This has resulted in companies having share prices increasing faster than their performance would have suggested. If there's more demand for company X stocks then the price will go up even if company's performance is not so great.

And here starts the loop for me, company X employees want a slice of this cake. Their are recompensed for the higher stock price (bonuses, wage increases) and not for their "real life" performance. And now those employees have even much more money they didn't need, so what they do? They invest and speculate => loop.

While the upper middle class (and above) has became richer thanks to this (more salary, stellar investment performance, low interest rates to invest even more etc) the bottom class has lost everything, they have pretty much the same salary than 10 years ago but everything is more expensive.

Nevertheless, almost everywhere in the world, we have also seen wealth tax cuts. So those who had money to invest have now even more and those who need to be helped are helped even less because less taxes means a state less able to help them.

All of this have brought us to where we are today. Unfortunately.

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

#25

Post by medvezhenok »

rembicilious wrote: post #21
saghm wrote: post #16

Earlier quoted context omitted.

> 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…

It seems like capping prices would cap inflation, but I can’t think of any great mechanism to accomplish such a cap. Central bank interest rates and taxes are controlled by relatively few people. Prices are controlled by hundreds of thousands of people.

It would cap reported inflation, but capping prices just turns inflation into shortages (since demand > supply either way), and potentially slows down the supply response (high prices incentivize more supply).

If supply is actually restricted (and can't be increased), then capping prices makes sense in certain scenarios, and indeed price caps have been used historically in the U.S., from the 1940s through the 1970s.

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

#26

Post by rogersnm »

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.

> It is about causing capital investment to be less lucrative than tying the money up in treasuries

Money isn't tied up in treasuries, money (loosely bank deposits and cash) and treasuries are two distinct concepts. You can trade money in exchange for treasuries, but then the previous holder of the treasuries has the money, and you have the treasuries, it doesn't tie the money up.

The amount of value captured in treasuries is a function of the total government debt outstanding, and a way to increase that value is to issue more Government debt (in which case, the money goes to the Government to then spend, it still isn't tied up), however the Government is actually disincentivised to do this as their cost of borrowing (interest rates) goes up.

> That’s why the last huge injection of money in 2008 didn’t cause inflation.

The "injection of money in 2008" (the creation of central bank reserves) didn't cause inflation because the overall quantity of broad money still fell over that time period (https://fred.stlouisfed.org/series/DDOI07USA648NWDB). This was because of the "credit crunch" occurring at the time, where commercial banks where massively reducing their lending activities. The same is not true now, the creation of additional central bank reserves in the past 2 years has directly translated into more broad money, and we have inflation as a result.

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

#27

Post by [deleted] »

barry-cotter wrote: post #17
raydiatian wrote: post #13

Earlier quoted context omitted.

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...

[deleted]

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

#28

Post by ShamelessC »

xivzgrev wrote: post #19

Interesting article but she continually cites one source about her hero - Paul volcker himself. I would believe her premise that he broke inflation more if she included other sources, especially other financial leaders from the time.

There are several other financial leaders "of the time" quoted and summarized in the article.

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

#29

Post by [deleted] »

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.

[deleted]

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

#30

Post by pcai »

barry-cotter wrote: post #18
pcai wrote: post #8

Earlier quoted context omitted.

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.

once inflation is embedded in the economy the velocity of money matters more than the supply, because the sticky price effect causes a spiral.

there will be enough money in that business's account because they will do the obvious thing and increase prices by 13% - after all, their costs are up and their customers are making more money so they can easily absorb the increase.

here is a simplified illustration of the phenomenon https://archive.nytimes.com/krugman.blogs.nytimes.com/2008/0...

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