What the Great Inflation (1965-1982) taught us • Hacker News Board

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

#31

Post by bloodyplonker22 » Sat, Oct 29, 2022, 7:41 AM UTC

rogersnm wrote: post #26

jnwatson wrote: post #11

Earlier quoted context omitted.

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 trea…

In addition, here's one big difference: the Biden Administration printed 1.7T worth of handouts, which was mostly spraying helicopter money directly to the people. During the financial crisis of 2008-2009, TARP was not mostly helicopter money given directly to the people. It was given to institutions, so it was much more indirect. With the Biden Administration's money spraying, a good amount of that taxpayer money went to covid relief scammers.

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

#32

Post by rogersnm » Sat, Oct 29, 2022, 7:44 AM UTC

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…

> 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.

The problem is a situation of run-away inflation can arise. This happens because the vast majority of the money supply is created by commercial banks lending activities (not central bank reserves as many seem to believe) - i.e. whenever any commercial bank lends, it creates new money.

When inflation goes up sharply, real interest rates can become sharply negative (as they are presently), and this provides an incentive to borrow money at negative real rates, where you profit by not having to repay as much in the future as you borrowed in real terms. This borrowing/lending activity itself then serves to further increase the money supply, until such time as interest rates are raised sufficiently so as to bring the (expected) real interest rate back into positive territory, thereby removing the profit incentive that drives marginal money creation.

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

#33

Post by rogersnm » Sat, Oct 29, 2022, 7:48 AM UTC

paulpauper wrote: post #10

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…

Higher unemployment is generally deflationary according to mainstream economic theory and empirical evidence

Correlation or causation though? If it's correlation then higher unemployment is not in and of itself deflationary, it's just that whatever causes higher unemployment also causes reduced inflation. A non-causal link makes more intuitive sense than a direct causal link: as we go from monetary stimulus (having too much money) to monetary contraction (having too little money), demand for labour cools, as does the rate of increases in the price level.

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

#34

Post by tkk23 » Sat, Oct 29, 2022, 7:53 AM UTC

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.

I would rather say it's money throughput, not velocity.

Higher interest rates also lead to less borrowing which reduces the volume of available money. Together with the reduced velocity, this leads to an overall reduced throughput.

That said, why is money velocity, or throughput, reduced when inflation itself is a self-correcting problem?

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

#35

Post by rogersnm » Sat, Oct 29, 2022, 7:54 AM UTC

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.

If you cap prices for a given company or product, you prevent that company (or producers of that product) from competing effectively for the inputs to that product in the broader market place (bear in mind things like labour and energy are relatively interchangeable between companies), that can ultimately mean that the company can no longer produce anything at all (if the cost of their inputs rise above their sale price cap).

The only way to make a price cap work is to set all prices in the economy, which as you observe, is not possible. The much more practical solution to maintaining a stable general price level is to adequately control the quantity of money that exists.

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

#36

Post by nverno » Sat, Oct 29, 2022, 7:55 AM UTC

rogersnm wrote: post #32

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…

> 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. The problem is a situation of run-away inflation can arise. This happens because the vast majority of the money supply is created by commercial banks lending activities (not central bank reserves as many se…

Why isn't the Fed raising the reserve rate (apparently it was set to 0 in 2020[1]) to reduce commercial banks creating new money?

[1] https://www.investopedia.com/terms/b/bank-reserve.asp#citati...

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

#37

Post by rogersnm » Sat, Oct 29, 2022, 7:56 AM UTC

nverno wrote: post #36

rogersnm wrote: post #32

Earlier quoted context omitted.

> 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. The problem is a situation of run-away inflation can arise. This happens because the vast majority of the money supply is created by commercial banks lending activities (not central bank reserves as many se…

Why isn't the Fed raising the reserve rate (apparently it was set to 0 in 2020[1]) to reduce commercial banks creating new money? [1] https://www.investopedia.com/terms/b/bank-reserve.asp#citati...

The Fed is doing exactly that: https://fred.stlouisfed.org/series/FEDFUNDS

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

#38

Post by nverno » Sat, Oct 29, 2022, 7:59 AM UTC

rogersnm wrote: post #37

nverno wrote: post #36

Earlier quoted context omitted.

Why isn't the Fed raising the reserve rate (apparently it was set to 0 in 2020[1]) to reduce commercial banks creating new money? [1] https://www.investopedia.com/terms/b/bank-reserve.asp#citati...

The Fed is doing exactly that: https://fred.stlouisfed.org/series/FEDFUNDS

Ah thankyou, do you think it will spike anything like it did in the 80s?

[edit: I see she discusses this in article as well, now]

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

#39

Post by [deleted] » Sat, Oct 29, 2022, 8:02 AM UTC

bloodyplonker22 wrote: post #31

rogersnm wrote: post #26

Earlier quoted context omitted.

> 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 trea…

In addition, here's one big difference: the Biden Administration printed 1.7T worth of handouts, which was mostly spraying helicopter money directly to the people. During the financial crisis of 2008-2009, TARP was not mostly helicopter money given directly to the people. It was given to institutions, so it was much more indirect. With the Biden Administration's money spraying, a good amount of that taxpayer money we…

[deleted]

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

#40

Post by Rufbdbskrufb473 » Sat, Oct 29, 2022, 8:34 AM UTC

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…

> It is simply not possible to invest in anything that can keep up with the inflation

Why not just invest in diversified real estate rather than betting on a single property and its local market? In expectation, the returns should be similar on average but with lower volatility.

I'd rather rent and put capital in a real estate investment fund. I guess something could be said for buying a property if you're very certain that you'll live there for the rest of your life, but if you would ever like to move, you'd be highly exposed to fluctuations in the value of a single asset, your home.