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

mrjin

The only thing we learnt from history was that *we learn nothing from the history*.

For the past decades, what were the central banks all over the world doing? Nothing but printing money. Whenever there was a (economical) crisis, the only measure was printing money, *nothing but printing money*. Were the problems resolved ever? Never!!. They event pretended to be innocent by asking "why there were no inflation". Of course, there was no inflation as the design of CPI, the indicator of indicator, was flawed. CPI does not consider price of assets, otherwise sky would be the limit. There were crisis simply because the money went to the people who didn't it that much. Printing much made things worse as most of the printed money went to those didn't need it much, but nonetheless had postponed them a lot.

Such pretending to be dumb game could have being played a lot longer if not the pandemic which made them had no choice but printing money and sending them to those in need. And all of a sudden, those who needed the money most had so much cash they had never imaged before? What were they going to do? For sure spending them all.

Now here is the long *expected* inflation, what are central banks planning to deal with it? Increasing interest rate to where it should be? Seems too hard, let's print more money!

pas

CPI has asset components, like housing.

Central banks have one universal lever, and they use it. (This is by design, so it can be mostly independent.) The responsibility is on the fiscal side to spend it on shit that actually matters.

Sending people money without means testing is dumb, but politics in this age is dumb.

Unfortunately harping half-truths about central banking won't help with the situation :/

Your comment completely ignores the supply side of inflation, ie. food & energy prices. Ie. there's a war between the food and fossil faucets of Europe.

See also the whole baby formula debacle (sustained government intervention reduced the market to a very fragile one, and lobbying and protectionism prevents imports to the US), see the perverse incentives in low-paying logistics sectors (the big ports are all owned by local governments, and they are shit at responding to supply-and-demand, and trucking is of course completely fucked because the liability is shifted to the drivers while the profit is nicely shifted off of their hands, due to a relative large pool of potential new drivers to fleece).

simonebrunozzi

Most of the spike in energy costs for the consumers is caused primarily by how energy markets are designed, not by hikes in gas prices (which could only justify a small part of the price hike).

See this long, but well explained, video on the topic [0].

[0]: https://www.youtube.com/watch?v=NicE0-N9ux0

lumb63

Neglecting issues due to the war in Ukraine, a lot of the “supply side issues” are not totally isolated from central bank policy, QE, and stimulus. The use of QE and stimulus increased demand, while simultaneously, government policy decreased supply. Now, supply is (mostly) recovered, but demand still remains elevated. Supply can’t keep up, because its target is too high.

This is why we see talk from the Federal Reserve about how consumers will “feel pain” - the only way to reduce demand is to reduce employment or wages, to a level that the supply chain is capable of keeping up with. The Fed press conferences are really interesting to watch as they make this very clear - we are really looking at an “imbalance between supply and demand” due in part to all of economic, social, and political factors.

Also, regarding the CPI not reflecting asset prices: the CPI does not include any measure of equity prices, for instance. Since so many rely on equities to fund their retirement, an increase in equity prices is a meaningful inflation. If the price of the S&P 500 for instance is higher due to an asset bubble, it decreases my ability to purchase shares of it. The increase in equity prices we see is really inflation of equities, but never branded as such. We call it “return on investment”, because the people talking about it are mostly those who already own equities, not those looking to buy them. It’s the same reason as why homeowners dislike seeing home prices increase, while homebuyers enjoy it.

I’ll also mention that the CPI has a lot of other bunk practices in it. For instance, “hedonistic adjustment”. A (slightly conspiratorial) site called ShadowStats computes a modified CPI that uses older CPI methodology (before the meaning of inflation was redefined to show lower inflation) that currently sits at 17 or so percent.

pas

Just quickly on ShadowStats, and why it's complete bullshit (it's not slightly it's 120% conspiratorial :D)

http://blog.jparsons.net/2011/03/shadow-stats-debunked-part-...

https://www.thestreet.com/economonitor/emerging-markets/deco...

https://www.bls.gov/opub/mlr/2008/08/art1full.pdf

> If the price of the S&P 500 for instance is higher due to an asset bubble, it decreases my ability to purchase shares of it.

BLS says that the CPI doesn't track savings, just day-to-day living expenses. And that's okay, people want these indices to do everything. (And the Fed is not even using the CPI, they are using the PCE ... and there's a bunch more https://www.bea.gov/resources/learning-center/quick-guide-so... And the PCE is considered too broad, because it has inputs from businesses, nonprofits, etc. But of course it's not like business costs are irrelevant to the economy...)

That said, I think the biggest problem is that these general indices are used for things like welfare calculations, but they already don't represent the average welfare recipient. So adding equity would make it even less useful for that. (Which is mostly just an argument for having more indices, each representing a large chunk of society. But of course the cynic in me says that we already have one for the important people, the SP500, and poor people only matter when they are undecided voters in swing states.)

> Now, supply is (mostly) recovered, but demand still remains elevated.

Mostly, though basic input like oil is still not at the early 2020 levels. Aaand OPEC cut production just yesterday.

https://ycharts.com/indicators/world_crude_oil_production (5Y chart)

> we are really looking at an “imbalance between supply and demand” due in part to all of economic, social, and political factors.

Yep. And every think tank from the political zoo has their own critique of the actions of the Fed, but monetary policy is simply a blunt tool, and all of the structural problems are ... surprise surprise ... structural conflicts between big powerblocks. (One common laughing stock is the Jones Act. US shipbuilding is basically non-existent, and what's left is useless for "national security" purposes anyway. But it's somehow completely entrenched. Similarly other protectionist policies that serve special interests serve exactly one purpose to enrich members of those special interest groups. It's bad for consumers, it's bad for the economy, it's bad for labor markets, etc.)

All in all there's an argument in this about how the US fucked up the transition during globalization. (The big one is using market access as a carrot in WTO, but then not enforcing reciprocity with China and others. And the lack of any real and effective management of wage deflation in the affected areas, like the rust belt, goes without saying.)

m0llusk

This is clearly an oversimplification because the crisis of 2008 was met with extreme money printing which did not cause a burst of inflation and was reeled in with relative ease as the economy restored itself. If money printing were the variable then it should cause inflation every time but it does not.

suoduandao2

I think the GP is saying, 2008's money printing did cause a burst of inflation in stocks, which would have otherwise fallen even further. Measuring CPI by excluding assets like growth stocks hides the true effect of this money printing by glossing over what most already wealthy spend money on.

pjmorris

The extreme money printing (look at the Fed's balance sheet before and after 2008 [0]) showed up as inflation in house prices, which have ballooned in relation to wage income. This was done for the explicit purpose of keeping the biggest lenders flush (see Timothy Geithner's comments about 'deeply unfair', e.g. [1]) and is exactly what the GP is describing.

[0] https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

[1] https://www.pbs.org/newshour/show/geithner

randomdata

> because the crisis of 2008 was met with extreme money printing which did not cause a burst of inflation

The inflation was very much visible in the places where the people who received the money spend their money (i.e. Wall Street). The money never made its way to Main Street, so naturally there would be no price pressure found there.

This time around the money was distributed to Main Street.

chasd00

The money printing in 2008/9 was in response to a deflationary spiral. It didn’t cause inflation because it was mopped up by the deflationary conditions.

gitfan86

At this point the fed seems to be saying that those days are over, they will continue to increase rates until inflation hits 2%. Obviously this cannot go on forever because it becomes impossible to service the debt and you have to print money to pay it off. But it gives you more time and prevents hyper-inflation and we can hope that by then AI and other technological advances have made what we consider "economics" mostly irrelevant.

diordiderot

> because it becomes impossible to service the debt

Those companies should have made more responsible financial decisions.

watersb

When the money was free (near zero interest rates), borrowing money to invest in capital was imminently responsible.

weberer

*governments

suoduandao2

>we can hope that by then AI and other technological advances have made what we consider "economics" mostly irrelevant.

Is there a serious hope that AGI will invent a replicator soon after coming online? It seems likeliest to me that if a greater-than-human intelligence comes online it won't have a circumvention for the laws of thermodynamics and there still won't be such a thing as a free lunch.

chasd00

If AGI came online it would probably look at the current conditions of its existence and segfault itself.

gitfan86

No replicator, just extremely cheap labor and energy. Imagine if someone from 1000 years ago could have access to an American garbage dump. Things that in our current economy have zero or negative value would be extremely valuable to those people (Plastics, Metals, Electronics, Machined Clothes, Plant Seeds)

That same thing will happen again once we have another huge advancement in technology. What we consider to be expensive and valuable today will be of zero or negative value to someone 100 years from now.

null

[deleted]

compumike

It may also help to see the cumulative inflation picture: https://totalrealreturns.com/s/USDOLLAR?normalize=end (disclosure: my side project)

The 1974 and 1980 peaks from the article correspond to the steeper slope regions in those same years on my graph. (I'm plotting 1/[CPI-U price level], while the article is plotting d/dt [CPI-U price level])

On my y-axis is the purchasing power of a US dollar, relative to current level. So when the y-axis shows 9.813 on 1962-10-04, this means that sixty years ago, a one-dollar bill would buy a basket of goods that today would cost $9.813.

It certainly "feels scary" when the purchasing power is eroding quickly (i.e. a fast-declining slope on my purchasing power graph, or a peak on the article's year-over-year derivative graph).

All data from BLS: https://www.bls.gov/news.release/cpi.nr0.htm

zie

I haven't dug into everything you are doing, but the biggest flaw I see seems to be that you assume Cash returns 0% nominal, i.e. that there is no return for holding cash. That is only true if you hide it under your mattress(and no deflation happens). Most people do not hide money under their mattress anymore, especially if they have large amounts of it. They put it in a bank account or in a MMF or some other interest producing place.

Since 1972, Cash has a real return of 0.53% (inflation adjusted):

https://www.portfoliovisualizer.com/backtest-asset-class-all...

consp

Doesn't that practically mean the rich get richer and the poor stay poor? If it would be net 0 everything would stay the same?

saurik

Is that surprising? Alternatively, do you have a fix in mind? Having power means you can build more things that give you more power faster than someone with less power. You can't change this using inflation, as people will just hold something else instead of cash (and, in fact, inflation seems to most punish the people with the least power, as those people are spending a much much greater proportion of their income on critical consumption and are least able to hold assets that aren't cash... hell: we make laws that actively limit or even prevent poorer people from holding non-cash assets "for their own protection").

robertlagrant

> Doesn't that practically mean the rich get richer and the poor stay poor? If it would be net 0 everything would stay the same?

The rich aren't rich through this route, although things they do mean that bank interest rates are a guaranteed return for people who are less risk-tolerant. They're rich through one or more of: risk-taking, talent, hard work, luck, connections, etc, all of which feed into the one thing that makes them money: usefulness to other people.

zie

Not because of this one thing, every bank offers some return on holding cash. Most are ridiculously low.

Personally I like to think of it as, the US govt guarantees a return on overnight cash based on the Federal funds rate. Banks and other people that hold cash will give you that rate minus some fee(s) for the hassle of keeping up with your cash for you. Most banks have a very hefty fee, but not all banks.

As of this writing:

The Federal Reserve will pay 2.56% for cash deposited with them.

Bank Of America pays 0.01%, for a fee of 2.55%/yr.

Ally bank pays 2.25% for their savings account for a cost of .31%/yr

If you are willing to hold cash in an ETF, ICSH will hold cash for a 0.08%/yr fee.

For the record, I'm not against Bank Of America, I have an account with them, but I don't hold much, if any, cash with them for any length of time, because I know they charge a lot for that service.

valenterry

Yes, if it were not for the inherent risk that comes with it. If you put the cash in your mattress you only face the risk of losing it due to it being stolen or when it burns. You can get insurance against that it this would need to be deducted as well. So effectively you are losing money.

Now for money on your bank that pays interest it's not necessarily better. The bank can be robbed or simply go bankcrupt. And since the money there was used by the bank for various things, there's no guarantee you'll get it back. This inherent risk needs to be priced into the ROI.

So IF the government always saves banks with buyout, then yes. That's also why I believe it's not a great idea and people of such a bank should lose at least a part of their assets/savings to understand the fact that the money isn's just stored by the bank.

p0nce

Yes, see also Piketty

xapata

Yep, always need to pick your risk-free asset for comparison.

rdtwo

Yeah but that’s not the whole picture… in 1962 the ford truck was $2000 now is around 40,000 so while a new one is better you still have to earn 2x as much to get the most basic one available

mrb

When I go to ford.com and look at their basic truck, the 2023 Maverick, I see "starting at $22,195". So if a 1962 truck truly sold for $2000, the inflation seems to account for entirely the price increase. And I'm pretty sure everyone will agree a 2023 Maverick is superior to a 1962 F-100 in every conceivable aspect.

Housing and healthcare are better examples of goods or services whose prices have increased faster than CPI-U.

raffraffraff

In the 80s when I was a kid, we owned our own house, even though my father was a small time farmer and my mother stayed home raising us. We scraped by. In today's standards, it was a life of abject poverty. I knew a guy whose father ran a steel company (self made millionaire). Their house wasn't much bigger than ours, but they had VCR, microwave, CD players and satellite TV years before we did. But the real difference was that they had a new Mercedes and we had a low-end Ford that we drove until it fell apart. Our house build cost about 4x the price of the Ford. The Merc? I don't have exact figures but I think you could have built our house at least 2.5x times before you hit the price of a new Merc. These days that's totally flipped around. For the cost of building my parents house today, you could have at least 4x new Mercs.

Aunche

I'd be surprised if you can get a truck at anywhere near MSRP these days. Trucks aren't a great example anyways because they're seen as a luxury good in the US today, which wasn't the case in the 60s.

dalbasal

Idk..

First, you can't get the old vehicle new for cheap. That option is no longer available. You do get an objectively better one, but value is fundamentally subjective.

Marginal economics bridges this gap with consumer choice, but if no choice is available then I don't think you can assume consumers are better off.

In any case, I think inflation is a backwards lens through which to examine vehicle prices. The primary mover is industrial learning curves. Inflation is downstream.

In the 20s, when domestic car sales increased annually, the auto manufacturing industry was constantly growing. Factory efficiency increased every year and prices came down every year. The model T got cheaper every year, not just better.

Part of what caused the depression was this process maturing. Auto sales peaked. Manufacturing volume stopped growing. Efficiency stopped growing with it.

This breaks many financial assumptions/instruments and results in deflation, or rather, a local quanta of deflation. Growth industries can vary a lot of long term debt/equity/promises. Shifting from one state to another is deflationary/deleveraging.

Anyway, vehicles stopped getting cheaper 100 years ago. They get better/nicer gradually. Not cheaper though, ever.

mikewarot

The F-150 is the lowest cost full size pickup truck Ford makes. If you can't put full sheets of plywood and 2x4s in it, it's not really a pickup truck.

  How Much Does the Ford F-150 Cost?

  The 2022 Ford F-150 starts at $29,990, which is the lowest base price in the full-size pickup truck segment. However, that's for the three-seat Regular Cab, so if you're looking for more room, take note of the Super Cab's $34,075 base price and the SuperCrew's $37,700 MSRP.
Source: https://cars.usnews.com/cars-trucks/ford/f-150

The nearest dealer to me had 17 of them ranging in price from USD$34k to USD$62k

once_inc

With regards to differentiating prices of products by category over time, this chart looks relevant: http://www.roseassociates.ca/20-years-of-price-changes-in-th...

"The Price of Tomorrow" by Jeff Booth really nails this concept.

gbro3n

I suspect that to an extent, prices rise with the proportion of income people are willing to allocate to something. Cars will rise to the amount that matches the importance people place on them. If cars become less important due to electric bikes and Zoom, manufacturers will be able to charge less. The investment in researching car design would decrease accordingly. Same with energy sources etc.

Klinky

You should go to a dealer and try to actually get one for $22,195. Dealers have been gouging with huge fees above sticker / MSRP.

more_corn

I’d prefer a brand new 62 f-150 to a 2023 maverick.

But yeah housing is a better example. We really fucked that one up didn’t we?

Healthcare is hard because we have so many better technologies, but worse outcomes so the price increase is arguably not worth it. Maybe this one is like the truck. Lotta new technology, at the end of the day not better.

washywashy

And most people rarely need a pickup truck for its specifically design utility. They likely just want a safer car which is essentially an arms race at that point. I think less pickup trucks on the road would be a good thing considering how the majority of people drive.

eru

American CAFE standards drove people away from station wagons and towards SUVs and pickup trucks.

logifail

> They likely just want a safer car

Are modern pickup trucks objectively safer than modern cars, or is it more about the perception of driving something that feels it's half way to being an armoured vehicle?

In Europe almost no-one drives around in a truck. Even the tradespeople (carpenters, plumbers, roofers, gardeners, heating installers, you name it) all drive light vans, not trucks.

arcticbull

You can't just pick one single item and consider it 'representative' of inflation. [1] Some things cost more than they used to, some less. Cars happen to have tracked very well.

[1] https://ritholtz.com/wp-content/uploads/2018/02/pricechanges...

zeckalpha

They also last much longer

taftster

Or we are forced to make them last longer.

tcbawo

I think a new 2022 Ford F-150 will run closer to $60k.

filoeleven

I had no idea that kids in 1962 were spending $100 on one piece of licorice. Kinda puts the “millennials and their avocado toast” thing in perspective, huh?

RayVR

Great stuff!

This is a nice demonstration of the variability of inflation and how under-trend we have been for many years. There was a strong push from some monetary policy people to move toward a longer term, average inflation targeting that would make the Fed have symmetric reaction functions to upside and downside inflation while attempting to keep a longer term average as the goal.

One interesting explanation for high inflation during the 1970s to early 1980s was that the monetary system and supply of real assets had to adjust to a massive influx of working age adults (babyboomers). A second wave from that population event started to enter the workforce over the last ten years. It might be interesting to normalize the data here against the size of the workforce.

Gibbon1

My partial theory is oil production grew exponentially up till a bit after 1970. And before that the US had outstripped domestic supply and started having to import oil.

And you are right boomers household formation increased demand for stuff.

collegeburner

nice site you built. where did you source the data?

dkrich

The most dangerous thing that can happen to an advanced economy is credit markets grinding to a halt. It was the panic of 1907 that created the federal reserve in the first place.

Over the ensuing decades there was a very awkward path to eventually figuring out that at the moments where a complete halt to credit markets looks imminent, the fed should step in and release the jam. What we’ve learned is that just the knowledge of the fed being able to just print and buy any debt and that they would do so caused major crises to be avoided (2008 and 2020).

The problem recently has been that this fed is simply incompetent. They do not form their own opinions and simply follow what the prevailing narrative dictates. If it’s consensus that rates should not be lifted, they just coast through those meetings towing the same line and continuing to buy bonds.

Then one day the narrative shifts and concern starts to grow over fed policy. So the fed suddenly reverses course and announces sudden rate hikes. When it turns out that cpi moves slower than the fed hoped, the pressure to intervene grows.

Now the consensus is that the fed should be making multiple 75-100 bps hikes so that’s what they do.

The question now is will the narrative shift fast enough for them to not end up going too far the other way.

I sincerely hope the next fed chair is someone who understands the relationship between credit markets and the economy and the need at times for the fed to be the lender of last resort, but also understands that the fed should be an independent entity capable of forming its own policy and having the courage to ignore what market pundits say should be done. The Fed’s mandate is not to make Wall Street happy.

blagie

I'm kind of inclined to agree.

We want to avoid structural damage: Lost jobs, bankrupt businesses, lost mortgages, and so on. Structural damage leads to loss of real productivity, and real harm to people's lives. The only way I knew to get through COVID shutdowns was to devalue currency by about as much as we've done.

I didn't mind the short-term money printing, and I expected inflation to result. The inflation is painful, but the alternative is much more painful. My income buys less than it did two years ago, but I'm thankful I have a job. I was even more thankful when jobs were easy to come by. If my employer went under or I lost my job, I'd be profoundly unhappy.

The right approach now would be to accept a dollar is worth less than it was before, and to give an honest estimate of how much less.

Aggressively trying to control inflation by raising interest rates is a lost cause, and will do a lot of real harm. The outcome here seems to be that rather than mitigating the harm of COVID shutdowns, we've delayed them, and did a lot more harm along the way.

rsync

"We want to avoid structural damage: Lost jobs, bankrupt businesses, lost mortgages, and so on."

I disagree - I think what we need is a constant, low, background level of structural damage - which includes lost jobs and especially bankrupt businesses.

I grow increasingly fond of the forest fire / controlled burns analogy:

We have come to realize that preventing, or extinguishing, every wildland fire causes a dangerous level of fuels to slowly build up, eventually erupting in an unstoppable conflagration that destroys much more than the sum of the fuel overload.

Preventing recessions and keeping business firms afloat that would otherwise fail without easy loan rollover - that's the financial equivalent of refusing to maintain fuel loads with controlled burns.

Eventually the dead fuels (zombie business firms) will overwhelm all firefighting efforts (QE ? Negative interest rates ?) and will take down a much larger portion of the economy than otherwise would have failed along the way ...

caeril

> We want to avoid structural damage: Lost jobs, bankrupt businesses

Completely incorrect. If the jobs and businesses in question existed only due to speculative excess, they shouldn't exist. Easy money generates what David Graeber would call "Bullshit Jobs", that contribute anywhere from zero to negative real value production.

We want these businesses liquidated and the employees out on the street, to pursue work that actually contributes to society.

The trick is to somehow limit the collateral damage to businesses that do produce real value. I don't think that's a problem that's been solved.

naijaboiler

Spoken very fairly. For a central banker, it's either high inflation or high unemployment. Strangely enough, they prefer the latter. Inflation affects everybody mildly, a recession affects the unlucky few that lose their jobs very badly

drchiu

This is perhaps one of the best explanation of the dynamics between the fed and the market as it actually happens.

If I recall, those fed chairs tend to be Wall St alumni unfortunately.

beerdoggie

In California, people fitting certain economic criteria are now being issued $1000 checks for inflation relief. This is beyond ludicrous.

We have printed so much money, the only solution is to... print more?

It's almost like it is all a sneaky backdoor to letting the government redistribute wealth without real oversight...

abeppu

Elsewhere in this subthread I pointed out that California is not printing money; it's spending surplus from 2021. California cannot print money bc we use US dollars and not CA dollars.

But I think a more interesting aspect of this is the cynical way language around the same idea has changed. The Franchise Tax Board is calling them a "tax refund", though your "refund" is based on your income being low, rather than your tax bill having been high. But the press has certainly been cooperative in calling them "inflation relief" recently, though the program was planned before inflation rose to the top of so many people's list of concerns. Politically, Newsome wants as much credit as possible for handing back a windfall of taxpayer money that came in mostly because of economic conditions he did not create and taxes that he did not introduce.

https://www.ftb.ca.gov/about-ftb/newsroom/middle-class-tax-r...

0xy

In this case they're using debt, because while they may have had a surplus in a single calendar year, they're still over $150bn in debt. So it isn't spending surplus, because they're massively underwater and a "profit" is meaningless.

KptMarchewa

They are just not overpaying debt, which makes no sense when the rate of outstanding debt is way below inflation.

wins32767

California doesn't print money, the Federal Reserve does. California is required to balance its budget by law, like every state but Vermont. Nearly every state has more money than normal right now (some of it from high tax revenues due to nearly full employment, some due to federal stimulus), so they're finding ways of getting rid of the money. This is a second order effect from the much too large stimulus in 2020/2021.

nostromo

The only reason the states are afloat right now is because the federal government gave them hundreds of billions in printed money. So, yeah, it’s printed all the same.

1. Federal reserve makes several trillions in new money and lends it to the US Government.

2. The US Government passes “infrastructure” and “Covid relief” bills that shower billions on states and cities.

If not for this flow of printed money, most of the states would be cutting budgets since 2020.

So, yeah, a lot of it is printed.

imtringued

You know, if there is a world where money isn't printed but people refer to it as printing, then maybe at some point the government will do exactly that because people don't seem to be concerned about the rate at which money is being spent nor do they care if the government does it or not, they just want to complain.

Negitivefrags

You would think that there would be something more useful to do with the money, like fixing the infrastructure.

pkaye

Any excess taxes above some budget threshold has to be refunded to the public due to some proposition.

xorfish

Fixing infrastructure is not always useful.

Infrastructure for low density suburbs is a money pit that bankrupts cities.

Here is a good playlist that explains why this is the case:

https://www.youtube.com/watch?v=y_SXXTBypIg&list=PLJp5q-R0lZ...

0xy

California's high-speed rail money pit hasn't had enough cash thrown in? The state is incapable of building nearly anything.

abstrctComp

Why is stabilizing human beings economic anxiety not useful?

What theory of science dictates infrastructure is the best place to spend it? If the answer is none, it’s a purely social policy and you’re spewing politically correct memory. That infra spend is not an immutable law of reality means there are options other than “poison the sky with expansive vanity projects.”

Even then, there’s plenty of money for both, and human agency available for both. We can stop pretending money is what drives human invention and discovery. It’s politically correct spoken tradition since it’s not an immutable law; how we feel about other economic choices is a range of possibilities, not just the ones we have been raised to speak of

bushbaba

The excess tax revenues was also caused by overly inflated IPOs and more than normal capital gains. At least in CA, if the surplus is large enough the government is legally required to give the money back if not spent.

Gavin Newsom in this case is acting like Robinhood. Taking from the rich and giving to the less well off.

0xy

He's taking from the children of the recipients, considering California's current debt load. When you're underwater, a "profit" doesn't mean you're suddenly flush with cash. It's still debt-funded frivolity, which will paid by children.

anon291

A charitable interpretation of the comment above would assume that the taxes being collected are primarily the result of printed money, or at least that the fed's printed money forms a large portion of these revenues which are again being redistributed. It's actually quite sneaky. Print money to stimulate the economy and then tax it back out to redistribute. You just printed the poor into 'wealth', but did it in an incredibly roundabout way that saves all the politicians face.

unity1001

> In California, people fitting certain economic criteria are now being issued $1000 checks for inflation relief. This is beyond ludicrous.

Its not. Its happening in Europe too. Its a way to try to get people through the winter and avoid the energy crisis impacting ordinary people.

That's what a government should do - take care of its people during extraordinary times.

stingraycharles

Yeah in the grand scheme of things, this doesn’t impact inflation all that much, but it does help the people that need it most. Just like increasing the minimum wage to keep up with inflation does.

Over the past year businesses have increased their prices all over the board, you can’t then just simply say “but inflation!!” when you want to help the people with some amount of compensation for this.

vladimirralev

If you take it just one step further, the people "that need it most" really only need it in order to instantly donate it to the megacorps with pricing power at ever-increasing prices. The handouts help only in that instant and at the very next clock cycle that money is now in the hands of the megacorps. Printing money and handouts only help the top of the top in the pricing power hierarchy. If you want to actually help people you'd be doing taxes on excess. Everything else ends up in gigantic accumulation of wealth at the top in just a few steps down the game.

JohnSmitty32

tchaffee

Then try getting paid outside of civilized society. Unemployment will never be zero. An economy can't be 100% efficient. Taking care of those who cannot find work due to an imperfect system is a part of a civilized society.

ALittleLight

That doesn't make sense though. You can't create energy by printing money. You just redistribute the value of your money. Maybe that's good - not clear to me why it's better to use inflation, which risks destabilizing the currency and punishes people who saved money, rather than straightforward taxes.

abeppu

But in the Californian case, it's not printing money. The state government doesn't have the ability to make US dollars. The state must balance its budget, and cannot rely on debt the way the federal government does. The inflation checks are only possible because of a giant, historic budget surplus from 2021. Had inflation not gotten this bad, the checks would have still gone out in some other form (earlier in 2022 we were talking about it as a "tax rebate").

Though this action is redistributive, it is explicitly not about printing money. It is about spending excess tax dollars. You may have opinions about taxes in the state, and you may have opinions about redistribution, but overall if the state temporarily has a surplus (ie it shouldn't put this money towards increasing long running programs that will become a burden in future years), shouldn't it give that money back to the citizens in some form?

neilwilson

If you create money and give it to people, they spend it. That creates additional taxation. That spending is earned, which is taxed. The earnings are then spent, which is taxed, and so on. Like a stone skipping across a pond.

Do the fairly simple geometric series from that and you'll discover that all money creation generates additional taxation that extinguishes it - to the penny. All that changes with the tax rate is the number of hops before the money impulse disappears.

What you have to do to balance the system is remove some hops elsewhere. That's what threats about interest rate rises are supposed to do. Money then isn't created by loans, or the transaction hops from those loan creation events are fewer.

That reduction is what we call 'saving' and tends to show up in aggregate as a government deficit. The bigger the deficit, the more saving there was and the fewer transaction hops in the economy.

Saving is little more than voluntary taxation. The current approach is to go down the voluntary route rather than the compulsory one - largely because the population won't sanction any further taxes.

If the money used to purchase energy causes a large rise in the government deficit (or a significant reduction in the loan growth rate) then that will 'pay' for it without causing inflation.

badlucklottery

> You can't create energy by printing money.

Yes but the energy crisis isn't evenly distributed across the world. NA, for example, is still doing relatively well. While Europe is being hit relatively hard by the shortage and will likely have to import from more expensive sources than previous years to make it through the winter.

imtringued

>That doesn't make sense though. You can't create energy by printing money.

Think again. You can't create energy by cutting taxes either. The tax cut can only be spent on energy, exacerbating the problem by making wasting energy much cheaper.

A check on the other hand discourages people to buy expensive energy because they could be spending the subsidy on something else that isn't energy constrained.

js8

The problem is that the world is at neoliberal capitalism's end, as predicted by Marx. Basically, in capitalism, you pay for continuing investment (of capital owners) with giving them more property, which is something that cannot continue indefinitely. That internally increases social inequality, and the money will eventually accumulate at the top (in the form of asset price rises).

Capitalism's own solution so far was to create more available properties - more individual debt such as credit cards and mortgages, privatize public goods like health and education, more destruction of ecosystems, selling attention and disrupting work, and the latest fad, cryptocurrencies. But these are only temporary solutions, they do not address the core problem of increasing social inequality.

Likewise, printing money and giving them to the poor (while half of it goes directly to the top, because the decision-makers are only human) is a stopgap solution in the system where most money quickly end up accumulated at the top. It's a desperate attempt by governments to maintain social order.

In the middle of 20th century, the capitalism's tendency to create disparity was somewhat resolved in Keynesian approach, where state "investments" (based on taxation) were basically redistribution of the money back to the bottom, so that the process of accumulation could continue slower and indefinitely. That was eventually abandoned, for ideological reasons (people shouldn't get "free money", and the "private property" is sacrosanct).

However, it is the only known solution. The proper taxation of the rich (and property) is badly needed to long-term stabilize the capitalist system.

One could make an analogy with any other competition. When another competition starts, winners (of the old competition) are usually given the same place at the start as everybody else. This is because without this rule, the competition would quickly demotivate everybody. But this is happening under neoliberalism, and threatens to eventually halt the positives of the capitalist competition.

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jedberg

It should be noted that California cannot print money. It is simply redistributing what it's residents already have.

fulafel

Income transfers generally don't imply printing money, they can be funded by eg taxes from a higher income part of population.

groby_b

Given that California can't print money, why do you think those checks are "printing money"?

And no, it's not a "sneaky backdoor". It's the government doing what it should do, tighten financial inequality gaps. And preventing unnecessary suffering. We're still a society, we occasionally take care of the weaker people amongst us. (Frankly, not often enough)

And "without real oversight" is... you're aware this is going through the normal process of fund allocation, is reported widely in the press, and is part of the data that voters can take into account next round, no? It has just as much oversight as any other government spending. (Arguably more than some federal programs)

I get that fiscally conservative folks might disagree with this, and we can certainly debate merits. But "printing money" and "without oversight" are empty slogans without basis in fact.

imtringued

Nowadays everyone prints money, didn't you read internet comments. If I loan you five dollars I have printed five dollars because the contract we signed counts as a certificate of deposit in the minds of these people.

commandlinefan

> the government doing what it should do, tighten financial inequality gaps

No, that’s really, really not what the government should be doing.

andrekandre

what should it be doing?

petilon

They may not be printing money, but they are propping up inflation by giving people free money for compensating for inflation.

bigyikes

Yes, people are ignoring the second-order effects. Just because California can’t directly print money doesn’t mean they aren’t contributing to the macroeconomic factors leading to the Fed feeling the need to print more money.

anon291

Right. One way to combat inflation is to save money. The fed encourages this by increasing the interest rate. If california truly wanted to reduce inflation, it would simply retain those $1000 checks. Taking money out of supply reduces inflation.

imtringued

They can spend the money on things that don't inflate. A tax rebate can only be spent on energy which makes the problem worse.

Aeolun

Giving people a one-time bonus never made sense to me. They’ll feel rich, spend it all, and be back in their previous situation next month.

atq2119

Sounds like a decent recipe for boosting the economy, assuming the supply side capacity is available: injects a bunch of demand, but at the same time, precisely by being a one-time measure, discourages price hikes.

m0llusk

Limited available evidence shows that people are extremely conservative with spending windfalls with much of it going to pay down debt.

grecy

We have printed so much money, the only solution is to... print more?

Yes. Once you start printing money to fix problems, you fall into the pit of always needing to print more. See Zimbabwe’s $100 trillion dollar bill. I have one, it makes a great placemat.

Syonyk

> 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 the individual level.

At an individual level, just how much slack and flexibility do you have in your spending, your finances, your general way of living? If you're a high earner (there are certainly plenty here that would qualify), are you spending that on lots of monthly payments of assorted luxury and stretch items (house, cars, all the other crap you can get loans for)? You're probably going to be in a world of hurt - there's no income so high you can't outspend it, and it's really hard to adjust those payments when the value of money goes down and you need more for the living expenses. Also, those payments don't go away if your job is eliminated.

If you're comfortably pulled back, with either a high savings rate or a high "optional spending" rate, then you should be in far better shape to adapt - and I'll suggest that using some of those resources to help others around you would be useful. Even just coordinating bulk buys of food and other resources is helpful. But the key here is that this allows for flexibility. It's good to be rich, and all that - so don't be stupid about it.

I think, collectively, we're in for a world of hurt. Inflation is high, and energy costs seem to be staggering back up. Europe is going to be a frozen wasteland this winter if it's anything but a warm winter, and the energy costs are already eating businesses alive out there. That's before you get to a possibility this winter, in which money doesn't help, because there's simply no energy to deliver. If the natural gas pipeline to your place are empty, welp. Doesn't help to be able to afford the energy when there's none to buy.

That does imply that you might consider some backup energy solutions for the winter. I'm a fan of kerosene lately. Less annoying to use than propane, and stores almost as well.

The last couple years have broken a lot of things. And we're only just beginning to learn how much is broken, how badly.

bcrosby95

I went into college during the dotcom bust. Everyone told me I would be making peanuts. I'm pretty happy where I am.

I've lived my life trying to minimize the financial downsides. I want money for security, not to live the high life. I like my job, and don't feel the need to retire early - I would love to do it until I'm 6 feet under. I make a decent enough income, although not the level of many here. I bought a modest house (700k - hey, it's California) compared to what lenders wanted to lend me (1.3mil).

We could afford our expenses on two minimum wage jobs if need be. And that's with 3 kids.

deathanatos

> We could afford our expenses on two minimum wage jobs if need be. And that's with 3 kids.

Let's assume a $15 minimum wage. The housing one can afford on two such wages is $1,560/mo. On a $700k home, assuming 20% down, to repay the principal alone is $1,556/mo. A mortgage calculator says $3,800/mo once you have interest in there — or 73% of your gross income. And that ignores insurance & taxes. And those 3 kids.

thebradbain

I imagine that the OP probably has savings to fall back on (since they stress financial security), and more equity in the home than just the downpayment— not to mention that if they bought it not so recently (5-10 years back), the home value appreciation has likely been insane to still come out well ahead in even an 2008-esque crash, plus they could have refinanced at 2% fixed 30year rates in 2020-2021 drastically lowing their monthly payments even further, depending on how much equity they had.

Also, California just passed a law requiring minimum wage be $22 in some industries/companies of a certain size (and the next step will likely be rolling that out to all industries and companies, as they did with the $15 minimum wage between 2016-2020)

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wahnfrieden

I experienced the same and I’ve probably enjoyed similar extremely cushy tech career experiences that also aren’t that relevant to a macro discussion but it’s nice to hear individual anecdotes

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WaxProlix

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.

Syonyk

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.

mrep

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.

Syonyk

I'm in the US. I certainly could do something like that. I just won't.

I hope it works for you. That's a level of debt-based risk that neither myself nor my wife have any interest in. There have been a lot of people throughout history who thought similar arrangements were "sure things," and they were, up until they weren't and it all came down around their ankles.

We live in a very modest (manufactured, gasp!) home for our income, our "new" car is a decade old, with other vehicles ranging far older (the tractor is about 80), but still maintained in perfectly good condition and they all do exactly what we ask of them. Mostly. One of the Urals got demanding lately.

It's low stress and high slack/flexibility. Those seem useful to us.

maxerickson

Concern over US natural gas supply is not warranted. At all.

If producers decided not to produce during a period of high prices (unlikely), we have gas in storage, right now, to last through the typical winter.

https://ir.eia.gov/ngs/ngs.html

(unfortunately, export capacity is a rounding error, so we can't do a whole lot to help Europe out. https://www.eia.gov/dnav/ng/ng_move_expc_s1_a.htm )

mrep

2/3 of my debt payments are a sure thing as they are fixed and inflation is also a sure thing as deflation is catastrophic so governments won't allow it and deflation is trivially easy to fix with helicopter money.

The only thing that isn't a sure thing are wages but they have over the long term gone up [0] and when they do go down it is usually only for a few years.

The last one is a risk but I think it is well worth the risk.

[0]: https://fred.stlouisfed.org/series/MEPAINUSA672N

Spooky23

You do you. But assets like real property are historically good investments. It doesn’t make sense to not buy the best house you can afford.

I’m with you with cars… but even then the maintenance expense starts to catch up.

senectus1

In Australia I don't think I've ever seen an ability to fix 100% of a mortgage.

We tend to fix about 75% and variable the remaining.

hackerfromthefu

That is wrong, you can fix 100%. However in Australia the fixed terms are shorter, typically 1-5 years.

csomar

There is no fixed rate loan. It's all variable. There is a trader (might be the bank) that is buying variable rate and selling you a fixed rate. If he goes bankrupt, somebody will be holding the bag.

You might want to re-read your terms if the interest rates get much higher.

fshbbdssbbgdd

I read my mortgage and there’s nothing in there that entitles the lender to raise the rate in any circumstances.

The interest-rate risk is on whoever owns the bonds to that ultimately funded the mortgage. The value of those bonds is going down as interest rates rise.

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jjav

> There is no fixed rate loan.

Most loans in the US are fixed rate for the life of the loan.

bearjaws

Proof?

anon291

> if it's anything but a warm winter,

I guess they should hope that their green technologies didn't work enough to curb global warming or something. What a messed up situation.

DoingIsLearning

>That does imply that you might consider some backup energy solutions for the winter. I'm a fan of kerosene lately. Less annoying to use than propane, and stores almost as well.

By backup you mean for heating? Can you safely burn kerosene indoors? I thought you would have all sort of pollutants on top of monoxide?

lmm

"Safely" is relative, but here in Japan kerosene heaters are totally normal in older homes.

fomine3

I realized that kerosene heater without exhaust that often used in cooler Japan area is really bad after I bought CO2 meter. CO2 easily go 10000ppm if ventilation is a bit poor (even poor insulation). Kerosene heater with exhaust pipe seems to fine, but now heat pump is generally better option. Still it seems to good backup for not to be death by freeze.

jbm

Those homes are also poorly insulated, and probably let gasses out much more easily than modern well-sealed homes. I didn't see kerosene heaters in new homes in Japan, probably for the same reason.

As such, I would be hesitant to use a kerosene heater in my home without investigating it in much more detail.

(It's a theoretical issue for me as my geographical area has more NG than it can use)

Consultant32452

You can order indoor rated kerosene heaters on Amazon.

Syonyk

Heating and light, yes.

You can, and people have throughout the last century and a half, both for heat and light. In terms of winter, the fact that kerosene lanterns provide "a bit of light and a lot of heat" is useful - though the light coming off a good cold blast lantern is just wonderful, year round. A nice continuous spectrum, cooler than candles, but still a very nice yellow-orange, with more than enough to read by.

I've been experimenting with them for a while now, and as far as I can tell, a properly burning kerosene lantern doesn't put any measurable particulate in the air, at least as far as PM2.5 or PM10. Run them too high, they'll certainly smoke, but run properly, I can't measure any real difference with the meters I have. They should be burning cleanly.

The same goes for the wick type kerosene heaters - either convection or radiant. They should be burning clean, and if you get any smoke off them, you've got a problem that needs fixing (the good news is that it's almost always either just burning them dry to remove tars from the wick, or at worst replacing the wick).

You shouldn't be getting any carbon monoxide off them either. That's from incomplete combustion, which, again, shouldn't be happening. A properly designed and operating lantern or heater will be feeding a strong draft into the burner. A window slightly open should provide enough venting for a typical unit burning - though I'd have a CO meter around any combustion heat as a normal habit anymore.

If you're burning 1K, you'll get some kerosene odor on startup and shutdown, but it shouldn't be much during operation. However, if you're in the US (perhaps other places too), you can get Klean Heat, which is a kerosene substitute that's somewhat more expensive (~$15/gal vs about $10 for 1K out here), but burns significantly cleaner. It behaves the same, so can burn in the same lanterns, but just burns cleaner all around - less odor, less wick fouling (though that's not usually a big issue with 1K, just the red dyed stuff), etc.

But, yes, I very much do refer to kerosene as a backup for heating. I prefer it over propane - it smells better (propane has a bit of a metallic tang, kerosene is a far warmer smell), and I don't have a pressurized bottle of flammable gas in the house. Kerosene is combustible - not flammable. The flash point of the stuff you should be using is around 140F, which means below that temperature, it doesn't emit enough vapor to ignite in regular air. Gasoline's flash point is -40, give or take, so it will happily generate vapors in regular air looking for a thing to light them of. Especially in the winter, at 40-50F, kerosene is quite safe compared to other heating solutions.

Anyway, it's something to look into. Our energy systems are not in good shape globally, and being able to stay warm with the power grid down and the natural gas empty seems like the sort of thing one might want to consider more lately.

WalterBright

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 Law of Supply & Demand. The more currency there is flooding the economy, the less value that currency has.

zie

This is a very simplistic viewpoint. One could also argue that Inflation happens when people don't trust that their government will pay back all the money borrowed.

The US govt has been on a spending spree as of late, but hasn't yet bothered to mention how they are going to pay for it.

In 2008/2009, the US govt was also on a spending spree, but did promise to pay the bill eventually. Inflation didn't spike in 2008/2009.

The bottom line is, nobody really KNOWS, we just have guesses. My guess currently fits all the facts, where yours does not, but that doesn't mean my guess is right, but perhaps it's more correct than your version.

WalterBright

> perhaps it's more correct than your version.

My version has lots and lots and LOTS of history backing it up.

Did you know that the US had inflation when on the gold standard during the California and Yukon gold rushes?

Did you know that Spain experienced massive inflation during the period when they were shipping the silver in S. America across the Atlantic?

I could go on and on.

> One could also argue that Inflation happens when people don't trust that their government will pay back all the money borrowed.

This sort of thing happens with private banknotes, which would trade at a discount based on the level of trust. But that is a one-time discount, not a cumulative process.

zie

I agree that there is lots of data that shows your version has some merit, but that doesn't mean it's 100% correct. I know of at least one instance where your version was incorrect(2008/2009). Again, I'm not arguing my version is correct, and I'm not even arguing that your version is completely wrong, because we literally do not know.

Read some John Cochrane[0] if you want a more academic defence of my version(which is where I got it from, I'm certainly not smart enough to have come up with it myself).

0: https://www.justicenewsflash.com/2022/01/03/the-grumpy-econo...

imtringued

>But that is a one-time discount, not a cumulative process.

Providing liquidity is a cumulative process.

W3cUYxYwmXb5c

Monetary inflation is the increase in the money supply. Price inflation is one of the potential symptoms of monetary inflation. Too often people look at just one symptom to gauge the occurrence of the cause. Currently we are experiencing both, but people seem to want to ignore the inflation of the money supply, and scratch our heads over every other variable that affects prices.

imtringued

Ok, now introduce negative interest rates on cash.

jnwatson

We have very educated guesses.

The primary difference between 2008 and now with respect to monetary policy is money velocity. Increasing money supply is a necessary but insufficient condition for inflation.

In 2008, much of that money sat uninvested, so it didn’t impact the price of goods. In 2020, most of it got used to buy and invest.

zie

We do have educated guesses, The OP and my comment are 2 of them. There are more of them for sure.

It wasn't un-invested, it just didn't much make it out to buy consumer goods(at least not as directly as in 2020).

Like all things the devil is in the details, which get stupidly complicated.

dasil003

There’s also a tipping point where inflation is self propelled because everyone is used to it so they just proactively raise prices on a regular basis. I experienced this growing up in Brazil in the 80s and 90s. It’s hard for Americans to relate, but essentially the mentality is spend/invest every penny you get before it loses value. Took some creative policy to break the cycle: https://en.m.wikipedia.org/wiki/Plano_Real

WalterBright

> There’s also a tipping point where inflation is self propelled because everyone is used to it so they just proactively raise prices on a regular basis.

This is called cost-push inflation. Unfortunately, that theory doesn't explain where the extra dollars come from.

mixmastamyk

Not really, it happened in the US in the 70s and early 80s. Not as high as in some countries, but enough to make a difference in behavior.

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roenxi

There is no reason to believe the situation is complex. The value of money is changing because the authority that controls money is changing it.

Nobody understands the economy. But we can be pretty sure that it isn't the economy destroying the value of the dollar, because there is no reason for consistent annual inflation to be happening. If anything, in the absence of money creation, we should be seeing deflation because of technological improvements. Short term wobbles, sure, maybe even sometimes a few straight years of inflation due to exceptional conditions. But that isn't what is happening.

The only thing that can have caused the dollar to lose value consistently is creating new money. Otherwise we'd see it regularly snapping back to normal value with deflation. Which, in my lifetime, I think may have literally never happened.

foobarian

> History teaches us that inflation will continue as long as the government keeps printing fiat money.

Of course, that is almost a tautology. The devil is in the details. No inflation is bad because the economy stops. High inflation is bad because of erosion of purchasing power and negative impact on nearly every participant in the economy. So what do you do to get that sweet spot of about 1-2% inflation? I'd say raising interest rates was a pretty good start, if a bit late in the game.

WalterBright

> Of course, that is almost a tautology

Inflation lags the money printing, so it isn't a tautology.

> So what do you do to get that sweet spot of about 1-2% inflation?

I'm amazed that propaganda of a sweet spot gets so heavily embedded into the popular wisdom.

If there is a sweet spot for inflation, it's 0%.

Note that the US had net 0% inflation from 1800-1914, while growing from subsistence farming to superpower.

woodruffw

> Note that the US had net 0% inflation from 1800-1914, while growing from subsistence farming to superpower.

This is grossly ahistorical: in 1914, 2/3rds of the US lived in abject poverty[1]. Individual farming, including subsistence farming, didn't peak until the 1930s[2]. The US's ascent to superpower status can be traced, at the earliest, to lending programs begun during WWI (and repeated, to fantastic effect, during WWII).

The US's phenomenal ascent in international status and power is directly tied to its monetary policy, a policy that has more or less kept inflation around 2% since 1935[3].

[1]: https://web.archive.org/web/20150720050803/https://www.irp.w...

[2]: https://www.ers.usda.gov/data-products/ag-and-food-statistic...

[3]: https://www.thebalancemoney.com/u-s-inflation-rate-history-b...

colinmhayes

0% inflation is incredibly dangerous. Deflation is just about the worst possible thing that can happen to an economy. It instantly kills money market liquidity as real interest rates rise as they hit the lower bond for nominal rates. People stop spending as much as they can since their money will be worth more in the future. So the question is how can we guarantee no deflation. And the only answer is target 1-2% inflation.

By the way the us was in a recession for practically the entirety of the second half of the 19th century, mostly because of absolutely garbage monetary policy.

foobarian

I don’t know, the concept just makes sense to me intuitively. There are enough weird effects in systems and math when things are at zero that I just can’t tell what would happen. Example, in queueing theory when input rate is equal to output rate under reasonable randomness you get large backlogs. When everything drains at just a few percent over zero it just seems like a better system.

The US also had a civil war during that period. And then repeated brutal boom and bust cycles until Breton Woods.

stopping

Dismissing a contrary position as "propaganda" only stifles debate, and you haven't presented an argument against "sweet spots". It's a good mental model for many situations. What makes you think there doesn't exist an optimal inflation rate?

0% inflation is generally not a safe target. In an economy you want to avoid deflation at all costs. If consumers expect future price drops, demand can dip significantly and induce further drops in price (deflationary spiral). Businesses need consistent, predictable demand, else they enact shortsighted, over-reactive responses (e.g. layoffs) which can further exacerbate an economic downturn. See the Japanese financial crisis. Even a small fluctuation into deflationary territory can have long-lasting effects on consumer perception. It's safer (read: insurance policy) to maintain a slightly positive inflation rate so that consumers are encouraged to make purchase decisions promptly when needs arise versus indefinite speculative postponement.

Of course, the "optimal" inflation rate is context-dependent. Your unique economic situation will dictate which inflation trade-offs you end up selecting.

imtringued

>I'm amazed that propaganda of a sweet spot gets so heavily embedded into the popular wisdom.

Because that sweet spot is very similar to the benefits liquidity confers to the holder of liquidity. Come on grandpa, please don't tell me all the people "bringing their wares to the market" are doing so at no cost and that the holders of liquidity aren't benefitting from stores optimistically stocking goods.

mixmastamyk

^Became a superpower in the 1940s gearing up for WWII and then the only country left standing with brand new factories.

sidewndr46

I've never heard anyone tell me they were going to quit working because the US government wasn't printing money fast enough.

I have heard people tell me they weren't making enough money to cover their expenses on a month-to-month basis as a result of cost increases. These happen to correlate with inflation.

There is no way an economy would stop just because there was no inflation. Would Microsoft suddenly decree that if the US government won't print US dollars, it won't sell you a Windows license key? Even in the case of extreme deflation, it only becomes an issue when you have people trying to do weird things with physical currency like cut a penny into 1/4s and use it to buy different goods.

colinmhayes

The people who couldn’t afford their expenses due to rising costs likely would have lost their job in the recession that was averted due to inflation.

virissimo

> No inflation is bad because the economy stops.

How much net inflation was there in Europe between the Napoleonic Wars and the start of WWI? Do you think "the economy stops" is a fair description of this time period?

ryanisnan

I'm not very versed in economics, but can you explain "No inflation is bad because the economy stops."?

Aunche

Zero inflation is fine, but a small hiccup would cause it to spiral into deflation. Deflation sounds good in a micro-scale because money gets more valuable. However, this is actually a terrible thing because the only way this can happen is when money gets destroyed through defaults, which is why you only see deflation during a financial crisis.

When technology increases increases productivity and society has a fixed supply of paper money, you'd think you'd see deflation because there are more goods and the same amount of money. However, actually during those periods of times, banks lend out money, which increases the money supply. This is a good thing because they're enabling economic activity that otherwise wouldn't have happened like a loan to start a new business. However, this system is fragile because if depositors lose faith in the bank, everyone will try to withdrawal their money, which is called a bank run. The bank doesn't have enough money because they leant some of it out, so they default and depositors that aren't quick money lose their money. One of the purposes of central banks is to ensure that this doesn't happen.

foobarian

There are some other comments that probably described it better, but as an example: let's say inflation is negative. That means it is good to keep cash. What happens is everyone starts hoarding cash under their mattresses and there is no liquidity around to help exchange goods, and everything slows down.

With a small inflation, there is no incentive to hoard cash, and there is enough liquidity to make sure goods get exchanged without too much delay. At the end of the day that is what an economy is, exchanging goods.

kelseyfrog

Why are interests rates as a money sink preferable to the more direct approach of simply sinking money out of supply via tax? They seem to amount to the same thing at the end of the day - siphoning dollars out.

merely-unlikely

That is also a valid approach but I'm not sure it is more direct. Tax policy is generally only set once a year and only affects tax payers. Interest rates can be tweaked more frequently and (I think) directly impact a larger subset of economic players. That and the Fed doesn't determine tax rates.

bombcar

Because you don't have to subject it to a vote. People vote against taxes, they kinda ignore moderate interest/inflation.

em500

The Federal Reserves implements interest rate increases by selling the bonds that they own (bought in the past) in the market in exchange for cash ("Open Market Operations"). This takes cash out of the hand of the public (in exchange for cash that can be spent in the future). That's about as direct as it gets.

Removing cash in the public's hand via taxation has several drawbacks, as mentioned by other posters. It's a very slow legislative process, because it has much more direct distributional effects (who is going to be taxed?). Additionally, most academic economists believe more taxation reduces real, as opposed to nominal, economic activity ("distortionary effects of taxation").

marcosdumay

Why governments don't do monetary policy by fiscal means? Well, because the central bank is the authority on monetary matters, and the congress the authority on fiscal matters. They don't even usually agree on what direction to go. (Things are this way on every democracy.)

But that specific question, nobody would take money out of the economy by fiscal means, even if they could. You would need huge fiscal changes to have the same effect of a small monetary restriction. And you don't do huge fiscal changes, ever.

badpun

This way, you'd only be vacuuming dollars held by US entities (citizens, companies), while USD is a global currency held by everyone in the world. This policy would greatly benefit non-US entities, at the cost of US entities.

Consultant32452

Have you ever noticed you get raises roughly based on last year's inflation and not an estimation of next year's inflation? When the money printers print the people who touch the new money first get to buy assets before the price inflation occurs. Then, once the new money eventually circulates to the peasants, they get to use it to buy goods and services at the new, higher prices.

Inflation is a wealth transfer from the poor to the wealthy. It is not, by any means, necessary.

https://mises.org/wire/inflation-its-wealth-redistribution-s...

imtringued

Isn't it amazing that Austrian economists completely ignore that providing liquidity creates costs for the providers of liquidity?

Businesses give money value by offering products and services, meanwhile the holder of money expects the business to keep providing this costly service at no cost. In other words, there is a constant flow of free liquidity provisioning services toward the holders of money which makes the providers of liquidity poorer and the holders of liquidity richer if they market that liquidity. After all, money is worth more than the purchasing power it represents, it can buy anything available in the payments network. Money that buys bananas and apples is more valuable than money that only buys apples even if both have the same amount of purchasing power. Since liquidity is paid for by the general enterprising public, the holders who have none of the costs can just loan out and market their liquidity for a price and they get to pretend that they are providing a service, even though they haven't done anything for it in any way.

People who still have a need to transact must now pay the costs of liquidity to someone who doesn't provide it when they borrow money.

The person who borrows money is now stuck with the costs of liquidity even if they spend it. When they spend it, they no longer benefit from liquidity but they must still pay for the liquidity that someone else owns. That person then can lend his liquidity out without paying for it. The end result is that liquidity costs must be paid twice.

This is an endlessly compounding system. Like a pyramid scheme. Money acts like a perpetuity where the yield is paid out in liquidity which can through borrowing be turned into money. Previous perpetuities are paid by creating new perpetuities.

Very interesting scheme and Austrian economists are even denying the above so they are complicit.

tsimionescu

You keep claiming this, but it is fairly obvious that prices can be forced up by factors that have nothing to do with the money supply - most notably, constrained supply in basic raw materials (especially oil and its derivatives) can force virtually all prices up, regardless of the amount of currency available.

WalterBright

Since you know all the obvious answers, try these on:

1. Where does all the money come from to pay for increased gas prices?

2. When gas prices go down (and they often do go down by multiples), why doesn't deflation happen?

tsimionescu

1. There's no extra money - poorer people just consume less.

2. Because companies just take all of the difference as extra revenue, and prefer to increase salaries (if not just keep everything as profit) rather than reducing prices.

Note that I'm not claiming that increased money supply doesn't cause inflation. It obviously does. I'm claiming it's not the only cause of inflation. It's sufficient, but not necessary for inflation to happen.

marcosdumay

Not all prices at the same time.

tsimionescu

Sure - goods whose production costs are not deeply tied to gas will not go up in price, or at least not as much. For example, software prices or services shouldn't immediately be affected if gas prices go up but the money supply stays relatively the same.

But electricity, gas, consumer goods, food, housing (via construction costs) - these will all go up, and they form the vast majority of consumer spending.

wpietri

> 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

WalterBright

> 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/

wpietri

> 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...

senectus1

yes but in August 15, 1971 the US stopped using the gold standard.

Ever since then when the Fed needs more money they just printed it.

Reminds me of that scene in Douglas Adams Hitchhiker Guide to the Galaxy

"“Thank you. Since we decided a few weeks ago to adopt the leaf as legal tender, we have, of course, all become immensely rich. [...]

"But we have also," continued the management consultant, "run into a small inflation problem on account of the high level of leaf availability, which means that, I gather, the current going rate has something like three deciduous forests buying on ship's peanut." [...] "

One wonders when the defoliation stage is going to hit.

anon291

This is not obvious at all. 'decades' is a short term in the history of money. It is perfectly reasonable to believe that switching to fiat causes low inflation in the short term but results in long term hurt. I feel if anything, the past few years should have taught us that things that seem easy or prudent in the short term can lead to long-term issues. Why is it such a stretch to believe that about fiat.

Either way I don't think 'decades' should be used as evidence that any monetary policy is good. We can reconsider if we get to centuries.

jollybean

No - this is completely false.

As an economy expands, it needs more currency to facilitate growth.

A 'very hard currency' would strangle an economy with ugly deflationary issues.

Moreover - with a 'hard currency' the system will fail and collapse when it faces an existential shock such as an internal failure (bank collapse), war, pandemic.

The objective is to provide 'the right' amount of liquidity for the economy as needed, and, during times of crisis to be able to release enough liquidity to see the economy through the crisis.

Yes, the 'price will be paid' in later years for excess liquidity in terms of higher prices, but that's not necessary a bad thing, it's just accounting. It depends on the distortions. If the community accepts that 'yes, resources needed to be diverted to pay for xyz' then that's 'the cost' and it's going to be borne out in higher prices.

And yes, if Central Banks print wily nilly and provide too much supply this will result in hyper inflation.

But fundamentally, this idea that fiat = untenable is completely false.

WalterBright

> A 'very hard currency' would strangle an economy with ugly deflationary issues.

https://news.ycombinator.com/item?id=33087419

ForHackernews

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.

BitwiseFool

I have only a layman's understanding of financial markets, so keep that in mind.

The explanation I've heard is that most of the QE in the 2010's was metered out in such a way that the average person wasn't receiving funds and the money wasn't quickly and directly going into the economy. The post 2008 QE purchased troubled assets and freed up institutions to lend money. It could be said that most of that QE money wound up in stocks and assets such as real estate, which is why valuations were going so crazy over the last decade while consumer goods stayed relatively flat.

All of the Covid stimulus, loans, and bailouts were different because so much more of that money went directly into the consumer economy. Price increases were exacerbated because of supply chain disruptions, needing to recoup losses from lock-downs, and the price hikes due to raw materials shortages. There is also a self-fulfilling prophecy that inflation is both higher than reported, and that our officials are lying to us about how bad the problem is. When everyone else is raising prices, it is a lot easier for a business to follow suit.

That's the explanation I've gathered while trying to understand the question and it seems reasonable to me. It may be entirely wrong, however.

sofixa

You're not entirely wrong, but you're missing a massive piece of the puzzle, a war that is impacting the global markets in multiple very important raw material segments (oil, foodstuffs, various metals, general instability due to war involving a nuclear power in Europe, not to mention the fact that the nuclear power is losing ans it's dictator is starting to sound desperate). When prices of many products go up due to raw materials price booms, you get inflation.

marcosdumay

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.

gizmo

Stocks/real estate are mostly owned by richer people (and 401ks). There was plenty of inflation in luxury goods. Watches, private jets, art. Prices went through the roof.

Covid boom put money into the hands of regular people, and that -- combined with a supply shock -- made all the difference.

rnernento

I don't think you realize just how much of the money has been printed in the last 2 years.

See fed balance sheet over time: https://www.federalreserve.gov/monetarypolicy/bst_recenttren...

See M2 over time: https://fred.stlouisfed.org/series/M2SL

UncleMeat

So? The argument is that inflation always happens when there is fiat printing. We printed a shitload of dollars between 2000-2020, yet inflation was low throughout that period. So the explanation is clearly insufficient.

prottog

The price of anything that can be converted to a monthly payment, which is most things in this highly financialized economy, inflates when the interest rate is artificially suppressed. The CPI understates that kind of inflation because it looks at the monthly payment, and not the final price. So there are plenty of things like houses or college degrees that have inflated a lot more than the CPI in that "quite a while". There is no reason to believe that the value of money is immune to the law of supply and demand.

Besides, if you have an argument to make, you can make it without calling somebody an 8th grader.

jollybean

Because we just went through a massive existential shock with COVID, in which the Fed took on a staggering amount of assets i.e. liquidity - and - we've had material global problems which cause major increase in the cost of goods and fuel.

In 2008 we had a 'banking crisis' but that was an 'accounting crisis' otherwise the economy was normal. We had to re-allocate.

With COVID, we had a real shock to the system, and then lasting shocks due to increased prices.

So both the money printing and regular higher prices are coming back to hit the economy.

joycian

I like that you're asking for the mechanics. Many people just repeat their mantras.

If QE led to inflation quickly and in a simple way, we could have known that long ago. We didn't even have to do it ourselves: Japan did the experiment long before we did.

If you know, please explain it to me.

7speter

No one wants to talk about the actual problem, and will blame government printing money. What’s different now from any point in the last 12 years is that we are at full employment. Going over that causes the economy to overheat. As a study partner for an economics course put it (he took more economics than I did): too many hands competing for goods, the prices go up.

WalterBright

> Going over that causes the economy to overheat

The notion of an "overheating" economy always sounded like nonsense to me.

> full employment

Those figures are misleading because a great many people permanently left the work force during the pandemic and are not counted as unemployment.

chasd00

Right, the thing the Fed is doing by raising rates is increasing unemployment but trying to not come right out and say it. Increasing unemployment decreases demand and therefore prices. A hard recession is how this is going to end IMO.

boole1854

> History teaches us that inflation will continue as long as the government keeps printing fiat money with no backing.

The government (to be correct we should say: the Federal Reserve) has not been "printing money" for around a year now. Monetary base has actually declined by ~12% in that time:

https://fred.stlouisfed.org/graph/?g=UrKo

WalterBright

Issuing debt is the same thing.

boole1854

Issuing governance debt is definitely different from increasing the money supply ("printing money"). Debt can be financed by borrowing from the domestic or foreign private sector or from foreign governments / central banks.

sbf501

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.

WalterBright

> 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.

autoexec

> If the wealthy (or everyone else) needs more money, and just raising prices will work, why don't they do that anyway?

companies are constantly raising prices to hit the highest price point customers will tolerate. Normally, when prices get too high too quickly consumers eventually get sticker shock and start to feel ripped off so they stop buying the overpriced good (assuming they have the option), so companies lower prices by a very small amount and a new generation of consumers come into the world where the almost too high price is "normal" since it's all they've known and the whole process repeats and prices just climb and climb which is why everything when your great great grandmother was alive cost a nickle but today you pay using stacks of bills.

Right now though things are pretty messed up because every company had an excuse that let them jack prices up without customers blaming them. Companies said "Supply issues! Don't be mad at us! We're all in this together!" and consumers begrudgingly accepted excessively priced goods because "that's just how it is, extraordinary circumstances" and a generation of consumers now sees those excessive prices are normal. Some companies continue to limit supply, dragging their feet ramping production back up, because they're making money hand over fist and pulling in record profits while consumers are forced to scale back and watch their standard of living decline. Now companies are saying "Don't blame us, it's this damn inflation!" and since consumers are expecting it, they can continue to jack up prices while continuing to make money hand over fist. They don't ever want to lower prices and accept a little less so prices must continue to go up and up just like before, but now it's happening at a rate they couldn't have gotten away with previously.

Companies could accept making a little less profit and lower prices and inflation would drop. They don't want to though because for them greed is the whole of the law and anything less than higher profits and endless growth is failure. Consumers could help by refusing to buy the things they love and have spent their whole lives becoming accustomed to, but they're still traumatized from a global pandemic, they're desperate for normalcy and the goods they were forced to do without for 2+ years and in denial about the fact that their lifestyle is declining and things are only going to get worse.

sbf501

> why don't they do that anyway?

Ever heard of a company called Apple?

They raise prices all the time because they can.

Same with AT&T, or banks ATM Fees, or gas prices.

Right now gas prices are at an all time high, and so are gas profits.

> The answer is Supply & Demand, it's the Law, and is in every econ textbook.

Also, that's Econ 101. Which isn't quite reality, it's idealized for simplicity because it is an introduction to macroeconomics. But I don't want to digress into Austrian vs. Modern theory because neither of us will do justice to that.

merely-unlikely

I'm skeptical of that claim since the rich hold more assets than dollars. To the extent inflation hurts the economy then your claim is true but that is a second order affect. All else equal, inflation can simply lead to asset inflation in which case the rich maintain their wealth.

In economics circles inflation is generally considered a tax on the poor who only hold cash and whose wages are slower to rise vs price inflation.

WalterBright

> I'm skeptical of that claim since the rich hold more assets than dollars

You should be. I doubt the rich hold any dollars at all. They invest it all. There aren't any Scrooge McDuck cash vaults.

(Criminals often do hold lots of cash, and they try to get rid of it by laundering it.)

seer-zig

I disagree about framing it as the top few. I recommend you look into Islam's Zakat system for something that actually works, and is fair across the board.

IncRnd

A good working definition of inflation is a general increase in prices and a fall in the purchasing value of money. There will generally be inflation when there are fewer goods to purchase or when the money supply increases.

History teaches us that the government, often through good intentions, decreases the supply of available goods. There are many reasons this happens. Recently, people were told to stay at home, and many businesses closed. At the very least, the supply of many goods dropped, and people were at home all shopping online for the same goods - causing prices to rise - inflation.

History also teaches us that the government increases the money supply by printing more money.

It's not an accident that both of those are caused by the government. These are the masses' reasons to have lower regulation, not to give handouts to some but to stop government interference. Not to favor winners and losers but to have just enough regulation - without printing stupid amounts of money to save the economy in the short-term.

Unfortunately, history also shows us that government interference, though possibly well-intended, results in price controls that also cause the same problem - inflation.

merely-unlikely

A good example of unintended consequences is the proposed ban of US exports of gasoline. The intuition is that will boost supply in the US market, but that intuition fails for large chunks of the country. The East Coast is heavily dependent on imports due to a lack of pipeline capacity and US flagged ships (see Jones Act). So if exports are banned then international market prices go up, and East Coast imports become more expensive. Pockets located near refiners might get cheap gas but most of the population ends up worse off.

jacknews

"There will generally be inflation when there are fewer goods to purchase or when the money supply increases."

But these seem like entirely different problems. If there's too much money, then you should reduce the money supply by increasing interest rates, stoking job fears, etc.

If there are not enough goods, and the market isn't responding by producing more, you can't solve it by making sure people have less money. Or, you can but you are really make people poorer, not just curbing runaway prices.

zhoujianfu

Exactly... and it seems like right now it's more because of fewer goods to purchase (less energy supply because of Russia, less goods / workers because of covid), but demand has returned to pre-pandemic levels.

I'm a little worried they're fighting a money supply increase when the problem is a (hopefully relatively temporary) shortage of supply. I think the money printing resulted in some asset bubbles (crypto, real estate, stocks), and raising interest rates has popped it already. But I think inflation will just settle down as we get our energy and supply chains righted, regardless of where interest rates are.

jollybean

I'm wary that this is a problematic articulation.

The government rarely if ever controls markets to the point where it causes material price increase for things.

The US government has not taken measures to materially affect the cost of goods imported from China, or gas, for example.

Yes, the Central Bank sometimes creates more liquidity than is required for a given economic cycle, but in most cases, this is due to economic calamity i.e. banking collapse, pandemic, war etc. in which case the resulting inflation is the 'accounting adjustment' made to accomodate for that 'external factor' (i.e. factor external to the regular economy).

A pandemic, banking failure, getting invaded etc. can be the result of government action (I mean, especially if the nation is 'choosing to go to war', as in Vietnam) but not necessarily.

Finally, and importantly, the Central Bank is not the 'government' rather, part of 'governance' - they are very different things and act for different reasons. If the 'government' did control the money printing we would all be in trouble!

bruce511

I'm not sure for what reason you are being down-voted, but I disagree with your comment on China.

Tarrifs on imported goods are specifically designed to make the cost of goods locally higher.

If a foreign product costs $100 landed, and a locally produced one $120,then adding 20% to the foreign one makes them both the higher price.

This is good news for those in local manufacturing, less-good news for the consumer.

Ultimately a tariff is paid by the consumer[1], and received by the local govt, it is thus really just a consumption tax of sorts, although one that is self imposed by the consumer. The alternative is to "not pay the tax" but instead spend the same money supporting local industry.

The US has had a policy over the last 6 years of adding new tariffs. (if they've been revoked in the last 2, I'm not aware.) This drives up local prices, which is a factor in (not the sole cause of) inflation.

[1] politically this was spun as "China pays the tariff" but this is obviously untrue. There is no incentive for them to do so, and even if they did, it would negate the point of the tariff in the first place, which is to raise local prices to make local businesses more compeditive.

legulere

Money supply increases don’t necessarily lead to inflation. They only do when there’s more consumer spending on products.

In the recent low interest rate period, that didn’t really happen. Money instead went into an asset price bubble.

What we need to do to curb inflation is to lower consumption. The best point where to do that is the rich with their excessive consumption.

jbay808

> Money supply increases don’t necessarily lead to inflation[...] Money instead went into an asset price bubble.

In the short term, yes, but this is a precursor to inflation; eventually the inflated asset prices propagate to consumer prices. Some paths are: increased demand (the "wealth effect"), reduced productivity (eg. people retiring with their stock portfolios or quitting jobs to speculate on crypto/real estate), as well as rising rents.

Engineering trains us to analyze full cycles. There are a lot of perpetual motion machines that look promising on the expansion stroke.

Reduced borrowing costs can mask this pressure, as eg. rents remain low when mortgages are cheap, despite high housing prices. But when borrowing costs rise the floodgates are opened. Either the bubble pops and the paper asset "wealth" gets vacuumed away, or else it dumps that growth into consumer prices.

major505

As a brazilian, history teaches that inflation is a pain in the ass.

I lived in hyperinflation when I was a kid. I rememore that my parents would receive and run to the market in the same day, and buy everything in bulk, because next day, their money would be worth half.

Markets would tag products once or twice a day.

I remember buying an X-men comic that was worth something like 1000 BRC.

Monthly inflation would be beetween 50% - 80%.

Also a lot of the commerce was informal and using barter.

bruce511

It's something of a pity that hyper-inflation, and inflation, share more-or-less the same name.

Hyper-inflation is bad, and ultimately makes local-money such a poor store of value as to make it useless. People will revert to non-money approaches to trade, or use a different currency for money.

So yeah hyper-inflation is really bad, and (I suspect) what most Americans think of when the word "inflation" is used.

By contrast regular inflation, say in the 3% to 6% band has significant upsides. It promotes exports, leverages borrowings, and so on.

Equally it devalues income for those on a fixed-value pension (probably an excellent lesson to current generations of the value of inflation-linked investments and income) and that sucks. The solution though is not 0% inflation for ever, the solution is better pension plans.

Yes, inflation is "high" at the moment, but it's several orders of magnitude away from hyper-inflation. And the counter to inflation, higher interest rates, is starting to happen.

major505

Inlflation is bad. Specially because is a "tax" that affects the poorest population, that this days the origin is not rare, because the state prints money like crazy, to achieve its goals in the short term.

sometimeshuman

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 to be locked up for 1 year. Too bad there's a $10k annual deposit limit.

bob_theslob646

Here are a few things about i-bonds that the average joe may not know.

Series I bonds with issue dates prior to February 2003 became eligible for redemption six months from the issue date. Bonds with issue dates of February 2003 and later are eligible for redemption one year from the issue date.

However, if a bond is cashed within the first five years after its issue date, interest earned during the three months prior to cashing will be forfeited. Once a Series I bond is five years old, there is no interest penalty for redemption.

Another problem, you will owe federal tax on the I bond interest when you cash it in.

In general interest on treasury bonds is not taxable at the state level. I am not sure about local taxes, which have all sorts of one off rules. But the thing most miss about the I bonds is you receive no interest until maturity/cashing it in. So no compound interest.

Hope that helps!

goldfish3

>But the thing most miss about the I bonds is you receive no interest until maturity/cashing it in. So no compound interest.

That's incorrect. I bonds compound semi-annually.

https://www.treasurydirect.gov/savings-bonds/i-bonds/i-bonds...

bob_theslob646

Technically you are correct, but it is only when you cash them in.

Please see this for other questions.

>3). Tax Deferred - I-bonds do not throw off interest. You only owe tax on the internally compounding interest once the bonds are cashed in, which means you control when you pay tax. Always a good thing!

https://www.reddit.com/r/personalfinance/comments/qprqpy/ibo...

koolba

> Too bad there's a $10k annual deposit limit.

It’s $10K per tax identifier, so if you’re married you just doubled it. If you have kids, each of them can buy $10K as well (though be sure to understand that you’re permanently transferring the assets to them, you can’t take it back it’s effectively an early inheritance).

You can also buy $10K as a corporation, LLC, or anything else with a tax identifier.

btbuildem

So you could technically open N LLCs and stick $10k in each of them?

go_elmo

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

wahern

The Econ 101 is the complete opposite. Bonds usually have fixed rates, whereas stock prices are in principal tied to revenues, and nominal revenues should increase with inflation--companies increasing prices is literally how most people experience inflation. But Econ 101 also suggests that in the short term things will be more complex than all that because price adjustments won't be instantaneous. Fear and volatility will create demand for bonds, which could offset to some extent the clearly diminishing nominal value of fixed-rate bonds.

Note that a key factor here isn't inflation, per se, but the rate of change in inflation. From an Econ 101 perspective 2% inflation is no different than 20% inflation if things are otherwise steady-state. Stocks are the better bet because in principal they should respond more quickly to changes in the inflation rate. If inflation is steady, bonds in principal are the simpler, cheaper instrument.

mrep

I like your thought process on the "rate of change in inflation" but BND and VTI are both down 15% in the past year when inflation has had the greatest change in decades.

I would have thought BND would have fallen a lot harder considering how much higher new bonds are paying but maybe the market is pretty good at pricing bonds based on their associated risk per length of bond time with inflation?

IDK, what do you think?

merely-unlikely

Depends on the sector. You would expect consumer staples (ie food stuffs) to perform well since higher prices can easily be passed to consumers who can't cut back (hence inflation). You would expect money losing tech stocks to suffer as interest rates (and thereby discount rates) rise.

You would also expect bonds to perform poorly as their prices need to decline to make their yields competitive with those of new bonds issued at higher interest rates. Term loans should outperform since their interest rates are variable, making them safer in a regime of raising/fluctuating interest rates.

Conversely, sometimes US treasuries will outperform if investors are fleeing to a safe haven against potential recision risks. There's always another variable.

voisin

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.

DoingIsLearning

Is there a historic precedent for Quantitive Easing?

Is there a historic precedent for Quantitive Tightening?

We have been at it since 2008 that means there is little historic data to draw any preemption from, we are on unchartered waters at this point.

Rury

QE and QT aren't really anything new. They're mostly just modernish terms given to old ways of doing things.

What is unprecedented is hitting 0% interest rates nearly everywhere worldwide. When things hit this point, economies are forced to deleverage, to which economists refer to as an 'economic deleveraging'. National economies have gone through deleveragings in the past, and has so far played out in 3-4 ways:

-a period of high inflation (which sometimes lead to the collapse of the currency)

-a period of deflation (either via a bear market, or a rapid crash)

-a long period of almost 0 economic growth (stagnation - AKA 'the soft landing').

-some degree and combination of the above 3 scenarios.

pphysch

A major aspect of QE is creating artificial demand for USTs (the Fed becomes a buyer), i.e. price support in the wake of the GFC. That is intimately related to the USD as global reserve currency, which is not something there is much historical precedent for.

In the past, reserve currencies died for many compounding reasons. QE is a novel scheme to prolong the USD's life as a reserve currency, and is only possible due to modern financial technology. It's definitely not sustainable and can only prolong the inevitable crash in demand for USTs as faith in Washington continues to wane globally. Kicking the can down the road.

blevin

It depends on your admissible vintages for historic precedents. The Bank of Japan has been doing Quantitative Easing for over 20 years and has also extended it to include ETF share purchases.

joycian

Not that uncharted, perhaps. You can look up the Amsterdam banking crisis of 1763.

https://en.m.wikipedia.org/wiki/Amsterdam_banking_crisis_of_...

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JohnJamesRambo

What I’m seeing here is three spikes caused or exacerbated by fossil fuels. I wish we would get past the “burning stuff” era.

jelliclesfarm

1. we should gently force a recession. 2. reduction in money supply. 3. this can be achieved through higher interest rates. 4. there will be higher unemployment rates. 5. home prices will fall down and speculation will cool. 6. inflation should be capped as soon as possible.

I am sure America is on the job. For all it's shortcomings, noone had to starve due to bad economic policy in this country and not for decades. Having to file for bankruptcy and living less grand is not the same as starvation death level poverty. And this, btw..still exists in many countries around the world. In America(not speaking about other economies), we'll be fine. It will be weird ride for the next decade, but this isn't bad for America. If we were a corporation, we have sufficient moat.