Comment by nostrademons | Hacker News Reader

Comment by nostrademons | Hacker News Reader

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Commodities are going crazy:

https://www.cnn.com/business/markets/commodities/

Crude oil, natural gas, silver, corn, wheat, lumber, all up 2-3x since the bottom in April. In many cases (i.e. everything not oil-related), this is not just recovery from a dip: prices are significantly higher than 2017-2020 levels.

That said, I don't buy the conventional Wall Street narrative that this means the Fed'll raise rates and we'll get a stock market crash. Or rather, I believe that'll happen, but it'll be too late and the currency will have devalued 10x or more by then. The Fed has pledged to keep rates low through 2023, and to allow inflation to overshoot the 2% target to make up for the last decade of ~1.5% inflation rates, and that any rate movements will be "well telegraphed" for a long period of time beforehand. They still have tens of millions of people out of work. I doubt they'll act until it shows up in headline CPIs for a year or two.

Once inflation rates really get going, it's hard to tamp them down. The Fed has a pretty fun (and quite educational) game where you get to play the Fed chair:

https://www.sffed-education.org/chairthefed/default

Try playing one of the inflationary scenarios (they're random, but just keep playing till you get one with a tight labor market rather than a housing crash or recession). If you don't raise rates early and often, you quickly get into a situation where inflation is 7-8% and you have to hike rates to 15% or more to tamp it down. Why? Because inflationary expectations are subtracted from the nominal interest rate to get to the real interest rate. If inflation is high, you have to hike nominal rates even higher to get real rates to go up at all, and you have to hike real rates pretty high to make a meaningful dent in the money supply.

> that'll happen, but it'll be too late and the currency will have devalued 10x or more by then

Im curious why you think inflation in the US is going to go from <2%, not to 3, or 5, or 10%, but to 1000%?

Because in the absence of quick intervention (i.e. Volcker), it's a feedback loop.

The basic money equation from macro-econ 101 is MV = PQ: money supply * velocity of money = average price level * quantity of goods sold. Under normal conditions, V is assumed to be constant, and so you either increase the money supply to keep up with greater economic output (M ∝ Q) or if you increase it too fast, you get inflation (M ∝ P). This is "ordinary" inflation: it's predictable, controllable by the central bank, and follows roughly linear equations.

When people notice and then start to assume inflation, their behavior changes. If you know that your dollars are going to be worth 20% less next year, you have an incentive to get rid of your dollars as quickly as possible. You'll spend them as soon as you get them, because they'll quickly become worthless otherwise. This shows up as an increase in V, and it means that even holding the money supply constant, you still get inflation (V ∝ P). Moreover, because the cause of the increased price level was increased velocity of money, this feedback loop becomes self-reinforcing: the higher prices go, the quicker people want to get rid of their money and turn them into hard goods. At this point the central bank has lost control of the economy, and you have hyperinflation.

Looking at data on a few dozen instances of hyperinflation, the threshold seems to be ~20% inflation annually. Below this, consumers write off inflation as annoying but don't change their behavior significantly. Above it, hyperinflation seems inevitable: there are very few instances of sustained inflation above 20%/year where the government has later managed to bring it down, and it usually ends with hyperinflation, a currency crisis, and the replacement of the currency (and usually government) with a new one.

We've observed price increases > 20% in a number of industries this year: commodities (listed above), housing, food, and labor is getting up there. It hasn't filtered down into CPI numbers because those are averages, and inflation is flat or even negative among some demographics. But prices in fundamental industries tend to bubble up eventually, and if the Fed is focused on bringing back the stagnant parts of the economy while other areas are raising prices at 50-100%/year, inflation will cross that threshold throughout the economy before they can react.

(Incidentally, historical incidents of hyperinflation usually happen in the transition between a command to a market economy, the two most common examples being when wartime gives way to peacetime, and when communism gives way to capitalism. The transition from a pandemic economy to a normal economy has many elements in common with that: there's a large shift in consumer demand while the economy has been optimizing for pandemic production for the last year.)

Hyperinflation is caused by a collapse of production capacity(think of weimar republik or the collapse of coal and gas power plants in texas). Where do you see that happening? Obviously, there is a collapse in house construction rates and that's why you see house prices go up but that's a long term trend which started decades ago and not something caused by the Fed.

>(Incidentally, historical incidents of hyperinflation usually happen in the transition between a command to a market economy,

Most command economies simply didn't provide enough production capacity to meet the demand of all citizens.

>the two most common examples being when wartime gives way to peacetime, and when communism gives way to capitalism.

China had massive food shortages that were papered over by price controls. Just because someone fakes the numbers doesn't mean there was food for everyone. By introducing a free market you are merely revealing an existing collapse in production

The Weimar Republik is a classic example of a collapse in production capacity. Germany lost the war, winners destroy factories and there is a lack of working age men because they died in the war. People don't have fond memories of there being food everywhere and some speculating capitalist driving up prices because of greed. No, there were many days where they got three slices of bread per day and a hand sized lump of coal to heat their home.

>The transition from a pandemic economy to a normal economy has many elements in common with that: there's a large shift in consumer demand while the economy has been optimizing for pandemic production for the last year.)

How exactly is that going to result in a food shortage?

Why are gold prices more or less the inverse of the other commodities (including other metals)? Is it because it's used more as a portfolio hedge than a commercial good, whereas the other metals have more industrial applications?

They're not the inverse, but the price of gold had its run-up earlier than other currencies (it started rising in mid-2019 and peaked in summer 2020). This is probably because of gold's status as an inflation hedge - people started buying as soon as Powell started easing in 2019 - and because its speculative nature and easy storage makes it more responsive to future expectations. If the Fed drops rates in March 2020 and you expect this to mean major inflation will hit in Oct 2021, you can buy gold immediately to hedge this. If you try to buy corn instead, good luck storing it for the next 18 months.

It's also interesting to plot all these commodities (as well as cryptocurrencies) in terms of the S&P 500, which is rapidly becoming the true store of value. I think you'll find that their price is relatively constant in those terms, and it's the dollar that's been falling.

I was describing the last 10 years. Also probably used the wrong word, I meant consumer products (basically how you officially calculate inflation)

What makes you think that the GDP of the USA will shrink down to 2 trillion per year? (assuming current purchasing power)

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