Comment by pezzana | Hacker News Reader

Comment by pezzana | Hacker News Reader

> In a separate report, the Labor Department said real wages after inflation fell 0.5% from September to October, the product of a 0.4% increase in average hourly earnings that was more than offset by the CPI surge.

This is the thing to watch. Inflation beaten by wage increases is sustainable. Inflation not beaten by wage increases ends with higher prices being rejected and a recession at least.

Given the hyper-inflated nature of just about every asset, including housing, far worse is on deck.

> Escalating inflation could cause the Fed to tighten policy more quickly than it has indicated. The central bank has indicated that it will within the next few weeks start reducing the amount of bonds it buys each month, though officials have indicated that interest rate hikes are still off in the future.

The Fed has been on the transitory bandwagon since the beginning of this mess. The idea that it would act to cause a recession by either tapering or raising rates is hard to believe right now. They will talk the tough talk for now. But they will not walk the tough walk.

Why not? Consider the positions at the Fed that have been vacated. Consider that Powell's term ends soon. There was already a meeting at the White House with Powell and one of his most likely successors. The last thing the administration will tolerate is a recession and asset price collapse at this point.

Also consider the effect of raising interest rates on the precarious US fiscal position. The entire Build Back Better initiative is based on the availability of low interest rates. Raising them means even less money to spend into the economy, not to mention resistance within the Democratic Party.

Bottom line: something is going to break. There will be massive resistance to this idea for a time. Rates will not rise. QE will not be scaled back. Asset and CPI inflation will shoot higher. Consumer prices will be rejected and to stave off the inevitable collapse, still more government transfers ("helicopter money") will be injected.

The result will be something common in third-world countries which follow this playbook with boring regularity, but quite new to the US. But the IMF won't be able to fix this.

Entirely the other way around. Price rises beaten by wage increases is actual economic inflation: 'true inflation'.

Price rises without wage increases is a redistribution either away from wages towards profit, or more likely towards those workers in demand and away from those that are not. Or 'semi-inflation' as it is known.

And playing around with interest rates will affect neither issue, because, as it should be clear after more than a decade, interest rates aren't actually that effective a policy tool.

The economic rebalancing has to play out so that the new normal can re-establish.

No, not really.

Inflation refers only to the decrease in value of money, it has nothing to do with wages.

"In economics, inflation refers to a general progressive increase in prices of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduction in the purchasing power of money."

https://en.wikipedia.org/wiki/Inflation

It says "reduction in the purchasing power of money", not "people can now buy less stuff for their salary".

Inflation means you can buy less for the same amount of money, but how much money people earn is a separate matter.

That's not an economic inflation.

An economic inflation is when wages and prices go up together so nothing much changes other than numbers.

If people can buy less stuff with their wages that's a redistribution away from the wage share and towards the profit share.

Guess which share pays people to write the definitions on Wikipedia?

I actually went to school (which included economics in its curriculum).

I have also worked for many financial institutions over past 20 years including banks, brokerage houses and insurance companies. Currently for Citi Group as a tech lead for one of its risk systems. My work requires me to understand what inflation is because it has very deep impact on everything we do.

Here you have other reputable source: https://www.investopedia.com/terms/i/inflation.asp

"Inflation is the decline of purchasing power of a given currency over time."

"I actually went to school (which included economics in its curriculum).

That'll be your problem. Any training in economics or financial institutions leads to a skewed view of how the world actually works.

You don't understand what inflation is. You understand what financial institutions want to consider inflation to be because it affects the returns on the debt instruments.

For everybody else in the economy that isn't a problem. In fact it is of benefit to them since it redistributes away from financial institutions towards actual people doing stuff.

Inflation is more than just a narrow view of price changes.

"When a further increase in the quantity of effective demand produces no further increase in output and entirely spends itself on an increase in the cost-unit fully proportionate to the increase in effective demand, we have reached a condition which might be appropriately designated as one of true inflation. Up to this point the effect of monetary expansion is entirely a question of degree, and there is no previous point at which we can draw a definite line and declare that conditions of inflation have set in. Every previous increase in the quantity of money is likely, in so far as it increases effective demand, to spend itself partly in increasing the cost-unit and partly in increasing output."

The General Theory of Employment, Interest, and Money; John Maynard Keynes' Ch 21, V

The causes of inflation are fairly straightforward. It's a shortage of labor, international supply chain issues, and an unbalanced labor market due to a demand profile that changed rapidly over the pandemic (essentially a huge shift to goods over services).

Since the interest rates work by encouraging investment (usually long term), it doesn't look like interest rate changes will have any impact on inflation at least in the short term, since any investments in the labor market will take years to show results.

> The causes of inflation are fairly straightforward. It's a shortage of labor, international supply chain issues, and an unbalanced labor market due to a demand profile that changed rapidly over the pandemic (essentially a huge shift to goods over services).

So the trillions printed out of thin air have nothing to do with the inflation currently experienced?

We've been printing like crazy people for at least the last ten years. Why haven't we see inflation before this?

I do agree that asset price inflation has been a real thing, but if it's just money printing, then why didn't we see broad based inflation from 2008 onwards? (Serious question).

Supply chain problems because of virus & fiscal stimulus (as opposed to monetary).

Monetary can't cause inflation since velocity of money drops. Fiscal can)

Also the overall consumption basket suddenly flipping from 60% services to 60% goods on a dime in April 2020)

The asset prices aren't inflating. They are returning to their true market determined level.

Interest rate setting is an artificial market intervention that suppresses market prices by giving people a 'free money' alternative paid for by taxpayers.

As long as you are a bank of course.

Nothing. All government spending is done by printing out of thin air. That's how monetary system clearing works.

It's offset by taxes collected and people saving in excess of borrowing (net financial savings).

If you want trillions in savings you have to have trillions in debt because the accounting needs to sum up to zero

It's not an inflation, it's a redistribution - due to those changes in demand patterns. It'll play out and settle down over time.

Interest rates changes have nothing to do with investment.

Nobody who has ever risked their own money on a venture would ever say that a 0.1% change in the cost of liquidity changes the investment case.

The estimate error on the sales projections swamps that by several orders of magnitude.

Whether prices or wages are the true measure of inflation is a class marker. If you are a (0.)1%er making most of your money from stocks, it's wages. If you are working for a living, it's prices. Guess which side dominates the US public discourse.

> The last thing the administration will tolerate is a recession and asset price collapse at this point.

It really doesn't matter what they will "tolerate." They do not have the power to stop it if it's coming, just like they don't have the power to stop the surge in inflation. The current economic situation was set in motion by policy decisions made months and over a year ago (as far back as April 2020), as well as the worst of the pandemic, that we are still feeling the effects of.

Or you're just being incredibly pessimistic. We had a massive trade war, a reduction in immigrants coming into the country, and a massive pandemic all contributing to a goods and labor shortage that will work itself out as businesses adapt to the new environment

Reply on news.ycombinator.com