The Importance of Price Signals | Hacker News Reader

The Importance of Price Signals

lynalden.com

183 pointsjger15152 comments

Price signals are an important part of ensuring that resources go where they're needed, but this also sort of assumes that everyone has an equal capacity to pay.

There's an extent to which, yes, in a gas shortage I'll pay 4x to drive my wife to the hospital but not to drive my kids to the pool, so the gas goes where it's needed.

But if I'm very poor, I can't pay 4x even if my wife is in labour, and if I'm very rich, I'll pay whatever to drive my kids to the pool because I don't even notice gas prices.

It's not a perfect system, but it generally works. Yes, some people will be too poor to afford the gas to get the hospital at 4x the price. But some people are already too poor to afford the gas at 1x the price - and it similarly sucks.

The price going up means that there is gas for someone that can afford to pay 4x to take their wife to the hospital. If it didn't go up, the gas would still be hoarded only moreso and there wouldn't be gas for you to take your wife to the hospital at any price.

Wealth inequality renders many of the assumptions about social utility being maximized by free markets invalid. That is, I believe, the parent commenter's point.

Furthermore, your example is exactly wrong. Restrictions are both on price and on the quantity that can be purchased. Without both controls, in shortages, the earliest speculator is free to create shortages by hoarding, and is in fact incentivized to.

Wait, HOW does inequality render assumptions about free markers maximising social utility invalid?

You cannot just make such a profound statement without fleshing out the argument for it at least a little bit.

(I'm ignoring the 2nd part about restricting both quantity and price simultaneously - as I am more interested in how you quantity and substantiate your first claim)

Not the GP, but it's an easily defended view along several avenues.

First, I could point out that the marginal utility of money must decline at least logarithmically with quantity*, which means that egalitarian resource distributions tend to have a higher net utility.

Second, I could point out that the Pareto principle only guarantees an outcome for which, locally, no individual actor can do marginally better without another doing marginally worse, not an outcome in which the total utility of all actors even approaches a local maximum, let alone a global one. We can easily end up in a scenario where a beggar can starve to death while a baron gorges on food whose loss would go unnoticed to him.

I could go on but I think the above is already enough of a basis to support the claim.

* The proof of this is not short enough to type on my phone.

I agree with your argument that a Baron could be gorging himself while a begger starves to death... this is a definite disadvantage of capitalism, but does this disadvantage outweigh the advantages? And how do the alternatives compare... I would say it's still a far leap to say tue system is terrible or worse than most proposed alternatives. I like the saying - Democracy is the worst possible system, except for all other alternatives... which is to say democracy is a way for 51 percent to force their will down the throats of the other 49 percent... but autocracy is still worse in general because it does not have a corrective mechanism like democracy has. The same I believe applies to capitalism. We can improve pure democracy by going for constitutional democracy... some may argue a mostly free market with some taxation is an improvement over pure anarcho-capitalism.

Well, I'm not making a claim in favour of any particular system, merely answering this question:

> Wait, HOW does inequality render assumptions about free markers maximising social utility invalid?

by showing that there is no particularly strong reason to think that free markets maximize social utility.

When it comes to other systems, all I can really say is that the space of alternatives is not very well explored.

Money is essential for commercial work yet when someone hoards it, you have to borrow new money into the economy, often with interest. As interest must be included in consumer prices and interest is paid out according to how much money you already own the bottom 90% are net payers in this system and the top 10% are net recipients.

So now politicians must make the economy grow or be forced to take care of the unemployed. At some point there is a limit to how much growth you can achieve domestically so you start exploiting foreign countries.

Maybe we should just reform money then, capitalism is fine according to your problem description, the problem is fractional reserve banking. Maybe bitcoin, gold, or some similar idea would solve your entire concern? Often times people refer to gold money as "honest money" in contrast to FIAT money (money declared into existence by the government).

It requires no substantiation, it is in the common definition of social utility that each persons contribution to it should have a priori equal weight.

You say by DEFINITION of social utility everyone's contribution should have equal weight?

Are you saying the fat lazy guy sitting on his arse eating cheetos and playing viddeo games have as much value to society as the cardiac surgeon working 14 hours a day and saving several lives per week ?

Why would you bring such a terrible statement ? I honestly hope you are trolling, because if you normalise such bs in your own mind, you are harming yourself - programming your own mind to accept bad ideas as normal, training it to make bad decisions in all areas of your life if you are not very careful.

PS: WHO's definition of social utlity are you using, and why are you uncritically imbibing it ?

Social utility is typically regarded as some kind of sum-like object over everyone's personal utility. When I say contribution, I mean to this figure.

> Price signals are an important part of ensuring that resources go where they're needed, but this also sort of assumes that everyone has an equal capacity to pay.

Technically, neither of those things are true. An efficient market only ensures that resources aren’t wasted - that they won’t be allocated in ways that are worse for everyone. There are still (infinitely) many efficient outcomes where some people could be better off at the expense of others.

Defining ‘need’, especially when it comes to trade offs between individuals is an extremely fraught and unsolved (and demonstrably unsolvable) problem in economics.

But then the money keeps flowing. It doesn't disappear just because you drove to the pool. The gasoline supplier uses the cash to crank up supply, the price goes down, etc.

> assumes that everyone has an equal capacity to pay

No, it does not. Nor does it assume equal willingness to pay, or equal utility to the buyer, or perfect information.

Yes. Keep the price signals. Redistribute more of the wealth. It's a win win.

You’ll need to come up with a way of redistributing wealth without impacting price signals. Peoples net pay rate is a price signal. I’m not aware of any method of taxation that doesn’t affect price signals.

> I’m not aware of any method of taxation that doesn’t affect price signals.

Well, you could distort price signals less by:

(1) Not selectively favoring capital income in taxation via a reduced rate for long-term gains, and (2) Not selectively disfavoring labor income (beyond #1) in taxation via payroll taxes.

This would also, on a revenue-neutral basis, effect an upward shift of tax burden (downward shift in after-tax income) compared to the status quo, given where labor and capital income dominate.

I'd be in favor of this change iff capital losses could offset capital gains infinitely forward and backward in time with no limits.

> I'd be in favor of this change iff capital losses could offset capital gains infinitely forward and backward in time with no limits.

I'm not negotiating with you, I’m describing how to undo a deliberate price distortion advantaging a particular class in status quo tax policy.

That said, while I wouldn't do exactly what you want, I’d do something similar and from the perspective of basically every taxpayer with capital losses (and many without) better:

(1) allow recognizing income for tax purposes is advance of realizing it, without limit, inflation indexing advance-recognized income when it is then used to offset against realized income.

(2) allow capital losses to offset income recognized in the current year (this is effectively the same as an infinite forward offset against income, not restricted to capital income, and protected against erosion by inflation.)

(3) allow deferring tax recognition of any or all realized income exceeding 110% of the minimum realized over the past 3 years (excluding 10/9 of any deferred amount; that is, with maximum deferral amount, the baseline would not change), provided that no amount may be deferred without first using all available advance-recognized income.

(4) Allow further deferring up to 90% of any remaining previously-deferred income after recognizing all current realized income not eligible for deferral under #3.

(5) At death, final year taxes would allow notionally “deferring” any taxes deferrable under the normal rules one final time, which deferred amount would then be taxed at the average (not marginal) rate of the final tax year before the “deferral”.

(6) At death, any unused advance-recognized income after applying to the final tax year would be retroactively applied to past tax years starting with the most recent (but “deadjusted" for inflation back to the tax year it is applied to.)

(Tangentially to the central issue here, I’d also eliminate separate estate and gift taxes, but keep the per-recipient per-year exemptions from the former for tax free transfers of either kind, and then tax any non-exempt transfers as normal income to the recipient.)

Pigovian taxes are an example where altering price signals is a feature, not a bug: simultaneously disincentivize negative externalities, and act as wealth redistribution with dividends/UBI.

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

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

Tax inelastic goods and services.

Land. Wealth.

Note that attempting to legislate such taxation runs into that slight issue observed some time ago by a radical economist:

"Wealth, as Mr Hobbes says, is power."

-- Adam Smith, Wealth of Nations, 1776.

An equal, universal, non-means-tested UBI will accomplish this. https://m-davis.com/blog/?p=43

If you ask for reform, you will wait forever. Reform is possible when there is a credible threat of a much greater shake up.

Reform are concession that demonstrate what more is possible in a given moment. Without further progress it will be withdrawn after the threat dissipates.

Land value tax

> Price signals are an important part of ensuring that resources go where they're needed, but this also sort of assumes that everyone has an equal capacity to pay.

Right, but it's not claimed that price signals is some all-powerful force to drive behavior. It just ensures "resources go where they're needed" in aggregate. Well resourced individuals can still use their money to override that as they see fit.

They're not overriding anything - those with the money pays more to obtain the right to decide where the resources go.

But they _can_ pay more because they've produced the wealth in the past (and did not consume it). If their will could be overridden at a moment's notice, then this stored wealth means less, and thus people would choose to consume more and not invest, and thus, the overall aggregate wealth would be reduced.

Perhaps! I think some of us are nonetheless born with a lot more wealth than others, and that compounds a heck of a lot.

What about an emergency credits system? In an emergency, the government issues 100 credits to every person, each equal to $x. Prices for essentials are shifted to credits for the duration of the emergency (but remain floating) and shopkeepers can exchange credits for cash with the government.

This credit system sounds like another form of currency.

It is. But it’s equally distributed.

What would stop someone from operating a currency exchange system? Ex: a market to buy and sell credits using USD

Nothing. But if you needed water to stay alive and it was $1,000 a bottle you may have no way of getting it. If you needed water to say alive and it was 100 credits a bottle you would at least have the option of getting the water or selling your credits.

I agree with the general sentiment in this article. Price as a mechanism to coordinate supply and demand is underappreciated by the general public. You can use it to control the level company-internal resources are used so it stays within reasonable bounds and doesn't grow a huge backlog.

You can even use a price to make distributed, globally optimal decisions on product decision. If e.g. time to market is a scarce resource in your project, you can tell everyone that if they can reduce time to market without costing the project budget more than $x/week saved, they need no permission to adjust the requirements -- they should just go ahead and do it. (Boeing used this except for a weight problem with one of their models.)

I have but one quibble: the first point starts out true but then does a correlation-is-causation error right after that.

> 1) Broad money supply and price inflation are rather correlated.

> The most precise way to phrase it is that rapid money supply growth is necessary but not sufficient to cause widespread price inflation.

The alternative perspective here is that obviously money supply and inflation is correlated, but for exactly the opposite reason: when prices go up without real values changing, people are still going to need the same real stuff, so banks and governments will print more money so people can afford the things they need.

In other words, money supply could be a symptom of inflation as much as a cause.

We play Monopoly. Suddenly the bank gives everyone 40% more money. What happens to the prices for owned properties and houses?

We play Monopoly. Suddenly everyone wants 40% more money for their owned properties and houses. No one has any more money to pay for these items.

Which of these two scenarios seem more likely to cause inflation?

For more info about which we are seeing, this is a great summary from Bridgewater.

https://www.bridgewater.com/its-mostly-a-demand-shock-not-a-...

You should consider another option not possible in Monopoly: what if 25% of the properties are removed from the playing board?

For a concrete example, consider the debate over what caused the recent spike in vehicle fuel prices. Was it the Fed's QE policy? Was it a spike in demand by consumers? Was it a deliberate reduction in supply by the crude oil producers and refinery operators?

For the third option, note that in 2015 the US government lifted the ban on the export of crude oil from the United States. In 2020, several major refineries were closed down. As a result more crude oil (produced by fracking) is being exported to global markets, and less gasoline is being refined in the US. This is a pretty good explanation for the spike in gas prices. This view is loudly condemned by the corporate media, Wall Street, and the fossil fuel corporations... for reasons that should be obvious. They'll instead try to blame restrictions on the import of dirty Canadian tar sands oil for the rise in prices, while deliberately ignoring the 2015 crude oil export law and the refinery closures.

How correlated is the rise in US gas prices with the rise in commodity oil prices? If the US gas price rose independently of international crude prices then I think you'd have a point. I don't know, I'm just curious.

I seem to remember hearing that a lot of US crude production went offline during 2020 because the falling price of oil made it uneconomical. With the rise in crude prices, maybe it's back now, but I don't know if production can scale as quickly as oil prices. In any case, I think it would be hard to argue that fed printing did not at least significantly contribute to the rise price of nearly every commodity.

It's very easy to argue that Fed QE (aka 'money printing') had nothing to do with current inflation, just look at when the QE boom began, i.e. right after the 2008-2009 subprime-mortgage-fraud-triggered collapse. Inflation wasn't an issue througout the decade after that, it wasn't even mentioned in the analysis of QE at the time (2014) [1] nor does it show up in the data until this year[2]:

[1] https://www.bbc.com/news/business-29227597

[2] https://www.usinflationcalculator.com/inflation/current-infl...

So if the Fed dumping $4 trillion into the economy from 2009-2014 didn't jack up inflation then, what's the argument now? Sounds more like a basic supply and demand issue due to frail global supply chains, plus monopolistic price manipulation by centralized power in corporate America.

Different type of printing.

The intervention in 2008, printed asset money (not bank liability deposits as were given out recently), and crucially used it to buy a 4 trillion of bad loans from the Banking System, which were then placed in runoff (the Fed ended up making a small profit on this as it happens).

Think of it as deliberately creating a loop in the monetary system to get the loans away from the banks, where the losses would crash the banking system, and into a place where they could just be quietly allowed to drain off.

The money printing last year on the other hand, was a Weimar style directly into liability deposit accounts, and that has a much broader impact.

To be fair about the subtleties of all this - had the banking system still relied on the old reserve based regulation as used in the 1920´s, 2008 would have triggered a hyperinflation - but as Basel capital regulation now also controls the system, that intervened to prevent a monetary spiral with more lending creation more (deposit) money.

Perhaps Fed QE, with artificial suppression of lending rates(if I understand it correctly), was akin to leaving kindling around, but without the spark of a global supply panic, there wasn't a sure bet for traders to leverage. Once it seemed clear that prices were heading upwards due to supply shocks, it was a no-brainer to use the cheap money and drive up the prices of assets even further.

I'd also add that the helicopter stimulus from the government probably helped goose asset prices as well.

I don't know... if you listen to some folks, QE is deflationary because it traps money in the financial system. I'll say that I personally pulled most of my money out of the market in late 2019 because I already thought we were due for a correction. It seemed like, while it took a few years, asset prices were already climbing before COVID hit. The lack of inflation could be explained by increasing globalization and overall anemic economic growth(which is one piece of evidence used by the "QE is deflationary" crowd).

One could also argue that QE is a response to deflation.

If you play monopoly with house rules that make it more similar to a real mix of sovereign economies, surely the latter. (Source: I have played with such house rules. Yes, it gets more interesting than vanilla monopoly. Yes, that's how inflation happens in those games. One bank has never, so far, suddenly decided to give people money they don't need (that sounds like financial suicide). External events, however, have caused changes in demand for one bank currency which forces that bank to lend more money.)

so… what are these house rules?

The core of it is free banking: anyone who wants to can produce their own currency and manage it however they want. The exchange rate to the standard monopoly currency is determined by the market.

Another major element (though more common in house rules) is that arbitrary agreements between players are allowed, enforced only by one's honour.

(These rules probably only work when sort of the same group of people play multiple sessions.)

Add 2 new players to the game after all but 2 properties are claimed... See how that works out :-)

Also don't we know in this case that the bank increased the supply by 40% first? Inflation followed, as you would expect when there are drastically more money units competing for goods and services (combined with fewer goods/services as a result of shut downs).

I don't get all the mental gymnastics around this.

Could it be the case that banks end up lending more not only in response to increased prices, but also in when there are expectations of future increased prices?

The only mental gymnastics I don't get are the ones where one pretends the market is simple and ultimately controlled by one entity. It's not.

The base money supply has more than doubled since February 2020, and the M1 money stock has more than quadrupled since then. Any one with half a brain knew the “transitory inflation” claim was pure propaganda.

exactly. But it has been an all round perfect storm, aided by both circumstance and policy WHILE keeping the money slauces wide open.

Money printing is the base driver of inflation.

BUT: the best anti-dote to inflation is productivity growth. Biden lifting regulations and taxes are both well known enemies of productivity growth.

On top of this you had supply chain disruptions... meaning fewer good and services chased by an avalanche of money... laws of supply and demand gaurantees price pressure.

It was not hard to predict. The fed played word games with the word transitory because they hoped to psychologically influence peoples economic behaviour to mitigate additional feedback loops I wager.

Or maybe the bond market doesn't care about current consumer inflation? I honestly stopped giving a damn about inflation because it is all pointless.

Everyone cares about an irrelevant number while getting screwed by the properties of money that they think they enjoy.

You say the bond market doesn't care about inflation ? Well, it should, especially if it isn't transitory.

If you really think one should not care about inflation, then one of us will be proven wrong. (I have put options - i.e. money where my mouth is)

Isn't that second one already literally inflation?

Except according to (neoclassical) economic theory, real economy is not like Monopoly. In real economy, you can have capital investment (or lack of it), which changes how much real production you have (in Monopoly, this is fixed by the amount of houses available).

So whether increase in money supply causes inflation depends on whether you can increase the production. If it is possible to increase production, the inflation should happen only temporarily, as the extra money from the demand will get reinvested. This should cause the supply to catch up and prices to fall back again.

However, I think the current social inequality complicates the situation a bit. If the investors know that the increase in money supply is only temporary, and the money from the demand will again very quickly end up in the hands of the few (in increase of asset prices), there is no real incentive to invest and increase production, because who will consume, if the extra demand is only temporary? This seems to me like a marxian trap of too low rate of profit (at least for the typical consumer goods).

The general problem with the broad macroeconomic indicators (such as inflation) is that they completely ignore the different classes in society. Unfortunately, the mode american economy is in now (where 50% of it is owned by only a small number of people), this becomes much more relevant.

Land is finite in both Monopoly and in real life. This is actually what Monopoly was designed to communicate to players. It pisses players off and turns them against each other because it was designed to.

Land might be finite but we're nowhere near its limits. I once read that you could easily fit every human building ever built in a 10km stretch of the Grand Canyon. So let's carefully say we can have 1e9 times the number of buildings we have now.

Desirable locations are finite, though. People want to live near jobs, infrastructure, amenities, their friends and family. There is limited supply of locations that are near to those things, so land functions as a monopoly.

You don’t need to be anywhere near a resource’s exhaustion for its finitude to affect how people value it. Look at any valuable natural resource.

That’s especially true of land where, as the other commenter says, all land is decidedly not created equal. There are very good reasons more people want to live in Manhattan than in Death Valley.

> We play Monopoly. Suddenly the bank gives everyone 40% more money. What happens to the prices for owned properties and houses?

Nothing if it just sits around, which is what is generally happening in the real world:

* https://fred.stlouisfed.org/series/M2V

Please stop with the Monetarism: there is no empirical evidence for it, no matter how 'intuitive' you think it is.

> But also – why do so many people insist that inflation is an increase in the money supply? This makes zero sense. Here’s why – our economy is mostly a credit based economy. So, if I take out a loan for $100,000 then the money supply has technically increased by $100,000. But what if I don’t actually tap that loan? What if I borrow the money because, for instance, house prices just went up 25% and I want to have some cash around for emergencies? This doesn’t tell us anything about prices, living standards or really anything. But this is what so much of the money supply represents – money that has been issued and is just sitting around unused. Why is this useful? It’s like calculating your weight changes by counting how much food you have in your refrigerator. No. That’s potential calories consumed and potential weight gain. The amount of food in your fridge tells you little about your future weight changes just like the amount of money in the economy tells us little about the actual price changes in the economy.

> Sometimes I feel like people read some econ 101 and the admittedly intuitive idea that inflation is “always and everywhere a monetary phenomenon”, but didn’t stop to think that it might be a lot more complex than that.

* https://www.pragcap.com/three-things-i-think-i-think-i-see-d...

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1799102

Edit: Regarding the downvotes, it doesn't change what the evidence has been saying for a few decades:

* https://www.longtermtrends.net/m2-money-supply-vs-inflation/

> So why did the monetary base increase not cause a proportionate increase in either the general price level or GDP? The answer lies in the private sector’s dramatic increase in their willingness to hoard money instead of spend it. Such an unprecedented increase in money demand has slowed down the velocity of money, as the figure below shows.

* https://www.stlouisfed.org/on-the-economy/2014/september/wha...

> Similar analysis on the eurozone reflects the same trend: Central bank money printing is largely irrelevant to money supply and inflation.

* https://blogs.cfainstitute.org/investor/2021/04/19/myth-bust...

What people should really be asking is: why is (has) velocity (been) dropping? One hypothesis I've heard is wealth inequality: if the top x% has most of the money, then it's probably just sitting around collecting interest/dust and not circulating.

There is a harvard article that the top 1% have become net lenders through stock ownership of companies that themselves are net lenders. Who is borrowing? Bottom 99% and the government.

https://scholar.harvard.edu/straub/publications/saving-glut-...

You know, companies should be net borrowers and net investors.

“Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” ― Milton Friedman

If you can accept this, inflation becomes a lot less mysterious.

If Milton Friedman were right with this statement, then the increasing money supply since 2008 due to the actions of the Fed, ECB and BoE would imply that since then we've seen either a massive increase in economic output or inflation.

Neither of those things happened and as a consequence we can conclude that Friedman was wrong about this.

> then we've seen either a massive increase in economic output or inflation.

No, there wasn't a massive increase in economic output nor a hyperinflation. But there was an asset price inflation. World wide we saw a surge of housing prices (in US, China and Europe -- where money supply grew phenomenally over the years), booming financial markets and a massive price increase of cryptographic money. So much of the growing monetary supply was being absorbed by those markets. But now the time has come where the all the additional money starts having an effect on the price of everyday items.

So contrary to what you _want_ to believe, Milton Friedman turns out to be right ... again.

Demand for housing in Europe is also huge as people move towards cities and supply hasn't caught up and struggles to catch up due to regulation and NIMBYism. This naturally leads to an increase in prices. The price changes of everyday items right now can be explained with effects from the pandemic.

Perhaps you are right and there is indeed a tipping point and we've crossed that point. Time will tell however people have also claimed we'd reach that tipping point any moment for the last 10 years or so, claiming Friedman was right because of the effects we now has strong broken clock vibes. Perhaps that's genuinely the case but it's still way too early to make that call.

Except CSI across the board has increased incredibly fast compared to historical trends since 2000 ish, not just in cities.

EDIT: I meant CSI, Case-Schiller Index, for house prices, a tragic typo XD

The BLS has a page that shows the CPI over the last 20 years[1]. Looks perfectly fine over that timeframe. Some ups and downs as one would expect but generally on target.

[1]: https://www.bls.gov/charts/consumer-price-index/consumer-pri...

Until you look at commodities, minus energy and food. These also happen to be within 1% of all time highs.

I meant CSI haha, that was a bad typo

Cantillion Effect[0], see my earlier post.

If you print money by lowering the interest rate, the new money is created by credit worthy people, who go on to buy assets, so you see no increase in consumption demand, so there is no inflation. If you print money and give it to the average person, you will see consumption demand rise.

But that first effect is temporary. When you lower the interest rate, you are storing inflation, and using my previous posts analogy, by trapping it behind a dam. That money still exists, and given a supply shock, that dam will be opened. But it wasn't the supply shock that caused the inflation, it was always the creation of the new money in the first place. So Milton is correct. If the weathy did not have wealth stored, they could not use that wealth, and you would have no inflation.

So this year we see a combination of three effects.

1. Less people working, so the average wage goes up. (The people not working retired, as their stock was up by enough, so they are still spending.) This allows the average person to have more money, which they will spend.

2. Governments have given money - and more importantly to the average person - have suspended student loan payments. This means people can spend more of what they earn.

3. Supply shock on goods caused by CO-VID and caused by inefficiencies of the Supply Chain caused by the increased demand and the switch from service economy to more stuff.

You'll note that unlike 1971 or Weimar, none of this is exponential. When we reach an equilibrium point, peoples wages will level out, and peoples wages might rise back to the level they were in 1971, but the system will be stable. So the Fed is correct, it's transitory, but that transition might be longer and bigger than they expected. That is, until they raise rates next year.

[0]: https://news.ycombinator.com/item?id=25646585

We have seen a massive increases in stock and housing prices all over the world. I don’t think that either companies have done multiple times better work over the last decade or that houses have improved several times. That should count as inflation.

Friedman would still on logically safe ground. The quote says [Inflation -> Monetary policy]. Logically, monetary policy may not necessarily cause inflation.

That isn't a pedantic point - if someone gave me 10 trillion dollars and banned me from spending it, there would be no inflation. Or if I lent it all out to people buying assets, or "invested" it in government bonds.

Friedman's model is now considered false, or at least only very conditional. It fits only certain economies.

Is Inflation Always and Everywhere a Monetary Phenomenon? https://www.jstor.org/stable/3441104

>The relation between long-run inflation and the money growth rate is not proportional. The strong link between inflation and money growth is almost wholly due to the presence of high- (or hyper-) inflation countries in the sample. The relationship between inflation and money growth for low-inflation countries (on average less than 10% per annum over the last 30 years) is weak.

The part you quoted doesn’t seem to address the output half of Friedman’s statement, repeated here for convenience:

> can be produced only by a more rapid increase in the quantity of money than in output

Surely inflation can also be caused by a rapid decrease in the quantity of goods e.g. production moved to weaponry in wartime, blockades, natural disasters, strikes, pandemic shutdowns? Same money, chasing fewer goods.

It’s more complicated when the fed has open market operations that can pump and dump treasuries, and other market participants can use leverage as well.

> The alternative perspective here is that obviously money supply and inflation is correlated, but for exactly the opposite reason: when prices go up without real values changing, people are still going to need the same real stuff, so banks and governments will print more money so people can afford the things they need.

Clearly untrue. It can be reasoned from first principles that expanding money supply leads to rising prices. Furthermore, if governments answered price inflation by expanding money supply even more, it would lead to hyperinflation.

Similarly, it can be reasoned from first principles that any other cause of a decreased demand for a currency leads to rising prices. I'm not disregarding one explanation in favour of others, I'm just saying that what I've seen in terms of evidence for the default explanation is far from conclusive as far as I can tell.

More lending in response to inflation does sometimes lead to hyperinflation! That's how little Weimar and his printing press got into such a pickle. But in the presence of other corrective feedback loops, it doesn't have to.

> when prices go up without real values changing

So in your model, why does this happen?

In the classic Friedman model it's because the money supply has increased. In your model, it just happens for no reason?

There are so many different reasons prices can change. Changes in availability of natural resources, changes in consumer demand, changes in the means of production, changes in technology.

We know the market is complex and with cyclical components and resonances at various frequencies. We know of the feedback loops caused by expectations driving self-fulfilling prophecies. We know of its fractal and stochastic nature. We know it's almost never a simple cause-and-effect relationship -- rarely is a market participant strong enough to wrestle on even terms with everyone else.

Individual prices change all the time for a zillion reasons.

The aggregate price level depends on the amount of circulating money. When gas prices go up, we have less to spend on other items, which then fall in price.

Milton Friedman figured this out in the 50s, which led to his Nobel prize.

To be clear, in case I have made myself misunderstood: I agree money supply affects prices.

In fact, whenever someone purchases or sells something, there are two objects being exchanged. One is a currency and the other being the object of sale. Supply and demand for the currency affects the price just as much as supply and demand for the thing being sold.

That's all I'm saying. It's very hard to convincingly put a direction on quantities so tightly intertwined.

> In fact, whenever someone purchases or sells something, there are two objects being exchanged. One is a currency and the other being the object of sale. Supply and demand for the currency affects the price just as much as supply and demand for the thing being sold.

This philosophy of viewing currency itself as subject to supply/demand is literally one of the insights that led to Friedman’s philosophy. For example see the Great Depression where an insufficient supply of money was one of the primary factors.

(See https://en.m.wikipedia.org/wiki/Causes_of_the_Great_Depressi...)

I agree that it's a hard problem, but economists figured out most of it 60+ years ago!

I don't mean to pick on you personally, but I don't know any other field where educated people are so happy to believe their hunches over the established science...

"Economists" disagree today, though, regardless of how strong their agreement was 60+ years ago. It seems unfair to the scholarly argument to pretend it's not there.

Saying that economists figured it out is a bit like saying "doctors figured blood-letting out 200 years ago". As true as that may be, we know today whatever it was they figured out is complete garbage.

What am I missing?

If economists disagree about this particular thing, I've missed it.

Which scholars are you referring to?

Putting "Economists" in quotes and comparing them to blood letting doctors doesn't really shake my impression that you don't really respect this field of science :)

Thank you for holding me accountable. The ideas I refer to (as much sense as they make to me) do not, indeed, seem to have much support of mainstream economics. (Contrary to what I thought before you had me look it up.)

I'm still not ready to write them off, in part because of the bias against professional economists you've already caught me exhibiting. But I can admit at this point that it's completely based on personal whim and not much actual substance, as long as the substance is determined by mainstream economics.

Well, if you're going to be reasonable we'll have to stop arguing :)

I'm a "hard science" guy. My degree is in physics and I work writing software. But last 1-2 decades I've found economics to be the most interesting science there is, since it makes me understand society much better than I used to.

> You can use it to control the level company-internal resources are used so it stays within reasonable bounds and doesn't grow a huge backlog

I've been trying to sell this concept to the centralized IT org I work in. Right now they're charging some fuzzy flat fee to all departments but demand for services is not equal across units and prioritization is basically a graft and pull system. I'd love to democratize this with price signals but it's difficult to justify when you're also a monopoly that won't allow competition.

Except that the timing of those don't line up. Money supply increasing leads inflation, there are almost no instances of CPI increase leading inflation. [edit to add:] (except one very small blip at the beginning of recovery from the great depression)

> there are almost no instances of CPI increase leading inflation

CPI increase defines inflation, I think you mean monetary expansion, not inflation.

Yeah, typoed that. Thanks for pointing it out.

This is a nice story and makes rational sense. But the world is rarely rational, and I doubt that price signals behave any where near as logically or predictably as the author implies during the article. It reminded me of the classic ‘beer distribution game’ referenced in Peter Senge’s - The fifth discipline of how delayed feedback loops in supply chains can amplify or mute signals traveling back through layers of producers due to lack of shared context and understanding.

About this:

"When price inflation occurs, it can be a very challenging time for everyone. In that type of environment, prices of goods and services often go up faster than wages, and the public and policymakers wish to constrain them."

Wages in the USA went up faster than inflation during the period 1893-1973, despite two long upwards trends in inflation, 1893-1920 and 1938-1973.

Likewise, wages rose faster than inflation for most of the 1800s, though the 1800s didn't see many long-term inflationary trends.

When you read an article like this one, it is worth remembering that the era 1973-1995, when inflation rose much faster than wages, is unique in USA history.

Also, inflation rose faster than wages for most of the period from 2000-2015, even though this was an era of low inflation.

So, when someone says high inflation will outrace the increase in wages, they are really just talking about 1973-1995.

I've read many different theories about why the era 1973-1995 was so bad, and I don't think there is a definite answer, but there is wide agreement that two of the big contributing factors then were deindustrialization and the collapse of the labor unions. It seems unlikely that anything like deindustrialization is going to repeat itself now, as the USA has already lost all of the jobs that compete directly with low wage export industries.

I’m a big fan of this theory:

https://www.youtube.com/watch?v=1gEz__sMVaY

> The Cardboard Box Reform - Nixon's Ghost Bill & A Crucial Flaw in Democracy

video title, for those without a magic youtube url preview device.

i'm not 100% convinced, but the video does make a very compelling argument that congress votes not being secret means they can be sold or be intimidated into voting against the interests of the constituents.

Food for thought.

> 1973

Don't forget that the price of petroleum and everything downstream of it, which meant just about everything, more or less doubled twice, once in 1973 in the OPEC boycott and then again in 1980 with the Shah of Iran crisis.

It was a difficult time for investors and the economy in general, pretty much world wide.

Honestly it is quite simple. Interest rate increases hurt the working population because they are the ones paying interest. Meanwhile the money owning population benefits without having to contribute anything.

I am guessing inflation spiked because the economy and asset prices recovered much faster than expected. The expectation in April 2020 was that there would be a prolonged slump or a crisis similar to 2008. Few foresaw that there would be such an abrupt V-shaped recovery in GDP, asset prices, consumer spending, and large cap profits even after accounting for the stimulus. Suppliers cut back production in anticipation of a long slump, which never came.

There was a lot of stimulus spending in 2009-2010 and the fed cut rates to zero, but the recovery was slower, nor did inflation spike. So it's not like more spending = more inflation.

However, despite all the doom and glom, Americas have gotten wealthier over the past year thanks to surging asset prices and strong wages and the supremacy of the US dollar, which has surged this year. The same cannot be said for Turks, who have gotten poorer due to collapsing currency and whose inflation problem is far worse.

No, inflation is spiking because the Government expanded the money supply by about 25%.

https://fred.stlouisfed.org/series/M2SL

Now sit back, and watch every economist who doesn't pay attention to the money supply make a complete fool of themselves in public.

Lyn Alden is a better economist than most, and this article helps explain in a simple way what causes inflation.

We have inflation because of massive government "stimulus" handouts over the last two years of the pandemic. The response to this pandemic was way overblown and has ended up destroying our economy and did no save many lives.

Everyone loves getting government checks, but if all that new printed cash has to chase a smaller supply of goods and services (as a result of shutdowns), then massive inflation hits.

> Everyone loves getting government checks, but if all that new printed cash has to chase a smaller supply of goods and services (as a result of shutdowns), then massive inflation hits.

I am not really sure what do you suggest as an alternative solution to the sudden demand decrease, that some people simply die of hunger being unemployed? Inflation is IMHO less harmful than real wage decrease or unemployment.

Not GP, but how about the alternative that the people not become unemployed at all, because the government doesn't force their employer to shut down?

Nah, that wont work. How about we give everyone money and then those that are still employed are earning way way less than they used to in terms of purchasing power. That would be a much better equalizer for the middle class towards the bottom.

1. I echo josephcsible, shutting down employers is a mistake and likely to cause starvation. If people are banned from improving their own lives, there is a chance that their lives will get worse.

2. Just because there is an emergency doesn't mean everyone needs to sit around twiddling their thumbs. There was more work that needed doing in the pandemic, not less. That could have been parleyed into a job, leading to money for food.

> Inflation is IMHO less harmful than real wage decrease or unemployment

For minimum wage workers and in general unskilled labor, this is just not true. Minimum wage workers can't afford to hedge against inflation by buying assets, and their income is artificially kept high by a price floor (minimum wage + legally mandatory benefits). When you inflate the USD their real income will drop to its true market value since the price floor doesn't move with inflation. Low paid workers also don't benefit from their debt reducing in real value because their nominal wage won't increase as fast as inflation due to the price floor I just talked about.

Government checks made sense in the beginning of the pandemic but the 2nd round of stimulus passed later on by reconciliation did not. At that point there was a vaccine and a strong economic rebound. You need only look at the popularity of Dogecoin, WSB, etc. to see that people did not actually need that extra round of stimulus.

>that some people simply die of hunger being unemployed

thats exactly what they want

Real wages are going down. Nominal wages are going up significantly, but prices for goods and services are going up far faster. Keep in mind government corruption meant the rich got far more handouts than the poor, and that many billions were stolen by scammers.

Government enforced shutdowns and regulations caused this, people should have been allowed to exercise their personal freedoms to stay home if they were at risk rather than required to at gunpoint.

BTW, I am not an anti-masker / anti-vaxxer. I have the vaccine and booster and wear a mask. I just think the government reaction has been worse than the pandemic itself.

Inflation can be found as a result of several possible root causes, and stimulus is probably certainly one of them. But you also have a shortage of goods due to extended supply chain issues. You have a reshuffling of the housing market as people go remote and move to different places(people leaving SF to go to Nashville, etc...). You have low interest rates that allow for incredibly cheap borrowing. There is no way to pin everything inflation to just printing.

Commodity cycles and price inflation are tightly correlated.

Next we can follow that logic to look at commodities. This chart shows the 5-year rolling change in CPI vs oil prices:

https://www.lynalden.com/wp-content/uploads/price-signal-cpi...

This is not a tight correlation at all. All the evidence she gives is weak.

I've seen this domain submitted in the last year or so. Who or what is Lynalden? Are they an economist, or a blogger, or both?

Not that credentials are the be all end all, but what's different about this person vs anyone who's posting at SeekingAlpha, or any of the investing sub reddits?

She's very popular with the bitcoin crowd, tends to write respectable-looking articles legitimizing them. She's also quite a skilled self promoter. I assume that's why she gets so much attention, because her blog posts are usually pretty banal, basic stuff in my experience. Not the worst, but not particularly worthy of attention or praise, IMO.

what are more interesting blogs you’d recommend that touch similar-ish topics to Lyn’s?

Not GP, but two blogs I like are https://noahpinion.substack.com and https://braddelong.substack.com

Both authors are quite witty, so their blogs are eminently readable. They're also trained in economics (have PhDs in economics) and are econ professors, so I put a lot more stock in the stuff they write (useful heuristic, but some may disagree) than in lynalden's posts.

Economics is harder to separate from politics compared to other sciences, so it's especially useful to read multiple points of view and understand what the biases of authors lie/what the ongoing debates are. One thing I dislike about lynalden is her tendency to present as the one "true" economics Milton Friedman's monetarist theory of inflation, and doing so without explicitly calling out the hidden assumptions being made along the way or considering other theories of economics (e.g. Keynesian). OTOH, Noah and Brad can be categorized as Keynesian economists, so they present a more left-leaning view of the field of economics where the quantity theory of money is not accepted whole cloth.

She's not an economist. She's an engineer who taught herself economics. You can tell because she gets a lot of things wrong.

> You can tell because she gets a lot of things wrong.

That puts her in good company with pretty much all of the world's most respected economists.

As an engineer, she's more bound by reality and reasons from first principles. I find that she's right more often than mainstream economists.

Relevant example: They were surprised by non-transitory inflation, she was not. That's a huge miss by other economists.

> As an engineer, she's more bound by reality and reasons from first principles.

Reasoning from first principles (applying a priori dogma) and being bound by reality (responding to empirical cues) are generally opposed, the exception is when the dogmas are laid down by people who are bound by reality.

Much (but not all) engineering work is bounded by reality inherently because there is quick and non-murky feedback when it is wrong; this is a feature of the work, not the worker. Engineers working in economics (and even moreso in economic punditry than actual policy, though it's true either way) don't get that. And the available “first principle” dogmas they can choose to apply are either intentional pedagogical simplifications, poorly tested against reality by comparison to anything in most domains of engineering, or flatly falsified, often ideologically motivated, ideas.

There's a difference between an engineer and a scientist, and you just hit on it.

Most people can’t tell. If you see something that’s wrong, it might be helpful to point it out.

I agree, however her posts tend to be very long and if you starting pointing out all the mistakes that you find it can become tedious very quickly.

how about 2 things she gets wrong

1. Comparing the money supply per capita (a meaningless statistic) to the CPI 2. Comparing the price of oil to the CPI for mysterious reasons 3. Making up the "natural resource cycle", a novel concept 4. Strange remarks that suggest she doesn't understand the subject matter: "with the caveat being that the new assets they created are subject to credit risk so they should create this new money prudently" (banks don't create money on purpose, new money is created as a side effect when they make loans) 5. Saying that the other way of creating money is by "monetizing large fiscal deficits"

I'll stop here.

ranks top 15% of public stock pickers

It's easy to pick stocks in a bull market

Then why aren't the other 85% not as nearly as good? They are in the same bull market. You're mixing relative and absolute performance.

She puts the money where her mouth is and outperforms the average professional by a considerable margin. Gotta respect that.

No, I don't respect that, for the same reason that I don't respect astrologists or fortune tellers.

Nobody cares about the source as long as there is consistent profitability.Ego is the enemy most of the time, especially when you are more concerned about being right than about making money.

I don't believe in stock pickers, that's all.

Economists don't pick stocks.

Is there a law that forbids them to?

An economist placing bets on the market puts money where their mouth is, so should just write whatever they think is true.

No, nothing forbids them from picking stocks. The skills related to picking stocks are completely unrelated to the economics profession.

Inflation is always and everywhere a monetary phenomenon

Inflation is always and everywhere a fiscal phenomenon

> Broad money supply and price inflation are rather correlated.

No they aren't. Consumer prices (inflation is the ratio of the first derivative of this to itself) and broad money supply might be, though charting them against each other that doesn't look particularly true beyond “both tend to increase over time”.

How do hedge inflation?

Index funds (S&P 500 up 23% vs 5% cpi)

Real estate, mortgages

Those are investments (which carry certain risks).

Gold is traditionally used specifically as a hedge against inflation (though you won't be getting nearly the returns over the long term compared to index funds).

As evidenced in the past 18 months.

Oh wait.

Gold is a terrible inflation hedge. Any other commodity worked better. Basically anything that is a part of the cpi basket is an inflation hedge. (Insert used car meme.)

> Basically anything that is a part of the cpi basket is an inflation hedge. (Insert used car meme.)

much of the CPI are depreciatory or non-durable goods. i can’t hedge against multi-year inflation by purchasing meat and dairy. if i buy a car as you suggest, it’s not likely to be worth as much 5 years from now than today.

or do you mean not literally buying the CPI basket, but buying commodity futures, stock in producer companies, etc?

yes, exactly, except not necessarily futures; commodity etfs are just fine, so are energy companies, materials, etc.

of course you have to know when the regime changes, see e.g. energy prices in the past 3 months.

Gold is better hedge if your currency is in freefall such as in Turkey. Not so great for Americans, when the US dollar is the global unit of wealth.

Know the risks though: when inflation increases very fast, the Feds might end up having to respond with a shock, and usually real estates are the first to respond to this shock by losing 5-10%.

The argument starts that people who need gas more are going to buy it in the shortage (suggesting efficient distribution), and then acknowledges that it's just as likely wealthier people or price gougers who don't need it.

In actual shortages where there's a strong political motivation to efficiently distribute goods (e.g. wartime), we switch to central planning (i.e. rations) because we know that's what works, denying price gougers their tax and making sure poor people who need stuff can get it.

"efficiently"

This is the weasel word.

In war, especially a war of national survival, one can argue that winning the war is the important cause and all others are of secondary importance. So you can actually use the word "efficient" about distribution of goods without first discussing the ends of said distribution. The main end is simply to win, or at least not to lose catastrophically.

In peacetime, there isn't a single primary objective, but a multitude of smaller, competing ones. Once you start speaking of "efficient distribution of goods", you imply existence of a ladder of importance on which these objectives are sorted.

An example: is it more efficient if Peter and Paul have one car each or if Peter has two cars and Paul has none? Well, it depends what they do with them, no? What if Paul is legally blind and cannot drive? (But radicals might still argue that Peter having two cars is a big no-no because it increases inequality.)

Sue me, I have whatever concept of efficiency that means that people eating and having housing and having a habitable environment is more important than NFT's or space tourism or car collections. That's my ladder of importance. So weasely!

That ladder of importance isn't as simple as you present it.

Having housing of which quality? What floor size per person? In what location? You can buy an entire empty house in depopulated Italian villages for 1 euro, which isn't a prohibitive cost for anyone, but there seem to be few takers [1].

Is space tourism necessary for promotion of space research in general? What about the money it brings into various coffers? Maybe it contributes to having habitable environment in the future.

As for eating, Coca-Cola and McDonalds are ready to drown the entire world in cheap sugary fast food. That probably isn't what you had in mind - this kind of eating will kill people slowly. Is it possible to feed 8 billion people just with organic food? Probably not either. Etc.

[1] https://www.idealista.it/en/news/tags/1-euro-homes-italy/

The pricing mechanism is very good at ensuring people prepare for resource shortage (with storage or whatever) and avoid the worst part of it at all.

There are still a few shortages one simply can't prepare for, but dismissing the entire mechanism due to a few very large scale emergencies that wold break any kind of normalcy isn't constructive.

> In actual shortages where there's a strong political motivation to efficiently distribute goods (e.g. wartime), we switch to central planning (i.e. rations)

That is glossing over the fact that wartime is miserable for the average consumer. Extreme central planning leads to horrible outcomes.

Central planning in wartime has two motivations: 1. It allows tactical objectives to be met very quickly, at unreasonable cost. 2. Free markets are at heart anti-war, because war destroys capital and suppresses trade/investment, both bad outcomes for traders. So there needs to be a mechanism to suppress the markets and force it to make economically bad decisions.

Wartime central planning has nothing to do with getting poor people what they need. It is more likely poor people will be purposefully starved drafting able bodied farmers into soldiers then making sure they have lots of food.

Heck, even private businesses often do a kind of ad-hoc rationing for essential goods when there's a rush on them, because they know that the kind of arbitrage free-for-all described in the article has extremely poor social outcomes in a crisis.

I might be in a more conspiratorial mood than usual, but isn't centralised rationing more about ensuring the government can take its cut before anyone else has a chance to place a bid?

> In actual shortages where there's a strong political motivation to efficiently distribute goods (e.g. wartime), we switch to central planning (i.e. rations) because we know that's what works,

There's a big difference between war and peace. Markets allow individuals, who do not necessarily have winning a war as their number one objective, to pursue their own objectives with their own demands, as communicated by prices.

In war, there is a political motivation to override individual objectives and force everyone to serve the needs of the war effort above all, even if they don't particularly want to.

Central planning isn't used in war because it's the most efficient way for every individual to achieve their own objectives, it's the opposite - central planning is the most efficient way to erase individual objectives in favor of a single overriding objective: winning the war.

This isn't an argument in favor of price gouging, my point is that full-on central planning isn't a means to general prosperity, and that's not even why everyone centrally plans during war. Central planning is about control and the erasure of individual freedom. Sometimes that's needed in a war. Inefficiently pursuing one objective (the war) is more effective at winning a war than efficiently pursuing a whole range of objectives, most of which have nothing to do with war.

The old socialist arguments about central planning being more efficient even during peacetime have been dead and buried for decades.

>and making sure poor people who need stuff can get it.

...but not before the politically well-connected people get their dibs.

Alternatively, the government makes advance purchase agreements because it’s that important, and this has nothing to do with denying manufacturers their profits. (Covid vaccines.)

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