Inflation propagates unevenly

You can still save and get real market returns through owning real private assets like stocks.

https://www.csun.edu/~vcovrig/Asset_Aloc.pdf

Edit: I think your point still stands though. In situations where inflation is out of control or where you don't have access to stable investments, then spending your income as soon as you get it could be more rational than saving it.

Losing savings to inflation means you sod your labor in a market that was oversupplied with labor, and spent it in market that is under supplied.

Economicaly, to optimize returns, you should have taken time off from selling labor when inflation was low, instead of hoarding cash.

If you have a good use for your money, you can invest it to beat inflation. Otherwise, you are just seeing the correction for your inflated (ha!) estimate of the value of money.

Inflation isn't bad, it is merely the messenger of the previously hidden misallocation of resources -- either "printing money" (not your fault, but blame the printer, not inflation, or accept it as a wealth tax), or real economic destruction like a natural disaster (Covid) and arguably the political respite to it, or war.

> "Low time preference generations produce prosperity, which produces high time preference generations, who bring ruin, which produces low time preference generations."

I don’t understand

Preppers, for example, are very low-time-preference people who have chosen food storage, energy capture and storage, machines, tools, land, structures, raw materials, cabling, conduit, lumber, etc as their mode of savings. They will tend to do very, very well in high-inflation environments.

This also ignores the fact that many assets owned by low-time-preference people (and/or the funds they hold) are leveraged, whether it be real estate leveraged by long-term mortgages, or 4% dividend-paying equities leveraged by 2% margin accounts. Inflation helps these people quite a bit.

If you get to old age having spent every penny you earned, your standard of living will fall off a cliff when you can’t or won’t work anymore. Someone who saved has both a larger budget and lower expectations of burn rate.

People who can’t fathom having a 6 month emergency fund are somewhat self perpetuating. People with 3 months will find they’ve moved the goalposts closer, and they just need time to get there, but less than they expected when they had 1 month in the bank.

I don't really understand how you got there - it may be left implicit in some conversations, but essentially the entire discussion about monetary policy wrt inflation rates is about managing this preference trade off. The general consensus seems to be that swinging too hard in either direction is a bad thing, hence targeting nominal 2%-ish.

For example, I know people that were scared to take out massive mortgages in past years and instead saved. That turned out to be the wrong move. In our money printing world, it has been much better for folks to buy as much house as they can. The house appreciates and the debt is wiped away by inflation.

This kind of environment isn't sustainable.

I would disagree here. This now 32 year old was saving their income during one of the longest booms in American history, and depending on where he invested, now has multiple years worth of investments producing solid returns.

Also, this 22 year old was in a better position to buy a house or car because they also lived through a bust time where lending was much more restrictive in the past. No savings means no house.

The person who went into debt still has all that debt, but now will be buried in a rising interest rate environment. Since they never saved, they are facing rising rents, plunging them further into debt.

People with assets benefit from high inflation environments. People spending more than they earn aren't in a position to acquire assets.

The other thing is that as inflation goes up you'd expect interest rates to go up. Going into something like bonds at the height of that cycle can get you higher real rates than at any other time.

So what matters isn't inflation but rather real rates and valuations (P/E), certainly there are times where people are more motivated to save and there are times where they're more motivated to spend but I don't think it's as simple as saying that you shouldn't save at a 7% inflation environment.

What inflation does do is it motivates you to buy sooner. If you know the price of something is going higher, and you have no options to get a good return in the short term, and you want it, then you want to buy it sooner.

Not an expert but lived through hyperinflation ;)

If you are a billionaire and can't even spend all your money without being completely reckless then your wealth will grow by the sheer nature of the exponential function, i.e. you spend 3% of your wealth but it grows by 6% so your wealth will grow by 3% forever until the economic system collapses since you have completely absorbed it.

Your time preference is basically 0% as you are unable to spend the vast majority of your wealth.

The time preference of poor people is very high, because their fixed costs like shelter and food massively outweigh the capital gains they earn. Yet every single cent they spend is partially paying the capital gains of the rich.

This has nothing to do with not doing YOLO or being smart or being rewarded, the system is simply rigged.

If this was a free market the interest rate would fall below time preference. In fact, the interest rate would actually have to go negative, not because time preference can be negative, but instead because time preference is actually unable to capture the nature of interest to begin with. It's a complete myth that time preference and the interest rate are the same thing. It's fundamentally impossible as time preference can only exist relative to the highest risk free interest rate minus time preference.

What is the highest risk free interest rate? Fucking 0%. Why is a 0% interest floor terrible? Because the real world undergoes a permanent increase in entropy and requires a perpetual energy input to stand still. So, getting 0% interest actually requires someone, anyone, to pay a non zero interest rate which represents the amount of energy that was added to the system to keep it standing still. In other words, the interest floor is below 0% and we simply forced it to be 0% by decree, against the will of the vast majority of humans on the planet. This is not a free market, it's an oppressive and coercive market.

Obviously, it is impossible for us to simply declare entropy increase nonexistent. The dust we have swept under the rug is still there. It's accumulating. You can see a little mountain forming under the rug. Yes, I'm talking about inflation. Because we refuse to face reality, we either have to perpetually grow the economy to make the mountain of money seem appropriate or we implement negative interest rates through the backdoor, with inflation where people start noticing the dust mountain getting in their way.

No, a gold standard does not solve the fact that we are mortal. It's just another way of ignoring entropy by decree.

I'm not sure that using an oversimplified model to make your point about inflation will help clarify the article here.

And if you diminish the quantity of some essential product used for everything, as, for instance, energy, you will get the same effect.

Also, people confuse a one time increase of prices with inflation (that is a constant increase in time), and inflation with hyperinflation (two different phenomena).

Increasing the number of dollars spent beyond the economy capacity will cause inflation (at least if the spending is not done in investments that increase capacity) but that's almost never (never?) the cause of hyperinflation. See (1) for hyperinflation examples.

(1) - http://bilbo.economicoutlook.net/blog/?p=3773

Same with labour. Increase the number of people making cheeseburgers, and you get more cheeseburgers and more people buying cheeseburgers. There is no fixed amount of labour to be done. It depends on the number of people.

The trouble with this simple and seeming obvious hypothesis and labour (by which I assume you mean immigration) is that labour sits on both sides of the equation.

If you increase the supply of labour, then you're also increasing demand of all the things the immigrants consume, which means you're increasing the demand for labour.

(How much you're increasing each side of the equation - and how long each side takes to adjust - left as an exercise for the reader.)

You are flying in the face of decades of empirical economic research, you are performing the epistemological equivalent of saying "and then they'll say that everything is made of atoms!"

Where you say 'you increase the number of dollars but leave cheeseburger production the same' - how exactly do you do that?

I mean, there certainly are institutions that can increase the number of dollars. But those institutions can't constrain cheeseburger production to make sure it stays the same, can they? Cheeseburger makers are free to adjust their production.

So nobody's doing what you suggested - increasing dollars while holding cheeseburger production steady. Instead, they're expecting cheeseburger production to change (maybe it's changing all on its own, as people develop new cheeseburger recipes and tastes in cheeseburgers change), and they are adjusting the number of dollars to compensate.

Which, yes, suggests you are committing the lump of cheeseburger fallacy.

The "leave cheeseburger production the same" is doing much of the heavy lifting here. There are many studies that show that prices tend to be sticky[1]. However, when prices do go up, more production does come online to capture those higher prices[2]. However, this can fail to materialize due to a number of reasons.

[1] https://en.wikipedia.org/wiki/Nominal_rigidity

[2] https://en.wikipedia.org/wiki/2010s_oil_glut#Causes

As someone else said in response, the first chapter of a HS economics textbook is not sufficient to explain the modern economy.

Why does an increase in the money supply encourage people to produce more? From the perspective of the community, producing more is certainly a good thing as the economy is not very well developed and there are some progression cliffs as getting engineers and technicians are basically a form of luxury as only ship building is really dependent on their products.

So, more money is somehow good, but why? One idea I had is that creating new money rewards people for doing something they would have otherwise not done. In other words, people receive a share of the economy in return for their economic activity even if half the economic activity is simply being throwing into an NPC dumpster. If you were to represent that share as a percentage of the economy, then your percentage grows as you obtain more created money. It also means that the share of the economy of others shrinks. One could say that this is a way of decentralizing power.

When you think about the opposite idea. A fixed money supply. The economic share of all players may effectively be frozen. Since your power may never shrink, unless you want it to shrink, it becomes very easy for the system to be dominated by a few players.

So ultimately, the problem is the fact that those who need money cannot get it and those who have too much want to keep it. Redistribution among players somehow ends up benefiting both yet this is not the natural order of things. If one person had too much wheat and another too little and the first one has too few tomatoes and the second one has too many, one would obviously see the opportunity for a trade, the market apparently solves the exchange of goods but why does it fail to solve the exchange of money properly? New players are obviously dependent on older players to give them money, but the older players have no incentive to buy from new players, they can just buy from other old players. Lots of people give up at the start, precisely because they don't feel they are being needed.

In fact, I think I would describe the biggest fear that I have experienced in life that I am not needed by anyone. Yes my boss pay me a salary. My parents like me. I have some nice friends. I have had plenty of experiences that make me glad I was born. If reality was a game I probably would have quit, not because of some angry capitalists exploiting me or because of violence against me. I would have thought, this is a nice game but I feel out of place, enjoy your time here, I unfortunately won't be participating.

In fact, a lot of males are sent to fight wars to keep them busy and feel needed. A lot of child soldiers start that way.

What's the solution? Well, the solution doesn't sound that bad or even impossible, it may even sound obvious. Essentially, there must be a purpose for every life. The supply of labor must drive the demand for labor. Interestingly, there is even a law that postulates such a thing to occur. It is known as says' law and yet full employment has remained elusive. If economics predicts that supply and demand will balance themselves automatically, then the only reason for that to not happen is that we have built a machine that prevents this from happening. Money, when used as a store of value, is essentially the ability to decouple supply and demand and we have decided that one should be allowed to do so eternally. Imagine if everyone saves half their salary and nobody borrows that money and money is saved until that person dies. Half the supply would fail to generate demand! Half the people in the economy would be redundant!

This is the ugly truth, we are trying to make each other redundant for fear of becoming redundant ourselves as someone must be redundant at the end of the day the moment the economy is saturated. It's not really a lump of labor fallacy. Those who save, will at some point spend their money even if they do so in a single second at the end of their life. The problem is the mismatch between when the money must be spent and when it is actually spent. A negative interest rate effectively indicates the point at which spending can no longer be delayed and savings must be reduced.

People love smartphones in inflation discussions. Look at all them new features!

I remember a time when no one had them and no one needed them to be a high-functioning, successful adult. So, they're a modern tax at any price point.

To be pendantic, the ride quality of the Rolls Royce is still superior. We've had hydropneumatic suspension since the 50s, and that's not a feature anyone thought to include in an economy car. They don't compare to the electronic dampening we have today, but even vintage Rolls Royces are incredibly smooth and quiet.

For example, a new iphone costs a little more than last year's model cost. You can claim the exact same goods weren't involved, but the available goods have increased in price year over year.

The thing is that if you have millions of dollars of computing power in the 1990s, you have something extremely scarce, so you can trade it for an abundant supply of other things you need. If you have computing power today, it's abundant, while the other things you need are much more scarce. Dollar values here are just illusions hiding the disparity in productivity improvements between industries, as well as the disparities in market concentration, regulatory capture, etc.

Would you have spent ten thousand dollars on such a phone a few years ago? I wouldn't have. I'd have put that money towards renting a nice place to live.

Are you spending, today, ten thousand dollars to buy pre-production builds of next year's smartphone? Is it worth it to you?

The reason people buy smartphones today is because they're a few hundred dollars. That's the point where the cost of the thing falls far enough below the value it delivers to make it worth buying. You can buy one and use it to access your bank account and stress about how to pay back your credit bill next month. So even if that phone would have cost a million dollars decades ago, you don't feel like a millionaire because you aren't one. If you were a millionaire in the 1990s, you'd probably have a house with a swimming pool. If you were poor in the 1990s, you would be stressed about your credit card bill, but maybe doing it on paper.

If someone gave a million dollars to a poor person in the 1990s, they'd probably have spent it to pay off debt, get a roof over their head and feed their family, not blow it all on a prototype palm pilot, a portable TV, and a Cray. In other words, they wouldn't have spent $1,000,000 on smartphone-equivalent functionality, because that functionality would still only have been worth about $500 to them.

The technological deflation gave you a $500 phone, it didn't give you a million dollars of value.

Something only the extremely wealthy could afford, but also something the extremely wealthy never bothered with.

If you think a modern, middle class lifestyle is in any way comparable to the rich in the past 60, 70 years then you have no clue what it means to be rich. It isn't the gadgets they can buy, its the people they buy that completely removes the need to even think about all those things you listed.

The rich don't do self service. This is why the whole discussion makes no sense.

Like, economists have spent centuries figuring out how to solve the "scarcity problem of reproducible goods" but they haven't spent a second figuring out how to solve the "scarcity problem of non reproducible goods". The suburban sprawl nonsense only exists because we can't figure out how to redevelop existing plots within the city in an equitable way. Yes we have to kick the old residents out, there is no other way but we also build more housing than the numbers of people that were kicked out so if this were done at scale you wouldn't have to worry about leaving the city, just the block you are living in.

The problem isn't the fact that the boots are longer lasting. It's the fact that buying new boots is an emergency so you cannot just delay it. It's a fixed cost that everyone has to pay. The rich person can afford to buy both the crappy boots and the good boots and still have enough left over for everything else.

Note the qualifacations on that though. Change any and things change. In the US real estate often does fit the specifics.

Here's a paper from the New York Fed that contains the sentence "Because the basket actually purchased by each household potentially differs from the CPIís basket, the inflation rate faced by any given household might be very different from the CPI-inflation rate."

https://www.newyorkfed.org/medialibrary/media/research/staff...

The truth is, money printing and/or government spending beyond tax revenue is the source of inflation. Every loan a bank makes in fractional reserve systems will be inflationary, and every time money is printed for the government it will be inflationary. Due to the cartel structure of banking in the modern world, the inflation will first hit things like stocks, bonds, land, and other asset classes. It takes time for that inflation to leak into all other things, but it does. As businesses expand, as people move, they are then forced to pay these higher prices, and this drives up the price of goods produced and bought.

I did learn general equilibrium in grad school, but we were not told that it was a precise description of reality.

Otherwise, what i find most sad is, that people are cheering the printing of money (because they get handouts), but "in the end" (which is very soon after the handouts), they lose the same amount of money in price hikes everywhere due to inflation, and large corporations (so the ones that get the "free money" from the people to sell them stuff) profit in the end.

Also the propaganda machine is helping the pumping-up the prices... first they talk about the higher prices of everything because of this and that (covid, putin, war,...), people then expect higher prices, and even if the current wholesale prices are still low, the sellers will raise them, because the media told the people that the prices will go up, people blame putin (and not the stores), and why not take advantage of the situation?