Inflation is differential and restructuring (2021)
economicsfromthetopdown.com
economicsfromthetopdown.com
- There's an authority about the field that really isn't deserved. The models are not made properly, and there's a lot of hand-waiving. I studied economics with a class of engineers and everyone pointed this out.
- The pop-sci version of economics is a bunch of easy quips. Friedman's "everywhere a monetary phenomenon", Keynes "In the long run".
- The econ 101 version of economics is dominant in popular thought. You see it everywhere in newspapers. A more nuanced version of economics does exist, but the appeal to authority is strong in the field, because there's no real reasonable arguments, it's actually politics.
- Inflation is more interesting in a disaggregated view, for reasons mentioned. You can't look at it as a single figure.
- Relative price changes are what matter in society, because they represent changes in negotiation terms between different actors. Post-pandemic and Ukraine, we should expect to see more shortages as well as more strike action. Various groups like the RMT union will decide they need to flex their muscles. Chip shortages will cause negotiation positions to change across a wide variety of affected sectors like cars, meaning push will come to shove for certain lines of business.
It's interesting that there's no mention of debtors and creditors.
The biggest winners in hyperinflation are people in massive debt. It's inflated away to nothing. The biggest losers are creditors for the opposite reasons.
When inflation is just abnormally high (~8%), your debt doesn't get deflated to nothing, but you're getting a ~6% discount.
> Consumer spending climbs sharply again — and not just because of inflation > Rising incomes partly cushion Americans against high inflation
https://www.marketwatch.com/story/consumer-spending-climbs-s...
But rising wages and the threat of a wage-price spiral and the effect on debts is precisely why the Fed is indicating they're going to crash the economy.
That’s only true for fixed rate debt, which is common to think about for Americans due to the popularity of the 30 year fixed rate mortgage but in many countries ARMs are more popular or most popular.
In theory, fixed rate debt products should be priced in to reflect interest rate risk as well, so it’s hard to say the creditors are losers per se.
Talking about mortgages misses the larger fixed rate bond market (government and company long term debt).
When we’re talking about institutions with billions of dollars (and not joe lending Bobby $20), I wouldn’t call them a loser unless they specifically failed to properly hedge their positions.
Hedging is done at the portfolio level using derivatives. This allows you to move your unwanted exposure to interest rate risk (or just about any kind of risk) to someone else in exchange for a premium. Whoever is taking that risk off your hands probably has a more diverse portfolio and wants the premium (ie their risk profile is different). In this manner, large fixed-rate creditors shouldn’t be largely exposed to rising interest rates, because they’ve been hedging that risk all along.
With merely high inflation you still have insecurity. Many salaries are not inflation indexed (I struggle to think of anyone I know), so the only way to maintain your budget is to get a new job. For many lines of work, especially at the lower end of the scales, that's utterly unappetizing, and people would rather pressure their union to push up salaries.
Correction: The most common reason for hyperinflation is that the productive capabilities of the local economy has gone down the crapper. That mean everyone entirely dependent on the local economy is a loser. But, in the places where hyperinflation has occurred, it's not uncommon for elites to have significant foreign investments.
Where else was this the case beside Germany?
That’s all inflation is too, fraud that if you would commit it, e.g., you added filler to some product you delivered or forged signatures on delivery paperwork, you would be punished for.
You are given currency coupons in exchange for your work, and then more of those coupons are just forged than correspond to actual work having been done, thereby defrauding you out of the value of your work, also commonly called theft of service.
All currency is made up. Even gold, or bitcoin, or giant rocks:
* https://en.wikipedia.org/wiki/Rai_stones
The only thing that has "inherent" value to humans is air/oxygen, shelter, water, and food. Everything else is psychological projection for convenience.
See The Power of Gold: The History of an Obsession by Bernstein:
* https://www.goodreads.com/book/show/249245.The_Power_of_Gold
* https://en.wikipedia.org/wiki/Peter_L._Bernstein
And Money: The True Story of a Made-Up Thing by Goldstein:
This isnt really true. If you put someone in solitary confinement for long enough they will go insane.
People commit suicide for a variety of mental health reasons.
Mental health is absolutely as important as physical health and it isnt obvious where to draw the line for required vs. convenient.
There is also health/medicine/medical care/sanitation.
There are also secondary requirements that enable the production capacity for the above stated requirements.
Yes, but gold, bitcoin, and giant rocks can't be inflated at will, which is what the OP was complaining about.
Simulated pieces of green paper can.
Even with the formerly-used real pieces of green paper, there's a physical limit to how fast printing presses can run.
With simulated pieces of green paper, you can just type some numbers into a computer and suddenly there are twice as many of them as there were before. Or a hundred times as many. Or a trillion times as many...
I know there is this myth of the "no crisis ever during the gold standard era", but this is false. We had a crisis every ten years or so, sometime way bigger than the 2008 crisis despite the economies being less interconnected. And those crisis sometimes were entirely disconnected from production issues, unlike 2008 that is clearly linked with the conventional oil/gas peak. Because having liquidity that allow easy trading of ressources actually help recover faster and avoid made up crisis like the 1893 one in the US.
Which of course does not match the historical record:
* https://www.theatlantic.com/business/archive/2012/08/why-the...
It always amuses me how strongly people come out in opposition to the idea of the gold standard, when it demonstrably seemed to work for America, it powered the country from the time it was a collection of colonies to the time it had men driving buggies around on the moon. The country was on the gold standard for hundreds of years. Coming off the gold standard is the experiment, is the outlier. The gold standard obviously worked well enough for that vast majority of the country's history, yet it's somehow regarded by certain people as an obviously horrible idea which is gross, repugnant, "a barbarous relic that belongs in the dustbin of history". It just doesn't add up. If it's such an insanely horrible idea, how did it work so well for so long?
And you can tell this because… ?
> […] the author isn't even attempting to present an impartial view on the topic.
Neither would someone who was arguing the Earth was round.
> It always amuses me how strongly people come out in opposition to the idea of the gold standard, when it demonstrably seemed to work for America, it powered the country from the time it was a collection of colonies to the time it had men driving buggies around on the moon.
No, it caused some huge boom and bust cycles, deflationary periods, and much suffering. It certainly made the Great Depression worse:
* https://www.nber.org/papers/w3488
Gold-as-currency was useful when we didn't know better, but we've moved on. See The Power of Gold: The History of an Obsession by Bernstein for a good history:
* https://www.goodreads.com/book/show/249245.The_Power_of_Gold
An alternate telling would be that abandoning the gold standard allowed the government to circumvent the will of the people and enter a war there was no appetite to get involved in.
You may wish to re-examine that claim:
> Germany also made a secret offer to help Mexico regain territories lost in the Mexican–American War in an encoded telegram known as the Zimmermann Telegram, which was intercepted by British intelligence. Publication of that communique outraged Americans just as German submarines started sinking American merchant ships in the North Atlantic. Wilson then asked Congress for "a war to end all wars" that would "make the world safe for democracy", and Congress voted to declare war on Germany on April 6, 1917.[4] U.S. troops began major combat operations on the Western Front under General John J. Pershing in the summer of 1918.
* https://en.wikipedia.org/wiki/American_entry_into_World_War_...
The declaration passed 82-6 in the US Senate, and 373–50 in HoR:
* https://en.wikipedia.org/wiki/United_States_declaration_of_w...
Sound like a fairly popular action.
And it was NOT a production or energy crisis. That what people seems to not understand. Yes, 2008 was a bubble, but a lot of bubble bursted since the 70s and none of the burst created a depression like 2008. The only reason 2008 was this big is because it was an energy crisis, almost four time worst than the oil crisis of the 70s (which is also the first energy crisis). The gold/silver standard manufactured crisis (not helped with fractionnal banking tbh) that had no reason existing at all. Just made people poorer by design. This wasn't even caused by a famine or a war.
Here is my advice: unless the expert/advocate is an historian specialist of the 19th century (or even better: specialist of foreign trade or economics during the 19th century), do not believe anything he said. Don't believe me either, but "Those who cannot remember the past are condemned to repeat it", so look it up, just read on how interesting where the time of hard metal, how easy it is to raise interest rate without impairing trade when you have a gold standard. 19th century financial crisis in the western world despite the huge production boost from pillaging colonies workforce and ressources...
Despite the stupid downvotes, this is true.
Of course the mechanism can be abused by printing money that are not backed by real growth (like in the US), but most countries don't do that.
Since 1920, at least 55 hyperinflation events have taken place, destroying savings and creating economic hardship. [https://assets.website-files.com/614e11526f6630959fc98679/61...]
A stable currency and strong property rights are the exception, not the rule.
Governments have been fiddling with metal-based currencies going back to Ancient Rome and Han China:
* https://en.wikipedia.org/wiki/Seigniorage
Never mind what the general public has done as well:
* https://en.wikipedia.org/wiki/Methods_of_coin_debasement#Coi...
See Bernstein.
> With simulated pieces of green paper, you can just type some numbers into a computer and suddenly there are twice as many of them as there were before. Or a hundred times as many. Or a trillion times as many...
Yup, and that's how private banks create loans and mortgages:
* https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
Central banks do not create the money that the public uses in the economy, and the only money that the government creates is coins and bills via the their mints.
Also, have you ever asked what happens when there isn't enough money?
* https://en.wikipedia.org/wiki/Great_Slump_(15th_century)
* https://en.wikipedia.org/wiki/Great_Bullion_Famine
* http://www.nber.org/chapters/c11482
And it's not like 'hard money' brings any more stability:
* https://www.theatlantic.com/business/archive/2012/08/why-the...
Yeah this true, but I wonder if it's as straightforwardly sinister as that. I'm sure there are a lot of economists, esp in the mid 20th century, who would have liked to turn economics into physics. Some of those ideas are of no real merit after further inspection, but are kept alive by political interests.
You do come across a lot of thought pieces by think tanks, which seem to be more political than science.
> You are given currency coupons in exchange for your work, and then more of those coupons are just forged than correspond to actual work having been done, thereby defrauding you out of the value of your work, also commonly called theft of service.
The problem with that is there are legitimate reasons for printing more coupons, they're just mixed in with less legit reasons.
If people want to exchange more, they need more coupons. Otherwise everyone would have to wait for their income to arrive before sending it on, and while they wait some of the opportunities will vanish. A little bit of creation isn't so bad.
thats a fallacy. nothing prevents you from exchanging more even if you had a fixed number of coupons. you would just have to consider that the value of each coupon becomes more, not less, over time, so you need to use subdivisions of coupons more.
Inflation, even at low levels, is ultimately value destruction over time.
Deflation has historically been a bad thing every time it's happened.
Instead, our savings are buying us LESS over time, so that government can buy votes, fund wars, bail out defense contractors, pharma companies, financial institutions, and other cronies, etc. Inflation via the printing press, which is now just considered by many a normal phenomenon, is actually legalized wealth transfer from the savings of ordinary citizens into the coffers of giant government bureaucracies and the large corporations that feed off them.
Having said that, deflation isn't always the awful spectre of doom it's sometimes made out do be, especially if it's due to technological improvements or increased supply. As the article we're all notionally discussing explains, inflation in a reasonably well managed economy is generally differential and reflects shifts in the structure of the economy.
Who should be the ultimate judge of how capital is saved and invested? You? The government? What about the person who actually did the saving?
Taken to it's logical conclusion, saying that "devaluing in-the-mattress savings is a good thing" sounds a lot like "let's soak the rich" to me.... and it's a very slippery road to serfdom.
This is the opposite of soaking the rich. The well-off generally have a very large proportion of their wealth invested in productive economic activities, with returns well above inflation.
Savings and investment are largely synonymous so I stand by my initial statement. How can one expect to buy a house if they're precluded from putting savings "in-the-mattress"? I'm not suggesting they'd be better or worse off using leverage... I'm saying it is solely for them to determine since they're the ones who are most familiar with their own circumstances.
If someone enjoys wiping their rear with $100 bills that's up to them.
As I can tell, the best definition for "in-the-mattress savings" is capital that is deemed a bad investment by any/every one except the person who managed to create the savings itself.
Your argument leads to a slippery slope... what would stop me from taking your assets because they don't fit my definition of "investment"?
The basic fact is that money is a financial instrument created and managed by a government for their own purposes. They create it and therefore obviously they control the supply of it. It's value is therefore based on the degree to which people trust that government to manage it effectively, as with a bond or equity or any other financial instrument.
If short term bills are serving a "useful economic function" and "in-the-mattress savings" does not... then there must be some asset that serves "the most useful economic function". No? Are you suggesting to know the true intrinsic value of all assets?
So, to assert that "Devaluing in-the-mattress savings is a good thing" one needs to assume that this objective way to measure value exists. Otherwise how can we [de]value things if we can't objectively valuate them?
Unfortunately, since the value theory of labor fails in so many ways where the subjective theory of value does not, it's hard to see your rational as anything but an appeal to authority.
Continuing a mindless appeal to authority just leads to tyranny. And therein lies the slippery slope.
Short term paper pays interest because it’s issued by people who need short term money and are willing to pay for it. There’s no central authority setting its value, no objective criteria, no law of physics, just actual people choosing to pay for something they need. Same with equities, same with bonds. Same with money itself.
As I said even central governments don’t set the value of money, only it’s supply, people set its value. That’s why the currencies in Venezuela and Zimbabwe collapsed. The people selling things chose how many ZB$ they wanted to sell things for, and buyers decided how much they would pay, and it turned to be a lot because there was so much around.
Nobody needs you to keep money in a mattress. It doesn’t benefit anyone, so they won’t pay you to do it no matter how useful you think it is to you. An economy with a significantly appreciating currency is set up to incentivise not engaging in economic activity, not investing and not lending isn’t going to work very well because those incentives have to be paid by someone somehow. Why would they do that?
To win me you need to consider the difference between a free market vs. a coerced or highly regulated one; the dynamics likely change.
> even central governments don’t set the value of money
And the difference between real and nominal rates? I'd say your statement is largely true but that doesn't mean a central bank doesn't try to manipulate real rates. That's actually their charter... price stability.
However, there is a strong argument to be made that they're not very good at it and can make things worse. The last year of exceptionally high inflation is a rather obvious real-world example.
> Nobody needs you to keep money in a mattress
Maybe true, but the question isn't what do others need... it's who gets to allocate my capital? I contend it should be me, you seem to think otherwise. Why should the government actively try to de-value people's savings? Is it a good thing to squeeze elderly retirees back into the work-force?
This is what you're implying when you say "Devaluing in-the-mattress savings is a good thing". It could be a bad thing; again esp. for pensioners and people who don't have better investment opportunities.
It's not just a question of "does the theory hold water" but also one of morality. This is why I think the phrase "in-the-mattress savings" is loaded and full of hooey. It just sounds like you're telling me I'm an idiot and can't be trusted to spend my own money wisely? It's not convincing and quite insulting to boot! Lol
I believe savings is always a good thing and it's up to the individual to determine their own preference in terms of allocation; some under a mattress and maybe some in a shoebox or some short General Dynamics puts.
The point is it's up to the individual. Why should someone else have a say when they haven't been entrusted? That is the very gist. Why should someone else have a say when they haven't been entrusted?
Freedom and liberty vs. tyranny. That's it... you're going to have a hard time convincing me that financial repression is the moral high ground.
I don’t want to devalue their savings. I’m in my 50s and looking forward to retiring myself. I want them to have productive savings that grow and provide them with a retirement income. Savings accounts, ISAs, pension funds, stocks and bonds, even property are all productive savings that grow and can provide income in retirement. They help the economy and help savers.
> who gets to allocate my capital? I contend it should be me, you seem to think otherwise
Not at all, it should absolutely be you, we just talking about incentives. The question we’re debating is what should happen to the value of cash you keep in your pocket. Literal cash. Should it appreciate in value or depreciate? Is there a benefit to society either way?
If money itself appreciates in value that’s because someone is paying a cost for that to happen. I don’t think that’s a reasonable expectation. Beyond that, it benefits society if savings are put to economically useful purposes, such as savings accounts and investments. A small amount of inflation incentivises this.
I’m not telling anyone what to do. But on the flip side you can’t tell people what to do either. You can’t tell them what they will or won’t pay you to do, and they’re not going to pay you to keep your money in your pocket, mattress, whatever by inflating the value of cash.
Cash is a financial instrument. You own the notes, but can’t set its value. We all do that collectively, so other people have a say in it. That’s just the nature of it.
Hallelujah! I do presume this means the /kind/ of savings or /where/ it's held is immaterial.
Sometimes I like to keep a portion of my savings as seashells in a shoe-box. But as you acknowledge...
> Not at all, it should absolutely be you,
And after all that circumlocution I was beginning to think you'd never concede. You've made my day!
>> I don’t want to devalue their savings.
>Hallelujah! I do presume this means the /kind/ of savings or /where/ it's held is immaterial.
It's absolutely material, but it's their choice not mine. If they choose to invest unwisely then that can have unfortunate consequences (assuming no crime was committed, that's a different question). Can I guarantee the savings of people who unwisely invest in swamp land? No. Do you think I or anyone else should? So of course the choices people make matter, and have consequences.
It’s not clear the direction of the causal link and it’s almost surely a bit of both. Having more money affords the luxury of making (and time to research or money to outsource) better decisions. Making better decisions leads to having more money.
If the predominant economic paradigm were one that favored in-mattress-saving (such as persistent deflation might be), would the “rich” still be as inclined to invest in today’s productive-given-inflation assets or would they pivot to being heavy in-mattress savers? The ones that didn’t adjust would presumably become relatively less rich over time.
you say "I don’t want to devalue their savings" yet above you say
"Devaluing in-the-mattress savings is a good thing".
Either your thinking has changed or, you're trying to cause confusion or, maybe confused yourself, or are trolling. At this point I suspect I may even be chatting with an ELIZA... so what else is there for me to say? Think whatever you want.
¯\_(ツ)_/¯
If the supply of money goes up relative to demand then we call that inflation.
It seems like you are conflating the two categories.
That I can think of, the obvious difference is that the second one almost definitionally means a steady decrease in nominal wages. This seems like a perverse incentive - if I sock away my first paycheck flipping burgers under my mattress and do nothing with it for 50 years, a deflationary regime means I can take it back out and buy a lot more with it than someone with their first paycheck flipping burgers today.
People said similar stuff about negative interest rates, yet they were rolled out and kind of worked around the world. I'm not buying this defense of inflationism.
Thats still true with inflation too. No idea what your point is.
Deflation means what it sounds like - goods, assets, wages generally trending downward over time. Yes, I posit that this has a chilling effect on recirculating money into investments, because you get worse odds on a positive return on any investment you make vs. just doing nothing.
If the impact is sinister, then debating the motive just extends the duration of the pain experienced.
Motives matter at the time of trial - when the action and pain are over. Until then, debating motive is just a distraction from stopping the unjust activity.
Right now we know for a fact that current inflation is a genuine global shortage of actual stuff. Crude oil, cooking oil, wheat, Chinese products. Plus American government overspending, to be fair, but that's just a US phenomenon.
Of course that's inconvenient if you really desperately want to complain that you specifically are being cheated. After all if you have less, it must be because somebody else has more, right?
If we're all screwed, who do you blame? Putin and Xi are far away and broadly hated already, so there's no satisfaction to be had blaming anything on them.
That's not true. US spent the most, but Europe spent €3.2 trillion. US spent $12 trillion but they had to "shore up" a lot of global banks because that's just what they do. About half went into asset purchases and liquidity measures.
I take a simple approach. What would you expect to happen if you just created trillions out of thin air and distributed it? Arguing nothing would happen is the economic equivalent of a perpetual motion machine. It just doesn't pass the smell test to me because you can just create global wealth from changing some numbers in a computer with no repercussions. It's alchemy. Can I "prove" that there are negative consequences that in the long run outweigh the benefits? No. But I can say that I cannot find a single case of high inflation that did not coincide with government printing money. Printing a lot of money doesn't always cause inflation, but any time there is inflation there has been a lot of money printing.
Sure what happens may not be predictable, but its obvious that you're messing with a complex system and effects aren't instantaneous or uniform. That's why you see things like product X is going up 50% while product Y is going up 5%. And the people that point this out think they're debunking something.
With complex systems its best to keep things simple. You can get lost in the data from all the noise and overconfidence will bite you in the ass. Which is why it's not a smart idea to increase the money supply by 30+% in a year and dump it into the market.
https://www.weforum.org/agenda/2020/04/european-union-financ...
In fact, you can even argue that inflation causes a lot of money printing! When the government has trouble affording things that have gotten more expensive, they have to print more money to be able to buy the services they need!
(Of course, any responsible government would then also provide a drain for the corresponding amount of excess money -- e.g. tax it back out of existence shortly thereafter -- but somehow it's much easier to get elected when you promise to buy things, and not so much when you promise to tax the money away again...)
Look, I’d have voted for him too given the options, and probably still would, but his economic policy is ill advised.
They’re functionally indistinguishable, with mythology replaced by mathematics, and God replaced with GDP. Similarly, they’re both arbitrary rules; conjured, imposed, and protected from scrutiny by the ruling class.
That’s not to say it’s not useful, but I find it baffling that an imaginary concept is unquestionably granted veto over tangible and visceral phenomena.
religion tells you what goals you should have and how you should live a life, passing judgement and establishing morality.
They are orthogonal to each other.
Is this Karl Marx's critique of inflation?
Yes and: This OC refers to the empirical data.
Friedman (et al) rejected empiricism. I was gobsmacked when I finally figured out what that meant. Like, wtf are they even arguing about if they reject reality?! (Ya, I am a slow learner.)
So agree or not with Nitzan's thesis, at least critics can have constructive debates about it.
If only. Rent control wouldn’t exist. Policies that couldn’t pass any sane cost benefit trade off would be abolished. There would be a smooth, graduated marginal tax schedule. There would be congestion taxes on traffic.
The world would be incredibly different if Econ 101 was widely understood.
Economics can predict the outcome, but cannot make a value judgement between two options.
I used to think some people were irrational (especially when they disagreed with my logical viewpoint). It turns out that everyone is irrational, they simply have different opinions of the relative priority of values. For example it might be worth it to them to trade off long term economic efficiency for short term reduction in variance.
Nationalized health care, social security, and rent control are all examples of policies that reflect this value system.
"Freedom" is not a universal value. In fact many people are willing to trade freedom for security (or reduction in variance). They are not wrong or bad people, they just have a different opinion of priorities.
The real point is that "inflation" is a badly defined term, and everybody uses a different meaning. So one person using the number measured by averaging the prices of a few real items says it's not purely monetary, while another using the value that converts monetary unities into real goods on the macroeconomic equations yells "what do you mean it's not purely monetary? It's defined that way, any real data was removed" (as a hint, you can't even measure that one).
If you get tired of this, there is a related discussion about the Keynesian investment multiplier. It's just as fun.
And this article barely mentions wages, unionization and wage-price spirals.
Sure, inflation reports the change in price of an average basket, and some prices in the basket might have gone up a lot, and some down a lot. But that is a different issue, and not inflation.
The basket is carefully constructed to mirror what the average consumer consumes. Thus, the inflation of the basket measures how much more the average consumer has to spend on his consumption. That is certainly a useful number.
To your further points:
- [...] The models are not made properly, and there's a lot of hand-waiving.
I'd disagree, you must have come across the wrong models. Theoretical economics has many beautiful models precisely laid out. For example, the Arrow-Debreu equilibrium model [1] utilises "the Kakutani fixed-point theorem on the fixed points of a continuous function from a compact, convex set into itself." I doubt that any engineer can find fault with the specification of that model. Similarly, the Heckscher–Ohlin model of international trade is well specified and yields five informative theorems [2].
To which extent those models reflect, or can be applied to, the real world is an entirely different question of course.
Then there is empirical economics, a whole different ball park. But if you look at national accounts [3], for example, all those measurements are defined in excruciating detail, and there are books just dedicated to define the terms correctly.
- The pop-sci version of economics is a bunch of easy quips
Agreed. Some of them are more informative than others.
- The econ 101 version of economics is dominant in popular thought.
Yes, and that is quite bad, and is often exploited particularly by the political right, the business-friendly laissez-faire libertarians. James Kwak calls this Economism, and he has a great book about it [4].
- Inflation [...] can't look at it as a single figure.
Again, to the extent that it reflects the price increase for the consumption basket of an average consumer: yes, it is an interesting and important number, and in particular, it is one number. Obviously, with more numbers a more nuanced discussion is possible.
- Relative price changes are what matter in society.
Sure, they matter. But inflation in itself really matters also, per se.
By the way, Keynes pointed out that inflation need not be a bad thing. One thinks it is obviously bad because the average consumer has to pay more for his basket, thus can afford less of it. However, if there was, for example, a fiscal stimulus in the wake of a recession, and that leads to everyone having more money at their disposal, and aggregate demand rising, then there will be a new equilibrium with more demand, more supply, and higher prices (=inflation), but the average consumer having more of their basket than before. Good, not bad.
[1] https://en.wikipedia.org/wiki/Arrow–Debreu_model
[2] https://en.wikipedia.org/wiki/Heckscher–Ohlin_model#Conclusi...
There's a lot of theorems in economics that I basically think of as math theorems. Arrow's Impossibility Theorem for instance. Various things in game theory as well, just about all of Tirole's book (IO? Can't remember).
But I think of them as math, with the very particular term "theorem" precisely because they are defined like math problems, with very specific assumptions.
They are really math theorems that are dressed in economics words like "demand function" in the same way that you can have a theorem in physics, eg the Bubble Theorem about what angles arise. Or that theorem that says you can't balance a magnet statically.
> To which extent those models reflect, or can be applied to, the real world is an entirely different question of course.
That's what engineers tend to care about though.
Now about averages, I think the point really does matter that the person who spends the average basket isn't representative. The guy in the 1% just doesn't care much at all about his beans and rice getting expensive. The family in the bottom 1% may well end up not eating for a day. Sweeping everything into one number causes some real problems with our decision making.
From Thomas Sowell's Basic Economics - "Inflation is a _general_ rise in prices. The national price level rises for the same reason that prices of particular goods and services rise - namely, that there is more demanded than supplied at a given price. When people have more money, they tend to spend more. Without a corresponding increase in the volume of output, the prices of existing goods and services simply rise because the quantity demanded exceeds the quantity supplied at current prices and either people bid against each other during the shortage or sellers realize the increased demand for their products at existing prices and raise their prices accordingly."
Note the emphasis on general. There is no reason to expect that the outcome of customers bidding against each other, or producers increasing prices to meet new demand levels would be uniform across all goods and services, furthermore, you would expect that the existing climate of the time would wildly swing the actors' actions involved in these bidding & pricing exercises.
The real questions is why do people go to these thoughts/opinions rather than the "expert" thoughts/opinions?
I think it's a straw man argument, because nobody claims that inflation fully explains changes in the prices of commodities. Instead, measuring inflation allows us to decompose these changes into a general component (i.e. inflation) and an idiosyncratic component (i.e. a change in relative prices), which is useful because it gives us more information about the causes of price changes. Inflation is only misleading if you're willingly misinterpreting it.
I find that argument reasonably persuasive. His other point about inflation indices themselves being effectively useless, because of the inter price variability, I find less so. He skirts over the weightings which are key to the meaning of the index. They are weighted in such a way as to approximate the relative spending on each commodity. So the net effect of the index should be the inflation rate that you feel.
So average measures of inflation are valuable. The standard cures likely less so.
Restricting money supply may not be the solution. I don't think the author claims that restricting money supply can't be a part of the solution and a major part even. If he does, we have evidence to the contrary - 1980s in US. The inflation variation was even bigger then.
1) Inflation is not a useful metric for financial planning. If your investments are keeping pace with inflation then you have completely failed to position yourself correctly relative to the massive money creation going on. The gold price trend is posting consistent real returns vs the CPI - which is stupid (if you believe the CPI measures inflation, anyway).
2) Inflation isn't a fair metric for referencing on wage raises. Again, we can see that wage earners are slowly getting crushed as a % of the economy [0]. If they are focusing on keeping up with the CPI then they'll get distracted from the fact that they could be doing a lot better if they could re-link wages with productivity.
3) Nobody knows how the CPI is calculated. If someone can find out the actual methods, weights and inputs then report back you get a virtual gold star. I did it once and it is a labyrinth to work out what they are actually measuring - I don't believe more than a small fraction of the people debating inflation understand or care about the details of what it measures.
To cap off a mild rant; it is not obvious why we care about what the truth about inflation is. Few people understand the number and it is unclear what use it is for decision making.
The more concerning factor is that the government is creating money on a grand and accelerating scale and that is going to end badly, like it always does. Cite some examples where it has led to a golden age? Printing money literally does not and cannot plausibly solve real problems.
[0] https://www.weforum.org/agenda/2020/11/productivity-workforc...
That's the baseline reality. The rest is just misdirection and handwaving.
If this seems implausible, consider that the governor of the Bank of England recently said that workers should be "consider carefully" whether they wanted to pursue pay rises, while at the same time the energy monopolies in the UK are threatening to put 40% of the population into fuel poverty by massively hiking prices during a time of record profits.
And the Bank's own senior staff are receiving huge pay increases.
This explains everything that you're chalking up to some conspiracy by plutocrats. The massive price hikes which make fuel unaffordable are because there's not enough being produced to satisfy demand at the original pricing, and fuel demand is price inelastic enough mean that large price increases are required to get fuel consumption down to a level that can actually be supplied. Profits are at record highs because the money has to go somewhere, and it's going to those who did invest in fuel production (an action we probably do want to reward, since having more production makes us all better off). The Bank of England is worried about workers pursuing pay rises on a large scale since this won't make people better off in real terms - it does nothing about the underlying supply limitation that actually affects how much people can afford to consume - and it will make inflation worse, which is something they'll have to deal with, probably with consequences that will make workers worse off in real terms judging from past experience.
Arguably this is the only one that the voting public really do care about - the relation between wages and the cost of living is one that historically produces unrest, and that's because it's not related to abstract figures but to each individual's cash flow which they experience directly.
It's also one where decades of political effort have gone into making sure there's no mechanism for people to demand higher wages.
The alternative to printing money would be to raise money through taxation, which is also politically infeasible.
The scary thing, looking back on the 20th century, is that is probably what was said in a lot of places that then went through extreme political turmoil.
There have been a lot of instances where the only politically feasible road was printing money. That is typically the introduction in stories that end in poverty and/or war. No examples are leaping to mind of case studies where extreme money creation led to happiness and tranquillity. Possibly someone should try one of these infeasible options.
Someone has to do without when the government goes spending. We can pretend that nobody is paying, but if that becomes policy option #1 - as seems to be happening - then that sort of wilful ignorance on the part of the elites leads to real anger.
Well, yes; inequality and shortages that the elite refuse to address lead to a lot of the classic Latin American revolutions, as well as the earlier Chinese revolution and Russian revolution. This is the concept referred to as "redistribution is insurance against pitchforks".
> wilful ignorance on the part of the elites
This really characterises a lot of the post 2016 era. The amount of incredibly stupid and incoherent nonsense. But no matter how comfortable the narrow elite are, no matter how much surplus money is sloshing around for crazy startup projects and asset price inflation, they're not going to tolerate higher taxes.
(I hereby propose the least politically feasible project ever: confiscatory taxes on billionaires, but the money is simply deleted in an effort to bring down the money supply)
What an interesting idea. Is there any historical precedent for actually deleting/destroying money?
It was pretty disruptive: "The move reduced the country's industrial production and its GDP growth rate. It is estimated that 1.5 million jobs were lost." and it seems to not have been very effective in its stated aim to move the "black economy" back into visibility.
The Cyprus "bank haircut" could count as another example, in that it's deleting secondary money - bank deposits which had become unbacked and unbackable - rather than primary money. https://www.ft.com/content/4a1bb1d6-9926-11e2-af84-00144feab...
Bitcoin?
Why the government took home prices out of its main inflation index
https://fullstackeconomics.com/why-the-government-took-home-...
It is always better to get the lower price higher interest combo though if you can afford to overpay as it reduces the term more effectively due to compounding.
Also the lowering interest rates are a one way street so the people getting in at the older higher interest rates get more equity for doing nothing as the lowering interest rates increase house prices. The latecomers just get more risk of negative equity.
Nimbyism and insufficient new building is another topic!
That's 24%. You're obviously at a huge advantage if you're in this 24% - but it's kind of like saying that the top 10% of people have >$1M in assets (they also happen to predominantly be old).
But that is orthogonal. Both people in the comparison have the home equity to begin with. How? Either they paid $500k from earnings or they got it a lot cheaper in the past. A lot cheaper in the past == inflation.
> The reason, as I understand it, is that shelter costs are kinda funny in how they are added to this statistic.
Housing prices are not considered in the CPI ("cost of living") because houses are mostly an asset:
> House prices are an interesting case. Houses are considered capital investment by the [US] BLS. So, when the value of your home increases that's a good thing as you didn't consume the house. In other words, you don't need to replace the house. Consumption goods are different in that you need to replace the thing you bought. Inflation is very bad for consumption goods because it costs you more to replace that thing each time you need it (food, for instance).
* https://www.pragcap.com/forum/topic/assflation/#postid-2165
> The BLS views housing as a mostly “investment” item as opposed to a consumption item. So, for instance, when you consume a hot dog and have to replace it then the cost of replacement is a direct reflection on your well-being. A $1 hot dog that costs $2 one year later is a material change in living standards, all else equal, since the hot dog is an asset that you literally consume. A house is much more complex. […]
> Of course, anyone who owns a house knows that it’s not that simple. You do basically consume your house over time. For instance, my home has appreciated substantially since I purchased it just 5 years ago and underwent a hellish remodel. At that time the cost of replacement was roughly $300 per square foot. But in the ensuing years the cost of replacement has increased to $400 per square foot. As my physical home falls apart over the years I will need to replace it. But the key point is that, as I replace these components the housing market is likely to revalue the total home value to account for this investment. So even though I am consuming my house over time I am very likely to recoup those costs.
* https://www.pragcap.com/should-house-prices-be-in-the-cpi/
The "C" in CPI stands for consumer. Houses aren't in the CPI for the same reasons stocks and bonds are not: we don't consume them to live.
'Shelter' is considered in the CPI generally though:
* https://www150.statcan.gc.ca/n1/pub/71-607-x/2018016/cpi-ipc...
And in that you have mortgage payments: yes prices are up, but rates were going down recently, and are low by the standards of the last ~40 years.
> But if you are forced to rent forever due to unaffordable housing, in your later years you might be paying $3000/m rent instead of $0/m mortgage interest. But that fact is conveniently left out.
Rent is often cheaper than mortgage payments, and is very more often cheaper than mortgage payments plus the cost of maintaining a home. If you take the difference and investment you can have just as must equity in a few decades. Preet Banerjee goes over the math in this ten minute video:
* https://www.youtube.com/watch?v=KAMeI4uHAFE
He rents:
* https://www.speakers.ca/2013/10/preet-banerjee-sold-his-hous...
If you want to know when it makes financial sense, the "5% Rule" by Ben Felix is a decent place to start:
* https://www.youtube.com/watch?v=q9Golcxjpi8
* https://www.youtube.com/watch?v=Uwl3-jBNEd4
Until recently he was a renter, but purchased a house 1-2 years ago. Not exactly happy with the decision:
"But between 1979-2019, whilst net productivity has continued to increase by an expected 70%, hourly compensation in the country is less than a fifth of that at just 12%."
What difference would switching to total compensation make?
My dad worked as a teacher and got a super fat pension - that’s not included.
Total compensation has risen much more than hourly wage.
I don't think article is necessarily wrong in pointing out the huge gap when most big total comp increases only seem to apply to the upper middle class. At the very least, I don't think Pizza Friday is going to make up that huge gap.
When you add up the share of income that goes to employees, total compensation growth keeps up with productivity growth.
https://www.nber.org/digest/oct08/total-compensation-reflect...
I agree total comp is the better metric, but your source doesn't really do anything to dispel skepticism when many current day anecdotes lament the lack of secondary benefits beyond said Pizza Friday. A fair number of Americans are given contracts which skirt the border of having to be paid secondary benefits. At the same time, those are primarily the Americans who are most sensitive to price increases in food, gas, rent, real estate (even if this isn't part of inflation), utilities and more. If there is are decisive sources talking about pre- or even post-COVID, that'd be another story.
Even if total compensation was flat from 2006 to 2019, it would still be a radically different conclusion that what was drawn in the article.
The article says hourly wages only increase half of what productivity did by 2006. Yet total compensation increased equally.
The direction of this vector can change due to non-monetary stuff like Russia and oil. But if all of the categories, especially those without clear non-monetary drivers, rise, then it's also monetary.
So maybe X = p_monetary + Q_nonmonetaty where p is a scalar and Q is a vector.
I think it is both. But the monetary side is controllable by our constituency. Friedman was still right.
Monetary inflation is an increase in the money supply which happens when more money is borrowed, usually as a result of lower interest rates. Price inflation is in increase in the prices of good and services.
Monetary inflation causes price inflation and other things can also cause price inflation. But it's meaningless to add up monetary inflation and price inflation.
So when you introduce money through debt, what you get is mostly the third group who takes out debt. If they have the money and don't actually spend it, you just get a lower velocity, you don't get any inflation. When assets are increasing faster than consumption items, of course they invest in assets, and you get stocks and homes and monkey jpeg reciepts going up.
That is, until a recession is coming around. When a recession is incoming, money managers look at history and find the best recession-proof investments. And it turns out some of those items are in the consumption basket. And it turns out widely inflated asset prices are exactly what you need to get out of.
What happens when you buy oils futures contracts 2 years out? Some bank will work out a arbitrage opportunity, hedge that contract, some other bank will hedge them, and within a few days the value of oil TODAY goes up. That's inflation.
And so you can say that expectations of interest rising causes recession fears, and those recession fears cause inflation. If the money supply drops, or is expected to drop, or we think that the likelyhood of debts getting margin-called is going to increase, you will see inflation.
But you can only see that inflation, as Friedman rightly pointed out, if the reservoirs are full. Wealthy people store possible inflation in their reservoirs. If as the Fed you completely ignore the possibility that the dam can release all of that water out into the rivers, you're always going to be surprised when it happens.
Empirical data says money supply often doesn't do much. See Japan for example:
* https://fred.stlouisfed.org/graph/?g=PA7P
Data series:
* https://fred.stlouisfed.org/series/FPCPITOTLZGJPN (JP inflation)
* https://fred.stlouisfed.org/series/MYAGM2JPM189S (JP M2)
> Friedman was still right.
Lots of folks were following Friedman-like ideas in 2010:
> We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.
* https://economics21.org/html/open-letter-ben-bernanke-287.ht...
And nothing happened—just like the Keynesians said. See also 'expansionary austerity' that many right-leaning folks were pushing, which also turned out to be a bust:
* https://www.washingtonpost.com/news/wonk/wp/2012/10/12/imf-a...
* https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Exp...
* https://www.theguardian.com/business/ng-interactive/2015/apr...
CPI: Shelter measures rents people are currently paying, not new rental prices. New rental prices aren't fully appreciated for 12 months. So the CPI: Shelter figure lags by a year plus a quarter (for data collection).
The reasons for the lag are solid. But it adds to the reasons CPI is an aweful indicator of consumer inflation expectations and effects on personal budgets.
that would made his inflation theory the only theory he was right about.
Even in this case, 90+% of the money supply is created by private banks, so wouldn't that make big bank responsible for inflation?
Of course, the money created in this way is spent mostly on assets, so all the price inflation mostly happens there, not in the CPI. Friedman is still right if we look at these markets as largely disjoint.
The last section attempts to link "differential" inflation to oligopolies, and I'm not sure I buy their arguments there, but it's thought-provoking nonetheless!
For me that applied even to the (second?) Zeitgeist movie on monetary theory, which was a very opinionated or even conspiratory view on the financial system, yet that was the model that actually stuck for me: Due to a single interest rate that was once taken higher than zero, there now is never enough money to pay back all debts. AKA there is no money, it just represents some else's debt.
People don't like the fact that the world is complicated and more inter-dependent than ever. I guess that's why some people go and live in the wilderness.
Not that I have a better suggestion, mind you. Maybe sortition with an advisory panel of experts? But how would the experts be chosen?
It would be easy to draw from the top ranks of some guild system -- but probably also highly inequitable, as guilds tend to restrict the profession to their likes.
Such discourse can be compared to memes, in the literal sense of the word. One sentence digs that seem to ring true get shared and thrown at political opponents. Nothing of value is created in such discourse, but the more effective memes proliferate through society and give advantage in voting season.
In fact, if your salary is labelled in dollar and you live in Europe, your purchasing power increased in that period, which shows that the current level of inflation in the US isn't cause by the intrinsic value of the dollar going down.
Many countries have their own reserves for the USD, which they use for their own purposes, and may exchange their reserves with each other, in a way where the US isn't even involved at all.
So in the forex markets the USD is just another commodity, and not a direct representation of the cost of living in the USA.
Going the other direction though, if the value of the USD goes up or down, I can see how that would affect the cost of living _within_ the USA since it is the local currency there. But outside the USA, why would it affect the cost of living in another country where they use some other currency?
This isn't really my field though, I'm just throwing out my thoughts. If anything I've written is wrong, I'm happy to read an explanation as to why.
Like many things in macroeconomics, the exchange rate / inflation relationship should be true in equilibrium. But several things are out of equilibrium right now due to supply chain disruptions and a demand surge after the pandemic.
And some things (most of them actually) are never at their equilibrium price for many reasons (but mostly because the characteristic time to reach equilibrium is higher than the frequency of perturbations). A bit like how it's completely fine to still have snow outside even if the temperature is firmly above zero Celsius.
Each person is affected by this inflation differently because they buy different things.
To “solve” this problem, the government has decided to collapse this high dimensional object into a scalar number.
And now we are seeing a divergence between this scalar number and the actual high dimensional object.
Today with digitised transaction records, there is a ripe opportunity to convert these records back into a person-specific , high-dimensional object with pretty visualisations to aid with understanding.
Granted, the BLS indices are not raw prices. But using actual raw prices is a few orders of magnitude more work, and the results are rather unspectacular (if you summarize the price changes into lower dimensions you get similar results as what the good folks at the BLS already did for you) [2]
[1] https://download.bls.gov/pub/time.series/cu/cu.txt, https://download.bls.gov/pub/time.series/cu/cu.series, https://data.bls.gov/cgi-bin/srgate
No, that's just the changes in individual prices.
Inflation is the change in the price level, and it has always been that. Nobody has changed subreptitiously the definition of inflation in order to rip you off.
So I am not a matrix to apply to the vector. Maybe more like a neutal net.
I don’t buy it. I have heard plenty of economists and economically savvy people call BS on CPI as a metric for the very same reasons outlined here. CPI is a fallacy, mostly pushed by the the govt since it tends to generally be favorable to them and disguise the disaggregated nature of inflation. But that doesn’t mean that the underlying economic principles are false.
What inflation doesn't necessarily do is capture how my grocery bill changes relative to my paycheck. If you look at the historical inflation rate, it does a semi-decent job of indicating when weird stuff happens. Wars tend to be accompanied by spikes in inflation. Things get scarce. Supply chains get disrupted. There's less stuff to be had so, on average, people can afford less stuff. Everybody is making the same salary but things cost more. Pandemics can have similar effects. (We just happen to have gone from one directly into the other.)
Deflation coincides with recessions (e.g. 1929). You'd think things getting cheaper would be indicate people can afford more stuff, but it's just the opposite. People are making less, so they buy less, and prices come down as supply exceeds demand.
Inflation does need the context of average earnings to be useful, but it is useful given that context.
The real world of PhD dissertations isn’t that different from that of economics textbooks.
Now you can argue that CPI baskets aren’t representative, and I think they often underweight real estate. But that doesn’t mean that you are measuring the wrong thing by using a basket.
It does explain though why the money printing 2008-2019 didn’t translate into CPI inflation, because that money was injected in the financial system, asset prices shot up, asset managers and VC investors got rich, but that didn’t affect main street. In 2020-2022, the pace of money printing massively accelerated and was directly introduced in everyone’s pockets through furlough schemes.
(Especially since the silly economists actually have lots of theories about how specific instances of inflation are driven by dynamics of one particular sector like fuel prices to test against the "oligopoly" theory)
To me it absolutely is, because you can only keep borrowing money and paying the (increasingly large) interest on it for so long. Eventually it'll exceed your revenue and you have no choice but to print money and hyperinflate your currency... right? Yet modern economists keep arguing it's... fine? "It's not like your household debt" or whatever the argument is.
Interest is denominated in $/month. Loans are denominated in $. Mixing those up is like mixing up miles per hour and miles. They are different units of measurement - the first is a flow, the second is a stock.
Remember that bankers are people too, and they eat just like you do. Therefore interest is nothing more than the wages of bankers. They take those wages and they spend them back with firms in return for food and shelter. The firms then pay the banks with the money they earn from bankers. Round and round the money goes. Bankers earn on the turn as they say.
The same applies to government interest. It is paid on bonds and reserves to financial institutions who pay people a pension from them. Those pensioners then spend that income, which generates additional taxation (because that's how percentages work), which will then balance the amount government paid in the first place.
Therefore the tax that offsets the government interest payments comes from paying the interest payments.
It's just a way of stimulating output, or redistributing it away from the producers to pensioners and other people with money.
In fact all government spending creates the additional tax that offsets it - to the last cent for any positive tax rate. It's a simple geometric progression. The only question is when. If somebody doesn't spend all their income, then taxes are not collected from the spending, earning and re-spending process that would otherwise occur.
And that's what creates the 'deficit' - people deciding not to spend all they earn.
Also known as saving for a rainy day.
There is no need for government to pay interest at all. It's entirely a policy choice. People can then choose to continue to save for no reward, or they can spend the money, which will stimulate economic output.
I'm sorry but your long-winded explanation (as this topic always produces for reasons I never understand) just isn't something I can make sense of. You're pointing out loops in the payment graph. Sure there are, nobody claimed the graph is loopless. But that obviously doesn't imply 100% of the flow is going through a closed loop. The more you increase the outward flow the more you need to increase the inward flow, and the extent to which you can do the latter is not limitless. This seems too obvious to me to convince myself it can be just hand-waved away with a complicated explanation.
> There is no need for government to pay interest at all. It's entirely a policy choice.
I don't know why you purchase (say) bonds, but most people I know purchase them for the interest, not out of some sense of patriotic goodwill. You'd think if the government could get the same loans with the same terms without paying interest, then they would avoid paying interest...
Nobody's explanation of this ever makes sense to me, like you can see above. Half of it always seems overcomplicated (missing half the issue) and the other half just seems outright wrong. (This is precisely why I said someone needs to write a convincing & comprehensible blog post on this.)
You don't need to issue bonds. When government spends it automatically borrows the same amount at that time as a function of the way bank transfers work at the accounting level. Tax payments then reverse that as the money spins around the economy, which reduces that borrowing. What is left is simultaneously what people have saved from that spending flow, and the government deficit.
"You'd think if the government could get the same loans with the same terms without paying interest, then they would avoid paying interest."
That rather depends who government is working for doesn't it. If it is exempting holders of debt assets from the inflation process, by giving them free money when there is no need - while spinning an elaborate story to cover - it makes perfect sense.
"The more you increase the outward flow the more you need to increase the inward flow, and the extent to which you can do the latter is not limitless."
When you turn on the hose pipe, and then increase the flow by turning the tap, do you need to widen or lengthen the pipe, or does the water just come out of the end faster?
Sovereign money is a closed system. The more government spends, the more tax and financial savings it creates. Tax + financial savings = spending. Always. And it can do that until the cows come home.
What stops the process is running out of real things to buy at a price worth paying. Then government spending stops.
Government spending works like spinning a stone across a pond. Each hop is a tax point reducing the size of the next hop, and eventually the stone disappears.
Saving is like videoing the hopping and pressing the pause button. The hopping will then continue when the pause button releases - ie when the savings get spent.
"Nobody's explanation of this ever makes sense to me,"
Perhaps if you drew out the balance sheets, and applied the journals you'd see how it works.
What you're missing, it would seem, is that for every debtor there is a creditor and everything must always add up to zero at all times.
Do that and you'll see that what you're calling 'unsustainable debt' is just a balancing entry in the accounts.
Not if you are the US. Because the US $ is a reserve currency needed by the rest of the world (primarly for oil, since most of the oil is still priced in US $). So, what can US do? Well, it can print the $ indefinitely because the countries of the world will always need it to run their economies.
But, lets say that the need for US $ inside a country dissapears. What then? Then, that country is placed under sanctions by the collective West (examples Iran, North Korea and the Russian Federation) or, as was in the cases of Iraq and Libya, bombed to submission.
Which brings us to the answer why the US economy is staying afloat despite an enormous national debt and the obvious "living beyond one's means" budget.
https://www.bloomberg.com/markets/rates-bonds/government-bon...
The 30-year yield is 2.97%. The way you read those figures from the 30-year line is that the US can borrow $98.19 today, and have to pay back $100 plus a $2.88 coupon in 30 years. That's not a lot of interest. And if it weren't for the use of interest rates to fight inflation, it could potentially be driven lower.
If the US could borrow $100 today and pay back $99 in 30 years, a negative rate, what would be the right amount to borrow?
The USD is safe because the borrowing is:
- in dollars
- from Americans (to a great extent; "In June 2021 approximately $20.9 trillion of outstanding Treasury securities, representing 74% of the public debt, belonged to domestic holders. Of this amount $6.2 trillion or 22% of the debt was held by agencies of the federal government itself")
- matched by real economic growth still
- and the US has adequate domestic oil production for its needs
No. This is modelled and understood reasonably well. There are limits, of course (though the Reinhard-Rogoff paper stipulating a significant drop in growth beyond a certain level of debt to GDP is considered flawed [1]). But moderately growing debt can be sustained indefinitely.
A blog post explaining this well would be useful indeed, I wonder whether Krugman has written one (but haven't found one after a quick search).
[1] https://www.newyorker.com/news/john-cassidy/the-reinhart-and..., https://en.wikipedia.org/wiki/Growth_in_a_Time_of_Debt, https://krugman.blogs.nytimes.com/2013/05/26/reinhart-and-ro...
Define "so long".
Not too long ago the UK refinanced debt from South Sea Sea Bubble (1700s), Napoleonic and Crimean Wars (1800s), and World War 1 (1910s):
* https://www.theguardian.com/business/blog/2014/oct/31/paying...
There were points in British history that debt hit >250% of GDP:
* https://en.wikipedia.org/wiki/United_Kingdom_national_debt#M...
And people lived through it all and the country is still around, and not a bad place to have lived, all things considered, during its history. Most of the times you may not have wanted to live there were unrelated to finances (e.g., Civil War, if you were Catholic during the 1500s).
Argentina does it every 10 years or so, and the next day after default banks line up to credit it again.
Greece practically (but not technically) defaulted in the 2012 European debt crisis.
China owns a lot of US debt. Now they are starting to question how wise that is.
I wonder if eventually the Fed will try to track inflation as a vector rather than a single number.
Staple foods might cost 25% more, but hey, those TVs are down 20%, so yay!
An old company of mine was very proud that everyone's payrise began equivalent to CPI increase, before any other performance related increases.
That was nice, but it's a CPI that excludes rent/mortgage payments in a massive property bubble. When your rent that was already 40% of your net income goes up by 25%, CPI is meaningless.
When we suggested their base pay raise also consider that aspect, we got a blank stare and "no, no, CPI... <vague hand gestures>"
Mind you, it's like the "unemployment rate", for statistical purposes, you're not unemployed if you worked somewhere for one hour plus, paid or unpaid.
So the percentage of our population on the unemployment benefit always tracks higher than the official unemployment rate.
I mean, I guess that's their measure, and it's useful for statisticians, but it's not meaningful for citizens.
It's even worse than that because most of the time the TV price don't really goes down by 20%, but by 3% and hedonic adjustment makes it appear as if it went down by 20% in CPI because some people estimated that going from HD to 4K increased the value by 17% …
That's how we get figures saying that computers cost 20 times less than what they used to be when in reality it costs a little less than 2 times less.
Can't you buy old PCs for 20 times less than a (second-hand) modern PC?
I bet this Pentium 4 desktop cost around NZ$2000 new: https://www.trademe.co.nz/a/marketplace/computers/desktops/n... but now it's going for NZ$100.
You can, but it's basically a paperweight at this point (I doubt you can even find a recent OS that boots it). Whereas back in the day, such a computer allowed me to play AAA games, browse the web, watch movies, and use the MS office suite for work or studies. Just as the average today's computer.
There have been gains (engineering or scientific calculation benefit a lot from the additional available computing power), but for most user, the improvement is at best marginal (the games' graphics are better, but I doubt it makes kids this days enjoy their games more than what I did when I was 12) or even nonexistent (what's the productivity gains from Word 2021 compared to Word 2000 for a student writing a thesis ?).
It isn't comparing like to like to compare the cost of a modern PC to one 20 years old, with modern games, modern websites, modern Office products etc.
They already do, they just publish it as a single number for simplicity and ease of comparison. Multiply your vector by weights corresponding to "relevance" and you get PCE.
https://www.thebalance.com/personal-consumption-expenditures...
And yet it's useful to be able to tell my customers that I have to raise my fee because of a 6% inflation instead of "gas went up 20%", "but clothing went down 5%."
you can still measure the distance between such a vector (even though you can't really visualize it). This distance is then the change in inflation, and can be compared across years.
Occasionally you'll hear that this is part of some government conspiracy to suppress true cost of living measures or some such. I think that's largely nonsense as CoL adjustments in government departments are always done with plain CPI, only the Fed uses Core. The logic of using Core (excl. food and energy) is mostly pragmatic, it's just a simple smoother, they could also use trimmed or rolling averages. The raw inflation is pretty volatile, based on that they'd have to adjust policy rates up and down all the time.[4]
[1] https://www.bls.gov/news.release/cpi.t01.htm
[2] https://en.wikipedia.org/wiki/Core_inflation
[3] https://www.bea.gov/data/personal-consumption-expenditures-p...
[4] https://krugman.blogs.nytimes.com/2010/02/26/core-logic/ (Sorry, can't find a non-paywalled link)
As for the idea that oligopolies are behind inflation, it seems a cry too much the reverse of saying it's all Governments fault.
https://thefreethoughtproject.com/80-of-all-us-dollars-in-ex...
The problem with the monetarist version of MV = PT isn't that we can't measure the variables, it's that we have measured the variables and that makes it clear that the monetarist assumption that the residual V is fairly stable in the long run and with respect to monetary policy change is clearly incorrect.
Actually it does. See The Canadian Consumer Price Index Reference Paper by StatCan, chapter seven, "Quality Change and Adjustment":
* https://www150.statcan.gc.ca/n1/pub/62-553-x/2014001/chap/ch...
So if Canada is so good at testing and knowing the change in quality they must be able to predict when something is going to fail. Right? So why do things pack up in Canada then?
"Addressing the Quality Change Issue in the ConsumerPrice Index" by US BLS (1997):
* https://www.brookings.edu/bpea-articles/addressing-the-quali...
"On quality bias and inflation targets" in Journal of Monetary Economics (2014):
* http://www.columbia.edu/~mu2166/quality_bias/quality_bias.pd...
I'm sure all these peer-reviewed folks are wrong about calculating the CPI and measuring inflation, and you're right. That the academic researchers, pension funds, futures traders, bond traders, union negotiators… all those folks missed this. But you… you've blown the whole thing right open.
The other possibility is that perhaps the professionals know what they're measuring and the pros-and-cons of various metrics.
Well if they are right, how come they cant stop recessions then?
> I'm sure all these peer-reviewed folks are wrong about calculating the CPI and measuring inflation,
Peer review is just group think. Thats what education is about, brainwashing people in subtle ways, its the next step up from believing in God, whilst not recognising chaos theory.
And if they are all correct, why do different countries do their own thing? IF the theory is sound, then everyone would be doing it, but like we see with law, different groups of people have different ideas of what is right and wrong, and its always, history doesnt lie about this, violence always wins out. You might know it simply as "Survival of the fittest"?
In the article and my suggestion, there's also an unexamined assumption here that the CPI categories are peers, on which it's valid to do statistics. It's not clear to me that "medical care commodities" and "shelter" are really things it makes sense to take an arithmetic mean of.
* "Please use the original title, unless it is misleading or linkbait" - https://news.ycombinator.com/newsguidelines.html
The classic policy lever works just fine for the past 30 years or so in the west: whenever inflation goes up, put up interest rates. That raises the cost of credit, puts people out of work and closes marginal businesses, thereby reducing demand.
If you look at https://www.macrotrends.net/countries/USA/united-states/infl... it's been kept perfectly in the 0-4% range by this process.
Government austerity is bad policy and has been for just about all of its history:
* https://en.wikipedia.org/wiki/Austerity:_The_History_of_a_Da...
(Of course this doesn't mean spending should be done without thought.)
It is not "mother nature": there are moneraty/economic "rules" made/enforced by a few humans to organise(oppress?) others humans. Don't be fooled.
To deal with inflation is to deal with those humans who are increasing prices.
If State's treasury generate money and all Citizens behind them exchange that money, taxes act for their own purpose witch is not financing States out of Citizens pockets but to redistribute richness to ensure a fair enough society where those who do more/are lucky get rewarded but still NOT being able to assume so much economical power to endanger the society at a whole.
Than inflation will not exists, or at least it's a kind of marginal concept almost non one is interested in.
If we are, like we are now, than inflation, mostly artificial, is a mean to cyclically made people poor to push a change against peoples and peoples will, like war or a new society built not to serve us humans but to serve very few of us who happen to be a human cancer, human as any cancer is part of the ill person, equally dangerous and lethal, to be cured by all means to try to survive...
If people do not understand that in sufficient enough mass, well a modern society is not possible and that means those who understand can only do their best to survive AGAINST other citizens-subjects waiting for a cyclic collapse and when this collapse happen, since there is no Democracy so no human rights try to get the hardest and inhuman revenge against those who happen to have, again, provoked the mess. Hoping that again in the history such big mess have made enough people understand who is the enemy.
If you think a separate society can work, like Indian's casts... Well... Try to look at history, yes for a certain time it work, but only for a certain time, so here the choice is moral in the sense: did we live ONLY for us or also for leaving an heritage?
What are some counter-arguments I should prepare myself for?
They shouldn’t. Tech worker compensation doesn’t follow inflation, it follows investment in the tech industry. So in this situation where you have high inflation causing interest rate hikes, you should expect your compensation to stay the same (if you keep your job, due to inelasticity) or to fall (because you were made redundant).
If however you work in Wendy’s, then your wages (note that nobody talks about service workers having compensation) are somewhat more determined by inflation because if Wendy’s gives all their workers a real wage cut they will probably quit en mass.
I disagree as my purchasing power has decreased by the average price of goods. Naturally, when I ask for my yearly raise I want to be certain I am also being compensated for a commensurate loss in purchasing power.
Okay, what about the variation? Definitely, prices for different goods change differently, and the NYT even has a calculator that estimates it for you based on your consumption: https://www.nytimes.com/interactive/2022/05/08/business/econ... Try it out with a few different choices- you'll see that pretty much everyone experiences significant price increases, out of line with the previous decade- so the CPI while not perfect definitely tells us something.
The fact that the standard deviation is greater than the mean does not tell us its not meaningful- for example, if I give you 1 million samples from a normal distribution with mean 0.1 and std 1.0, you can meaningfully tell me the mean is greater than 0.
Individual components of the price index don't give a useful item to take the variance of, because very few people have all their expenses in one component. We'd actually like the dispersion of the change in expenses for each person/company to understand how much expenses rise in general. I suspect this will be significantly smaller since most people have 'similar' spending profiles, at least compared to the hypothetical consumers which only buy one component of the price index.
Okay so why do prices change differentially more during inflation? This is a tough one, and recently there are obvious confounding factors (covid) that make it difficult to dissect. But I think even Friedman would expect this, because he claims that quantity of money leads inflation by 6 months-2 years, and we wouldn't expect it to propagate through all supply chains at equal speed. This also means that the standard theory is predictive and can't just be an accounting identity- the prediction (which we can make after the huge increase in M2 in 2020) is that prices will rise, with some delay but eventually about 30%. I'm not counting any change in the output of the economy here, so with covid disruption I wouldn't expect this to have particularly good accuracy. Let's see how it pans out!
Finally, we can look at things like the price of gold: it rose significantly pretty much in line with the M2 money supply. I don't know of anything that would significantly affect gold supply recently, so it would seem the demand comes from devaluation of the dollar or fear of it.
> Price-change variation rises and falls with the average rate of inflation.
I think we can see it as a decay of money as a tool, its main function of being a unit of account becomes disrupted because its self-referential aspect increases.
Inflation within the context of state level economics is the reduction in relative value of current monetary holdings.
That's it.
There's nothing magical, hidden, or complicated about it.
How it arrives, how it is dealt with, and how much is desirable for specific effects is all up for debate and the article has some great info and analysis there.
The most common reasons are monetary expansion and scarcity changes in resources. The most common methods of adjustment are monetary contraction and increases in resources.