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Comment by barrkel | Hacker News Reader

Inflation is an increase in the cost of living.

It can be caused by deficit spending. It can also be caused by supply shocks. For example, if you restrict building new housing, the price of housing will increase, both rents and house prices. If you tariff imports, a basket including those goods will rise in price to the degree those imports are not substituable. If you start a war in the Middle East, oil prices will rise, and increased energy costs can feed into lots of different things, raising prices.

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Sigh. It is always the result of deficit spending.

Bob earns $20 every day. He buys 5 eggs $2/ea and 5 apples $2/ea every day. Now, due to supply shocks, egg prices double. He still has only $20, and so he now buys fewer eggs and fewer apples.

What happens when he buys fewer apples? The price of apples goes down, due to the Law of Supply and Demand. There is no inflation.

What happens when this economy is flooded with dollars? The Law of Supply and Demand again, meaning the value of each dollar drops. That means the dollar price of eggs and apples rise, as well as his wages.

Oil prices rising means people have less money to spend meaning prices of other things drop.

Another way to look at it is the US had zero net inflation from 1800-1914. From 1914 to today a dollar is worth 3 cents of a 1914 dollar. That isn't due to supply shocks, and there certainly were plenty of supply shocks before 1914.

1914 is when the Fed was created and empowered to print money with no backing.

People had to put up with deflationary shocks and yet robber barons built their empires all the same. Hard money doesn't stop r>g, it doesn't stop expected returns from growing increasingly burdensome, and it doesn't stop assets from appreciating relative to wages. It doesn't actually deliver the things we care about.

It delivers plenty of things we don't care for, though. History provides the most lurid examples, but we have modern ones too. In the US, Clinton balanced the budget and the macroeconomic consequences broke something very important (audience participation: what was it? Hint: we call them "dual deficits" for a reason). We quickly took our finger off the stove, though, so it was only a lesson for the observant. Germany on the other hand kept its debt brake in place, which mechanically suppressed investment (macro 101 quiz time again: why?) with staggering consequences, leading to one of the most underinvested economies in Europe and almost completely shutting them out of the digital revolution, in which I privately suspect they'd have otherwise participated fabulously. In any case, had Clinton installed a debt brake, that would have been us. HackerNews, YCombinator, and all the ZIRP babies around these parts would have been among the most affected. The Magnificent 7 would not have all been in the US.

So no, deficits aren't the root of all evil and the appropriate deficit is considerably north of 0. That said, it's south of where we have it. Interest rates are the gauge. Is money being pushed in (low rates) or pulled in (high rates)? We are transitioning from the former regime to the latter regime, partly due to imperial retreat, partly due to crisis-level spending in a time of no crisis which is wildly irresponsible. The US is clearly headed for a debt crisis. But the answer is belt-tightening and either gentle-repression-over-time like we did after WWII (fat chance) or an inflation spike followed by a rate hike (probably several) until the bond market is happy again. It's going to be bumpy, but not as bumpy as the hard money counterfactual.

> deficits aren't the root of all evil

I didn't say it was. I said it was the root of inflation.

> robber barons built their empires all the same

Kerosene prices dropped 70% while Standard Oil prospered. Rockefeller was benefiting people, not robbing them.

Louis Brandeis would like a word. In particular: no, the fact that tech advances and economies of scale dropped oil prices at the same time Rockefeller was building his monopoly does not make that monopoly harmless or good or justify it into perpetuity.

More importantly, after Ronald Reagan and Robert Bork brought us back to robber-baron era antitrust policy, we've seen robber-baron level corporate consolidation and corporate profits. We've exceeded them in most regards, in fact. It has been terrible for consumers and excellent for shareholders.

So, dropping kerosene prices by 70% due to tech advances and economies of scale was terrible for consumers?

Do you have any evidence that corporate profit margins have increased?

Printing money without backing is not deficit spending!

We're all well aware of the money supply, M1 / M2 / M3, velocity of money, etc. It's important for money to not get tight when the economy slows down, and it's important to tighten up the amount of money when the velocity increases again. But this is neither deficit spending nor printing money without backing!

Inflation is can come from a social psychological phenomenon around expectations. If the cost of living goes up in a surprising way, you feel the pinch. You want more money. Maybe your employer gives you a raise, and raises prices to compensate, reasoning that other things are also going up in price. The risk is this creates a self-propagating loop (which in turn does to a degree depend on accommodating institutions that don't restrict monetary supply).

You can trigger inflation through loose monetary policy, sure, and you can dampen the cycle by restricting the supply of money, and that's been the main function of independent central banks for most of the latter 20th and 21st century.

But inflation is literally just increase in the cost of living. It's a symptom, not a disease. It admits multiple explanations.

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