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If you believe in rational markets, you should also probably consider that those rational markets are capable of pricing stable inflation into nominal pricing.

by cheald 10y ago

If you believe in rational markets, you should also probably consider that those rational markets are capable of pricing stable inflation into nominal pricing. Consider that money is widely accepted to be neutral in the long-run. In inflationary economies, there is nothing stopping individuals from saving value in the form of assets; you can store your value in pork bellies or gold or ownership of a company or whatever other asset you'd like, in order to build up savings to gain security and negotiating power. The oft-repeated idea that inflation precludes saving is silly; it does make it costly to save by stuffing your dollars into a mattress, but it would still hold true in an economy without managed inflation - such economies are still subject to inflation and deflation (see https://en.wikipedia.org/wiki/File:US_Historical_Inflation_Ancient.svg https://en.wikipedia.org/wiki/File:US_Historical_Inflation_A...) so if you need to actually spend your money during one of those 20% inflation spikes, well, good luck with that. Store your value in an asset rather than a medium of exchange and managed inflation is a tremendous boon thanks to its tendency to decrease the risk (and thus cost) of investment.

mindslight 10y ago
Even rational markets do not respond immediately or frictionlessly. And I wouldn't call a market where one sector gets a steady inflow of newly-created money "rational". The disconnect in your analysis is that price inflation hits hardest the areas where the conjured money is injected into the wider economy. Saving in gold works to pay for food, but not to pay for housing. To keep up with the latter, you must invest in housing to cover the entirety of your consumption. Until you achieve that, you're over the barrel servicing debt. This encourages everybody into further helping to inflate that bubble, with those who've succeeded then lobbying for even more housing inflation.
- cheald 10y ago
  You're presuming that 100% of price level changes are due to changes in the money supply. That's simply not the case (see also: that graph in my original post prior to 1913, 1933, or 1971, pick your favorite of those dates). Changes in the money supply do affect nominal prices, but it's not the only factor. Housing prices would continue to increase even with a perfectly fixed money supply; saving at an inflation rate of 0% would result in diminished purchasing power for housing over time, as aggregate demand increases. Historical record is not aligned with the fantasy that eliminating fiat currency would cause price stabilization and promote savings. It would eliminate long-run inflation, but at the cost of price stability and medium-run investment.
  - mindslight 10y ago
    First, we shouldn't have price "stability" as defined by the Fed. In a technological economy, the price of everything should be trending downward - price optimization is exactly what a market does! The Fed functions to smooth out the bumps, but they seem unable to do so without being tempted to destroy that natural downward trend. Which is why we're next door to 0% interest and "Helicopter Ben" is making rounds in academia (UBI). The core of your argument seems to be that there is little economic difference between natural technological deflation and forcing a slow inflation, that the market can adjust to either condition. But if markets were perfectly efficient like this, then forcing inflation would have no effect and in fact bubbles would not occur because they would be immediately corrected Real markets have inefficiencies and lag time, and altering the macro environment is straight endorsement of specific policy, but cloaked as science. If prices were allowed to go down and people were able to save money (actual savings, not simply leveraged between stocks and debt), then they could choose to work less and we would be able to actually see widespread gains from technology. Instead, the government is running the same tired Keynesian playbook for getting "full employment" while the need for human work is being ever reduced. > You're presuming that 100% of price level changes are due to changes in the money supply No, just the majority of them. Even though demand for housing is going up (population), we would expect prices to rise to stable premium over the cost of creating new housing (corresponding to the lag between demand and production). Instead, what we're observing is a continual inflation in "values" that seems to actually be constrained by the cost of interest on the value. This makes intuitive sense based on how people are actually encouraged to view houses (like various acquaintances thinking a $5k earnest money deposit is serious business, while seemingly oblivious that they're actually spending much much more). Furthermore, shamelessly implicit in the idea of forced inflation is the viewpoint that people should be forced to "invest". This certainly keeps the financial sector in demand, but obviously hurts the average person who has their savings eroded either passively through inflation or actively through transaction fees and time spent managing relatively small investments.

by cheald 10y ago

mindslight 10y ago

Even rational markets do not respond immediately or frictionlessly. And I wouldn't call a market where one sector gets a steady inflow of newly-created money "rational". The disconnect in your analysis is that price inflation hits hardest the areas where the conjured money is injected into the wider economy. Saving in gold works to pay for food, but not to pay for housing. To keep up with the latter, you must invest in housing to cover the entirety of your consumption. Until you achieve that, you're over the barrel servicing debt. This encourages everybody into further helping to inflate that bubble, with those who've succeeded then lobbying for even more housing inflation.

cheald 10y ago
You're presuming that 100% of price level changes are due to changes in the money supply. That's simply not the case (see also: that graph in my original post prior to 1913, 1933, or 1971, pick your favorite of those dates). Changes in the money supply do affect nominal prices, but it's not the only factor. Housing prices would continue to increase even with a perfectly fixed money supply; saving at an inflation rate of 0% would result in diminished purchasing power for housing over time, as aggregate demand increases. Historical record is not aligned with the fantasy that eliminating fiat currency would cause price stabilization and promote savings. It would eliminate long-run inflation, but at the cost of price stability and medium-run investment.
- mindslight 10y ago
  First, we shouldn't have price "stability" as defined by the Fed. In a technological economy, the price of everything should be trending downward - price optimization is exactly what a market does! The Fed functions to smooth out the bumps, but they seem unable to do so without being tempted to destroy that natural downward trend. Which is why we're next door to 0% interest and "Helicopter Ben" is making rounds in academia (UBI). The core of your argument seems to be that there is little economic difference between natural technological deflation and forcing a slow inflation, that the market can adjust to either condition. But if markets were perfectly efficient like this, then forcing inflation would have no effect and in fact bubbles would not occur because they would be immediately corrected Real markets have inefficiencies and lag time, and altering the macro environment is straight endorsement of specific policy, but cloaked as science. If prices were allowed to go down and people were able to save money (actual savings, not simply leveraged between stocks and debt), then they could choose to work less and we would be able to actually see widespread gains from technology. Instead, the government is running the same tired Keynesian playbook for getting "full employment" while the need for human work is being ever reduced. > You're presuming that 100% of price level changes are due to changes in the money supply No, just the majority of them. Even though demand for housing is going up (population), we would expect prices to rise to stable premium over the cost of creating new housing (corresponding to the lag between demand and production). Instead, what we're observing is a continual inflation in "values" that seems to actually be constrained by the cost of interest on the value. This makes intuitive sense based on how people are actually encouraged to view houses (like various acquaintances thinking a $5k earnest money deposit is serious business, while seemingly oblivious that they're actually spending much much more). Furthermore, shamelessly implicit in the idea of forced inflation is the viewpoint that people should be forced to "invest". This certainly keeps the financial sector in demand, but obviously hurts the average person who has their savings eroded either passively through inflation or actively through transaction fees and time spent managing relatively small investments.