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> Printing money does not cause inflation. Ah, but it does. It creates asset inflation. This may be the worst kind of all possible inflation because it makes p

by aazaa 7y ago

> Printing money does not cause inflation. Ah, but it does. It creates asset inflation. This may be the worst kind of all possible inflation because it makes people believe they are wealthier than they are. When the inflation can no longer be sustained, large numbers will soon find out they are far poorer than they once thought. That's the stuff of revolutions and Dark Times. Asset inflation takes root through policies that distribute money, not to the poor (Great Society), but to the rich (Deregulation and Quantitative Easing). The rich have no use for the money being given out and so drive up asset prices with it. From this perspective, it's easier to see how a multi-thousand word essay on new economics fails to mention negative interest rates once.

cryptica 7y ago
I agree with your point about asset inflation but I think that the author of the article is well aware of it based on these lines: > Doubling the amount of gold in a country will have no effect on the price of cheese if you give all the gold to rich people and they just bury it in their yards, or use it to make gold-plated submarines (this is, incidentally, why quantitative easing, the strategy of buying long-term government bonds to put money into circulation, did not work either). What actually matters is spending. Are you suggesting that negative interest rates are some kind of solution? I think they would make the problem worse, just like QE; the effect would just be to expand the money supply by injecting more money into the economy on the basis of arbitrary rules. With negative rates, the incentive becomes that everyone should borrow all the time (because borrowing becomes profitable), so then the question will quickly become "who is allowed/qualified to borrow?" and the answer will either be "rich people" or some other kind of unfair arbitrary criteria. Negative interest rates are a terrible idea. All the extra money will be absorbed by cryptocurrencies, advertising platforms and other speculative investments.
- panarky 7y ago
  > What actually matters is spending Exactly right. MV = PT Where M is the monetary base, V is the velocity of money, P is the price level, and T is the real value of transactions. Central banks would love it if they could precisely control inflation by creating and destroying money. What actually happened with QE is that M increased and V decreased in almost the identical magnitude, leaving P and T virtually unchanged. Central banks have very little influence over the real economy, aside from short-term changes in interest rates.
snidane 7y ago
This is the big flaw in how inflation is measured. Assets (eg. for pension savings) and especially housing costs are for some reason not included in the Consumer Pricing Index despite them being a huge expense from person's monthly paycheck. One can argue the reasons why. Is of the same problem with KPIs in general thay we only measure things which are easy to measure and omit the difficult but often much more important things to measure? Or is it a conspiracy plot in which the governments realized that the only way to repay those ever increasing government debts is by inflating them away. Ie. borrowing at 1% akin to CPI reported inflation instead of at 8% which is what the actual inflation might be.
- ianai 7y ago
  Putting on my academic Econ hat for a moment: There’s probably a stronger argument for including housing costs like rent into CPI than asset value like home values. Assets like homes are supposed to be illiquid and relatively constant over time. Ie little change in the underlying fundamentals of the item or changes that can be accounted for in an uncomplicated way. When such stable in underlying value but relatively illiquid assets like homes trade their realized prices are supposed to reflect little more than inflation. So maybe their price changes make more sense on the exogenous side of the equation than the endogenous? Is this argument still valid? It seems like it would be since it still seems moving in and out of a mortgage is a longer (by months) process than moving in or out of a lease.
  - ianai 7y ago
    Replying to myself to avoid an edit as this is a new topic. I’m wondering increasingly lately if oil hasn’t replaced gold and fiat as the underlying backer value of currency. We had a problem in Econ to contrast and compare fiat currency to gold backed currency. Fiat is supposed to not be tied to a scarce resource and thus central banks have the ability to influence market growth through currency growth. Gold or resource backed currency can only grow at the rate new stock is removed from the ground. Of course, oil complicates there concept as oil is irreversibly consumed when it’s burned. The value of it still greatly affects market growth potentials though.
aww_dang 7y ago
Speaking from the Austrian perspective, the original definition of inflation is an inflation of the money supply. Price inflation is a separate but associated phenomenon.
QuesnayJr 7y ago
There's no such thing as asset price inflation -- it's a pre-modern Austrian notion. The value of an asset is the discounted value of its future cash flows (the net present value). If an asset is worth more than its future cash flows, then you have an asset price bubble. The rich think they are rich because they actually are rich, and they expect to be rich in the future. The value of the stock market is high because profits are high, and the owners of stock expect them to remain high. They could be overoptimistic about the future, but its driven by future expectations about the real economy.
- corporate_shi11 7y ago
  What are the future cash flows of a stock with no dividend? They are 0. Does that mean that all stock price inflation for such securities is just a bubble? Of course not.
  - QuesnayJr 7y ago
    Stock buybacks also count as cash flows. But stock that will never pay a dividend (or do a buyback) in a million years? That is as pure a bubble as you will ever find.
    - wallacoloo 7y ago
      Isn’t it reasonable to consider a company’s assets in addition to cash flows? If a company has $1B of assets (and no loans, for simplicity), might indirect ownership/control over those assets via stock be worth something?
      - QuesnayJr 7y ago
        That's actually a really good point. But you have to be able to eventually convert the assets into cash (maybe through selling the assets to another company, rather than through dividends).

by aazaa 7y ago

cryptica 7y ago

I agree with your point about asset inflation but I think that the author of the article is well aware of it based on these lines: > Doubling the amount of gold in a country will have no effect on the price of cheese if you give all the gold to rich people and they just bury it in their yards, or use it to make gold-plated submarines (this is, incidentally, why quantitative easing, the strategy of buying long-term government bonds to put money into circulation, did not work either). What actually matters is spending. Are you suggesting that negative interest rates are some kind of solution? I think they would make the problem worse, just like QE; the effect would just be to expand the money supply by injecting more money into the economy on the basis of arbitrary rules. With negative rates, the incentive becomes that everyone should borrow all the time (because borrowing becomes profitable), so then the question will quickly become "who is allowed/qualified to borrow?" and the answer will either be "rich people" or some other kind of unfair arbitrary criteria. Negative interest rates are a terrible idea. All the extra money will be absorbed by cryptocurrencies, advertising platforms and other speculative investments.

panarky 7y ago
> What actually matters is spending Exactly right. MV = PT Where M is the monetary base, V is the velocity of money, P is the price level, and T is the real value of transactions. Central banks would love it if they could precisely control inflation by creating and destroying money. What actually happened with QE is that M increased and V decreased in almost the identical magnitude, leaving P and T virtually unchanged. Central banks have very little influence over the real economy, aside from short-term changes in interest rates.

snidane 7y ago

This is the big flaw in how inflation is measured. Assets (eg. for pension savings) and especially housing costs are for some reason not included in the Consumer Pricing Index despite them being a huge expense from person's monthly paycheck. One can argue the reasons why. Is of the same problem with KPIs in general thay we only measure things which are easy to measure and omit the difficult but often much more important things to measure? Or is it a conspiracy plot in which the governments realized that the only way to repay those ever increasing government debts is by inflating them away. Ie. borrowing at 1% akin to CPI reported inflation instead of at 8% which is what the actual inflation might be.

ianai 7y ago
Putting on my academic Econ hat for a moment: There’s probably a stronger argument for including housing costs like rent into CPI than asset value like home values. Assets like homes are supposed to be illiquid and relatively constant over time. Ie little change in the underlying fundamentals of the item or changes that can be accounted for in an uncomplicated way. When such stable in underlying value but relatively illiquid assets like homes trade their realized prices are supposed to reflect little more than inflation. So maybe their price changes make more sense on the exogenous side of the equation than the endogenous? Is this argument still valid? It seems like it would be since it still seems moving in and out of a mortgage is a longer (by months) process than moving in or out of a lease.
- ianai 7y ago
  Replying to myself to avoid an edit as this is a new topic. I’m wondering increasingly lately if oil hasn’t replaced gold and fiat as the underlying backer value of currency. We had a problem in Econ to contrast and compare fiat currency to gold backed currency. Fiat is supposed to not be tied to a scarce resource and thus central banks have the ability to influence market growth through currency growth. Gold or resource backed currency can only grow at the rate new stock is removed from the ground. Of course, oil complicates there concept as oil is irreversibly consumed when it’s burned. The value of it still greatly affects market growth potentials though.

aww_dang 7y ago

Speaking from the Austrian perspective, the original definition of inflation is an inflation of the money supply. Price inflation is a separate but associated phenomenon.

QuesnayJr 7y ago

There's no such thing as asset price inflation -- it's a pre-modern Austrian notion. The value of an asset is the discounted value of its future cash flows (the net present value). If an asset is worth more than its future cash flows, then you have an asset price bubble. The rich think they are rich because they actually are rich, and they expect to be rich in the future. The value of the stock market is high because profits are high, and the owners of stock expect them to remain high. They could be overoptimistic about the future, but its driven by future expectations about the real economy.

corporate_shi11 7y ago
What are the future cash flows of a stock with no dividend? They are 0. Does that mean that all stock price inflation for such securities is just a bubble? Of course not.
- QuesnayJr 7y ago
  Stock buybacks also count as cash flows. But stock that will never pay a dividend (or do a buyback) in a million years? That is as pure a bubble as you will ever find.
  - wallacoloo 7y ago
    Isn’t it reasonable to consider a company’s assets in addition to cash flows? If a company has $1B of assets (and no loans, for simplicity), might indirect ownership/control over those assets via stock be worth something?
    - QuesnayJr 7y ago
      That's actually a really good point. But you have to be able to eventually convert the assets into cash (maybe through selling the assets to another company, rather than through dividends).