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The usual knee-jerk reaction to money printing is "omg inflation is coming". But it is not that simple - inflation is just the trend in average prices of things

The usual knee-jerk reaction to money printing is "omg inflation is coming". But it is not that simple - inflation is just the trend in average prices of things/services/whatevers (and there's a great deal of disagreement about what should those things be; the US has 6 measures of inflation none of which agree with any other). All of those things are ultimately subject to the supply/demand pricing mechanism, so if you want to proclaim inflation you should be able to answer this question: why will demand outstrip supply? I'm not saying this cannot happen, it can, but most people just forget to even consider this basic supply/mechanism framework. Instead of trying to judge the reality of production and consumption people often rely on some "magic" properties of accounting numbers of large institutions (central banks or governments). It is so much simpler to just eyeball some trillions and say "it's too much, the currency is dead!" rather than deal with the complexities of reality.

ummonk 7y ago
I think it's particularly important to consider the velocity of money. When you consider that inflation is due to the change in (velocity of money * money supply / economic production), it's important to remember that even as economic production goes down, the velocity of money arguably goes down even faster as e.g. rent and mortgage payments are deferred, bill payments are deferred, etc. So, the government has to expand the money supply to keep money flowing due to the decrease in velocity. One of the issues though is that asset prices are not dependent on the velocity of money - asset prices are roughly proportional to (money supply / aggregate assets), so while printing money won't necessarily drive inflation, it does drive asset prices up.
- H8crilA 7y ago
  The velocity of money (a terrible name IMHO) can be described as follows: how correct is the "more money = more inflation" statement in our current environment? In particular if it's low then more money != more inflation. And yes, we've had terrible inflation in financial markets.
- logicchains 7y ago
  >asset prices are roughly proportional to (money supply / aggregate assets), so while printing money won't necessarily drive inflation, it does drive asset prices up. Asset price inflation doesn't count as inflation?
  - bob33212 7y ago
    A lot of people think of inflation as the consumer price index. ( Gas, bread, cars, toasters, etc) if those go up it puts pressure on wages because people cannot afford to live on existing wages at a certain level. The price of collectibles like rare art or comic books could go up or down a lot but the general economy doesn't care about those assets.
    - take_a_breath 7y ago
      The point isn’t about what you think the economy “cares about”. You mention commodity products which are a part of the picture, but they are all depreciating assets. In the end, there is an increased amount of money in the system. That money is looking for returns. Investors flood into the asset classes where they think they can find returns. This means collectibles increase in prices, but other (more common) assets like education, housing, and stocks have also increase considerably.
logicchains 7y ago
I read somewhere that because of the USD's status as an international reserve currency, a safe currency in times of crisis, and one in which a huge amount of debt is denominated, there's close to $20 trillion worth of demand for USD, so the Fed can afford to print up to that much without any expected inflation. Other countries, on the other hand, have much less room to print money without causing inflation.
- H8crilA 7y ago
  Again, don't do magical thinking. Inflation is about things like tomatoes. The only way to make their prices go up is to reduce the amount of tomatoes produced per year, or increase people's willingness to eat them.
  - gjulianm 7y ago
    Isn't the price affected also by increasing wages, transportation costs, etc too?
  - arethuza 7y ago
    "The only way to make their prices go up is to reduce the amount of tomatoes produced per year, or increase people's willingness to eat them" Or influence other people into thinking that either of those are going to happen?
  - crispyporkbites 7y ago
    That assumes that everyone who wants to buy tomatoes is able to buy them at current prices, and that everyone who is buying tomatoes now would no longer buy them if the price went up. If there are more dollars floating around in the economy, more people may be able to afford to buy tomatoes and more people become price insenstive (e.g. software engineers in SV do not care if tomaatoes are $2/kilo or $4/kilo, they'll still buy). As a seller you'll raise prices and see no drop in demand, ergo prices go up.
  - fbonetti 7y ago
    You’re only looking at one side of the equation. Assuming demand stays constant, if you reduce the number of tomatoes, their price will go up. Likewise if you increase the number of dollars, the price of tomatoes will also go up, because each individual dollar isn’t worth as much.
bob33212 7y ago
How do you give consumers money and say "Do not spend this on toilet paper. The paper products industry is a max capacity and cannot produce any more TP. It will only cause inflation" In a free market people are going to spend money on whatever they want. Maybe you offer refunds for industries which need to be restarted?
- throw0101a 7y ago
  > How do you give consumers money and say "Do not spend this on toilet paper. The paper products industry is a max capacity and cannot produce any more TP. It will only cause inflation" 1. Where will people actually store this very bulky commodity? 2. Staring at the wall of TP that has been collected, people will realize 'I will have to poop a lot to use up all of this'. 3. Once they realize they have a nine month supply of TP, and the space it is taking up, they will not buy TP for nine months so TP manufacturers may experience a reduction in demand in the not-too-distant future. It is certainly possible for a spike in prices (inflation) for TP (or whatever) to occur as people 'panic buy' supplies, but that spike will subside as people realize they've stock piled enough to last them the length of the shutdown.
roenxi 7y ago
I disagree but I'm going to make my counterpoint a little indirectly: I can name a couple of states in my lifetime where the government has collapsed in an inflationary manner and the people have suffered and starved. They are generally places people flee in large numbers. There are no counters that I'm aware of that have suffered a deflationary collapse. If I look up the Wikipedia page for deflation I'm given hellholes like Hong Kong and Japa... no, wait, those are some of the places I'd actually prefer to live than where I am now. Pity I don't speak any Asian languages. Pretty civilised places, really. Advanced is the word I'd actually use to describe them. There is literally one example of a deflationary collapse in the 1930s US Great Recession. Even then, that was the precursor to the modern US rather than, say, the Zimbabwe collapse through hyperinflation. I can fathom why governments call deflation the big enemy. I can't fathom why people believe that. Even in the worst case suffering and deflation seem like a pretty good foundation for long term success. People really should stop flirting with inflation and try encouraging deflation as a response for once. Who knows, it might work. Governments keep encouraging inflation and we keep having mysterious debt-fueled collapses.
- w-j-w 7y ago
  Japan hasn't seen any economic growth in a decade, and by no means would we want our economy to suffer the same date as theirs. Also, the reason we haven't seen anything like the 1930s (the worst economic downtown ever in the developed world) is because it isn't too difficult for a savvy government to stop.
- pjc50 7y ago
  The usual ones that people name are Venezuela and Zimbabwe, and in those the hyperinflation isn't just a monetary phenomenon that the states decided to self-destruct with; it's a symptom of a whole cascade of failures, including economic sanctions on the country! Hyperinflation in those cases is effectively a forex phenomenon. The country stops producing any useful export goods (or is banned from exporting, or in the case of Weimar Germany forced to export gold at gunpoint), so the value of its currency collapses. Because the country still requires imports, especially oil, the value of those goods shoots up - but you can't save the economy from this by printing local currency. (Can someone name a 20th century country with hyperinflation that wasn't under sanctions or involved in a war?)
harimau777 7y ago
It seems like the clearest example of something where demand is currently far outstripping supply is housing in America's most desirable cities.
cryptica 7y ago
Goodhart's law says that "When a measure becomes a target, it ceases to be a good measure." - This is what happened with inflation. The government's dual goal of attempting to measure inflation while at the same time keeping it low cannot possibly work. In our fiat monetary system, there are plenty of incentives for people to hide the real inflation numbers. The kind of inflation we have right now mostly affects the stock market - That's why speculative investments like Bitcoin, Snapchat and Uber are so valuable; not being backed by any net intrinsic value makes them a good benchmark against which to measure real inflation. You could even argue that Bitcoin is backed by negative value (since it costs Bitcoin owners money to keep miners and the network running). So the problem is worse than you think. Stocks are also a good measure of inflation. Many public companies are backed by real economic value but the value of this activity is often greatly exaggerated... Also, some stocks produce net negative value for society. Being able to earn revenue or even profits doesn't necessarily mean that a company delivers net positive value to the economy. If the money is obtained through trickery or coercion, then the company adds net negative value. For example, companies like Oracle which derive most of their earnings from socially counterproductive litigation and ill-gotten government contracts add significant negative value to society and yet they are highly profitable. I would argue that companies like Facebook add close to 0 net value; they add a lot of positive value and also a lot of negative value. There is no doubt that the fiat monetary system is to blame. big companies are essentially getting free money from the rest of us; when the Fed injects new money into the economy, big corporations are the first to get their hands into the pot. Big companies know where the newly printed Fed credit is flowing and they have the political and business connections to extract it. If we don't do something it will get worse. Big companies have shown over and over again that they cannot be trusted. It's deeply frustrating that, as an honest working citizen, I constantly have to bear witness to the elites receiving free credit over and over while I am enslaved to them under some pretext that they somehow deserve their share. The fact that the information is out there in the public domain and yet nobody seems to be doing anything about it is disturbing. My conclusion is that people are either evil, stupid or both. I guess people have not changed much since the time of slavery or the holocaust. Exactly the same kind of people running the show it seems. Even if you disagree with what I'm saying, you should at least support the intent. Unfortunately, I don't have any research to back my claims... Can you think of a single corporation who would sponsor such research? Exactly. This perspective that I'm sharing is doomed to remain in the domain of 'fake news'. The idea of 'fake news' is a weapon invented by the elites to discredit any information that is not aligned with hypercapitalist incentives.
fbonetti 7y ago
> inflation is just the trend in average prices Price inflation is not some force of nature - it’s deliberately induced by the central bank out of a belief that falling prices are bad. The trend in market economies is for everything to get cheaper every year. Look at TVs for example. There’s no “magic” in inflation. If you have more dollars chasing the same number of goods, those dollars will have less purchasing power. Because the Fed creates new money if the form of bank reserves, the things that to tend to be inflated the most are assets purchased with loans (real estate, equities, businesses, etc). Nobody takes out a loan to buy tomatoes but they will take out a loan to fund a new business.

ummonk 7y ago

I think it's particularly important to consider the velocity of money. When you consider that inflation is due to the change in (velocity of money * money supply / economic production), it's important to remember that even as economic production goes down, the velocity of money arguably goes down even faster as e.g. rent and mortgage payments are deferred, bill payments are deferred, etc. So, the government has to expand the money supply to keep money flowing due to the decrease in velocity. One of the issues though is that asset prices are not dependent on the velocity of money - asset prices are roughly proportional to (money supply / aggregate assets), so while printing money won't necessarily drive inflation, it does drive asset prices up.

H8crilA 7y ago
The velocity of money (a terrible name IMHO) can be described as follows: how correct is the "more money = more inflation" statement in our current environment? In particular if it's low then more money != more inflation. And yes, we've had terrible inflation in financial markets.
logicchains 7y ago
>asset prices are roughly proportional to (money supply / aggregate assets), so while printing money won't necessarily drive inflation, it does drive asset prices up. Asset price inflation doesn't count as inflation?
- bob33212 7y ago
  A lot of people think of inflation as the consumer price index. ( Gas, bread, cars, toasters, etc) if those go up it puts pressure on wages because people cannot afford to live on existing wages at a certain level. The price of collectibles like rare art or comic books could go up or down a lot but the general economy doesn't care about those assets.
  - take_a_breath 7y ago
    The point isn’t about what you think the economy “cares about”. You mention commodity products which are a part of the picture, but they are all depreciating assets. In the end, there is an increased amount of money in the system. That money is looking for returns. Investors flood into the asset classes where they think they can find returns. This means collectibles increase in prices, but other (more common) assets like education, housing, and stocks have also increase considerably.

logicchains 7y ago

I read somewhere that because of the USD's status as an international reserve currency, a safe currency in times of crisis, and one in which a huge amount of debt is denominated, there's close to $20 trillion worth of demand for USD, so the Fed can afford to print up to that much without any expected inflation. Other countries, on the other hand, have much less room to print money without causing inflation.

H8crilA 7y ago
Again, don't do magical thinking. Inflation is about things like tomatoes. The only way to make their prices go up is to reduce the amount of tomatoes produced per year, or increase people's willingness to eat them.
- gjulianm 7y ago
  Isn't the price affected also by increasing wages, transportation costs, etc too?
- arethuza 7y ago
  "The only way to make their prices go up is to reduce the amount of tomatoes produced per year, or increase people's willingness to eat them" Or influence other people into thinking that either of those are going to happen?
- crispyporkbites 7y ago
  That assumes that everyone who wants to buy tomatoes is able to buy them at current prices, and that everyone who is buying tomatoes now would no longer buy them if the price went up. If there are more dollars floating around in the economy, more people may be able to afford to buy tomatoes and more people become price insenstive (e.g. software engineers in SV do not care if tomaatoes are $2/kilo or $4/kilo, they'll still buy). As a seller you'll raise prices and see no drop in demand, ergo prices go up.
- fbonetti 7y ago
  You’re only looking at one side of the equation. Assuming demand stays constant, if you reduce the number of tomatoes, their price will go up. Likewise if you increase the number of dollars, the price of tomatoes will also go up, because each individual dollar isn’t worth as much.

bob33212 7y ago

How do you give consumers money and say "Do not spend this on toilet paper. The paper products industry is a max capacity and cannot produce any more TP. It will only cause inflation" In a free market people are going to spend money on whatever they want. Maybe you offer refunds for industries which need to be restarted?

throw0101a 7y ago
> How do you give consumers money and say "Do not spend this on toilet paper. The paper products industry is a max capacity and cannot produce any more TP. It will only cause inflation" 1. Where will people actually store this very bulky commodity? 2. Staring at the wall of TP that has been collected, people will realize 'I will have to poop a lot to use up all of this'. 3. Once they realize they have a nine month supply of TP, and the space it is taking up, they will not buy TP for nine months so TP manufacturers may experience a reduction in demand in the not-too-distant future. It is certainly possible for a spike in prices (inflation) for TP (or whatever) to occur as people 'panic buy' supplies, but that spike will subside as people realize they've stock piled enough to last them the length of the shutdown.

roenxi 7y ago

I disagree but I'm going to make my counterpoint a little indirectly: I can name a couple of states in my lifetime where the government has collapsed in an inflationary manner and the people have suffered and starved. They are generally places people flee in large numbers. There are no counters that I'm aware of that have suffered a deflationary collapse. If I look up the Wikipedia page for deflation I'm given hellholes like Hong Kong and Japa... no, wait, those are some of the places I'd actually prefer to live than where I am now. Pity I don't speak any Asian languages. Pretty civilised places, really. Advanced is the word I'd actually use to describe them. There is literally one example of a deflationary collapse in the 1930s US Great Recession. Even then, that was the precursor to the modern US rather than, say, the Zimbabwe collapse through hyperinflation. I can fathom why governments call deflation the big enemy. I can't fathom why people believe that. Even in the worst case suffering and deflation seem like a pretty good foundation for long term success. People really should stop flirting with inflation and try encouraging deflation as a response for once. Who knows, it might work. Governments keep encouraging inflation and we keep having mysterious debt-fueled collapses.

w-j-w 7y ago
Japan hasn't seen any economic growth in a decade, and by no means would we want our economy to suffer the same date as theirs. Also, the reason we haven't seen anything like the 1930s (the worst economic downtown ever in the developed world) is because it isn't too difficult for a savvy government to stop.
pjc50 7y ago
The usual ones that people name are Venezuela and Zimbabwe, and in those the hyperinflation isn't just a monetary phenomenon that the states decided to self-destruct with; it's a symptom of a whole cascade of failures, including economic sanctions on the country! Hyperinflation in those cases is effectively a forex phenomenon. The country stops producing any useful export goods (or is banned from exporting, or in the case of Weimar Germany forced to export gold at gunpoint), so the value of its currency collapses. Because the country still requires imports, especially oil, the value of those goods shoots up - but you can't save the economy from this by printing local currency. (Can someone name a 20th century country with hyperinflation that wasn't under sanctions or involved in a war?)

harimau777 7y ago

It seems like the clearest example of something where demand is currently far outstripping supply is housing in America's most desirable cities.

cryptica 7y ago

Goodhart's law says that "When a measure becomes a target, it ceases to be a good measure." - This is what happened with inflation. The government's dual goal of attempting to measure inflation while at the same time keeping it low cannot possibly work. In our fiat monetary system, there are plenty of incentives for people to hide the real inflation numbers. The kind of inflation we have right now mostly affects the stock market - That's why speculative investments like Bitcoin, Snapchat and Uber are so valuable; not being backed by any net intrinsic value makes them a good benchmark against which to measure real inflation. You could even argue that Bitcoin is backed by negative value (since it costs Bitcoin owners money to keep miners and the network running). So the problem is worse than you think. Stocks are also a good measure of inflation. Many public companies are backed by real economic value but the value of this activity is often greatly exaggerated... Also, some stocks produce net negative value for society. Being able to earn revenue or even profits doesn't necessarily mean that a company delivers net positive value to the economy. If the money is obtained through trickery or coercion, then the company adds net negative value. For example, companies like Oracle which derive most of their earnings from socially counterproductive litigation and ill-gotten government contracts add significant negative value to society and yet they are highly profitable. I would argue that companies like Facebook add close to 0 net value; they add a lot of positive value and also a lot of negative value. There is no doubt that the fiat monetary system is to blame. big companies are essentially getting free money from the rest of us; when the Fed injects new money into the economy, big corporations are the first to get their hands into the pot. Big companies know where the newly printed Fed credit is flowing and they have the political and business connections to extract it. If we don't do something it will get worse. Big companies have shown over and over again that they cannot be trusted. It's deeply frustrating that, as an honest working citizen, I constantly have to bear witness to the elites receiving free credit over and over while I am enslaved to them under some pretext that they somehow deserve their share. The fact that the information is out there in the public domain and yet nobody seems to be doing anything about it is disturbing. My conclusion is that people are either evil, stupid or both. I guess people have not changed much since the time of slavery or the holocaust. Exactly the same kind of people running the show it seems. Even if you disagree with what I'm saying, you should at least support the intent. Unfortunately, I don't have any research to back my claims... Can you think of a single corporation who would sponsor such research? Exactly. This perspective that I'm sharing is doomed to remain in the domain of 'fake news'. The idea of 'fake news' is a weapon invented by the elites to discredit any information that is not aligned with hypercapitalist incentives.

fbonetti 7y ago

> inflation is just the trend in average prices Price inflation is not some force of nature - it’s deliberately induced by the central bank out of a belief that falling prices are bad. The trend in market economies is for everything to get cheaper every year. Look at TVs for example. There’s no “magic” in inflation. If you have more dollars chasing the same number of goods, those dollars will have less purchasing power. Because the Fed creates new money if the form of bank reserves, the things that to tend to be inflated the most are assets purchased with loans (real estate, equities, businesses, etc). Nobody takes out a loan to buy tomatoes but they will take out a loan to fund a new business.