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People have been warning about inflation for more than a decade, but here we are in another deflationary environment, even with the Fed throwing endless fuel on

People have been warning about inflation for more than a decade, but here we are in another deflationary environment, even with the Fed throwing endless fuel on the fire. Inflationary expectations and wage growth remain low and the Fed has plenty of tools to tame it (interest rates, a huge balance sheet), so the question really is now: where is the inflation going to come from?

dd36 6y ago
Fed’s ever expanding balance sheet. It failed to reduce its size prior to the pandemic.
- dodobirdlord 6y ago
  Seems like in the long run the Fed will end up owning the whole market. It gets to invest with unlimited money in the most depressed assets every time there’s a downturn, and as an institution it’s horizon is forever. It seems like this ought to be a bizarre funding mechanism for the treasury. Perhaps the federal government should sell downturn insurance on assets. After all, it’s basically like the Fed is pretending it sold puts on much of the market when it in fact did not. Maybe the Fed should actually sell puts?
skohan 6y ago
I can't claim to be an expert in economics or finance, and I don't know if inflation per se is a threat at the moment, but I will say the current state of the economy doesn't make sense to me. If it really is the case that 30+ million Americans can be out of a job and the stock market reaction is to continue climbing on the assumption that the fed will continue to grow the balance sheet, doesn't that point to a fundamental decoupling between the value of the currency and real-world value? I mean are we really going to live in a society where the government pays companies so that their stock price can remain stable, even when demand for their products no longer exists because their customers are all out of work? It seems like a paper economy which essentially only serves to bail out investors. I'm not sure what the catalyst would be for that kind of a system to come crashing down, but I just don't understand how it could be sustainable.
- josho 6y ago
  The catalyst to a crash is when those 30 million people take to the streets and demand change. Unfortunately media has everyone misdirected to worry about guns/race instead of demanding the government serve the people instead of corporations.
  - kitotik 6y ago
    It took a full two years after the 2008 transfer of taxpayer money to financial institutions for the Occupy movement to get going. It’s possible that the scale of the current corporate welfare program + health pandemic + inaccessible healthcare + unemployment leads to faster and larger response from the plebes.
  - fragmede 6y ago
    The media is also doing a poor job covering possible/impending/discussions of rent strikes. The revolution, as they say, will not be televised.
- _curious_ 6y ago
  "I mean are we really going to live in a society where the government pays companies so that their stock price can remain stable, even when demand for their products no longer exists because their customers are all out of work? It seems like a paper economy which essentially only serves to bail out investors." To the last sentence, yes, a totally blatant wealth transfer scheme. Anecdotally, I think many of those suddenly "engaging" are just playing into the game - getting their dopamine and ego fix by showing dumb gains on nominal investments thinking that they too are wealthy and smarter than the next one :/ Of greater long term concern though is the decreasing transparency into which companies are benefiting disproportionately from government intervention. These fed manipulations will lead to an even more dysfunctional marketplace down the road because once the water is tainted - we don't know how much, where, or with what exactly. It's impossible to go back to safe and clean drinking water again from this source. Historically, the real value of the "stock market" has been that of a place for informed decisions based on consistent measurement and analysis of commonly reported variables regarding the well being of corporations. There's a reason a public company must abide by certain rules and regulations to go and remain public...it's so that investors can expect a certain amount of disclosure to actually make decisions on whether or not to invest. While public disclosure requirements have not changed lately (to my knowledge) - there is no way for the feds bailout factors to be decoupled from earnings. I would argue that aspect, which represents a huge value proposition of the "stock market" to investors of all sizes near and far, is quickly disappearing. I'm not sure what this means for the future.
the_gastropod 6y ago
I’ve got a bit of a hypothesis about why we’ve seen a decade+ of near-0 rates with virtually no inflation. It’s all about the wealth disparity. The wealthiest already have huge amounts of money saved and invested in the markets. Adding to the money supply primarily benefits those who already have the most money. So something like 80% of new money winds up in the hands of the top 1%, who save it, consume no extra (aside from stocks), and have no impact on the basket of goods. I think this also partly explains the high P/E ratios we’ve seen over the past decade+. Nothing in economics is that simple. But this feels reasonable to me. Anything I’m missing?
- leetcrew 6y ago
  the basic cause of inflation is more money chasing the same amount of real goods/services. so it stands to reason that which goods/services inflate depend on who is getting the new dollars. of course, things are always more complicated in macro.
- xikrib 6y ago
  I'm by no means an economist, but I think the same. I understand inflation to be the shifting reference point of purchasing power per unit of currency. So without an increase in pay for the lower class in the U.S., it actually prevents prices from moving up.
- mixmastamyk 6y ago
  There’s been plenty of inflation. Lunch and rent have doubled here in ~15 years. Education and healthcare are up much more than that. Sure consumer items get cheaper but it is small consolation.
- rrrrrrrrrrrryan 6y ago
  Giant megacorps that pay their workers minimum wage (i.e. Walmart) have done a tremendous amount to put downward pressure on inflation as well.
ghouse 6y ago
We may be conflating "asset inflation" with "consumer product inflation" But for the later, it will come from the reduced value of the dollar. Which (for more than a decade) has been muted by the reserve currency status of the USD.
j7ake 6y ago
The inflation rate is calculated by tracking price of a specific set of goods. The fed tracks this number and aims to set it at about 2%. So what happens is the inflation creeps up in everything that is not measured in this basket. For example, the price of homes, college education, and equities have gone up much faster than the 2% target. It is another one of those cases of Goodharts law. The way they are measuring inflation is no longer capturing the drop in the value of money.
take_a_breath 6y ago
Seems like we are seeing inflation, it’s just in assets not commodities. How else do you explain the current P/E ratio of the stock market?
- mrep 6y ago
  At 20.53 [0] why does it need explaining? It's been higher many times in the past. [0]: https://www.multpl.com/s-p-500-pe-ratio https://www.multpl.com/s-p-500-pe-ratio
  - take_a_breath 6y ago
    Your chart shows the median P/E of 14.82. That would make us 38.5% over priced based on historical standards. Meanwhile, we just had the most significant unemployment event in our country’s history. If you believe economic fundamentals support historically-high valuations, I think it does deserve an explanation. Forward P/E at highest levels in 18 years: https://markets.businessinsider.com/news/stocks/stock-market-trading-highest-valuation-years-pe-ratio-earnings-unemployment-2020-5-1029197856?op=1 https://markets.businessinsider.com/news/stocks/stock-market...
treyfitty 6y ago
Asset price inflation and real inflation are two very different things. Asset price inflation has undoubtedly increased.
jlbnjmn 6y ago
Inflation happens when the dollar is no longer the global reserve currency. That may not be for awhile, but the more debt the government takes on the more likely it is to happen. (The US government can literally print money to pay debt, but that devalues the dollar, aka inflation.) How long will the USA be the most trusted economy?

dd36 6y ago

Fed’s ever expanding balance sheet. It failed to reduce its size prior to the pandemic.

dodobirdlord 6y ago
Seems like in the long run the Fed will end up owning the whole market. It gets to invest with unlimited money in the most depressed assets every time there’s a downturn, and as an institution it’s horizon is forever. It seems like this ought to be a bizarre funding mechanism for the treasury. Perhaps the federal government should sell downturn insurance on assets. After all, it’s basically like the Fed is pretending it sold puts on much of the market when it in fact did not. Maybe the Fed should actually sell puts?

skohan 6y ago

I can't claim to be an expert in economics or finance, and I don't know if inflation per se is a threat at the moment, but I will say the current state of the economy doesn't make sense to me. If it really is the case that 30+ million Americans can be out of a job and the stock market reaction is to continue climbing on the assumption that the fed will continue to grow the balance sheet, doesn't that point to a fundamental decoupling between the value of the currency and real-world value? I mean are we really going to live in a society where the government pays companies so that their stock price can remain stable, even when demand for their products no longer exists because their customers are all out of work? It seems like a paper economy which essentially only serves to bail out investors. I'm not sure what the catalyst would be for that kind of a system to come crashing down, but I just don't understand how it could be sustainable.

josho 6y ago
The catalyst to a crash is when those 30 million people take to the streets and demand change. Unfortunately media has everyone misdirected to worry about guns/race instead of demanding the government serve the people instead of corporations.
- kitotik 6y ago
  It took a full two years after the 2008 transfer of taxpayer money to financial institutions for the Occupy movement to get going. It’s possible that the scale of the current corporate welfare program + health pandemic + inaccessible healthcare + unemployment leads to faster and larger response from the plebes.
- fragmede 6y ago
  The media is also doing a poor job covering possible/impending/discussions of rent strikes. The revolution, as they say, will not be televised.
_curious_ 6y ago
"I mean are we really going to live in a society where the government pays companies so that their stock price can remain stable, even when demand for their products no longer exists because their customers are all out of work? It seems like a paper economy which essentially only serves to bail out investors." To the last sentence, yes, a totally blatant wealth transfer scheme. Anecdotally, I think many of those suddenly "engaging" are just playing into the game - getting their dopamine and ego fix by showing dumb gains on nominal investments thinking that they too are wealthy and smarter than the next one :/ Of greater long term concern though is the decreasing transparency into which companies are benefiting disproportionately from government intervention. These fed manipulations will lead to an even more dysfunctional marketplace down the road because once the water is tainted - we don't know how much, where, or with what exactly. It's impossible to go back to safe and clean drinking water again from this source. Historically, the real value of the "stock market" has been that of a place for informed decisions based on consistent measurement and analysis of commonly reported variables regarding the well being of corporations. There's a reason a public company must abide by certain rules and regulations to go and remain public...it's so that investors can expect a certain amount of disclosure to actually make decisions on whether or not to invest. While public disclosure requirements have not changed lately (to my knowledge) - there is no way for the feds bailout factors to be decoupled from earnings. I would argue that aspect, which represents a huge value proposition of the "stock market" to investors of all sizes near and far, is quickly disappearing. I'm not sure what this means for the future.

the_gastropod 6y ago

I’ve got a bit of a hypothesis about why we’ve seen a decade+ of near-0 rates with virtually no inflation. It’s all about the wealth disparity. The wealthiest already have huge amounts of money saved and invested in the markets. Adding to the money supply primarily benefits those who already have the most money. So something like 80% of new money winds up in the hands of the top 1%, who save it, consume no extra (aside from stocks), and have no impact on the basket of goods. I think this also partly explains the high P/E ratios we’ve seen over the past decade+. Nothing in economics is that simple. But this feels reasonable to me. Anything I’m missing?

leetcrew 6y ago
the basic cause of inflation is more money chasing the same amount of real goods/services. so it stands to reason that which goods/services inflate depend on who is getting the new dollars. of course, things are always more complicated in macro.
xikrib 6y ago
I'm by no means an economist, but I think the same. I understand inflation to be the shifting reference point of purchasing power per unit of currency. So without an increase in pay for the lower class in the U.S., it actually prevents prices from moving up.
mixmastamyk 6y ago
There’s been plenty of inflation. Lunch and rent have doubled here in ~15 years. Education and healthcare are up much more than that. Sure consumer items get cheaper but it is small consolation.
rrrrrrrrrrrryan 6y ago
Giant megacorps that pay their workers minimum wage (i.e. Walmart) have done a tremendous amount to put downward pressure on inflation as well.

ghouse 6y ago

We may be conflating "asset inflation" with "consumer product inflation" But for the later, it will come from the reduced value of the dollar. Which (for more than a decade) has been muted by the reserve currency status of the USD.

j7ake 6y ago

The inflation rate is calculated by tracking price of a specific set of goods. The fed tracks this number and aims to set it at about 2%. So what happens is the inflation creeps up in everything that is not measured in this basket. For example, the price of homes, college education, and equities have gone up much faster than the 2% target. It is another one of those cases of Goodharts law. The way they are measuring inflation is no longer capturing the drop in the value of money.

take_a_breath 6y ago

Seems like we are seeing inflation, it’s just in assets not commodities. How else do you explain the current P/E ratio of the stock market?

mrep 6y ago
At 20.53 [0] why does it need explaining? It's been higher many times in the past. [0]: https://www.multpl.com/s-p-500-pe-ratio https://www.multpl.com/s-p-500-pe-ratio
- take_a_breath 6y ago
  Your chart shows the median P/E of 14.82. That would make us 38.5% over priced based on historical standards. Meanwhile, we just had the most significant unemployment event in our country’s history. If you believe economic fundamentals support historically-high valuations, I think it does deserve an explanation. Forward P/E at highest levels in 18 years: https://markets.businessinsider.com/news/stocks/stock-market-trading-highest-valuation-years-pe-ratio-earnings-unemployment-2020-5-1029197856?op=1 https://markets.businessinsider.com/news/stocks/stock-market...

treyfitty 6y ago

Asset price inflation and real inflation are two very different things. Asset price inflation has undoubtedly increased.

jlbnjmn 6y ago

Inflation happens when the dollar is no longer the global reserve currency. That may not be for awhile, but the more debt the government takes on the more likely it is to happen. (The US government can literally print money to pay debt, but that devalues the dollar, aka inflation.) How long will the USA be the most trusted economy?