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What I learned in high school economics is that printing more money means greater inflation. Why isn’t this a problem? Or rather why aren’t people more scared a

by osy 6y ago

What I learned in high school economics is that printing more money means greater inflation. Why isn’t this a problem? Or rather why aren’t people more scared about it being a problem?

ipsum2 6y ago
Planet Money covers it pretty well, if you can ignore the fluff: https://www.npr.org/transcripts/886036317 https://www.npr.org/transcripts/886036317 tl;dr: people not buying things = deflation, but giving everyone money = inflation. How this balances out is uncertain.
crooked-v 6y ago
$600/week/person over any reasonable period is hardly enough to trigger serious inflation worries in the short or medium term. Even if you apply that to everyone in the US, you're looking at $180 billion a week, against a GDP of $20.54 trillion.
- pansa2 6y ago
  $180-billion per week is $9-trillion per year - it’s almost half of GDP.
- endogui 6y ago
  $180B per week would be $9.4T per year. Almost half of the economy in stimulus seems likely to be quite inflationary.
- mulmen 6y ago
  You’re comparing weekly stimulus numbers to annual GDP numbers. If you compare the stimulus payments in similar annualized terms it is nearly half of GDP. $9.36 Trillion. Having said that, the relevance of GDP in a conversation about inflation is unclear to me when GDP does not account for inflation.
  - treyfitty 6y ago
    GDP is often quoted as Real GDP using chained prices. So it does account for inflation.
    - mulmen 6y ago
      Thanks I clicked through the Wikipedia reference and the IMF numbers quoted do appear to be Real GDP.
viburnum 6y ago
High school economics was wrong, inflation is way more complicated than that. Productivity, credit flows, balance of payments, financial flows, investment, wages, inequality, capital/labor bargaining, all of that matters too.
- jkhdigital 6y ago
  Eurodollars. The single most important factor that nobody ever talks about is that much of the printed money actually flows out of the country.
deleted 6y ago
[deleted]
amiga_500 6y ago
Private banks create money and that is being pulled back faster than the central bank can try to inject it.
- jkhdigital 6y ago
  Exactly, private banks create money by issuing debt and if consumers are using the printed money to pay down debt then no inflation (just a transfer of debt from private balance sheets to the government).
roymurdock 6y ago
this topic will probably get flagged, but if you're serious about learning about inflation look up money supply - m0, m1, m2, m3, m4, velocity of money figure out how federal reserve "printing money" (what does that even mean) affects the different buckets look up difference between how reserve requirements affect money supply vs "helicopter money" look up the federal reserve mandate to target 2% inflation while keeping unemployment as low as possible figure out how the federal reserve balance sheet works (eg what happens if debt the federal reserve owns defaults) and you'll be much closer to understanding our current economic situation than you were in high school ;)
- deleted 6y ago
  [deleted]
- jkhdigital 6y ago
  Technically the Fed cannot own “impaired” debt; it can only buy US government securities or government-backed securities like Fannie Mae mortgages. They are starting to push the bounds of this constraint though, by (for example) making arrangements with the Treasury to hold corporate bonds where the Treasury has to take all the write-downs if the loans go bad.
- repsilat 6y ago
  My rough understanding of some key mechanics: - Treasury makes bonds and sells them into the market. The market impact of this tends to increase interest rates (cost of bonds relative to dollars) a bit. - The government uses the money raised to buy goods and services. This causes the price of goods and services (relative to dollars) to go up a bit. - The Fed makes dollars and buys bonds. This pushes interest rates down and is roughly the inverse of step 1. Netting the Fed and Treasury actions (which people never do, mostly because they vary independently according to independent policy), the effect of recent fiscal and monetary policy is "the government" making cash and buying things with it (as well as giving it out to people who need it.) I guess it's the Fed's job to worry about price stability, but the above does make me think that the fiscal policy is just as relevant to inflation -- if govt spending as a proportion of the economy changes, it gets easier/harder for others to buy things. I guess interest rates mostly change behaviour, and have a less direct (though maybe no less real?) impact on scarcity.
joe_the_user 6y ago
"Inflationary spirals" - as existed in the US in the 1970s, are caused by a wage-price hike cycle. Prices go up, workers demand more money, prices go up more. The US "fixed" that problem by squashing the ability of workers to demand more money - starting with Reagan in the 80s and extending all the way 'till now. The problem is that increased prices just meant a lower standard of living and more people more precarious. By the time Covid hit, a large precentage of people were living pay check to paycheck. 28% of renters didn't paid rent in July and 30% won't be able to this month. That printed money has essentially had devastating consequences.
- 8note 6y ago
  Isn't that a consequence of the lowering standard of living, not the printing money?
  - joe_the_user 6y ago
    You have a point. The main thing is they all go together. Tracing chains of causation is in economics is the hardest and least useful process of analysis.
- refurb 6y ago
  "The US "fixed" that problem by squashing the ability of workers to demand more money" That seems like an incredibly simplified and wrong explanation. Monetary policy changed drastically in 1979 in order to get inflation under control.
  - bleepblorp 6y ago
    Given that US inflation-corrected wages have stagnated since the early 1970s, this explanation is substantively accurate. Sources: https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-workers-real-wages-have-barely-budged-for-decades/ https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us... https://www.epi.org/publication/charting-wage-stagnation/ https://www.epi.org/publication/charting-wage-stagnation/ https://fas.org/sgp/crs/misc/R45090.pdf https://fas.org/sgp/crs/misc/R45090.pdf
contravariant 6y ago
Not sure if the U.S. is printing more money, they might simply be incurring more debt. Regardless, inflation is complicated, even if you wanted to you might not be able to cause it, at least not in a controlled manner.
AQuantized 6y ago
I think there has been a reasonably large amount of inflation in terms of the real value of many assets at a national level. It has been counterbalanced in part by the deflationary pressure of the US being the global reserve currency that everyone wants to have their money stored in during trying times, and reduced spending. However, I think that national inflation often doesn't give a complete picture, and the more significant effects of inflation are often localized closer to the money. A lot of the insane COL in the Bay Area is an example of this. Exactly where is closest to the money in this instance is difficult to say.
cik2e 6y ago
Inflation is an increase in (printed) money chasing the same amount of goods and services. But consumer spending has dropped despite the stimulus. The lockdown has eliminated many options for discretionary spending and people have been dropping their extra unemployment money into paying down credit cards instead of trying to buy more stuff on Amazon. Basically, the economy is down despite the stimulus. To have inflation, we would need to see a rise in demand from free money and that’s not what’s happening.
- bleepblorp 6y ago
  Economics recognizes two types of inflation: cost-push inflation and demand-pull inflation. Demand-pull inflation follows the process you described, namely prices rise because too much money is pursuing too few goods. The other type of inflation, cost-push, happens when the cost of goods rises independent of demand. Abuse of monopoly power can cause cost-push inflation (hello, business software pricing) but so can increased costs of labor. On balance, cost-push inflation is a more probable outcome of the pandemic. It's physically harder to Do Stuff because workers need to stay further apart and because many will get sick and be unable to work. This will drive up prices to an extent, but price rises will be constrained by slack demand caused by reduced employment.
jkhdigital 6y ago
Shadow banking system. US dollars are now used to fund overseas banks through the Eurodollar system, and it has a virtually unlimited capacity to siphon up excess dollars without any noticeable inflation in the US. Mainly because those dollars can fund development in countries with cheap labor that actually lowers the price of our consumer goods (since we don’t make them here anyway). Just to drive the point home, observe that goods and services which can’t be produced elsewhere have experienced massive inflation: healthcare, housing, education.
- anm89 6y ago
  One really interesting thing I had never though about is that eurodollar lending increases the money supply in ways that are potentially totally opaque to the fed or treasury meaning we don't really know how many dollars exist and this unknown amount is very likely substantial. There is a whole fascinating YouTube series on the eurodollar that goes extremely in depth: https://m.youtube.com/watch?v=mVzKdqjtyhw https://m.youtube.com/watch?v=mVzKdqjtyhw
  - jkhdigital 6y ago
    Yeah Jeff Snider of Alhambra Investments knows his stuff. If you prefer text you can read all the same stuff at his “Eurodollar University”: https://alhambrapartners.com/2019/04/22/eurodollar-university-the-overview/ https://alhambrapartners.com/2019/04/22/eurodollar-universit...

by osy 6y ago

What I learned in high school economics is that printing more money means greater inflation. Why isn’t this a problem? Or rather why aren’t people more scared about it being a problem?

ipsum2 6y ago

Planet Money covers it pretty well, if you can ignore the fluff: https://www.npr.org/transcripts/886036317 https://www.npr.org/transcripts/886036317 tl;dr: people not buying things = deflation, but giving everyone money = inflation. How this balances out is uncertain.

crooked-v 6y ago

$600/week/person over any reasonable period is hardly enough to trigger serious inflation worries in the short or medium term. Even if you apply that to everyone in the US, you're looking at $180 billion a week, against a GDP of $20.54 trillion.

pansa2 6y ago
$180-billion per week is $9-trillion per year - it’s almost half of GDP.
endogui 6y ago
$180B per week would be $9.4T per year. Almost half of the economy in stimulus seems likely to be quite inflationary.
mulmen 6y ago
You’re comparing weekly stimulus numbers to annual GDP numbers. If you compare the stimulus payments in similar annualized terms it is nearly half of GDP. $9.36 Trillion. Having said that, the relevance of GDP in a conversation about inflation is unclear to me when GDP does not account for inflation.
- treyfitty 6y ago
  GDP is often quoted as Real GDP using chained prices. So it does account for inflation.
  - mulmen 6y ago
    Thanks I clicked through the Wikipedia reference and the IMF numbers quoted do appear to be Real GDP.

viburnum 6y ago

High school economics was wrong, inflation is way more complicated than that. Productivity, credit flows, balance of payments, financial flows, investment, wages, inequality, capital/labor bargaining, all of that matters too.

jkhdigital 6y ago
Eurodollars. The single most important factor that nobody ever talks about is that much of the printed money actually flows out of the country.

deleted 6y ago

[deleted]

amiga_500 6y ago

Private banks create money and that is being pulled back faster than the central bank can try to inject it.

jkhdigital 6y ago
Exactly, private banks create money by issuing debt and if consumers are using the printed money to pay down debt then no inflation (just a transfer of debt from private balance sheets to the government).

roymurdock 6y ago

this topic will probably get flagged, but if you're serious about learning about inflation look up money supply - m0, m1, m2, m3, m4, velocity of money figure out how federal reserve "printing money" (what does that even mean) affects the different buckets look up difference between how reserve requirements affect money supply vs "helicopter money" look up the federal reserve mandate to target 2% inflation while keeping unemployment as low as possible figure out how the federal reserve balance sheet works (eg what happens if debt the federal reserve owns defaults) and you'll be much closer to understanding our current economic situation than you were in high school ;)

deleted 6y ago
[deleted]
jkhdigital 6y ago
Technically the Fed cannot own “impaired” debt; it can only buy US government securities or government-backed securities like Fannie Mae mortgages. They are starting to push the bounds of this constraint though, by (for example) making arrangements with the Treasury to hold corporate bonds where the Treasury has to take all the write-downs if the loans go bad.
repsilat 6y ago
My rough understanding of some key mechanics: - Treasury makes bonds and sells them into the market. The market impact of this tends to increase interest rates (cost of bonds relative to dollars) a bit. - The government uses the money raised to buy goods and services. This causes the price of goods and services (relative to dollars) to go up a bit. - The Fed makes dollars and buys bonds. This pushes interest rates down and is roughly the inverse of step 1. Netting the Fed and Treasury actions (which people never do, mostly because they vary independently according to independent policy), the effect of recent fiscal and monetary policy is "the government" making cash and buying things with it (as well as giving it out to people who need it.) I guess it's the Fed's job to worry about price stability, but the above does make me think that the fiscal policy is just as relevant to inflation -- if govt spending as a proportion of the economy changes, it gets easier/harder for others to buy things. I guess interest rates mostly change behaviour, and have a less direct (though maybe no less real?) impact on scarcity.

joe_the_user 6y ago

"Inflationary spirals" - as existed in the US in the 1970s, are caused by a wage-price hike cycle. Prices go up, workers demand more money, prices go up more. The US "fixed" that problem by squashing the ability of workers to demand more money - starting with Reagan in the 80s and extending all the way 'till now. The problem is that increased prices just meant a lower standard of living and more people more precarious. By the time Covid hit, a large precentage of people were living pay check to paycheck. 28% of renters didn't paid rent in July and 30% won't be able to this month. That printed money has essentially had devastating consequences.

8note 6y ago
Isn't that a consequence of the lowering standard of living, not the printing money?
- joe_the_user 6y ago
  You have a point. The main thing is they all go together. Tracing chains of causation is in economics is the hardest and least useful process of analysis.
refurb 6y ago
"The US "fixed" that problem by squashing the ability of workers to demand more money" That seems like an incredibly simplified and wrong explanation. Monetary policy changed drastically in 1979 in order to get inflation under control.
- bleepblorp 6y ago
  Given that US inflation-corrected wages have stagnated since the early 1970s, this explanation is substantively accurate. Sources: https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-workers-real-wages-have-barely-budged-for-decades/ https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us... https://www.epi.org/publication/charting-wage-stagnation/ https://www.epi.org/publication/charting-wage-stagnation/ https://fas.org/sgp/crs/misc/R45090.pdf https://fas.org/sgp/crs/misc/R45090.pdf

contravariant 6y ago

Not sure if the U.S. is printing more money, they might simply be incurring more debt. Regardless, inflation is complicated, even if you wanted to you might not be able to cause it, at least not in a controlled manner.

AQuantized 6y ago

I think there has been a reasonably large amount of inflation in terms of the real value of many assets at a national level. It has been counterbalanced in part by the deflationary pressure of the US being the global reserve currency that everyone wants to have their money stored in during trying times, and reduced spending. However, I think that national inflation often doesn't give a complete picture, and the more significant effects of inflation are often localized closer to the money. A lot of the insane COL in the Bay Area is an example of this. Exactly where is closest to the money in this instance is difficult to say.

cik2e 6y ago

Inflation is an increase in (printed) money chasing the same amount of goods and services. But consumer spending has dropped despite the stimulus. The lockdown has eliminated many options for discretionary spending and people have been dropping their extra unemployment money into paying down credit cards instead of trying to buy more stuff on Amazon. Basically, the economy is down despite the stimulus. To have inflation, we would need to see a rise in demand from free money and that’s not what’s happening.

bleepblorp 6y ago
Economics recognizes two types of inflation: cost-push inflation and demand-pull inflation. Demand-pull inflation follows the process you described, namely prices rise because too much money is pursuing too few goods. The other type of inflation, cost-push, happens when the cost of goods rises independent of demand. Abuse of monopoly power can cause cost-push inflation (hello, business software pricing) but so can increased costs of labor. On balance, cost-push inflation is a more probable outcome of the pandemic. It's physically harder to Do Stuff because workers need to stay further apart and because many will get sick and be unable to work. This will drive up prices to an extent, but price rises will be constrained by slack demand caused by reduced employment.

jkhdigital 6y ago

Shadow banking system. US dollars are now used to fund overseas banks through the Eurodollar system, and it has a virtually unlimited capacity to siphon up excess dollars without any noticeable inflation in the US. Mainly because those dollars can fund development in countries with cheap labor that actually lowers the price of our consumer goods (since we don’t make them here anyway). Just to drive the point home, observe that goods and services which can’t be produced elsewhere have experienced massive inflation: healthcare, housing, education.

anm89 6y ago
One really interesting thing I had never though about is that eurodollar lending increases the money supply in ways that are potentially totally opaque to the fed or treasury meaning we don't really know how many dollars exist and this unknown amount is very likely substantial. There is a whole fascinating YouTube series on the eurodollar that goes extremely in depth: https://m.youtube.com/watch?v=mVzKdqjtyhw https://m.youtube.com/watch?v=mVzKdqjtyhw
- jkhdigital 6y ago
  Yeah Jeff Snider of Alhambra Investments knows his stuff. If you prefer text you can read all the same stuff at his “Eurodollar University”: https://alhambrapartners.com/2019/04/22/eurodollar-university-the-overview/ https://alhambrapartners.com/2019/04/22/eurodollar-universit...