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What's the logic behind economic activity leading to inflation? That seems very counterintuitive. From that equation, if you were to look at the extreme and pri

What's the logic behind economic activity leading to inflation? That seems very counterintuitive. From that equation, if you were to look at the extreme and print a ton of money and have zero usage there would no inflation. I would think the opposite would be true.

deleted 6y ago
[deleted]
throw0101a 6y ago
One person's spending is another person's income. The more economic activity there is, the more people feel confident about their future, the more they spend. They may at some point become "too confident" and start feeling that the 'party' may never end. So they go out and spend more and more: on new clothes, on renovations, or second (or third) houses, on new cars, boats, etc. However, there's only so much capacity for (say) manufacturing: only so many cars can be built, and if you really want one, then you'll be will to pay $40K to get the new shiny instead of trying to haggle down to $37K. There's only so many housing builders and lumber that is available: and if you want more square footage, they'll be setting the price that you have to pay. I'm not sure how old you are, but in the 2006-2007 timeframe there was a lot of "irrational exuberance" before people over-extended themselves. The movie The Big Short is an entertaining and fairly accurate take.
imtringued 6y ago
Inflation happens when demand outstrips supply. This not only applies to consumer goods but also to labor. If there are more jobs than workers those workers will pick the highest paying jobs. That's inflation. Here, I'll give you a simplified example. There is this game called prosperous universe. You can buy FE (Iron) to make BBH (construction material). People need BBH to build factories or farms or whatever. When everyone is producing BBH the demand for FE goes up. There is only a limited amount of FE on the market. You are buying the cheapest FE first. Eventually all the cheap FE is gone and only the expensive FE remains. The price of FE has risen. That's inflation. How do other players respond? They start investing into production of FE because there is a very clear profit motive. Every factory you build in the game needs workers. By building factories you directly decrease unemployment. I can also give you the opposite example. There is a high end facility that creates ES (Einsteinium) but there is very little demand for it. You run the factory for a month and start stockpiling a months worth of production. Then you demolish the factory because you don't need it anymore. Those workers are now unemployed. You have to consider that unemployment has a greater impact on your finances than the inability to make money off of a checking/savings account. Actually, the interest rates are generally high enough that your returns cover inflation so in practice you are not losing anything.
ahepp 6y ago
> if you were to look at the extreme and print a ton of money and have zero usage there would no inflation That sounds correct, under the assumptions of classical economics. Inflation is the cost of things going up. Classically, price is considered an equilibrium of supply and demand. If I print money, but don't use it to demand goods, why would the price of goods change? Reality is more complex than classical economics (and I should note, I'm not an economist). Expectations of inflation (due to say, seeing a giant pile of cash coming off the printing press) can trigger prices to rise. But hopefully that helps to explain why it's generally accepted that velocity plays an important role in inflation, not simply supply of money.

deleted 6y ago

[deleted]

throw0101a 6y ago

One person's spending is another person's income. The more economic activity there is, the more people feel confident about their future, the more they spend. They may at some point become "too confident" and start feeling that the 'party' may never end. So they go out and spend more and more: on new clothes, on renovations, or second (or third) houses, on new cars, boats, etc. However, there's only so much capacity for (say) manufacturing: only so many cars can be built, and if you really want one, then you'll be will to pay $40K to get the new shiny instead of trying to haggle down to $37K. There's only so many housing builders and lumber that is available: and if you want more square footage, they'll be setting the price that you have to pay. I'm not sure how old you are, but in the 2006-2007 timeframe there was a lot of "irrational exuberance" before people over-extended themselves. The movie The Big Short is an entertaining and fairly accurate take.

imtringued 6y ago

Inflation happens when demand outstrips supply. This not only applies to consumer goods but also to labor. If there are more jobs than workers those workers will pick the highest paying jobs. That's inflation. Here, I'll give you a simplified example. There is this game called prosperous universe. You can buy FE (Iron) to make BBH (construction material). People need BBH to build factories or farms or whatever. When everyone is producing BBH the demand for FE goes up. There is only a limited amount of FE on the market. You are buying the cheapest FE first. Eventually all the cheap FE is gone and only the expensive FE remains. The price of FE has risen. That's inflation. How do other players respond? They start investing into production of FE because there is a very clear profit motive. Every factory you build in the game needs workers. By building factories you directly decrease unemployment. I can also give you the opposite example. There is a high end facility that creates ES (Einsteinium) but there is very little demand for it. You run the factory for a month and start stockpiling a months worth of production. Then you demolish the factory because you don't need it anymore. Those workers are now unemployed. You have to consider that unemployment has a greater impact on your finances than the inability to make money off of a checking/savings account. Actually, the interest rates are generally high enough that your returns cover inflation so in practice you are not losing anything.

ahepp 6y ago

> if you were to look at the extreme and print a ton of money and have zero usage there would no inflation That sounds correct, under the assumptions of classical economics. Inflation is the cost of things going up. Classically, price is considered an equilibrium of supply and demand. If I print money, but don't use it to demand goods, why would the price of goods change? Reality is more complex than classical economics (and I should note, I'm not an economist). Expectations of inflation (due to say, seeing a giant pile of cash coming off the printing press) can trigger prices to rise. But hopefully that helps to explain why it's generally accepted that velocity plays an important role in inflation, not simply supply of money.