6 ms·

A lot of people say there’s no such thing as asset inflation [1] and I find that very confusing. Hypothetically, if we add $1T to the economy and everyone inves

by choxi 6y ago

A lot of people say there’s no such thing as asset inflation [1] and I find that very confusing. Hypothetically, if we add $1T to the economy and everyone invests it into stocks, is that not inflation? I guess economists say it’s not, but it feels like a pedantic argument about assets being “overpriced” not “inflated”. I think our current method of measuring inflation against the CPI is nonsense, the basic premise that you can assume the price of e.g. milk is stable doesn’t even make sense. There’s changes in manufacturing, quality, brands, and market demand that aren't accounted for in the CPI. Measuring inflation (or whatever you want to call the difference between an asset's nominal value and it's intrinsic value) is still useful, but the current method of pegging everything against the bag-of-goods in the CPI seems like an overly simplistic model. This approach of normalizing asset prices against the M1 supply seems more reasonable to me. The intrinsic dollar value of an asset is its value relative to how many dollars there are, not relative to whatever the price of milk is. 1. http://noahpinionblog.blogspot.com/2013/07/asset-price-inflation-is-not-inflation.html http://noahpinionblog.blogspot.com/2013/07/asset-price-infla... Edit: I am clearly not an economist, please see some of the informative comments below. In particular, it sounds like the CPI does account for some complexities, asset inflation is more commonly supported than I thought, but normalizing by M1 might not make any more sense than CPI.

kgwgk 6y ago
> There’s changes in manufacturing, quality, brands, and market demand that aren't accounted for in the CPI. https://www.bls.gov/cpi/quality-adjustment/questions-and-answers.htm https://www.bls.gov/cpi/quality-adjustment/questions-and-ans...
- choxi 6y ago
  Interesting, thanks I didn't know about this. I'm still struggling with "If we add $1T to the economy and TSLA goes up 500%, how do we calculate the actual change in TSLA's intrinsic value?" I still don't see how the CPI is factoring this in, do you?
  - dragonwriter 6y ago
    “intrinsic value” isn't a thing. The notional grounding of value of a stock is the current value of the future dividends plus the value that will be returned based on assets at dissolution. > I still don't see how the CPI is factoring this in, do you? Because value = acceptable opportunity cost = foregone utility And CPI measures (in closest approximation of any measure) changes in the prices of goods that provide direct rather than instrumental utility. Presuming monetary expansion affects prices but not, in first order effects, production possibilities and relative worth of non-money goods, a consumer price deflator is the most sensible kind of value deflator (one might still contest details of the construction of the CPI, of course.)
addicted 6y ago
If you wanna redefine inflation away from economists mean to a more colloquial meaning of the word then sure, that’s inflation. But it also doesn’t tell you anything.
- Geee 6y ago
  How doesn't it tell anything? To me it tells that the rich are getting richer, and the poor are getting poorer. It's a scam basically.
  - ta988 6y ago
    Everybody knows the captain lied.
CyberRabbi 6y ago
Of course there’s asset inflation. Inflation is not uniformly distributed across all industries and markets, and sometimes it takes a very long time for imbalances to dissipate. It’s similar to how certain industries can crash while others can boom at the same time. A non-uniform economy is such a basic and intuitive concept, it’s hard to believe it needs to be argued to the average layman.
marricks 6y ago
The general public cares a lot more about the price of bread than the price of Google's stock, so I'd say economists are reasonable on this one. If and when that money injection moves around to affect the price of bread will be quite important though.
- xiphias2 6y ago
  My friends mostly care about house / rental prices, not bread or stocks. Rent compared to their salaries is the main thing that they look at when they get a job offer.
  - Ericson2314 6y ago
    The fact that housing is more like stocks than bread is what's fucked up.
    - ac29 6y ago
      Everyone rich or poor can only eat so much bread, but you can always buy more stock or real estate. Supply is harder to increase as well.
      - Ericson2314 6y ago
        > Everyone rich or poor can only eat so much bread True, and that's great! > but you can always buy more stock or real estate. There is nothing innate about this state of affairs. What is "ownernship"? How many acres of land and I keep to myself with my own shotgun? Surely that's bounded too? > Supply is harder to increase as well. https://en.wikipedia.org/wiki/Floor_area_ratio https://en.wikipedia.org/wiki/Floor_area_ratio Every person deserves some amount of floor space near other people's floor space. They do not so deserve private land area. Land area is held in common in parks, whose size, beauty, and other factors vary inversely with their accessibility. We can vary the park distribution and the vacation distribution to do nice things with the expected nature rejuvenation. This is completely separate from housing.
      - 6y ago
zz865 6y ago
> A lot of people say “there’s no such thing as asset inflation” [1] and I find that very confusing. I think most people agree there is a lot of asset inflation. Your link doesn't match your quote either.
- choxi 6y ago
  You're right, I meant the quote as a paraphrase of what I hear often but it's misleading since that exact phrase is not in the article. I removed the quote.
- dragonwriter 6y ago
  > I think most people agree there is a lot of asset inflation. Yeah, “there is no asset inflation” doesn't seem to actually be a common belief. “Asset inflation is different in kind than consumer price inflation and not what normal people discussing inflation care about” is more common. I'm not sure why monetarily-driven asset inflation would be an issue at all, unless one expected the driving monetary force to not merely be removed (returning to a more typical long-term pattern of asset price changes), but undone (such that the current overall lift above the prior long-term trend would be unwound before returning to the prior long-term slope.) Producing a monetarily-driven transient bubble. It's not implausible that that could occur under some circumstances, but I'm not aware of any evidence that there would be anyway of distinguishing circumstances that might indicate it. Certainly, there's no obvious reason to assume such a monetary bubble is the normal case with monetarily-driven asset inflation.
  - zz865 6y ago
    > I'm not sure why monetarily-driven asset inflation would be an issue at all, Its been one of the main causes in inequality and unaffordable house prices so is very important. It also makes the economy vulnerable to big drops in prices which could/will happen.
dragonwriter 6y ago
> I think our current method of measuring inflation against the CPI is nonsense, It's not nonsense for policies that are directly concerned with consumer prices, which most that the CPI (or, more precisely, any of the CPIs, of which there are several) is used for do. We have lots of other inflation measures (, industry specific PPIs, for instance) for other purposes. > Measuring inflation (or whatever you want to call the difference between an asset's nominal value and it's intrinsic value) is still useful That's not what inflation is supposed to measure, because that's a nonsense thing to try to measure, because there is no such thing as intrinsic value. > but the current method of pegging everything against the bag-of-goods in the CPI seems like an overly simplistic model. How? Consumer prices are final prices. Everything else is instrumental to producing final goods and services. > The intrinsic dollar value of an asset is its value relative to how many dollars there are No it's not, and even if it was, that wouldn't make M1 a sensible measure. Why not the actual number of actual dollars there are: monetary base. Or something that better captures the number of effective dollars, M2.
- pieterhg 6y ago
  Added the monetary base (MB) now for you: https://m1chart.com/?m=mb&stock=sp500&time=5%20years https://m1chart.com/?m=mb&stock=sp500&time=5%20years
tylerhou 6y ago
Mainstream economists know that CPI isn't accurate because of changes in demand. So they created other indicators (like chained CPI [0]) to account for changes in the basket of goods. Normalizing against the M1 is an not very meaningful because ignores the fact that the price of a dollar is subject to demand as well. In times of high demand for dollars (like right now), the supply of money (the M1) needs to increase to for the price of a dollar to not rise. In other words, stock prices normalized to the M1 has the same amount of meaning as stock prices normalized to the number of loaves of bread the country produces, or the number of cars. It's nonsense — you're comparing a price to a metric that only takes into account half of the equation (only supply)! Sidenote: When the price of a dollar rises, that's deflation; when it falls, that's inflation. That's also why "asset price inflation" isn't precise — inflation measures the change in price of a currency, not an asset. Maybe individual assets go up or down in price, but that happens in response to consumer demand shift. The Fed's mandate is to manage inflation, which is affected by changes in aggregate consumer demand. Therefore, Congress delegated it tools to influence consumer demand as a whole, but not tools to shift demand from one asset to another. The phenomenon you're observing is: the Fed's monetary policy helps the US grow, which benefits corporations and increases stock prices. The only way the Fed can prevent that is to... stop the economy from growing by letting our currency deflate? Which sounds bad? I.e. the Fed can't do anything to shift consumer demand, short of causing a recession. TD;DR: If you think stonks are overvalued, then blame Congress, not the Fed. They're the ones who have the power to change that without causing a recession. [0] https://www.brookings.edu/blog/up-front/2017/12/07/the-hutchins-center-explains-the-chained-cpi/ https://www.brookings.edu/blog/up-front/2017/12/07/the-hutch...
- mawise 6y ago
  > Normalizing against the M1 is an not very meaningful because ignores the fact that the price of a dollar is subject to demand as well. I was thinking exactly this. Is there any reasonable measure economists use for the demand for dollars? Other than I suppose inferring it from CPI and M1...
- alexpetralia 6y ago
  Can you expand on the "high demand for dollars"? Is this from foreign investors in the form of FDI? Do you mean domestic investors (in which case I'd ask if borrowers and stock issuers are really demanding dollars, as opposed to merely accepting supplied dollars at very cheap rates)? Edit: According to this link, it would appear the foreign demand for dollars has declined? https://www.marketwatch.com/investing/index/dxy https://www.marketwatch.com/investing/index/dxy
siculars 6y ago
I think a WSJ article would call this "multiple expansion." I lost a lot of coins betting against the market recovery going into the summer of 2020. Because printing free money must have consequences, yes? Turns out I could not have been more wrong. Turns out, all the free money printing around the world has found its way into other assets. Namely, the US Equity markets and BTC.
- mguerville 6y ago
  Same, I got beat up on my bearish positions, but I see it as expensive insurance that I took in case my bullish exposure (job, home, 401k,etc) so I tell myself I am happy the metaphorical house didn’t burn down even though I bought a lot of insurance in case it would
conanbatt 6y ago
The standard definition of inflation is the general increase of prices. If only a subset of items increase in price, it's not really inflation. It is tempting to say that you can have asset inflation while other assets deflate, but it's not consistent with the general topic of inflation that implies the currency gets devalued. If the government said that it would collect a special tax to all goods but stocks of 1$, it will increase prices of many goods but it will not be inflation. It's a change in the relative price of goods.
- 0x008 6y ago
  But then we would never have inflation because not all goods will increase in price at the same time. It takes time until money trickles down through the system doesn’t it ?
  - conanbatt 6y ago
    Not all goods, but generalized. Stocks are a fraction of spending. High inflation economies have also seen a surge in pricing in housing, relative to other parts of the economy.
    - 0x008 6y ago
      But you said if only a subset of items increases in price it is not inflation by definition?
      - conanbatt 6y ago
        Yes. I'm saying assets have had relative changes of value in high inflation economies, where everything is going up. Say a bag of rice is 100, housing is 1000. In a 100% inflation scenario, it goes to 200 and 2000, but when you look at prices it is 200 and 3000. This points to two effects: inflation + relative price changes. It's an informal argument against the notion that there is "asset inflation" because of dollar printing. Economies with high inflation have seen "asset inflation" even with all prices increasing. It points to a typical change in demand.
lumost 6y ago
I suspect that the CPI is a good measure of how much social unrest an inflationary event is likely to cause in the short term. One may decry the rich getting richer at the expense of everyone else but one is unlikely to start a revolution unless you yourself feel poorer.

by choxi 6y ago

kgwgk 6y ago

> There’s changes in manufacturing, quality, brands, and market demand that aren't accounted for in the CPI. https://www.bls.gov/cpi/quality-adjustment/questions-and-answers.htm https://www.bls.gov/cpi/quality-adjustment/questions-and-ans...

choxi 6y ago
Interesting, thanks I didn't know about this. I'm still struggling with "If we add $1T to the economy and TSLA goes up 500%, how do we calculate the actual change in TSLA's intrinsic value?" I still don't see how the CPI is factoring this in, do you?
- dragonwriter 6y ago
  “intrinsic value” isn't a thing. The notional grounding of value of a stock is the current value of the future dividends plus the value that will be returned based on assets at dissolution. > I still don't see how the CPI is factoring this in, do you? Because value = acceptable opportunity cost = foregone utility And CPI measures (in closest approximation of any measure) changes in the prices of goods that provide direct rather than instrumental utility. Presuming monetary expansion affects prices but not, in first order effects, production possibilities and relative worth of non-money goods, a consumer price deflator is the most sensible kind of value deflator (one might still contest details of the construction of the CPI, of course.)

addicted 6y ago

If you wanna redefine inflation away from economists mean to a more colloquial meaning of the word then sure, that’s inflation. But it also doesn’t tell you anything.

Geee 6y ago
How doesn't it tell anything? To me it tells that the rich are getting richer, and the poor are getting poorer. It's a scam basically.
- ta988 6y ago
  Everybody knows the captain lied.

CyberRabbi 6y ago

Of course there’s asset inflation. Inflation is not uniformly distributed across all industries and markets, and sometimes it takes a very long time for imbalances to dissipate. It’s similar to how certain industries can crash while others can boom at the same time. A non-uniform economy is such a basic and intuitive concept, it’s hard to believe it needs to be argued to the average layman.

marricks 6y ago

The general public cares a lot more about the price of bread than the price of Google's stock, so I'd say economists are reasonable on this one. If and when that money injection moves around to affect the price of bread will be quite important though.

xiphias2 6y ago
My friends mostly care about house / rental prices, not bread or stocks. Rent compared to their salaries is the main thing that they look at when they get a job offer.
- Ericson2314 6y ago
  The fact that housing is more like stocks than bread is what's fucked up.
  - ac29 6y ago
    Everyone rich or poor can only eat so much bread, but you can always buy more stock or real estate. Supply is harder to increase as well.
    - Ericson2314 6y ago
      > Everyone rich or poor can only eat so much bread True, and that's great! > but you can always buy more stock or real estate. There is nothing innate about this state of affairs. What is "ownernship"? How many acres of land and I keep to myself with my own shotgun? Surely that's bounded too? > Supply is harder to increase as well. https://en.wikipedia.org/wiki/Floor_area_ratio https://en.wikipedia.org/wiki/Floor_area_ratio Every person deserves some amount of floor space near other people's floor space. They do not so deserve private land area. Land area is held in common in parks, whose size, beauty, and other factors vary inversely with their accessibility. We can vary the park distribution and the vacation distribution to do nice things with the expected nature rejuvenation. This is completely separate from housing.
    - 6y ago

zz865 6y ago

> A lot of people say “there’s no such thing as asset inflation” [1] and I find that very confusing. I think most people agree there is a lot of asset inflation. Your link doesn't match your quote either.

choxi 6y ago
You're right, I meant the quote as a paraphrase of what I hear often but it's misleading since that exact phrase is not in the article. I removed the quote.
dragonwriter 6y ago
> I think most people agree there is a lot of asset inflation. Yeah, “there is no asset inflation” doesn't seem to actually be a common belief. “Asset inflation is different in kind than consumer price inflation and not what normal people discussing inflation care about” is more common. I'm not sure why monetarily-driven asset inflation would be an issue at all, unless one expected the driving monetary force to not merely be removed (returning to a more typical long-term pattern of asset price changes), but undone (such that the current overall lift above the prior long-term trend would be unwound before returning to the prior long-term slope.) Producing a monetarily-driven transient bubble. It's not implausible that that could occur under some circumstances, but I'm not aware of any evidence that there would be anyway of distinguishing circumstances that might indicate it. Certainly, there's no obvious reason to assume such a monetary bubble is the normal case with monetarily-driven asset inflation.
- zz865 6y ago
  > I'm not sure why monetarily-driven asset inflation would be an issue at all, Its been one of the main causes in inequality and unaffordable house prices so is very important. It also makes the economy vulnerable to big drops in prices which could/will happen.

dragonwriter 6y ago

> I think our current method of measuring inflation against the CPI is nonsense, It's not nonsense for policies that are directly concerned with consumer prices, which most that the CPI (or, more precisely, any of the CPIs, of which there are several) is used for do. We have lots of other inflation measures (, industry specific PPIs, for instance) for other purposes. > Measuring inflation (or whatever you want to call the difference between an asset's nominal value and it's intrinsic value) is still useful That's not what inflation is supposed to measure, because that's a nonsense thing to try to measure, because there is no such thing as intrinsic value. > but the current method of pegging everything against the bag-of-goods in the CPI seems like an overly simplistic model. How? Consumer prices are final prices. Everything else is instrumental to producing final goods and services. > The intrinsic dollar value of an asset is its value relative to how many dollars there are No it's not, and even if it was, that wouldn't make M1 a sensible measure. Why not the actual number of actual dollars there are: monetary base. Or something that better captures the number of effective dollars, M2.

pieterhg 6y ago
Added the monetary base (MB) now for you: https://m1chart.com/?m=mb&stock=sp500&time=5%20years https://m1chart.com/?m=mb&stock=sp500&time=5%20years

tylerhou 6y ago

Mainstream economists know that CPI isn't accurate because of changes in demand. So they created other indicators (like chained CPI [0]) to account for changes in the basket of goods. Normalizing against the M1 is an not very meaningful because ignores the fact that the price of a dollar is subject to demand as well. In times of high demand for dollars (like right now), the supply of money (the M1) needs to increase to for the price of a dollar to not rise. In other words, stock prices normalized to the M1 has the same amount of meaning as stock prices normalized to the number of loaves of bread the country produces, or the number of cars. It's nonsense — you're comparing a price to a metric that only takes into account half of the equation (only supply)! Sidenote: When the price of a dollar rises, that's deflation; when it falls, that's inflation. That's also why "asset price inflation" isn't precise — inflation measures the change in price of a currency, not an asset. Maybe individual assets go up or down in price, but that happens in response to consumer demand shift. The Fed's mandate is to manage inflation, which is affected by changes in aggregate consumer demand. Therefore, Congress delegated it tools to influence consumer demand as a whole, but not tools to shift demand from one asset to another. The phenomenon you're observing is: the Fed's monetary policy helps the US grow, which benefits corporations and increases stock prices. The only way the Fed can prevent that is to... stop the economy from growing by letting our currency deflate? Which sounds bad? I.e. the Fed can't do anything to shift consumer demand, short of causing a recession. TD;DR: If you think stonks are overvalued, then blame Congress, not the Fed. They're the ones who have the power to change that without causing a recession. [0] https://www.brookings.edu/blog/up-front/2017/12/07/the-hutchins-center-explains-the-chained-cpi/ https://www.brookings.edu/blog/up-front/2017/12/07/the-hutch...

mawise 6y ago
> Normalizing against the M1 is an not very meaningful because ignores the fact that the price of a dollar is subject to demand as well. I was thinking exactly this. Is there any reasonable measure economists use for the demand for dollars? Other than I suppose inferring it from CPI and M1...
alexpetralia 6y ago
Can you expand on the "high demand for dollars"? Is this from foreign investors in the form of FDI? Do you mean domestic investors (in which case I'd ask if borrowers and stock issuers are really demanding dollars, as opposed to merely accepting supplied dollars at very cheap rates)? Edit: According to this link, it would appear the foreign demand for dollars has declined? https://www.marketwatch.com/investing/index/dxy https://www.marketwatch.com/investing/index/dxy

siculars 6y ago

I think a WSJ article would call this "multiple expansion." I lost a lot of coins betting against the market recovery going into the summer of 2020. Because printing free money must have consequences, yes? Turns out I could not have been more wrong. Turns out, all the free money printing around the world has found its way into other assets. Namely, the US Equity markets and BTC.

mguerville 6y ago
Same, I got beat up on my bearish positions, but I see it as expensive insurance that I took in case my bullish exposure (job, home, 401k,etc) so I tell myself I am happy the metaphorical house didn’t burn down even though I bought a lot of insurance in case it would

conanbatt 6y ago

The standard definition of inflation is the general increase of prices. If only a subset of items increase in price, it's not really inflation. It is tempting to say that you can have asset inflation while other assets deflate, but it's not consistent with the general topic of inflation that implies the currency gets devalued. If the government said that it would collect a special tax to all goods but stocks of 1$, it will increase prices of many goods but it will not be inflation. It's a change in the relative price of goods.

0x008 6y ago
But then we would never have inflation because not all goods will increase in price at the same time. It takes time until money trickles down through the system doesn’t it ?
- conanbatt 6y ago
  Not all goods, but generalized. Stocks are a fraction of spending. High inflation economies have also seen a surge in pricing in housing, relative to other parts of the economy.
  - 0x008 6y ago
    But you said if only a subset of items increases in price it is not inflation by definition?
    - conanbatt 6y ago
      Yes. I'm saying assets have had relative changes of value in high inflation economies, where everything is going up. Say a bag of rice is 100, housing is 1000. In a 100% inflation scenario, it goes to 200 and 2000, but when you look at prices it is 200 and 3000. This points to two effects: inflation + relative price changes. It's an informal argument against the notion that there is "asset inflation" because of dollar printing. Economies with high inflation have seen "asset inflation" even with all prices increasing. It points to a typical change in demand.

lumost 6y ago

I suspect that the CPI is a good measure of how much social unrest an inflationary event is likely to cause in the short term. One may decry the rich getting richer at the expense of everyone else but one is unlikely to start a revolution unless you yourself feel poorer.