3 ms·
The statement needs to be quantified: not a threat ONLY IN THE SHORT RUN. Yes you don't see it on your graphs right now. But IIRC 20% more money was printed b
by 1996 6y ago
The statement needs to be quantified: not a threat ONLY IN THE SHORT RUN.
Yes you don't see it on your graphs right now.
But IIRC 20% more money was printed by the fed for covid.
Unless you can refute modern economic theory, we still have PV=MQ, and the only thing saving us from inflation at the moment is the low velocity of money: in lockdown or with most high velocity businesses closed or operating at a fraction of what they did before (ex: bar, restaurants), the velocity will remain low.
We won't see anything on the graphs as long as V remains low.
However, as soon as they reopen and operate closer to their normal capacity, velocity WILL rise. When that happen, inflation WILL rise.
There's no magical way to wish inflation away. We will eventually get 20% inflation. The only question is how soon.
Yes, central banks may plan to have 2% per year for 9 years (19.5% inflation) if somehow they think business will not be able to catch up immediately (a closed restaurant will not get as many clients when it reopens) which is plausible.
However, I don't buy that, because 1) we are talking about 9 years, while the closed restaurant example will take more like 1 to 2 years max to work at normal capacity again 2) it would require TREMENDOUS discipline: no QE whatsoever for 9 years - which is politically impossible if unemployment rises for whatever reason (say the aftermath of a bubble, or a crisis due to malinvestment fueled by the low rates) 3) it fully ignores the rebound effect: deprived of social contact for too long, more people than usual will want to go to bars and restaurant - at least at first
I personally envision 5 to 7% inflation when things return to normal in the US (so schoolyear 2021-2022)
- deleted 6y ago[deleted]
- Majromax 6y ago> Unless you can refute modern economic theory, we still have PV=MQ, and the only thing saving us from inflation at the moment is the low velocity of money: in lockdown or with most high velocity businesses closed or operating at a fraction of what they did before (ex: bar, restaurants), the velocity will remain low. This theory was put to the test between 2007 and 2019, where the Fed greatly increased the monetary base during and after the financial crisis. As it turns out, the velocity of base money was much more flexible than assumed, and the monetary base remained greatly increased (about 4x its pre-recession level) without excess inflation. In comparison, the covid-related increase to the monetary base has been less than a doubling (see https://fred.stlouisfed.org/series/BOGMBASE https://fred.stlouisfed.org/series/BOGMBASE). > I personally envision 5 to 7% inflation when things return to normal in the US (so schoolyear 2021-2022) If you really think that, then go to a broker, buy TIPS (inflation-protected securities), and go short nominal bonds of equivalent duration. The five-year breakeven inflation rate (US) predicted from these bonds is about 2.5% (https://fred.stlouisfed.org/series/T5YIE https://fred.stlouisfed.org/series/T5YIE), so if your views are correct you would make a mint.
- jedharris 6y agoGreat point about TIPS! Effectively everyone who's arguing that we're in for catastrophic inflation doesn't trust the wisdom of the market as much as their own reasoning based on Economics 101 models. I wonder what that tells us?
- imtringued 6y ago>Unless you can refute modern economic theory, we still have PV=MQ, and the only thing saving us from inflation at the moment is the low velocity of money: in lockdown or with most high velocity businesses closed or operating at a fraction of what they did before (ex: bar, restaurants), the velocity will remain low. Actually this is an argument in favor of inflation and yet it failed to materialize. Stagflation is what happens when the central bank keeps creating more money and businesses are unable to meed the demand by expanding production. If such a supply shock fails to create inflation then almost nothing will.