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I've been thinking about this topic more and more, and the more I study it, the more I realize how incredibly rich of a subject it is. For example, I used to a

I've been thinking about this topic more and more, and the more I study it, the more I realize how incredibly rich of a subject it is. For example, I used to assume that monetary inflation was instant and automatic. Double the money supply overnight, and everyone will double their prices and incomes overnight too, as though all that happened was a substitution of variables. Later I understood that it's not that simple. First, the new money doesn't get distribution in proportion to how much people own, so savings get halved. Second, contracts denoted in dollars don't get adjusted, so debts and purchase orders get cheaper, accounts receivable become worth less, and so on. And lastly, prices aren't updated automatically by some perfectly objective value calculation. They're held in place by a combination of supply and demand, competitive forces, price elasticity, psychology, and collective expectations. So the inflation can apply instantly in some markets but it can also take years for those changes to propagate into various other markets. And even once the money supply stops increasing, inflation can keep going all on its own accord, once expectations become fixed. This happened in Japan in the '60s and '70s where unions demanded 5% annual wage increases to keep up with the inflation caused by every industry getting 5% annual price increases caused by union wage increases... Right now it seems like the new money is going straight into asset prices, and that will probably remain the case until either asset holders start selling their assets to consume an absurd amount of food and gasoline, or the high price of assets starts to weigh heavily on the cost of production.

hiram112 5y ago
> This happened in Japan in the '60s and '70s where unions demanded 5% annual wage increases to keep up with the inflation caused by every industry getting 5% annual price increases caused by union wage increases... As a gov contractor, I'm seeing this first-hand. Inflation has been tame my whole career in this industry - 2% or 3% / year; therefore, contracts of fixed length have built-in rate increases of similar percentages, and raises trickle down from there. Most companies will give you raises a bit less than what they're getting each year in increased rates themselves - it's how they increase their own growth and executive bonuses. This can go on for a long time - 5-10 years before the employee will really notice they're falling behind peers who've just been hired or general market rates if they were to jump shit. But when real inflation is running 7%-10%, the wage disparities between new hires & contracts and existing employees & contracts become evident quickly. For example, I'm discovering that new engineers with far less experience and talent are being hired on for $20K - $40K more than I make, all else equal. Which forces me to start looking for new employment or ask management for a raise, neither of which is desirable.
- leppr 5y ago
  You could simply ask for your salary to be denominated in gold/bitcoin. /s?
  - chii 5y ago
    and on the day you need to buy groceries, bitcoin suddenly tanks 50%, leaving you with scraps to live off, or you hold out eating food until the price recovers.
    - hiram112 5y ago
      Even more appropriate comment as gold did just take a huge dive tonight, lol.
imtringued 5y ago
Inflation is just the realization that your balance sheet doesn't match reality. The reason it is delayed is that people can flee into the balance sheet and refuse to interact with the real economy for years. Hyperinflation is what happens when the real economy is gone. Moderate inflation is what happens when the balance sheet is slightly off. Extremely low inflation or deflation is what happens when people pretend that there is no such thing as the real economy. Think of gold or Bitcoin. All hail the balance sheet! The funny thing about inflation is that if it is high enough to "sting" (2-5%) then people notice the missing wealth in the real world and create it to the best of their ability. The fact that the money isn't moving, that it isn't entering the real economy is one of the greatest mistakes made by the central bank which is prevented from doing so and the government which refuses to do it for petty ideological reasons.
ItsMonkk 5y ago
Right. If you double the money supply by dropping interest rates, the people with the new money are the credit worthy people who can afford to take out new debt(though mostly companies). The things that those people demand are what rises in prices. This is the Cantillion Effect, basic supply and demand flows. Since the people who can take out new debt are wealthy, the things that the wealthy buy go up. They don't need more apples, so the demand for apples stays the same, and the prices of apples stays the same. Instead they take that debt and pour it into the market(mostly buybacks) and other savings. So we don't end up seeing consumer prices change much. Each person is attempting to maximize their long-term utility, and so long as inflation stays in check their best option is to keep it in the market growing ever more. Money is useless if you can't eventually spend it for utility. Each billionaire/company is planning what to do with their wealth. Some will create rockets, others will fund disease research hoping to get their name into the history books. It's always and will always be about the utility. Like the Martingale Betting System has shown, you can not remove the risk by shifting the betting sizes around. As the money supply increase more "energy" is added to the system. It becomes harder and harder to control it. As it increases, the power of each individual to effect the entire system increases. In the 1970's the richest person had $6B, now the richest person has $177B, an increase of 30 times. By 2170 the richest person could have 30x that. If there is a reason to believe that selling their stocks will yield greater utility, then the wealthy would figure it out, and the first person who acts would win(like what happened with the banks handling Archegos), second would do worse, most would get wiped out, including all the non-wealthy. It would be like a dam collapsing all at once. Sometimes all it takes for the dam to burst is a small trickle. But all that energy was always being stored in the reservoir. But you better believe that the Fed understands this, and is doing everything in their power to keep the system under control. The problem is though, they need for investments to be the biggest long-term utility creator, but that only increases the energy. The more they keep it going, the more unstable it becomes.
- jbay808 5y ago
  Exactly! And borrowing money to spend on consumables like apples is clearly risky borrowing. How will you pay it back once you've eaten the apples? So the lender is very strict and the rates are high. When you borrow money for an asset, it looks safe. You aren't spending money you don't have. You haven't really spent anything; you can always sell the asset to repay your debt! And in the meantime, you reap the gains as the asset goes up. So mortgages are cheap and the lender works hard to help you qualify. But like you say the risk can only be shuffled into bigger gambles, not removed. You can't make risk-free money by borrowing money cheaply to buy growing assets forever. If the assets are increasingly bought with debt, then their price will correlate inversely with the cost of borrowing. So right when borrowing gets expensive and you want to sell your assets to pay back your debts, the asset price also drops because everyone else is doing the same thing. It's very hard to de-risk because almost every asset ends up correlated to the same thing: the debt that people are buying those assets with. I do believe the Fed understands this (and more relevant to me, the Bank of Canada). They know the game they're playing, and I think they're very good at it. And they know the psychology. They believe the economy will be better off with a period of transient inflation that levels off, because it will get oversized debts down. They're hoping they can hold off on rate increases before that happens, so that rates don't go up until debts are under control. And they're hoping the lenders will go along with it. Here in Canada we're seeing pseudo interest rate increases via the "stress test", where you have to prove you can afford a 5.8% mortgage in order to get a 2% mortgage, because the government needs to keep debt servicing costs low as they inflate them away without incentivizing everyone to load up on even more of them. That net doesn't catch everybody, but it should protect the most vulnerable. It's a very delicate balancing act. I don't know if it will work. I think we'll find out soon.

hiram112 5y ago

> This happened in Japan in the '60s and '70s where unions demanded 5% annual wage increases to keep up with the inflation caused by every industry getting 5% annual price increases caused by union wage increases... As a gov contractor, I'm seeing this first-hand. Inflation has been tame my whole career in this industry - 2% or 3% / year; therefore, contracts of fixed length have built-in rate increases of similar percentages, and raises trickle down from there. Most companies will give you raises a bit less than what they're getting each year in increased rates themselves - it's how they increase their own growth and executive bonuses. This can go on for a long time - 5-10 years before the employee will really notice they're falling behind peers who've just been hired or general market rates if they were to jump shit. But when real inflation is running 7%-10%, the wage disparities between new hires & contracts and existing employees & contracts become evident quickly. For example, I'm discovering that new engineers with far less experience and talent are being hired on for $20K - $40K more than I make, all else equal. Which forces me to start looking for new employment or ask management for a raise, neither of which is desirable.

leppr 5y ago
You could simply ask for your salary to be denominated in gold/bitcoin. /s?
- chii 5y ago
  and on the day you need to buy groceries, bitcoin suddenly tanks 50%, leaving you with scraps to live off, or you hold out eating food until the price recovers.
  - hiram112 5y ago
    Even more appropriate comment as gold did just take a huge dive tonight, lol.

imtringued 5y ago

Inflation is just the realization that your balance sheet doesn't match reality. The reason it is delayed is that people can flee into the balance sheet and refuse to interact with the real economy for years. Hyperinflation is what happens when the real economy is gone. Moderate inflation is what happens when the balance sheet is slightly off. Extremely low inflation or deflation is what happens when people pretend that there is no such thing as the real economy. Think of gold or Bitcoin. All hail the balance sheet! The funny thing about inflation is that if it is high enough to "sting" (2-5%) then people notice the missing wealth in the real world and create it to the best of their ability. The fact that the money isn't moving, that it isn't entering the real economy is one of the greatest mistakes made by the central bank which is prevented from doing so and the government which refuses to do it for petty ideological reasons.

ItsMonkk 5y ago

Right. If you double the money supply by dropping interest rates, the people with the new money are the credit worthy people who can afford to take out new debt(though mostly companies). The things that those people demand are what rises in prices. This is the Cantillion Effect, basic supply and demand flows. Since the people who can take out new debt are wealthy, the things that the wealthy buy go up. They don't need more apples, so the demand for apples stays the same, and the prices of apples stays the same. Instead they take that debt and pour it into the market(mostly buybacks) and other savings. So we don't end up seeing consumer prices change much. Each person is attempting to maximize their long-term utility, and so long as inflation stays in check their best option is to keep it in the market growing ever more. Money is useless if you can't eventually spend it for utility. Each billionaire/company is planning what to do with their wealth. Some will create rockets, others will fund disease research hoping to get their name into the history books. It's always and will always be about the utility. Like the Martingale Betting System has shown, you can not remove the risk by shifting the betting sizes around. As the money supply increase more "energy" is added to the system. It becomes harder and harder to control it. As it increases, the power of each individual to effect the entire system increases. In the 1970's the richest person had $6B, now the richest person has $177B, an increase of 30 times. By 2170 the richest person could have 30x that. If there is a reason to believe that selling their stocks will yield greater utility, then the wealthy would figure it out, and the first person who acts would win(like what happened with the banks handling Archegos), second would do worse, most would get wiped out, including all the non-wealthy. It would be like a dam collapsing all at once. Sometimes all it takes for the dam to burst is a small trickle. But all that energy was always being stored in the reservoir. But you better believe that the Fed understands this, and is doing everything in their power to keep the system under control. The problem is though, they need for investments to be the biggest long-term utility creator, but that only increases the energy. The more they keep it going, the more unstable it becomes.

jbay808 5y ago
Exactly! And borrowing money to spend on consumables like apples is clearly risky borrowing. How will you pay it back once you've eaten the apples? So the lender is very strict and the rates are high. When you borrow money for an asset, it looks safe. You aren't spending money you don't have. You haven't really spent anything; you can always sell the asset to repay your debt! And in the meantime, you reap the gains as the asset goes up. So mortgages are cheap and the lender works hard to help you qualify. But like you say the risk can only be shuffled into bigger gambles, not removed. You can't make risk-free money by borrowing money cheaply to buy growing assets forever. If the assets are increasingly bought with debt, then their price will correlate inversely with the cost of borrowing. So right when borrowing gets expensive and you want to sell your assets to pay back your debts, the asset price also drops because everyone else is doing the same thing. It's very hard to de-risk because almost every asset ends up correlated to the same thing: the debt that people are buying those assets with. I do believe the Fed understands this (and more relevant to me, the Bank of Canada). They know the game they're playing, and I think they're very good at it. And they know the psychology. They believe the economy will be better off with a period of transient inflation that levels off, because it will get oversized debts down. They're hoping they can hold off on rate increases before that happens, so that rates don't go up until debts are under control. And they're hoping the lenders will go along with it. Here in Canada we're seeing pseudo interest rate increases via the "stress test", where you have to prove you can afford a 5.8% mortgage in order to get a 2% mortgage, because the government needs to keep debt servicing costs low as they inflate them away without incentivizing everyone to load up on even more of them. That net doesn't catch everybody, but it should protect the most vulnerable. It's a very delicate balancing act. I don't know if it will work. I think we'll find out soon.