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The paper disputes the idea that people’s expectations for future inflation matter much for the level of inflation experienced today. What I have been reading

The paper disputes the idea that people’s expectations for future inflation matter much for the level of inflation experienced today. What I have been reading lately gives me the impression that different patterns of capital allocation have changed inflation dynamics. There's excess demand for older-generation used by the auto industry. In text book economics, that would lead to higher prices and then more factories and the meeting of that demand at a higher level. But what happens is chip makers, the only ones apparently capable of making even older generation chip factories, won't allocate capital for such factories because they view as on their way regardless of demand. So essentially, with huge capital allocations, companies won't chase short-term demand surges because they don't want to be left with future excess capacity (which is more costly than any immediate payoff). Look at Nvidia actively fighting the demand of crypto miners for their products. This seems to be a barrier to any inflationary spiral (increased demand leads to shortfalls, not higher prices and production. Maybe prices too but increases not propagating). So, it's not that the economy is incomprehensible but it's structure changes and so it's structure can't be captured by pure economic theory.

cannabis_sam 5y ago
> So, it's not that the economy is incomprehensible but it's structure changes and so it's structure can't be captured by pure economic theory. Pure economic theory is an oxymoron, other fields dealing with human behavior figured this out a long time ago, while economics desperately clung to the idea that it was actually math, rather than a social science. (Otherwise I agree with you)
xchaotic 5y ago
just a small nitpick in the overall correct train of thought - is that it this reduction in output still does drive up the inflation - as fewer cars are made, their price increases (and it has knock on effects of increasing prices to anything affected by cars - delivery, logistics, you name it)
- WalterBright 5y ago
  Inflation is a general rise in prices, not a rise in the price of one or a few goods. In order for prices to rise generally, there has to be an increase in the money supply relative to the goods and services it represents.
  - landemva 5y ago
    If inflation is reduction in broad (not one single item) purchasing power of the monetary unit, then inflation will be felt when people lose confidence in the money or the organization backing the money. USA will feel significant inflation when the public loses confidence in the federal government. EU is much further down that path.
    - WalterBright 5y ago
      People never lost confidence in gold, and yet the 1849 gold rush caused inflation. Gold's buying power declined significantly.
      - landemva 5y ago
        That is a good example of a commodity money that experienced supply volatility and subsequent price volatility. It was inflation - more supply of the money. Money is tricky to do in all times for all use cases. Bitcoin is making a run for store of value money, and unlike gold it is truly scarce.
  - zarzavat 5y ago
    Inflation is whatever you want to to be. Usually inflation is defined using the prices of a basket of goods. This does not capture the inflation that people feel - most people are far more interested in the price of a home than the price of spaghetti, but spaghetti is the definition. One reason why spaghetti is used rather than house prices is that it is less subject to speculatory swings, or local variation - to be used as a basis for adjusting other prices inflation has to be defined in terms of something stable and uniformly priced. This may seem circular, and it is. What we see is that increases in the money supply generally don't go into the prices of basic goods tracked by inflation. Instead they go into the prices of assets that are not tracked by inflation. Nobody is using spaghetti as an investment vehicle.
chmsky00 5y ago
It would be nice if the era of economic theory were to end. Herbert Weisberg argues in Willful Ignorance (paraphrasing for brevity; read and come to your own conclusions) we’re using statistical and probabilistic tools in economics that were purposely left crude by the mathematicians that defined them, as they were defined to handle abstract quantities. Applying them to human economics means we’re mathematically accepting rounding errors that leave people behind. That is the pattern we have to break politically. We spend a lot of time emotionally promoting certain stats and hand waving away at a number like “2% reduction in poverty” still means we’re leaving millions behind. Not having services like universal healthcare is clearly politically gamed, but we refuse to see it as anything like a government bombing civilians.
Traster 5y ago
This has always been the case. Economists are great at explaining the economy in retrospect - oh if demand rises we'll see extra supply. Oh except the suppliers can predict peak demand and won't expand to meet unsustainable demand causing a shortfall in supply even under excess demand. Sure, it sounds obvious, but actually predicting it rather than observing it is what's valuable.
magicalhippo 5y ago
> So, it's not that the economy is incomprehensible but it's structure changes and so it's structure can't be captured by pure economic theory. This reminded me of General Relativity and the problem of unifying it with Quantum Mechanics. QM is defined on a fixed background, while GR says that background is dynamic. Seems we need the Quantum Gravity version of economic theory, which tells you how interactions happen in a dynamic background.

cannabis_sam 5y ago

> So, it's not that the economy is incomprehensible but it's structure changes and so it's structure can't be captured by pure economic theory. Pure economic theory is an oxymoron, other fields dealing with human behavior figured this out a long time ago, while economics desperately clung to the idea that it was actually math, rather than a social science. (Otherwise I agree with you)

xchaotic 5y ago

just a small nitpick in the overall correct train of thought - is that it this reduction in output still does drive up the inflation - as fewer cars are made, their price increases (and it has knock on effects of increasing prices to anything affected by cars - delivery, logistics, you name it)

WalterBright 5y ago
Inflation is a general rise in prices, not a rise in the price of one or a few goods. In order for prices to rise generally, there has to be an increase in the money supply relative to the goods and services it represents.
- landemva 5y ago
  If inflation is reduction in broad (not one single item) purchasing power of the monetary unit, then inflation will be felt when people lose confidence in the money or the organization backing the money. USA will feel significant inflation when the public loses confidence in the federal government. EU is much further down that path.
  - WalterBright 5y ago
    People never lost confidence in gold, and yet the 1849 gold rush caused inflation. Gold's buying power declined significantly.
    - landemva 5y ago
      That is a good example of a commodity money that experienced supply volatility and subsequent price volatility. It was inflation - more supply of the money. Money is tricky to do in all times for all use cases. Bitcoin is making a run for store of value money, and unlike gold it is truly scarce.
- zarzavat 5y ago
  Inflation is whatever you want to to be. Usually inflation is defined using the prices of a basket of goods. This does not capture the inflation that people feel - most people are far more interested in the price of a home than the price of spaghetti, but spaghetti is the definition. One reason why spaghetti is used rather than house prices is that it is less subject to speculatory swings, or local variation - to be used as a basis for adjusting other prices inflation has to be defined in terms of something stable and uniformly priced. This may seem circular, and it is. What we see is that increases in the money supply generally don't go into the prices of basic goods tracked by inflation. Instead they go into the prices of assets that are not tracked by inflation. Nobody is using spaghetti as an investment vehicle.

chmsky00 5y ago

It would be nice if the era of economic theory were to end. Herbert Weisberg argues in Willful Ignorance (paraphrasing for brevity; read and come to your own conclusions) we’re using statistical and probabilistic tools in economics that were purposely left crude by the mathematicians that defined them, as they were defined to handle abstract quantities. Applying them to human economics means we’re mathematically accepting rounding errors that leave people behind. That is the pattern we have to break politically. We spend a lot of time emotionally promoting certain stats and hand waving away at a number like “2% reduction in poverty” still means we’re leaving millions behind. Not having services like universal healthcare is clearly politically gamed, but we refuse to see it as anything like a government bombing civilians.

Traster 5y ago

This has always been the case. Economists are great at explaining the economy in retrospect - oh if demand rises we'll see extra supply. Oh except the suppliers can predict peak demand and won't expand to meet unsustainable demand causing a shortfall in supply even under excess demand. Sure, it sounds obvious, but actually predicting it rather than observing it is what's valuable.

magicalhippo 5y ago

> So, it's not that the economy is incomprehensible but it's structure changes and so it's structure can't be captured by pure economic theory. This reminded me of General Relativity and the problem of unifying it with Quantum Mechanics. QM is defined on a fixed background, while GR says that background is dynamic. Seems we need the Quantum Gravity version of economic theory, which tells you how interactions happen in a dynamic background.