4 ms·

It's not so much hoarding as setting prices from future expected prices. If I'm writing a contract where I promise to deliver a product during the next year, an

by Ma8ee 5y ago

It's not so much hoarding as setting prices from future expected prices. If I'm writing a contract where I promise to deliver a product during the next year, and I expect the prices of both components and labour to be 10% higher by the end of the year, I of course factor that in when I set my prices now. When I negotiate my salary for the coming year I of course factor in that I expect my living expenses to be 10% higher by the end of the year, and that I know that my employer already is increasing her prices. Then everyone does the same, and of course everyone's inflation expectations are vindicated. Rinse, repeat. This is a very tricky trap to get out of. Last time it happened the federal reserve increased the interest rate to 20% and forced a recession just to get inflation back to normal.

pjc50 5y ago
Yes, inflation has an inertia all its own, and causes a certain amount of strife as all those prices and especially wages are re-negotiated, since wage negotiation often has to be accompanied by strikes. The introduction of the Brazilian Real was a surprisingly effective tactic to derail inflation in the previous currency; changing over the currency and promising "this time it's different" actually worked. > Last time it happened the federal reserve increased the interest rate to 20% This technique has since been refined and central banks have got really good at controlling inflation through rates. The cost is borne through unemployment being kept above the "NAIRU".
- lottin 5y ago
  > wages are re-negotiated It's common for wages to be contractually indexed to prices, so that they are automatically updated to reflect changes in the cost of living. See here, for some examples: https://www.ecb.europa.eu/pub/pdf/other/mb200805_focus05.en.pdf https://www.ecb.europa.eu/pub/pdf/other/mb200805_focus05.en....
  - alisonkisk 5y ago
    That doesn't look common to me. I see a few small countries, and France and Spain (which only gets through union negotiations, not law)
runeks 5y ago
> Last time it happened the federal reserve increased the interest rate to 20% and forced a recession just to get inflation back to normal. I'm not at all convinced that this manoeuvre actually hampered inflation. It might as well have exacerbated it. When you push up the rate of interest, you make it profitable for businesses whose return on capital is less than the given rate of interest, to liquidate all its assets and deposit the proceeds in a bank account (where you they will earn a greater return on capital). If the given business was producing consumer goods, it was actually helping to keep prices in check. Shutting down this business through the Fed offering its investors free profits -- as opposed to the market offering it profits for producing consumer goods -- doesn't solve the issue of inflation; it makes it worse.
- Ma8ee 5y ago
  I don’t know where to start. If you in the long run make more money by shutting down your business and put the money in a bank account, then of course, you should do that because it wasn’t a great business to start with. But no one expects the feds to keep the interest rates that high for very long. It’s only in a near monopoly that a few businesses shutting down will make a big difference on the prices. But if you shut down businesses, that will increase unemployment, which will keep wages down which will keep the inflation low. Quite a bit of empirical evidence are by now showing that you are wrong.
  - alisonkisk 5y ago
    What good is low inflation if people have even less money to spend so they can't afford the prices? Prices don't exist in a vacuum. Low/no wages and low inflation means purchasing power is dropping aka the economy is collapsing.

by Ma8ee 5y ago

pjc50 5y ago

Yes, inflation has an inertia all its own, and causes a certain amount of strife as all those prices and especially wages are re-negotiated, since wage negotiation often has to be accompanied by strikes. The introduction of the Brazilian Real was a surprisingly effective tactic to derail inflation in the previous currency; changing over the currency and promising "this time it's different" actually worked. > Last time it happened the federal reserve increased the interest rate to 20% This technique has since been refined and central banks have got really good at controlling inflation through rates. The cost is borne through unemployment being kept above the "NAIRU".

lottin 5y ago
> wages are re-negotiated It's common for wages to be contractually indexed to prices, so that they are automatically updated to reflect changes in the cost of living. See here, for some examples: https://www.ecb.europa.eu/pub/pdf/other/mb200805_focus05.en.pdf https://www.ecb.europa.eu/pub/pdf/other/mb200805_focus05.en....
- alisonkisk 5y ago
  That doesn't look common to me. I see a few small countries, and France and Spain (which only gets through union negotiations, not law)

runeks 5y ago

> Last time it happened the federal reserve increased the interest rate to 20% and forced a recession just to get inflation back to normal. I'm not at all convinced that this manoeuvre actually hampered inflation. It might as well have exacerbated it. When you push up the rate of interest, you make it profitable for businesses whose return on capital is less than the given rate of interest, to liquidate all its assets and deposit the proceeds in a bank account (where you they will earn a greater return on capital). If the given business was producing consumer goods, it was actually helping to keep prices in check. Shutting down this business through the Fed offering its investors free profits -- as opposed to the market offering it profits for producing consumer goods -- doesn't solve the issue of inflation; it makes it worse.

Ma8ee 5y ago
I don’t know where to start. If you in the long run make more money by shutting down your business and put the money in a bank account, then of course, you should do that because it wasn’t a great business to start with. But no one expects the feds to keep the interest rates that high for very long. It’s only in a near monopoly that a few businesses shutting down will make a big difference on the prices. But if you shut down businesses, that will increase unemployment, which will keep wages down which will keep the inflation low. Quite a bit of empirical evidence are by now showing that you are wrong.
- alisonkisk 5y ago
  What good is low inflation if people have even less money to spend so they can't afford the prices? Prices don't exist in a vacuum. Low/no wages and low inflation means purchasing power is dropping aka the economy is collapsing.