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Is one of the feedback loops for high inflation that companies don't want to increase wages, so you go into a recession because people stop buying things becaus

by xt00 5y ago

Is one of the feedback loops for high inflation that companies don't want to increase wages, so you go into a recession because people stop buying things because everything starts costing too much?

gizmo686 5y ago
How does that feedback loop work? People not spending money decreases the velocity of money, which effectively reduces the money supply, causing deflation. Similarly, the drop in demand itself acts as a counter pressure to inflation by simple supply and demand. Not only does this not make sense as a feedback loop, but until the 1970s, the economic consensus was that it was impossible to have both high inflation and a recession at the same time. This view was only overturned when it happened, and the phenomena came to be known as stagflation.
- Nick87633 5y ago
  Seems like velocity of money theory doesn't take into account that the rich and poor (and businesses) have different spending or investing habits. In my opinion the velocity of money for consumer and retail products is more or less constant because a large portion of the population doesn't (or can't) save a significant percentage of their income, while the 'asset money' category like real estate and stock market is hugely affected by velocity of money driven by falling interest rates.
  - imtringued 5y ago
    There are boring institutional investors and fancy equity investors who buy treasury bonds. The latter do it because they want dry powder during a recession. QE takes treasury bonds out of the system without issuing more bonds, meanwhile banks get central bank reserves that they don't want. Nobody is borrowing, no money is issued. Everyone is worse off. As yields go to 0%, those institutional investors simply hold cash in bank accounts which drags the velocity of money down. The unfortunate news is that most macroeconomic theories (including mine), especially the neoclassical variety, are kind of useless in the real world because of inability to actually implement policies 1:1 in the real world. The modeling errors are also quite significant. Nobody is really trying to solve NRAs(non reproducible assets) or monopolies. Everyone just assumes you can harvest more bananas or colonize a second planet.

by xt00 5y ago

Is one of the feedback loops for high inflation that companies don't want to increase wages, so you go into a recession because people stop buying things because everything starts costing too much?

gizmo686 5y ago

How does that feedback loop work? People not spending money decreases the velocity of money, which effectively reduces the money supply, causing deflation. Similarly, the drop in demand itself acts as a counter pressure to inflation by simple supply and demand. Not only does this not make sense as a feedback loop, but until the 1970s, the economic consensus was that it was impossible to have both high inflation and a recession at the same time. This view was only overturned when it happened, and the phenomena came to be known as stagflation.

Nick87633 5y ago
Seems like velocity of money theory doesn't take into account that the rich and poor (and businesses) have different spending or investing habits. In my opinion the velocity of money for consumer and retail products is more or less constant because a large portion of the population doesn't (or can't) save a significant percentage of their income, while the 'asset money' category like real estate and stock market is hugely affected by velocity of money driven by falling interest rates.
- imtringued 5y ago
  There are boring institutional investors and fancy equity investors who buy treasury bonds. The latter do it because they want dry powder during a recession. QE takes treasury bonds out of the system without issuing more bonds, meanwhile banks get central bank reserves that they don't want. Nobody is borrowing, no money is issued. Everyone is worse off. As yields go to 0%, those institutional investors simply hold cash in bank accounts which drags the velocity of money down. The unfortunate news is that most macroeconomic theories (including mine), especially the neoclassical variety, are kind of useless in the real world because of inability to actually implement policies 1:1 in the real world. The modeling errors are also quite significant. Nobody is really trying to solve NRAs(non reproducible assets) or monopolies. Everyone just assumes you can harvest more bananas or colonize a second planet.