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The Importance of Price Signals

• devops000 5y ago
  How do hedge inflation?
  • paulpauper 5y ago
    Index funds (S&P 500 up 23% vs 5% cpi) Real estate, mortgages
    • ak_111 5y ago
      Know the risks though: when inflation increases very fast, the Feds might end up having to respond with a shock, and usually real estates are the first to respond to this shock by losing 5-10%.
      • deleted 5y ago
        [deleted]
    • ByteJockey 5y ago
      Those are investments (which carry certain risks). Gold is traditionally used specifically as a hedge against inflation (though you won't be getting nearly the returns over the long term compared to index funds).
      • baq 5y ago
        As evidenced in the past 18 months. Oh wait. Gold is a terrible inflation hedge. Any other commodity worked better. Basically anything that is a part of the cpi basket is an inflation hedge. (Insert used car meme.)
        • wallacoloo 5y ago
          > Basically anything that is a part of the cpi basket is an inflation hedge. (Insert used car meme.) much of the CPI are depreciatory or non-durable goods. i can’t hedge against multi-year inflation by purchasing meat and dairy. if i buy a car as you suggest, it’s not likely to be worth as much 5 years from now than today. or do you mean not literally buying the CPI basket, but buying commodity futures, stock in producer companies, etc?
          • baq 5y ago
            yes, exactly, except not necessarily futures; commodity etfs are just fine, so are energy companies, materials, etc. of course you have to know when the regime changes, see e.g. energy prices in the past 3 months.
      • paulpauper 5y ago
        Gold is better hedge if your currency is in freefall such as in Turkey. Not so great for Americans, when the US dollar is the global unit of wealth.
• kqr 5y ago
  I agree with the general sentiment in this article. Price as a mechanism to coordinate supply and demand is underappreciated by the general public. You can use it to control the level company-internal resources are used so it stays within reasonable bounds and doesn't grow a huge backlog. You can even use a price to make distributed, globally optimal decisions on product decision. If e.g. time to market is a scarce resource in your project, you can tell everyone that if they can reduce time to market without costing the project budget more than $x/week saved, they need no permission to adjust the requirements -- they should just go ahead and do it. (Boeing used this except for a weight problem with one of their models.) I have but one quibble: the first point starts out true but then does a correlation-is-causation error right after that. > 1) Broad money supply and price inflation are rather correlated. > The most precise way to phrase it is that rapid money supply growth is necessary but not sufficient to cause widespread price inflation. The alternative perspective here is that obviously money supply and inflation is correlated, but for exactly the opposite reason: when prices go up without real values changing, people are still going to need the same real stuff, so banks and governments will print more money so people can afford the things they need. In other words, money supply could be a symptom of inflation as much as a cause.
  • jrexilius 5y ago
    Except that the timing of those don't line up. Money supply increasing leads inflation, there are almost no instances of CPI increase leading inflation. [edit to add:] (except one very small blip at the beginning of recovery from the great depression)
    • dragonwriter 5y ago
      > there are almost no instances of CPI increase leading inflation CPI increase defines inflation, I think you mean monetary expansion, not inflation.
      • jrexilius 5y ago
        Yeah, typoed that. Thanks for pointing it out.
• mmarq 5y ago
  Inflation is always and everywhere a monetary phenomenon Inflation is always and everywhere a fiscal phenomenon
  • echopurity 5y ago
• Wonnk13 5y ago
  I've seen this domain submitted in the last year or so. Who or what is Lynalden? Are they an economist, or a blogger, or both? Not that credentials are the be all end all, but what's different about this person vs anyone who's posting at SeekingAlpha, or any of the investing sub reddits?
  • lottin 5y ago
    She's not an economist. She's an engineer who taught herself economics. You can tell because she gets a lot of things wrong.
    • steelstraw 5y ago
      As an engineer, she's more bound by reality and reasons from first principles. I find that she's right more often than mainstream economists. Relevant example: They were surprised by non-transitory inflation, she was not. That's a huge miss by other economists.
      • dragonwriter 5y ago
        > As an engineer, she's more bound by reality and reasons from first principles. Reasoning from first principles (applying a priori dogma) and being bound by reality (responding to empirical cues) are generally opposed, the exception is when the dogmas are laid down by people who are bound by reality. Much (but not all) engineering work is bounded by reality inherently because there is quick and non-murky feedback when it is wrong; this is a feature of the work, not the worker. Engineers working in economics (and even moreso in economic punditry than actual policy, though it's true either way) don't get that. And the available “first principle” dogmas they can choose to apply are either intentional pedagogical simplifications, poorly tested against reality by comparison to anything in most domains of engineering, or flatly falsified, often ideologically motivated, ideas.
      • selimthegrim 5y ago
        There's a difference between an engineer and a scientist, and you just hit on it.
• dragonwriter 5y ago
  > Broad money supply and price inflation are rather correlated. No they aren't. Consumer prices (inflation is the ratio of the first derivative of this to itself) and broad money supply might be, though charting them against each other that doesn't look particularly true beyond “both tend to increase over time”.
• echopurity 5y ago
• silexia 5y ago
  Lyn Alden is a better economist than most, and this article helps explain in a simple way what causes inflation. We have inflation because of massive government "stimulus" handouts over the last two years of the pandemic. The response to this pandemic was way overblown and has ended up destroying our economy and did no save many lives. Everyone loves getting government checks, but if all that new printed cash has to chase a smaller supply of goods and services (as a result of shutdowns), then massive inflation hits.
  • deleted 5y ago
    [deleted]
  • js8 5y ago
    > Everyone loves getting government checks, but if all that new printed cash has to chase a smaller supply of goods and services (as a result of shutdowns), then massive inflation hits. I am not really sure what do you suggest as an alternative solution to the sudden demand decrease, that some people simply die of hunger being unemployed? Inflation is IMHO less harmful than real wage decrease or unemployment.
    • diordiderot 5y ago
      >that some people simply die of hunger being unemployed thats exactly what they want
    • silexia 5y ago
      Real wages are going down. Nominal wages are going up significantly, but prices for goods and services are going up far faster. Keep in mind government corruption meant the rich got far more handouts than the poor, and that many billions were stolen by scammers. Government enforced shutdowns and regulations caused this, people should have been allowed to exercise their personal freedoms to stay home if they were at risk rather than required to at gunpoint. BTW, I am not an anti-masker / anti-vaxxer. I have the vaccine and booster and wear a mask. I just think the government reaction has been worse than the pandemic itself.
    • josephcsible 5y ago
• overton 5y ago
  The argument starts that people who need gas more are going to buy it in the shortage (suggesting efficient distribution), and then acknowledges that it's just as likely wealthier people or price gougers who don't need it. In actual shortages where there's a strong political motivation to efficiently distribute goods (e.g. wartime), we switch to central planning (i.e. rations) because we know that's what works, denying price gougers their tax and making sure poor people who need stuff can get it.
  • skybrian 5y ago
    Alternatively, the government makes advance purchase agreements because it’s that important, and this has nothing to do with denying manufacturers their profits. (Covid vaccines.)
  • overton 5y ago
    Heck, even private businesses often do a kind of ad-hoc rationing for essential goods when there's a rush on them, because they know that the kind of arbitrage free-for-all described in the article has extremely poor social outcomes in a crisis.
  • kqr 5y ago
    I might be in a more conspiratorial mood than usual, but isn't centralised rationing more about ensuring the government can take its cut before anyone else has a chance to place a bid?
  • marcosdumay 5y ago
    The pricing mechanism is very good at ensuring people prepare for resource shortage (with storage or whatever) and avoid the worst part of it at all. There are still a few shortages one simply can't prepare for, but dismissing the entire mechanism due to a few very large scale emergencies that wold break any kind of normalcy isn't constructive.
  • kaashif 5y ago
    > In actual shortages where there's a strong political motivation to efficiently distribute goods (e.g. wartime), we switch to central planning (i.e. rations) because we know that's what works, There's a big difference between war and peace. Markets allow individuals, who do not necessarily have winning a war as their number one objective, to pursue their own objectives with their own demands, as communicated by prices. In war, there is a political motivation to override individual objectives and force everyone to serve the needs of the war effort above all, even if they don't particularly want to. Central planning isn't used in war because it's the most efficient way for every individual to achieve their own objectives, it's the opposite - central planning is the most efficient way to erase individual objectives in favor of a single overriding objective: winning the war. This isn't an argument in favor of price gouging, my point is that full-on central planning isn't a means to general prosperity, and that's not even why everyone centrally plans during war. Central planning is about control and the erasure of individual freedom. Sometimes that's needed in a war. Inefficiently pursuing one objective (the war) is more effective at winning a war than efficiently pursuing a whole range of objectives, most of which have nothing to do with war. The old socialist arguments about central planning being more efficient even during peacetime have been dead and buried for decades.
• lkrubner 5y ago
  About this: "When price inflation occurs, it can be a very challenging time for everyone. In that type of environment, prices of goods and services often go up faster than wages, and the public and policymakers wish to constrain them." Wages in the USA went up faster than inflation during the period 1893-1973, despite two long upwards trends in inflation, 1893-1920 and 1938-1973. Likewise, wages rose faster than inflation for most of the 1800s, though the 1800s didn't see many long-term inflationary trends. When you read an article like this one, it is worth remembering that the era 1973-1995, when inflation rose much faster than wages, is unique in USA history. Also, inflation rose faster than wages for most of the period from 2000-2015, even though this was an era of low inflation. So, when someone says high inflation will outrace the increase in wages, they are really just talking about 1973-1995. I've read many different theories about why the era 1973-1995 was so bad, and I don't think there is a definite answer, but there is wide agreement that two of the big contributing factors then were deindustrialization and the collapse of the labor unions. It seems unlikely that anything like deindustrialization is going to repeat itself now, as the USA has already lost all of the jobs that compete directly with low wage export industries.
  • kilroy123 5y ago
    I’m a big fan of this theory: https://www.youtube.com/watch?v=1gEz__sMVaY https://www.youtube.com/watch?v=1gEz__sMVaY
    • wallacoloo 5y ago
      > The Cardboard Box Reform - Nixon's Ghost Bill & A Crucial Flaw in Democracy video title, for those without a magic youtube url preview device.
    • chii 5y ago
      i'm not 100% convinced, but the video does make a very compelling argument that congress votes not being secret means they can be sold or be intimidated into voting against the interests of the constituents. Food for thought.
  • JJMcJ 5y ago
• paulpauper 5y ago
  Commodity cycles and price inflation are tightly correlated. Next we can follow that logic to look at commodities. This chart shows the 5-year rolling change in CPI vs oil prices: https://www.lynalden.com/wp-content/uploads/price-signal-cpi-vs-oil.png https://www.lynalden.com/wp-content/uploads/price-signal-cpi... This is not a tight correlation at all. All the evidence she gives is weak.
• paulpauper 5y ago
  I am guessing inflation spiked because the economy and asset prices recovered much faster than expected. The expectation in April 2020 was that there would be a prolonged slump or a crisis similar to 2008. Few foresaw that there would be such an abrupt V-shaped recovery in GDP, asset prices, consumer spending, and large cap profits even after accounting for the stimulus. Suppliers cut back production in anticipation of a long slump, which never came. There was a lot of stimulus spending in 2009-2010 and the fed cut rates to zero, but the recovery was slower, nor did inflation spike. So it's not like more spending = more inflation. However, despite all the doom and glom, Americas have gotten wealthier over the past year thanks to surging asset prices and strong wages and the supremacy of the US dollar, which has surged this year. The same cannot be said for Turks, who have gotten poorer due to collapsing currency and whose inflation problem is far worse.
  • neffy 5y ago
    No, inflation is spiking because the Government expanded the money supply by about 25%. https://fred.stlouisfed.org/series/M2SL https://fred.stlouisfed.org/series/M2SL Now sit back, and watch every economist who doesn't pay attention to the money supply make a complete fool of themselves in public.
• jbay808 5y ago
  Price signals are an important part of ensuring that resources go where they're needed, but this also sort of assumes that everyone has an equal capacity to pay. There's an extent to which, yes, in a gas shortage I'll pay 4x to drive my wife to the hospital but not to drive my kids to the pool, so the gas goes where it's needed. But if I'm very poor, I can't pay 4x even if my wife is in labour, and if I'm very rich, I'll pay whatever to drive my kids to the pool because I don't even notice gas prices.
  • gruez 5y ago
    > Price signals are an important part of ensuring that resources go where they're needed, but this also sort of assumes that everyone has an equal capacity to pay. Right, but it's not claimed that price signals is some all-powerful force to drive behavior. It just ensures "resources go where they're needed" in aggregate. Well resourced individuals can still use their money to override that as they see fit.
    • chii 5y ago
      They're not overriding anything - those with the money pays more to obtain the right to decide where the resources go. But they _can_ pay more because they've produced the wealth in the past (and did not consume it). If their will could be overridden at a moment's notice, then this stored wealth means less, and thus people would choose to consume more and not invest, and thus, the overall aggregate wealth would be reduced.
      • jbay808 5y ago
        Perhaps! I think some of us are nonetheless born with a lot more wealth than others, and that compounds a heck of a lot.
  • xapata 5y ago
    But then the money keeps flowing. It doesn't disappear just because you drove to the pool. The gasoline supplier uses the cash to crank up supply, the price goes down, etc.
• simon_000666 5y ago
  This is a nice story and makes rational sense. But the world is rarely rational, and I doubt that price signals behave any where near as logically or predictably as the author implies during the article. It reminded me of the classic ‘beer distribution game’ referenced in Peter Senge’s - The fifth discipline of how delayed feedback loops in supply chains can amplify or mute signals traveling back through layers of producers due to lack of shared context and understanding.