5 ms·

He mentions that asset prices (primarily stocks, but also housing) was rising during the earlier portion of the last decade, but I'm curious to know what is tak

by jdhn 5y ago

He mentions that asset prices (primarily stocks, but also housing) was rising during the earlier portion of the last decade, but I'm curious to know what is take would be on why we didn't see a lot of inflation outside of those assets until the supply chain issues due to covid popped up. Perhaps the supply chain issues were the match that lit the inflation fire?

HarryHirsch 5y ago
I think the supply chain problems are a separate issue. The reason that the stocks-and-housing asset inflation hasn't spilled over into the monetary economy yet is that not much of it has been sold so far. God help us when the retirees will have to cash out.
- JamesBarney 5y ago
  Inflation of assets and goods and services are two completely different phenomenon's with different causes. Inflation of assets are caused by lowered by interest rates, they don't spiral and they don't effect the cost of living. Just a straightforward result of net present value calculations. Inflation of goods is caused by a supply shock or too much demand (too much spending chasing two few resources).
  - HarryHirsch 5y ago
    Everyone needs a roof over the head, and the proportion of household income that went into housing has been steadily going up since the 1980's. So it's not correct that asset inflation does not affect everyday cost of living.
    - JamesBarney 5y ago
      We need to disentangle housing the good the thing you pay rent for, from a house an asset that produces housing. Why would low interest rates cause rent to increase? Intuitively I would think that low interest rates would make it cheaper to fund the creation of new housing lowering rents. I imagine the increase in rents is because we've made it more difficult to build things because of zoning, permitting etc..., and we're building better houses that are more insulated, fire proof, more outlets, etc... We also haven't made builders that much more productive over the last 40 years.
      - HarryHirsch 5y ago
        Housing prices went up 20 % between 2016 and now because zoning became more difficult? That doesn't compute. Clearing price is set by the maximum payment mortgage a household can afford, i.e. principal + interest. If the interest rate is lower, that results in a higher cash price, and that's what we see. Of course politicians at all levels and households who have already are uninterested in seeing a change to the status quo, so no surprise that there are supply constraints as well. All that started when housing became a popular investment vehicle sometimes in the late 1970's. The fact that entry-level housing is extra scarce because it's less profitable for the builder than a doctor's palace doesn't help either.
        JamesBarney 5y ago
        I understand how interest rates increase the price of house. It's a fairly straightforward calculation. But what is your theory for the mechanism by which lower interest rates causes an increase in the price of rent?
        HarryHirsch 5y ago
        That's households that are priced out of a mortgage, so they have no alternative but to rent. In emergencies you can go to a food bank, but you absolutely need a roof over the head.
        mikem170 5y ago
        I agree that interest rates are a factor. But so is the supply/demand curve. Housing supply is regulated by zoning and cannot freely increase with the changing market, and housing demand increased due to many Millennials reaching family and home buying age. Those are both also factors, not only interest rates.
  - hodgesrm 5y ago
    > Inflation of goods is caused by a supply shock or too much demand (too much spending chasing two few resources). It was my understanding that increase in the money supply caused severe inflation in Spain during the 1500s. [0] If true how does that square with the argument that goods inflation is from a supply shock or excess demand? [0] https://en.wikipedia.org/wiki/Price_revolution#Spain https://en.wikipedia.org/wiki/Price_revolution#Spain
    - HarryHirsch 5y ago
      There was also population growth as well as an increase in the velocity of money, compounded by the fact that the rural nobility was on fixed incomes, because taxes and levies were not adjusted to inflation. The inflation rate was 2 % or so, completely manageable with contemporary approaches.
    - JamesBarney 5y ago
      The money supply doesn't directly effect inflation. The money supply causes an increase in demand which triggers inflation. If you printed 10 trillion dollars and shot it into orbit around the Sun prices wouldn't change. People have to spend it creating increased demand. This is one of the reasons quantitative easing had little effect. They printed a bunch of money but it just sat in banks and was never spent.
ItsMonkk 5y ago
We were seeing these issues before CO-VID - when the employment rate is over-heating and the inflation rate is ticking up, the Fed takes on their dual mandate and starts raising rates. The Fed began raising their rate in 2016 topping out in mid 2019. This recession was predicated based on the yield curve of that 2019 top. This latest recession was interesting because the Fed and Congress did such a good job in handling it that coming out of it the job market was still booming, unlike most others that allow the inflation rate to cool down with many losing their jobs. When new money is created, it can be spent on consumption goods, creating inflation, or it can be spent on investment goods, causing a change in the velocity of money. Smart money will make a guess as to which one will soon be more scarce in the near future, money or assets. When the money supply is increasing at a rate greater than the rate of nominal incomes, assets will tend to increase. When the reverse is true, currencies tend to increase, so you will sell your assets while they are still worth something. In our current post-gold standard environment when the Fed lowers interest rates below the natural rate of a stable velocity, this causes the velocity to drop, and therefore it's a great time to speculate on assets. It's well understood therefore that when new money is created it does not initially create any inflation, but as this article argues, that inflation arrives with a time delay. When the Fed raises the interest rate above the natural rate of a stable velocity, the money supply will now rise slower than nominal income and that makes the crash an inevitability. This cycle the Fed dot plot is planning for this to happen around the end of the year 2022, and then it takes about 6 months after the yield curve inversion for the actual crash to occur.

by jdhn 5y ago

HarryHirsch 5y ago

I think the supply chain problems are a separate issue. The reason that the stocks-and-housing asset inflation hasn't spilled over into the monetary economy yet is that not much of it has been sold so far. God help us when the retirees will have to cash out.

JamesBarney 5y ago
Inflation of assets and goods and services are two completely different phenomenon's with different causes. Inflation of assets are caused by lowered by interest rates, they don't spiral and they don't effect the cost of living. Just a straightforward result of net present value calculations. Inflation of goods is caused by a supply shock or too much demand (too much spending chasing two few resources).
- HarryHirsch 5y ago
  Everyone needs a roof over the head, and the proportion of household income that went into housing has been steadily going up since the 1980's. So it's not correct that asset inflation does not affect everyday cost of living.
  - JamesBarney 5y ago
    We need to disentangle housing the good the thing you pay rent for, from a house an asset that produces housing. Why would low interest rates cause rent to increase? Intuitively I would think that low interest rates would make it cheaper to fund the creation of new housing lowering rents. I imagine the increase in rents is because we've made it more difficult to build things because of zoning, permitting etc..., and we're building better houses that are more insulated, fire proof, more outlets, etc... We also haven't made builders that much more productive over the last 40 years.
    - HarryHirsch 5y ago
      Housing prices went up 20 % between 2016 and now because zoning became more difficult? That doesn't compute. Clearing price is set by the maximum payment mortgage a household can afford, i.e. principal + interest. If the interest rate is lower, that results in a higher cash price, and that's what we see. Of course politicians at all levels and households who have already are uninterested in seeing a change to the status quo, so no surprise that there are supply constraints as well. All that started when housing became a popular investment vehicle sometimes in the late 1970's. The fact that entry-level housing is extra scarce because it's less profitable for the builder than a doctor's palace doesn't help either.
      - JamesBarney 5y ago
        I understand how interest rates increase the price of house. It's a fairly straightforward calculation. But what is your theory for the mechanism by which lower interest rates causes an increase in the price of rent?
        HarryHirsch 5y ago
        That's households that are priced out of a mortgage, so they have no alternative but to rent. In emergencies you can go to a food bank, but you absolutely need a roof over the head.
      - mikem170 5y ago
        I agree that interest rates are a factor. But so is the supply/demand curve. Housing supply is regulated by zoning and cannot freely increase with the changing market, and housing demand increased due to many Millennials reaching family and home buying age. Those are both also factors, not only interest rates.
- hodgesrm 5y ago
  > Inflation of goods is caused by a supply shock or too much demand (too much spending chasing two few resources). It was my understanding that increase in the money supply caused severe inflation in Spain during the 1500s. [0] If true how does that square with the argument that goods inflation is from a supply shock or excess demand? [0] https://en.wikipedia.org/wiki/Price_revolution#Spain https://en.wikipedia.org/wiki/Price_revolution#Spain
  - HarryHirsch 5y ago
    There was also population growth as well as an increase in the velocity of money, compounded by the fact that the rural nobility was on fixed incomes, because taxes and levies were not adjusted to inflation. The inflation rate was 2 % or so, completely manageable with contemporary approaches.
  - JamesBarney 5y ago
    The money supply doesn't directly effect inflation. The money supply causes an increase in demand which triggers inflation. If you printed 10 trillion dollars and shot it into orbit around the Sun prices wouldn't change. People have to spend it creating increased demand. This is one of the reasons quantitative easing had little effect. They printed a bunch of money but it just sat in banks and was never spent.

ItsMonkk 5y ago

We were seeing these issues before CO-VID - when the employment rate is over-heating and the inflation rate is ticking up, the Fed takes on their dual mandate and starts raising rates. The Fed began raising their rate in 2016 topping out in mid 2019. This recession was predicated based on the yield curve of that 2019 top. This latest recession was interesting because the Fed and Congress did such a good job in handling it that coming out of it the job market was still booming, unlike most others that allow the inflation rate to cool down with many losing their jobs. When new money is created, it can be spent on consumption goods, creating inflation, or it can be spent on investment goods, causing a change in the velocity of money. Smart money will make a guess as to which one will soon be more scarce in the near future, money or assets. When the money supply is increasing at a rate greater than the rate of nominal incomes, assets will tend to increase. When the reverse is true, currencies tend to increase, so you will sell your assets while they are still worth something. In our current post-gold standard environment when the Fed lowers interest rates below the natural rate of a stable velocity, this causes the velocity to drop, and therefore it's a great time to speculate on assets. It's well understood therefore that when new money is created it does not initially create any inflation, but as this article argues, that inflation arrives with a time delay. When the Fed raises the interest rate above the natural rate of a stable velocity, the money supply will now rise slower than nominal income and that makes the crash an inevitability. This cycle the Fed dot plot is planning for this to happen around the end of the year 2022, and then it takes about 6 months after the yield curve inversion for the actual crash to occur.