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Inflation. Everybody talks about how increasing the money supply means increased demand, which drives prices up. But nobody explains how does this *practically

Inflation. Everybody talks about how increasing the money supply means increased demand, which drives prices up. But nobody explains how does this *practically* happen. Prices don't go up on their own, it's the retailers who increase them at some point. So if the retailers' perception of the reality is not accurate (Suppose for example that money was printed "secretly", or that the increase in demand wasn't very apparent) prices won't magically go up, no? There is a common knowledge component in all those equations that's missing and nobody talks about it. Maybe it's too obvious that I'm overlooking it.

dragonwriter 5y ago
> Everybody talks about how increasing the money supply means increased demand, which drives prices up. But nobody explains how does this practically happen. Money supply isn't the only thing that does it, but when demand goes up sales go up, the additional production to keep pace with the sales has higher per-unit cost (because marginal costs increase), and everyone in the supply chain raises prices as a result. (That's simplified, a lot of price changes are anticipatory based on predictive singles, but that's the basic process that ultimately acts to align prices even if the anticipatory pricing misses movements.)
auspex 5y ago
Companies compete for resources. When there is more money out there (low interest rates from the Fed) companies will be able and willing to pay more for resources. When that happens it becomes more expensive to create products which lowers margins. Companies need to keep margins at a certain level (effort is related to … is the profit worth it to run this business?) prices need to go up to keep those margins. Commodity and base resources go up—>retail prices go up Very simplified explanation.
moltke 5y ago
>retailers' perception of the reality More food will be sold (because why not buy the extra whatever since you can afford it) the better workers will demand more pay (otherwise they can go somewhere else that can afford them.) It's much like gas exchange/osmosis/pressure. Sure the individual particles aren't "thinking" about the behavior of the macro system but their velocity changes every time they bump into each other and that creates the macro effects of osmosis, pressure, heat etc. In the same way inflation is a macro thing that results from the behavior of individuals. You can see it with boats and cars today: lots of people now have spare money and buy boats/cars -> people selling see that they can charge more (because there are fewer being sold, the ones that do get sold go for more etc) -> boats/cars are more expensive.
- BizarroLand 5y ago
  I think of it like heat in a room. In a normal room, the hottest air goes to the top of the room and the coldest air settles to the bottom, right? However, if the room were to keep expanding, then there is more room at the top for the warmer particles to escape to. Since you stay the same height, the room will feel colder and colder to you even though the total amount of heat in the room stays the same. As time goes on, unless the room's expansion is stopped or reversed, or temperature treated air is blown into the room to compensate for the difference or, failing that, platforms are provided that will raise you up from the colder areas into the warmer areas, you will eventually freeze to death as the ceiling steals all of the heat of the room, all because you cannot grow with the room.
  - mkd1964 5y ago
    This is a pretty good example - now just apply it to the actual problem. The amount of currency in circulation. Inflation isn't about the cost of goods or services actually costing more. They don't. If anything, the cost of production today is far less than it was 50 to 100 years ago because of advances in technology and automation. It's about the value of the dollar becoming less and less - because there are too many dollars in circulation, which aren't backed by anything real to begin with. "Real" could be something which has a finite supply that we attach an arbitrary value to, like precious metals, or it could be something vitally (needed for life) necessary in today's world like wheat or oil. But for decades now, newly created currency is just an entry in the Fed's ledger book, created out of thin air, backed by nothing. In your example both the size of the room and the heat represent aspects of currency (note I did not say "money"). The size of the room is the purchasing power of dollars leveraged against the actual effectiveness of the heat. The heat itself, is the value of the currency. The size of the room represents the price of goods. As the room gets bigger, the heat becomes less effective (it loses value). So pumping in more heat becomes required. When more heat than necessary gets pumped in (on purpose - and it is done on purpose), the room will begin to overheat and no one will want anymore (so it loses its value again). The sane solution would be to stop pumping in more heat - but instead, the same people supplying the heat decide to enlarge the room again, because they are in the business creating heat and charging a fee to deliver it ("they" would be the Federal Reserve - or any private, western central bank). So the room (i.e. price of goods) must be enlarged over and over again (artificially and unnecessarily) in order for a new infusion of heat to have any value to the people in the room. This in turn, requires the occupants of the room to keep forking over more money in delivery fees to keep the room at a comfortable temperature. If this becomes unfeasible, they may be forced to take out loans to have more usable heat. Now they're paying money for both the heat itself, plus interest on the loan for supplying it in the first place (and they owe it to the same people). Once you wrap your ahead around the fact that the enlarging of the room and the supply of heat are actually controlled by the same people (who make their money creating heat and charging to deliver it), you then understand that the entire financial system we currently enjoy, is nothing but a giant, legalized system of usury. That delivery fee you owe for supplying the heat is called "interest". This type of system will always (and is designed to) collapse at pretty regular intervals. When it does, those who control the flow of heat will shut it down, and have legal authority to confiscate the room from the occupants who took out loans for more heat, but couldn't afford to pay it back. What makes the whole thing more insidious, is that the people supplying the heat never actually owned it to begin with, nor did they create it. It would be as if the room (once upon a time) had a natural heat supply from, say, and underground geothermal source. But some strong-armed, outside entity stepped in, capped that off, and started charging the people in the room for access to what was once naturally available - free of charge.
antifa 5y ago
There is inflation, but there is also price gouging wearing inflation as a mask.
andrewmcwatters 5y ago
If you want specific information on the exact phenomenon you’re describing, read up on the “quantity theory of money.” While academically, it is not a precise concept of what happens in practice, as there are multiple factors at play, printing money nonetheless does have this effect. Organizations’ ability to increase prices as a result of inflated money supply is governed by competitive forces. So, it’s not as simple as seeing money supply increase 40% and thusly increasing your prices, but there is some truth to it.

dragonwriter 5y ago

> Everybody talks about how increasing the money supply means increased demand, which drives prices up. But nobody explains how does this practically happen. Money supply isn't the only thing that does it, but when demand goes up sales go up, the additional production to keep pace with the sales has higher per-unit cost (because marginal costs increase), and everyone in the supply chain raises prices as a result. (That's simplified, a lot of price changes are anticipatory based on predictive singles, but that's the basic process that ultimately acts to align prices even if the anticipatory pricing misses movements.)

auspex 5y ago

Companies compete for resources. When there is more money out there (low interest rates from the Fed) companies will be able and willing to pay more for resources. When that happens it becomes more expensive to create products which lowers margins. Companies need to keep margins at a certain level (effort is related to … is the profit worth it to run this business?) prices need to go up to keep those margins. Commodity and base resources go up—>retail prices go up Very simplified explanation.

moltke 5y ago

>retailers' perception of the reality More food will be sold (because why not buy the extra whatever since you can afford it) the better workers will demand more pay (otherwise they can go somewhere else that can afford them.) It's much like gas exchange/osmosis/pressure. Sure the individual particles aren't "thinking" about the behavior of the macro system but their velocity changes every time they bump into each other and that creates the macro effects of osmosis, pressure, heat etc. In the same way inflation is a macro thing that results from the behavior of individuals. You can see it with boats and cars today: lots of people now have spare money and buy boats/cars -> people selling see that they can charge more (because there are fewer being sold, the ones that do get sold go for more etc) -> boats/cars are more expensive.

BizarroLand 5y ago
I think of it like heat in a room. In a normal room, the hottest air goes to the top of the room and the coldest air settles to the bottom, right? However, if the room were to keep expanding, then there is more room at the top for the warmer particles to escape to. Since you stay the same height, the room will feel colder and colder to you even though the total amount of heat in the room stays the same. As time goes on, unless the room's expansion is stopped or reversed, or temperature treated air is blown into the room to compensate for the difference or, failing that, platforms are provided that will raise you up from the colder areas into the warmer areas, you will eventually freeze to death as the ceiling steals all of the heat of the room, all because you cannot grow with the room.
- mkd1964 5y ago
  This is a pretty good example - now just apply it to the actual problem. The amount of currency in circulation. Inflation isn't about the cost of goods or services actually costing more. They don't. If anything, the cost of production today is far less than it was 50 to 100 years ago because of advances in technology and automation. It's about the value of the dollar becoming less and less - because there are too many dollars in circulation, which aren't backed by anything real to begin with. "Real" could be something which has a finite supply that we attach an arbitrary value to, like precious metals, or it could be something vitally (needed for life) necessary in today's world like wheat or oil. But for decades now, newly created currency is just an entry in the Fed's ledger book, created out of thin air, backed by nothing. In your example both the size of the room and the heat represent aspects of currency (note I did not say "money"). The size of the room is the purchasing power of dollars leveraged against the actual effectiveness of the heat. The heat itself, is the value of the currency. The size of the room represents the price of goods. As the room gets bigger, the heat becomes less effective (it loses value). So pumping in more heat becomes required. When more heat than necessary gets pumped in (on purpose - and it is done on purpose), the room will begin to overheat and no one will want anymore (so it loses its value again). The sane solution would be to stop pumping in more heat - but instead, the same people supplying the heat decide to enlarge the room again, because they are in the business creating heat and charging a fee to deliver it ("they" would be the Federal Reserve - or any private, western central bank). So the room (i.e. price of goods) must be enlarged over and over again (artificially and unnecessarily) in order for a new infusion of heat to have any value to the people in the room. This in turn, requires the occupants of the room to keep forking over more money in delivery fees to keep the room at a comfortable temperature. If this becomes unfeasible, they may be forced to take out loans to have more usable heat. Now they're paying money for both the heat itself, plus interest on the loan for supplying it in the first place (and they owe it to the same people). Once you wrap your ahead around the fact that the enlarging of the room and the supply of heat are actually controlled by the same people (who make their money creating heat and charging to deliver it), you then understand that the entire financial system we currently enjoy, is nothing but a giant, legalized system of usury. That delivery fee you owe for supplying the heat is called "interest". This type of system will always (and is designed to) collapse at pretty regular intervals. When it does, those who control the flow of heat will shut it down, and have legal authority to confiscate the room from the occupants who took out loans for more heat, but couldn't afford to pay it back. What makes the whole thing more insidious, is that the people supplying the heat never actually owned it to begin with, nor did they create it. It would be as if the room (once upon a time) had a natural heat supply from, say, and underground geothermal source. But some strong-armed, outside entity stepped in, capped that off, and started charging the people in the room for access to what was once naturally available - free of charge.

antifa 5y ago

There is inflation, but there is also price gouging wearing inflation as a mask.

andrewmcwatters 5y ago

If you want specific information on the exact phenomenon you’re describing, read up on the “quantity theory of money.” While academically, it is not a precise concept of what happens in practice, as there are multiple factors at play, printing money nonetheless does have this effect. Organizations’ ability to increase prices as a result of inflated money supply is governed by competitive forces. So, it’s not as simple as seeing money supply increase 40% and thusly increasing your prices, but there is some truth to it.