7 ms·

Inflation is almost 100% caused by "too much money" chasing "too few goods". "Too much money" is a condition almost always caused by the creation of too much "

by cubano 5y ago

Inflation is almost 100% caused by "too much money" chasing "too few goods". "Too much money" is a condition almost always caused by the creation of too much "fiat currency" (ie a currency that is backed by nothing but the good faith and credit of the issuing government) As we all should know, in the US, on 6/5/1933 FDR took the US off gold-backed currency and started the fiat currency situation we still find ourselves in. Over the past 13 years, the US M3 money supply (see https://fred.stlouisfed.org/series/MABMM301USM189S https://fred.stlouisfed.org/series/MABMM301USM189S ) has grown from around $7.5T to $22T. This number represents the "too much money" part of the original equation, and to be honest I'm quite surprised that price inflation isn't significantly worse then what it currently is. This is almost certainly being caused by the fact that the US dollar is the world's Reserve Currency. Looking at the graph, starting Aug 2020 the line is starting to approach vertical, so it should be completely unsurprising that price inflation is occurring. Finally, a 0.25% increase in the Federal Funds Rate is laughably small, and will do absolutely nothing to help with the price inflation the US is currently seeing.

tehlike 5y ago
price inflation and asset inflation. That increased supply went to asset inflation.
danielmarkbruce 5y ago
Credit spends too. US Household debt to GDP steadily went down over that period.
throw0101a 5y ago
> "Too much money" is a condition almost always caused by the creation of too much "fiat currency" (ie a currency that is backed by nothing but the good faith and credit of the issuing government) Japan money supply: * https://fred.stlouisfed.org/series/MYAGM2JPM189S https://fred.stlouisfed.org/series/MYAGM2JPM189S Japan inflation: * https://fred.stlouisfed.org/series/FPCPITOTLZGJPN https://fred.stlouisfed.org/series/FPCPITOTLZGJPN Money supply ≠ inflation. > As we all should know, in the US, on 6/5/1933 FDR took the US off gold-backed currency and started the fiat currency situation we still find ourselves in. Except for the multiple decades post-WW2 with Bretton Woods. Further, being on the gold standard didn't seem to help with inflation in the US during the 1920s: * https://www.theatlantic.com/business/archive/2012/08/why-the-gold-standard-is-the-worlds-worst-economic-idea-in-2-charts/261552/ https://www.theatlantic.com/business/archive/2012/08/why-the... * https://archive.ph/FWKcL https://archive.ph/FWKcL
- deleted 5y ago
  [deleted]
- jppittma 5y ago
  I have no idea how anybody looks at Japan without realizing that the MMT people got it right. Thought experiment: If the government printed money to send unemployed people to uninhabited farmland to start cultivating it (in complete isolation from the rest of the economy) would it cause inflation for the rest of us who aren't connected? If that community was then connected to the rest of the world, would the economic benefit be positive? You can clearly see that the limitation on printing money is unutilized resources in the economy.
  - pdonis 5y ago
    > If the government printed money to send unemployed people to uninhabited farmland to start cultivating it (in complete isolation from the rest of the economy) would it cause inflation for the rest of us who aren't connected? First, this never happens, and certainly is not what's been happening for decades now in the US with the Fed printing money, so it's not a very relevant thought experiment. Second, taking your scenario as given for the sake of argument, what was stopping the unemployed people from cultivating the uninhabited farmland before? Was it the absence of money, or the fact that they didn't own the farmland? In other words, the real operative point in your thought experiment is not the government printing money, but the government giving tangible resources (uninhabited farmland) to a group of unemployed people, so that they will produce something of value from it. The money is really incidental: once they start producing more food than they can consume themselves, they will be able to acquire their own money by selling the excess. The initial printed money is really more like a one-time grant of working capital, so they can buy enough initial supplies to get the operation going. And money doesn't even have to be printed for that: the government could just allocate some tax revenue to it. Third, in our actual system as it actually works, who does get newly printed money? Is it unemployed people who could be doing productive work but aren't? That was perhaps true for COVID relief checks--although those didn't really enable anyone to go back to work, they enabled people to stay out of work, not producing anything, for longer--but in any case those don't actually add up to a lot in terms of the total US money supply. The vast majority of the money the Fed prints goes to financial institutions, and the only thing whose "production" is increased by that printed money is loans. Those loans, since they are mostly mortgages, will certainly redirect productive capacity in the economy (so we build more McMansions and commercial office buildings that sit empty for years after being built, while our roads, bridges, drainage systems, electrical power grid, and other infrastructure deteriorate), but they don't increase productive capacity overall. In other words, they're just redistribution--and almost always (with the COVID relief checks being the only possible exception I can see) from the poor to the rich, since that's who the newly printed money goes to (financial institutions). > You can clearly see that the limitation on printing money is unutilized resources in the economy. No, we can clearly see that the limitation on printing money is how much redistribution from the poor to the rich the rich think they can get away with. Remember that the Fed was initially advocated to the US government by rich bankers who were tired of the government coming to them for bailouts whenever there was a financial panic due to stupid government interventions (the Panic of 1907 was the specific one that prompted the legislation that became the Federal Reserve Act), so they decided to put a system in place that would make it so the costs of the bailouts ended up being paid by ordinary citizens (who wouldn't get any of the money the Fed would print) instead of them.
jldugger 5y ago
> Inflation is almost 100% caused by "too much money" chasing "too few goods". I find it baffling that the "always and everywhere a monetary phenomenon" crowd never inspects velocity.
- danielmarkbruce 5y ago
  It's a beautiful sounding, simple theory. Print lots of money, get inflation. Humans eat up stories that are beautiful sounding and simple.
- hgomersall 5y ago
  Worth a read https://new-wayland.com/blog/too-much-money/ https://new-wayland.com/blog/too-much-money/ and also https://economicsfromthetopdown.com/2021/11/24/the-truth-about-inflation/ https://economicsfromthetopdown.com/2021/11/24/the-truth-abo...
- deeg 5y ago
  I think this group is afraid of hyperinflation, which is almost always caused by governments printing too much money. (And, if we're honest, hyperinflation is a scary situation.) The problem is that they then extrapolate and decide that nominal inflation must be the result of the same problem and that all government action will lead to hyperinflation.
- voisin 5y ago
  Velocity always seems to be treated as independent. When velocity plummets, Fed increases money supply. When velocity recovers, the money supply never shrinks. It is a one-way ratchet. Why is that?
  - babypuncher 5y ago
    People who enjoy the cheap capital afforded by the Fed increasing supply do not want to see their gravy train end, even if it is better for the economy as a whole to temper it while it's hot. See Trump et al gnashing their teeth at the fed for talking about raising rates back in 2018.
- 5y ago
mpalczewski 5y ago
In the us we printed a bunch of money, and now the dollar is strong, but we have world wide inflation. I don't think it helps to look at US charts for a worldwide phenomenon.
AviationAtom 5y ago
You shared my exact sentiment. 0.25% is far too small. The reason we even discussed negative rates when COVID hit was because the Fed was too afraid hike rates more rapidly, hence we hadn't gotten to a reasonable rate, before it called for being dialed back. This left very little "powder in the keg." At the pace we are going now I fear it's only a matter of time before the next 2008 hits, and we have nothing left to throw at it. It's a very delicate balance, and it doesn't seem capable hands are at the controls.
- at-fates-hands 5y ago
  >> You shared my exact sentiment. 0.25% is far too small. Most reports were doubling the rate to 4% or greater. I think after the talk of moving it up that fast and that drastically, a lot of investors started getting the jitters: https://www.cnbc.com/2022/02/23/the-market-has-adjusted-its-views-of-how-the-federal-reserve-will-raise-interest-rates.html https://www.cnbc.com/2022/02/23/the-market-has-adjusted-its-... That change came after traders had been pricing a move double that size at the March 15-16 Federal Open Market Committee meeting. Central bankers have been dousing the idea of needing to go up 50 basis points at the meeting, with New York Fed President John Williams saying last week that there is “no compelling argument” for the move. Still, it hasn’t made investors any less nervous about what the path ahead will look like. “I’m not so worried about whether they do 50 [basis] points out of the gate or not. But I also think they shouldn’t overdo it here,” said Jim Paulsen, chief investment strategist at the Leuthold Group. “You can do 25, and if you want to do another one soon, you can do it, rather than add additional disruption or uncertainty.” I can understand the idea of going slowly and evaluating the effect on the current markets with inflation still going on. I like the cautious approach considering the massive fallout if it did suddenly jump up to 4%, you'd see a ton of money get pulled out of the market which could be disastrous. But like you said, either way could lead to another staggering recession so I'm not 100% confident in either approach.
specialp 5y ago
On 6/5/1933 the USA was also dealing with massive DEFLATION. Deflation is also a very bad thing. In fact periods of deflation correlate with periods of large economic slowdown. Now I know people who are against fiat currency enjoy deflationary fixed currencies like most cryptocurrencies, but the inability to control money supply leads to hoarding of money, and compounding economic problems due to the lack of money supply. Hyperinflation is a terrible thing too. But that does not necessarily make gold backed or non fiat currencies superior as large deflation is very destructive as well.
- colinmhayes 5y ago
  Deflation is much, much worse than the inflation we are currently experiencing. The US was in a 50 year depression starting in 1860 largely due to ineffective monetary policy which caused deflation. Small amounts of inflation are in fact a good thing, as it encourages loaning money.
nemo44x 5y ago
The inflation is worse in a lot of things like housing and healthcare. Especially at the high end. Income and wealth inequality are the signs here.
alliao 5y ago
you're correct on the too much money, though it's not the goods that we're chasing, rather anything else that represents value. The gold backed currency was limiting because it's incredibly hard to adjust for fast moving market. So by freeing up money supply, we can exploit the full extent of the market. When US print money, since the world values USD, whoever buys USD will pay for that inflation. Since there're not better alternatives, they just kept buying, in a sense US is just exporting capital. So it's no surprise that inflation will be absorbed by USD hoarding entities. say here.. https://ticdata.treasury.gov/Publish/mfh.txt https://ticdata.treasury.gov/Publish/mfh.txt
russellbeattie 5y ago
> I'm quite surprised that price inflation isn't significantly worse. The one benefit of wealth disparity in the US and around the world. I agree that if all that new money had been evenly distributed, then it would have most likely caused crazy inflation. But it wasn't. It went directly into the coffers of large banks, corporations and arms manufacturers, and eventually into the accounts of the 0.001%. The supply of money has to be available to spend in order for it to affect the economy. With the top 1% owning 40% of the wealth, it means all that money is essentially locked away from the general public.
stjohnswarts 5y ago
Gold would have been so outlandishly valued if we stuck with that. What is your solution to gold being worth astronomically more as currency backer vs it's day to use by people and industry? Just accept that you can't ever use gold again for manufacturing and let momma's wedding ring increase in value to ridiculous amounts? I'll agree we probably need at least a 0.5 increase in interest and that's on hte low side. I see so many new land grabs around town and too many new businesses popping up because it's pretty easy to get a loan right now.

by cubano 5y ago

tehlike 5y ago

price inflation and asset inflation. That increased supply went to asset inflation.

danielmarkbruce 5y ago

Credit spends too. US Household debt to GDP steadily went down over that period.

throw0101a 5y ago

> "Too much money" is a condition almost always caused by the creation of too much "fiat currency" (ie a currency that is backed by nothing but the good faith and credit of the issuing government) Japan money supply: * https://fred.stlouisfed.org/series/MYAGM2JPM189S https://fred.stlouisfed.org/series/MYAGM2JPM189S Japan inflation: * https://fred.stlouisfed.org/series/FPCPITOTLZGJPN https://fred.stlouisfed.org/series/FPCPITOTLZGJPN Money supply ≠ inflation. > As we all should know, in the US, on 6/5/1933 FDR took the US off gold-backed currency and started the fiat currency situation we still find ourselves in. Except for the multiple decades post-WW2 with Bretton Woods. Further, being on the gold standard didn't seem to help with inflation in the US during the 1920s: * https://www.theatlantic.com/business/archive/2012/08/why-the-gold-standard-is-the-worlds-worst-economic-idea-in-2-charts/261552/ https://www.theatlantic.com/business/archive/2012/08/why-the... * https://archive.ph/FWKcL https://archive.ph/FWKcL

deleted 5y ago
[deleted]
jppittma 5y ago
I have no idea how anybody looks at Japan without realizing that the MMT people got it right. Thought experiment: If the government printed money to send unemployed people to uninhabited farmland to start cultivating it (in complete isolation from the rest of the economy) would it cause inflation for the rest of us who aren't connected? If that community was then connected to the rest of the world, would the economic benefit be positive? You can clearly see that the limitation on printing money is unutilized resources in the economy.
- pdonis 5y ago
  > If the government printed money to send unemployed people to uninhabited farmland to start cultivating it (in complete isolation from the rest of the economy) would it cause inflation for the rest of us who aren't connected? First, this never happens, and certainly is not what's been happening for decades now in the US with the Fed printing money, so it's not a very relevant thought experiment. Second, taking your scenario as given for the sake of argument, what was stopping the unemployed people from cultivating the uninhabited farmland before? Was it the absence of money, or the fact that they didn't own the farmland? In other words, the real operative point in your thought experiment is not the government printing money, but the government giving tangible resources (uninhabited farmland) to a group of unemployed people, so that they will produce something of value from it. The money is really incidental: once they start producing more food than they can consume themselves, they will be able to acquire their own money by selling the excess. The initial printed money is really more like a one-time grant of working capital, so they can buy enough initial supplies to get the operation going. And money doesn't even have to be printed for that: the government could just allocate some tax revenue to it. Third, in our actual system as it actually works, who does get newly printed money? Is it unemployed people who could be doing productive work but aren't? That was perhaps true for COVID relief checks--although those didn't really enable anyone to go back to work, they enabled people to stay out of work, not producing anything, for longer--but in any case those don't actually add up to a lot in terms of the total US money supply. The vast majority of the money the Fed prints goes to financial institutions, and the only thing whose "production" is increased by that printed money is loans. Those loans, since they are mostly mortgages, will certainly redirect productive capacity in the economy (so we build more McMansions and commercial office buildings that sit empty for years after being built, while our roads, bridges, drainage systems, electrical power grid, and other infrastructure deteriorate), but they don't increase productive capacity overall. In other words, they're just redistribution--and almost always (with the COVID relief checks being the only possible exception I can see) from the poor to the rich, since that's who the newly printed money goes to (financial institutions). > You can clearly see that the limitation on printing money is unutilized resources in the economy. No, we can clearly see that the limitation on printing money is how much redistribution from the poor to the rich the rich think they can get away with. Remember that the Fed was initially advocated to the US government by rich bankers who were tired of the government coming to them for bailouts whenever there was a financial panic due to stupid government interventions (the Panic of 1907 was the specific one that prompted the legislation that became the Federal Reserve Act), so they decided to put a system in place that would make it so the costs of the bailouts ended up being paid by ordinary citizens (who wouldn't get any of the money the Fed would print) instead of them.

jldugger 5y ago

> Inflation is almost 100% caused by "too much money" chasing "too few goods". I find it baffling that the "always and everywhere a monetary phenomenon" crowd never inspects velocity.

danielmarkbruce 5y ago
It's a beautiful sounding, simple theory. Print lots of money, get inflation. Humans eat up stories that are beautiful sounding and simple.
hgomersall 5y ago
Worth a read https://new-wayland.com/blog/too-much-money/ https://new-wayland.com/blog/too-much-money/ and also https://economicsfromthetopdown.com/2021/11/24/the-truth-about-inflation/ https://economicsfromthetopdown.com/2021/11/24/the-truth-abo...
deeg 5y ago
I think this group is afraid of hyperinflation, which is almost always caused by governments printing too much money. (And, if we're honest, hyperinflation is a scary situation.) The problem is that they then extrapolate and decide that nominal inflation must be the result of the same problem and that all government action will lead to hyperinflation.
voisin 5y ago
Velocity always seems to be treated as independent. When velocity plummets, Fed increases money supply. When velocity recovers, the money supply never shrinks. It is a one-way ratchet. Why is that?
- babypuncher 5y ago
  People who enjoy the cheap capital afforded by the Fed increasing supply do not want to see their gravy train end, even if it is better for the economy as a whole to temper it while it's hot. See Trump et al gnashing their teeth at the fed for talking about raising rates back in 2018.
5y ago

mpalczewski 5y ago

In the us we printed a bunch of money, and now the dollar is strong, but we have world wide inflation. I don't think it helps to look at US charts for a worldwide phenomenon.

AviationAtom 5y ago

You shared my exact sentiment. 0.25% is far too small. The reason we even discussed negative rates when COVID hit was because the Fed was too afraid hike rates more rapidly, hence we hadn't gotten to a reasonable rate, before it called for being dialed back. This left very little "powder in the keg." At the pace we are going now I fear it's only a matter of time before the next 2008 hits, and we have nothing left to throw at it. It's a very delicate balance, and it doesn't seem capable hands are at the controls.

at-fates-hands 5y ago
>> You shared my exact sentiment. 0.25% is far too small. Most reports were doubling the rate to 4% or greater. I think after the talk of moving it up that fast and that drastically, a lot of investors started getting the jitters: https://www.cnbc.com/2022/02/23/the-market-has-adjusted-its-views-of-how-the-federal-reserve-will-raise-interest-rates.html https://www.cnbc.com/2022/02/23/the-market-has-adjusted-its-... That change came after traders had been pricing a move double that size at the March 15-16 Federal Open Market Committee meeting. Central bankers have been dousing the idea of needing to go up 50 basis points at the meeting, with New York Fed President John Williams saying last week that there is “no compelling argument” for the move. Still, it hasn’t made investors any less nervous about what the path ahead will look like. “I’m not so worried about whether they do 50 [basis] points out of the gate or not. But I also think they shouldn’t overdo it here,” said Jim Paulsen, chief investment strategist at the Leuthold Group. “You can do 25, and if you want to do another one soon, you can do it, rather than add additional disruption or uncertainty.” I can understand the idea of going slowly and evaluating the effect on the current markets with inflation still going on. I like the cautious approach considering the massive fallout if it did suddenly jump up to 4%, you'd see a ton of money get pulled out of the market which could be disastrous. But like you said, either way could lead to another staggering recession so I'm not 100% confident in either approach.

specialp 5y ago

On 6/5/1933 the USA was also dealing with massive DEFLATION. Deflation is also a very bad thing. In fact periods of deflation correlate with periods of large economic slowdown. Now I know people who are against fiat currency enjoy deflationary fixed currencies like most cryptocurrencies, but the inability to control money supply leads to hoarding of money, and compounding economic problems due to the lack of money supply. Hyperinflation is a terrible thing too. But that does not necessarily make gold backed or non fiat currencies superior as large deflation is very destructive as well.

colinmhayes 5y ago
Deflation is much, much worse than the inflation we are currently experiencing. The US was in a 50 year depression starting in 1860 largely due to ineffective monetary policy which caused deflation. Small amounts of inflation are in fact a good thing, as it encourages loaning money.

nemo44x 5y ago

The inflation is worse in a lot of things like housing and healthcare. Especially at the high end. Income and wealth inequality are the signs here.

alliao 5y ago

you're correct on the too much money, though it's not the goods that we're chasing, rather anything else that represents value. The gold backed currency was limiting because it's incredibly hard to adjust for fast moving market. So by freeing up money supply, we can exploit the full extent of the market. When US print money, since the world values USD, whoever buys USD will pay for that inflation. Since there're not better alternatives, they just kept buying, in a sense US is just exporting capital. So it's no surprise that inflation will be absorbed by USD hoarding entities. say here.. https://ticdata.treasury.gov/Publish/mfh.txt https://ticdata.treasury.gov/Publish/mfh.txt

russellbeattie 5y ago

> I'm quite surprised that price inflation isn't significantly worse. The one benefit of wealth disparity in the US and around the world. I agree that if all that new money had been evenly distributed, then it would have most likely caused crazy inflation. But it wasn't. It went directly into the coffers of large banks, corporations and arms manufacturers, and eventually into the accounts of the 0.001%. The supply of money has to be available to spend in order for it to affect the economy. With the top 1% owning 40% of the wealth, it means all that money is essentially locked away from the general public.

stjohnswarts 5y ago

Gold would have been so outlandishly valued if we stuck with that. What is your solution to gold being worth astronomically more as currency backer vs it's day to use by people and industry? Just accept that you can't ever use gold again for manufacturing and let momma's wedding ring increase in value to ridiculous amounts? I'll agree we probably need at least a 0.5 increase in interest and that's on hte low side. I see so many new land grabs around town and too many new businesses popping up because it's pretty easy to get a loan right now.