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This is a very simplistic viewpoint. One could also argue that Inflation happens when people don't trust that their government will pay back all the money borro

by zie 4y ago

This is a very simplistic viewpoint. One could also argue that Inflation happens when people don't trust that their government will pay back all the money borrowed. The US govt has been on a spending spree as of late, but hasn't yet bothered to mention how they are going to pay for it. In 2008/2009, the US govt was also on a spending spree, but did promise to pay the bill eventually. Inflation didn't spike in 2008/2009. The bottom line is, nobody really KNOWS, we just have guesses. My guess currently fits all the facts, where yours does not, but that doesn't mean my guess is right, but perhaps it's more correct than your version.

dasil003 4y ago
There’s also a tipping point where inflation is self propelled because everyone is used to it so they just proactively raise prices on a regular basis. I experienced this growing up in Brazil in the 80s and 90s. It’s hard for Americans to relate, but essentially the mentality is spend/invest every penny you get before it loses value. Took some creative policy to break the cycle: https://en.m.wikipedia.org/wiki/Plano_Real https://en.m.wikipedia.org/wiki/Plano_Real
- WalterBright 4y ago
  > There’s also a tipping point where inflation is self propelled because everyone is used to it so they just proactively raise prices on a regular basis. This is called cost-push inflation. Unfortunately, that theory doesn't explain where the extra dollars come from.
  - dasil003 4y ago
    Why would you expect there to be some unifying theory of inflation? It's an emergent phenomenon resulting from the actions of many individual actors. I'm quite sure the people raising the prices every week had no idea how much cash was in circulation.
    - WalterBright 4y ago
      Fiat money (or anything that increases the supply of money, like gold rushes) is the common factor with all instances of inflation. There are thousands of years of examples of this. You're right on one point, the Law of Supply & Demand. It is an emergent property of many individual actions, though each might be completely ignorant of the big picture.
      - lottin 4y ago
        Another common factor in all cases of inflation was the moon orbiting the Earth, so clearly the moon is causing inflation.
        WalterBright 4y ago
        Your theory doesn't explain deflation. Mine does.
      - imtringued 4y ago
        Egyptians used grain money which spoils over time and the grain banks charged the depositors a fee for the liquidity they provide. If you want a stable banking system you are going to have to make depositors pay for the costs they impose onto other people.
        WalterBright 4y ago
        I suggest reading up on how banks make money from fractional reserve banking. No need for depositors to pay, and in fact lending money is so lucrative banks will pay the depositors.
    - sidewndr46 4y ago
      All you've done here is dress up the "it's really complicated, you wouldn't understand it" dismissal in nicer terms.
    - mypalmike 4y ago
      Economists working for oil companies certainly don't ignore money supply.
  - wahern 4y ago
    AFAIU from reading about the Plano Real and some other cases, the extra dollars come from the central bank being stuck between a rock and a hard place. If they don't print the extra money, then inflation accelerates--a scarcer dollar increases in real value, but non-intuitively this doesn't produce deflation unless you're prepared to hold your ground while the economy and society incinerates in the chaos. EDIT: I think this is one of the primary phenomenons creating the dilemma for the central bank and government: https://en.wikipedia.org/wiki/Inertial_inflation https://en.wikipedia.org/wiki/Inertial_inflation But IIRC from the Brazil case, informal expectations and pricing strategies in the supply chain (from factory to corner store) were at least as important as contracts.
  - Calavar 4y ago
    Why would there need to be any extra dollars? If inflation is a matter of supply and demand of currency, as you say, then shouldn't we expect that a demand-side shift could lead to inflation without any change in the money supply?
    - hnick 4y ago
      Makes sense to me, the thing that matters is not total money but active money. Prices go up because there is the same amount of money, but sellers expect more, and buyers are used to paying more. This can continue by having their proportion of earnings/wealth spent increased which increases total liquid money supply, until they are at capacity (i.e. spending their whole income, selling off assets, etc). Basically the inverse of people being averse to spending and instead hoarding cash, leading to deflation as prices are lowered to tempt them into spending again.
- mixmastamyk 4y ago
  Not really, it happened in the US in the 70s and early 80s. Not as high as in some countries, but enough to make a difference in behavior.
jnwatson 4y ago
We have very educated guesses. The primary difference between 2008 and now with respect to monetary policy is money velocity. Increasing money supply is a necessary but insufficient condition for inflation. In 2008, much of that money sat uninvested, so it didn’t impact the price of goods. In 2020, most of it got used to buy and invest.
- zie 4y ago
  We do have educated guesses, The OP and my comment are 2 of them. There are more of them for sure. It wasn't un-invested, it just didn't much make it out to buy consumer goods(at least not as directly as in 2020). Like all things the devil is in the details, which get stupidly complicated.
deleted 4y ago
[deleted]
WalterBright 4y ago
> perhaps it's more correct than your version. My version has lots and lots and LOTS of history backing it up. Did you know that the US had inflation when on the gold standard during the California and Yukon gold rushes? Did you know that Spain experienced massive inflation during the period when they were shipping the silver in S. America across the Atlantic? I could go on and on. > One could also argue that Inflation happens when people don't trust that their government will pay back all the money borrowed. This sort of thing happens with private banknotes, which would trade at a discount based on the level of trust. But that is a one-time discount, not a cumulative process.
- zie 4y ago
  I agree that there is lots of data that shows your version has some merit, but that doesn't mean it's 100% correct. I know of at least one instance where your version was incorrect(2008/2009). Again, I'm not arguing my version is correct, and I'm not even arguing that your version is completely wrong, because we literally do not know. Read some John Cochrane[0] if you want a more academic defence of my version(which is where I got it from, I'm certainly not smart enough to have come up with it myself). 0: https://www.justicenewsflash.com/2022/01/03/the-grumpy-economist-fiscal-inflation_20220103164604.html https://www.justicenewsflash.com/2022/01/03/the-grumpy-econo...
  - WalterBright 4y ago
    > I know of at least one instance where your version was incorrect(2008/2009). One one hand, we have thousands of years of history with what causes inflation. On the other hand, we have one instance. I'd say one has to examine the one counterexample for something missed. (Your cite makes no mention of 2008/2009.) Extraordinary claims require extraordinary evidence. Recall my other post here about how making loans creates money, and paying the loans back destroys it. Bankruptcy destroys money. I wonder if all the bankruptcies, defaults, haircuts and writedowns removed a vast amount of money from circulation, and the deficit spending simply filled that hole rather than creating more inflation.
    - 4y ago
W3cUYxYwmXb5c 4y ago
Monetary inflation is the increase in the money supply. Price inflation is one of the potential symptoms of monetary inflation. Too often people look at just one symptom to gauge the occurrence of the cause. Currently we are experiencing both, but people seem to want to ignore the inflation of the money supply, and scratch our heads over every other variable that affects prices.
- imtringued 4y ago
  Ok, now introduce negative interest rates on cash.
roenxi 4y ago
There is no reason to believe the situation is complex. The value of money is changing because the authority that controls money is changing it. Nobody understands the economy. But we can be pretty sure that it isn't the economy destroying the value of the dollar, because there is no reason for consistent annual inflation to be happening. If anything, in the absence of money creation, we should be seeing deflation because of technological improvements. Short term wobbles, sure, maybe even sometimes a few straight years of inflation due to exceptional conditions. But that isn't what is happening. The only thing that can have caused the dollar to lose value consistently is creating new money. Otherwise we'd see it regularly snapping back to normal value with deflation. Which, in my lifetime, I think may have literally never happened.

by zie 4y ago

dasil003 4y ago

There’s also a tipping point where inflation is self propelled because everyone is used to it so they just proactively raise prices on a regular basis. I experienced this growing up in Brazil in the 80s and 90s. It’s hard for Americans to relate, but essentially the mentality is spend/invest every penny you get before it loses value. Took some creative policy to break the cycle: https://en.m.wikipedia.org/wiki/Plano_Real https://en.m.wikipedia.org/wiki/Plano_Real

WalterBright 4y ago
> There’s also a tipping point where inflation is self propelled because everyone is used to it so they just proactively raise prices on a regular basis. This is called cost-push inflation. Unfortunately, that theory doesn't explain where the extra dollars come from.
- dasil003 4y ago
  Why would you expect there to be some unifying theory of inflation? It's an emergent phenomenon resulting from the actions of many individual actors. I'm quite sure the people raising the prices every week had no idea how much cash was in circulation.
  - WalterBright 4y ago
    Fiat money (or anything that increases the supply of money, like gold rushes) is the common factor with all instances of inflation. There are thousands of years of examples of this. You're right on one point, the Law of Supply & Demand. It is an emergent property of many individual actions, though each might be completely ignorant of the big picture.
    - lottin 4y ago
      Another common factor in all cases of inflation was the moon orbiting the Earth, so clearly the moon is causing inflation.
      - WalterBright 4y ago
        Your theory doesn't explain deflation. Mine does.
    - imtringued 4y ago
      Egyptians used grain money which spoils over time and the grain banks charged the depositors a fee for the liquidity they provide. If you want a stable banking system you are going to have to make depositors pay for the costs they impose onto other people.
      - WalterBright 4y ago
        I suggest reading up on how banks make money from fractional reserve banking. No need for depositors to pay, and in fact lending money is so lucrative banks will pay the depositors.
  - sidewndr46 4y ago
    All you've done here is dress up the "it's really complicated, you wouldn't understand it" dismissal in nicer terms.
  - mypalmike 4y ago
    Economists working for oil companies certainly don't ignore money supply.
- wahern 4y ago
  AFAIU from reading about the Plano Real and some other cases, the extra dollars come from the central bank being stuck between a rock and a hard place. If they don't print the extra money, then inflation accelerates--a scarcer dollar increases in real value, but non-intuitively this doesn't produce deflation unless you're prepared to hold your ground while the economy and society incinerates in the chaos. EDIT: I think this is one of the primary phenomenons creating the dilemma for the central bank and government: https://en.wikipedia.org/wiki/Inertial_inflation https://en.wikipedia.org/wiki/Inertial_inflation But IIRC from the Brazil case, informal expectations and pricing strategies in the supply chain (from factory to corner store) were at least as important as contracts.
- Calavar 4y ago
  Why would there need to be any extra dollars? If inflation is a matter of supply and demand of currency, as you say, then shouldn't we expect that a demand-side shift could lead to inflation without any change in the money supply?
  - hnick 4y ago
    Makes sense to me, the thing that matters is not total money but active money. Prices go up because there is the same amount of money, but sellers expect more, and buyers are used to paying more. This can continue by having their proportion of earnings/wealth spent increased which increases total liquid money supply, until they are at capacity (i.e. spending their whole income, selling off assets, etc). Basically the inverse of people being averse to spending and instead hoarding cash, leading to deflation as prices are lowered to tempt them into spending again.
mixmastamyk 4y ago
Not really, it happened in the US in the 70s and early 80s. Not as high as in some countries, but enough to make a difference in behavior.

jnwatson 4y ago

We have very educated guesses. The primary difference between 2008 and now with respect to monetary policy is money velocity. Increasing money supply is a necessary but insufficient condition for inflation. In 2008, much of that money sat uninvested, so it didn’t impact the price of goods. In 2020, most of it got used to buy and invest.

zie 4y ago
We do have educated guesses, The OP and my comment are 2 of them. There are more of them for sure. It wasn't un-invested, it just didn't much make it out to buy consumer goods(at least not as directly as in 2020). Like all things the devil is in the details, which get stupidly complicated.

deleted 4y ago

[deleted]

WalterBright 4y ago

> perhaps it's more correct than your version. My version has lots and lots and LOTS of history backing it up. Did you know that the US had inflation when on the gold standard during the California and Yukon gold rushes? Did you know that Spain experienced massive inflation during the period when they were shipping the silver in S. America across the Atlantic? I could go on and on. > One could also argue that Inflation happens when people don't trust that their government will pay back all the money borrowed. This sort of thing happens with private banknotes, which would trade at a discount based on the level of trust. But that is a one-time discount, not a cumulative process.

zie 4y ago
I agree that there is lots of data that shows your version has some merit, but that doesn't mean it's 100% correct. I know of at least one instance where your version was incorrect(2008/2009). Again, I'm not arguing my version is correct, and I'm not even arguing that your version is completely wrong, because we literally do not know. Read some John Cochrane[0] if you want a more academic defence of my version(which is where I got it from, I'm certainly not smart enough to have come up with it myself). 0: https://www.justicenewsflash.com/2022/01/03/the-grumpy-economist-fiscal-inflation_20220103164604.html https://www.justicenewsflash.com/2022/01/03/the-grumpy-econo...
- WalterBright 4y ago
  > I know of at least one instance where your version was incorrect(2008/2009). One one hand, we have thousands of years of history with what causes inflation. On the other hand, we have one instance. I'd say one has to examine the one counterexample for something missed. (Your cite makes no mention of 2008/2009.) Extraordinary claims require extraordinary evidence. Recall my other post here about how making loans creates money, and paying the loans back destroys it. Bankruptcy destroys money. I wonder if all the bankruptcies, defaults, haircuts and writedowns removed a vast amount of money from circulation, and the deficit spending simply filled that hole rather than creating more inflation.
  - 4y ago

W3cUYxYwmXb5c 4y ago

Monetary inflation is the increase in the money supply. Price inflation is one of the potential symptoms of monetary inflation. Too often people look at just one symptom to gauge the occurrence of the cause. Currently we are experiencing both, but people seem to want to ignore the inflation of the money supply, and scratch our heads over every other variable that affects prices.

imtringued 4y ago
Ok, now introduce negative interest rates on cash.

roenxi 4y ago

There is no reason to believe the situation is complex. The value of money is changing because the authority that controls money is changing it. Nobody understands the economy. But we can be pretty sure that it isn't the economy destroying the value of the dollar, because there is no reason for consistent annual inflation to be happening. If anything, in the absence of money creation, we should be seeing deflation because of technological improvements. Short term wobbles, sure, maybe even sometimes a few straight years of inflation due to exceptional conditions. But that isn't what is happening. The only thing that can have caused the dollar to lose value consistently is creating new money. Otherwise we'd see it regularly snapping back to normal value with deflation. Which, in my lifetime, I think may have literally never happened.