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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 exper
by 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 agoWhy 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 agoFiat 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 agoAnother common factor in all cases of inflation was the moon orbiting the Earth, so clearly the moon is causing inflation.
- WalterBright 4y agoYour theory doesn't explain deflation. Mine does.
- imtringued 4y agoEgyptians 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 agoI 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 agoAll you've done here is dress up the "it's really complicated, you wouldn't understand it" dismissal in nicer terms.
- mypalmike 4y agoEconomists working for oil companies certainly don't ignore money supply.
- Izkata 4y agoOne of the reasons to raise price is to discourage people from buying when you have limited stock. Sellers can tell where their supply is coming from, compare it to how much stock they have left, and compare that to normal times. So yeah, they do have such a signal, though it is secondary to the actual reason for the price increase.
- wahern 4y agoAFAIU 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 agoWhy 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 agoMakes 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 agoNot 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.