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A good working definition of inflation is a general increase in prices and a fall in the purchasing value of money. There will generally be inflation when there

by IncRnd 4y ago

A good working definition of inflation is a general increase in prices and a fall in the purchasing value of money. There will generally be inflation when there are fewer goods to purchase or when the money supply increases. History teaches us that the government, often through good intentions, decreases the supply of available goods. There are many reasons this happens. Recently, people were told to stay at home, and many businesses closed. At the very least, the supply of many goods dropped, and people were at home all shopping online for the same goods - causing prices to rise - inflation. History also teaches us that the government increases the money supply by printing more money. It's not an accident that both of those are caused by the government. These are the masses' reasons to have lower regulation, not to give handouts to some but to stop government interference. Not to favor winners and losers but to have just enough regulation - without printing stupid amounts of money to save the economy in the short-term. Unfortunately, history also shows us that government interference, though possibly well-intended, results in price controls that also cause the same problem - inflation.

merely-unlikely 4y ago
A good example of unintended consequences is the proposed ban of US exports of gasoline. The intuition is that will boost supply in the US market, but that intuition fails for large chunks of the country. The East Coast is heavily dependent on imports due to a lack of pipeline capacity and US flagged ships (see Jones Act). So if exports are banned then international market prices go up, and East Coast imports become more expensive. Pockets located near refiners might get cheap gas but most of the population ends up worse off.
jollybean 4y ago
I'm wary that this is a problematic articulation. The government rarely if ever controls markets to the point where it causes material price increase for things. The US government has not taken measures to materially affect the cost of goods imported from China, or gas, for example. Yes, the Central Bank sometimes creates more liquidity than is required for a given economic cycle, but in most cases, this is due to economic calamity i.e. banking collapse, pandemic, war etc. in which case the resulting inflation is the 'accounting adjustment' made to accomodate for that 'external factor' (i.e. factor external to the regular economy). A pandemic, banking failure, getting invaded etc. can be the result of government action (I mean, especially if the nation is 'choosing to go to war', as in Vietnam) but not necessarily. Finally, and importantly, the Central Bank is not the 'government' rather, part of 'governance' - they are very different things and act for different reasons. If the 'government' did control the money printing we would all be in trouble!
- bruce511 4y ago
  I'm not sure for what reason you are being down-voted, but I disagree with your comment on China. Tarrifs on imported goods are specifically designed to make the cost of goods locally higher. If a foreign product costs $100 landed, and a locally produced one $120,then adding 20% to the foreign one makes them both the higher price. This is good news for those in local manufacturing, less-good news for the consumer. Ultimately a tariff is paid by the consumer[1], and received by the local govt, it is thus really just a consumption tax of sorts, although one that is self imposed by the consumer. The alternative is to "not pay the tax" but instead spend the same money supporting local industry. The US has had a policy over the last 6 years of adding new tariffs. (if they've been revoked in the last 2, I'm not aware.) This drives up local prices, which is a factor in (not the sole cause of) inflation. [1] politically this was spun as "China pays the tariff" but this is obviously untrue. There is no incentive for them to do so, and even if they did, it would negate the point of the tariff in the first place, which is to raise local prices to make local businesses more compeditive.
jacknews 4y ago
"There will generally be inflation when there are fewer goods to purchase or when the money supply increases." But these seem like entirely different problems. If there's too much money, then you should reduce the money supply by increasing interest rates, stoking job fears, etc. If there are not enough goods, and the market isn't responding by producing more, you can't solve it by making sure people have less money. Or, you can but you are really make people poorer, not just curbing runaway prices.
- zhoujianfu 4y ago
  Exactly... and it seems like right now it's more because of fewer goods to purchase (less energy supply because of Russia, less goods / workers because of covid), but demand has returned to pre-pandemic levels. I'm a little worried they're fighting a money supply increase when the problem is a (hopefully relatively temporary) shortage of supply. I think the money printing resulted in some asset bubbles (crypto, real estate, stocks), and raising interest rates has popped it already. But I think inflation will just settle down as we get our energy and supply chains righted, regardless of where interest rates are.
- jacknews 4y ago
  Put into much better words than I managed: https://timharford.com/2022/10/what-we-keep-getting-wrong-about-inflation/ https://timharford.com/2022/10/what-we-keep-getting-wrong-ab...
legulere 4y ago
Money supply increases don’t necessarily lead to inflation. They only do when there’s more consumer spending on products. In the recent low interest rate period, that didn’t really happen. Money instead went into an asset price bubble. What we need to do to curb inflation is to lower consumption. The best point where to do that is the rich with their excessive consumption.
- jbay808 4y ago
  > Money supply increases don’t necessarily lead to inflation[...] Money instead went into an asset price bubble. In the short term, yes, but this is a precursor to inflation; eventually the inflated asset prices propagate to consumer prices. Some paths are: increased demand (the "wealth effect"), reduced productivity (eg. people retiring with their stock portfolios or quitting jobs to speculate on crypto/real estate), as well as rising rents. Engineering trains us to analyze full cycles. There are a lot of perpetual motion machines that look promising on the expansion stroke. Reduced borrowing costs can mask this pressure, as eg. rents remain low when mortgages are cheap, despite high housing prices. But when borrowing costs rise the floodgates are opened. Either the bubble pops and the paper asset "wealth" gets vacuumed away, or else it dumps that growth into consumer prices.

by IncRnd 4y ago

merely-unlikely 4y ago

A good example of unintended consequences is the proposed ban of US exports of gasoline. The intuition is that will boost supply in the US market, but that intuition fails for large chunks of the country. The East Coast is heavily dependent on imports due to a lack of pipeline capacity and US flagged ships (see Jones Act). So if exports are banned then international market prices go up, and East Coast imports become more expensive. Pockets located near refiners might get cheap gas but most of the population ends up worse off.

jollybean 4y ago

I'm wary that this is a problematic articulation. The government rarely if ever controls markets to the point where it causes material price increase for things. The US government has not taken measures to materially affect the cost of goods imported from China, or gas, for example. Yes, the Central Bank sometimes creates more liquidity than is required for a given economic cycle, but in most cases, this is due to economic calamity i.e. banking collapse, pandemic, war etc. in which case the resulting inflation is the 'accounting adjustment' made to accomodate for that 'external factor' (i.e. factor external to the regular economy). A pandemic, banking failure, getting invaded etc. can be the result of government action (I mean, especially if the nation is 'choosing to go to war', as in Vietnam) but not necessarily. Finally, and importantly, the Central Bank is not the 'government' rather, part of 'governance' - they are very different things and act for different reasons. If the 'government' did control the money printing we would all be in trouble!

bruce511 4y ago
I'm not sure for what reason you are being down-voted, but I disagree with your comment on China. Tarrifs on imported goods are specifically designed to make the cost of goods locally higher. If a foreign product costs $100 landed, and a locally produced one $120,then adding 20% to the foreign one makes them both the higher price. This is good news for those in local manufacturing, less-good news for the consumer. Ultimately a tariff is paid by the consumer[1], and received by the local govt, it is thus really just a consumption tax of sorts, although one that is self imposed by the consumer. The alternative is to "not pay the tax" but instead spend the same money supporting local industry. The US has had a policy over the last 6 years of adding new tariffs. (if they've been revoked in the last 2, I'm not aware.) This drives up local prices, which is a factor in (not the sole cause of) inflation. [1] politically this was spun as "China pays the tariff" but this is obviously untrue. There is no incentive for them to do so, and even if they did, it would negate the point of the tariff in the first place, which is to raise local prices to make local businesses more compeditive.

jacknews 4y ago

"There will generally be inflation when there are fewer goods to purchase or when the money supply increases." But these seem like entirely different problems. If there's too much money, then you should reduce the money supply by increasing interest rates, stoking job fears, etc. If there are not enough goods, and the market isn't responding by producing more, you can't solve it by making sure people have less money. Or, you can but you are really make people poorer, not just curbing runaway prices.

zhoujianfu 4y ago
Exactly... and it seems like right now it's more because of fewer goods to purchase (less energy supply because of Russia, less goods / workers because of covid), but demand has returned to pre-pandemic levels. I'm a little worried they're fighting a money supply increase when the problem is a (hopefully relatively temporary) shortage of supply. I think the money printing resulted in some asset bubbles (crypto, real estate, stocks), and raising interest rates has popped it already. But I think inflation will just settle down as we get our energy and supply chains righted, regardless of where interest rates are.
jacknews 4y ago
Put into much better words than I managed: https://timharford.com/2022/10/what-we-keep-getting-wrong-about-inflation/ https://timharford.com/2022/10/what-we-keep-getting-wrong-ab...

legulere 4y ago

Money supply increases don’t necessarily lead to inflation. They only do when there’s more consumer spending on products. In the recent low interest rate period, that didn’t really happen. Money instead went into an asset price bubble. What we need to do to curb inflation is to lower consumption. The best point where to do that is the rich with their excessive consumption.

jbay808 4y ago
> Money supply increases don’t necessarily lead to inflation[...] Money instead went into an asset price bubble. In the short term, yes, but this is a precursor to inflation; eventually the inflated asset prices propagate to consumer prices. Some paths are: increased demand (the "wealth effect"), reduced productivity (eg. people retiring with their stock portfolios or quitting jobs to speculate on crypto/real estate), as well as rising rents. Engineering trains us to analyze full cycles. There are a lot of perpetual motion machines that look promising on the expansion stroke. Reduced borrowing costs can mask this pressure, as eg. rents remain low when mortgages are cheap, despite high housing prices. But when borrowing costs rise the floodgates are opened. Either the bubble pops and the paper asset "wealth" gets vacuumed away, or else it dumps that growth into consumer prices.