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If inflation is caused by people having too much money then it is a self-correcting problem because as prices go up people will no longer have as much money. So

If inflation is caused by people having too much money then it is a self-correcting problem because as prices go up people will no longer have as much money. Soon enough they will not have too much money at all. So what is the real problem with inflation? Is it the economic inequality it brings to those who have to live on fixed income? I've been following the discussion on US TV and it seems they are saying we need more unemployment. We need economic hard time so that people will not have too much loose money any more. We need more unemployment so that employers don't have to pay bigger wages causing wage-inflation. To me this sounds counter-intuitive. How can the solution be more unemployment? People will then have even less money after paying the grocery and gas-bills.

nyokodo 4y ago
> People will then have even less money after paying the grocery and gas-bills. Precisely. The less money people have the lower prices have to go for sales to be possible so increased unemployment is a downward force on prices but isn’t all that successful right now when there’s also a massive skilled labor shortage in the vicinity of record expansions of the money supply.
- rightbyte 4y ago
  Instead of forcing some people into unemployment wouldn't raising taxes a little bit on everyone have the same effect?
  - happymellon 4y ago
    Yes, but the people who raise taxes are not the people who understand economics.
bfung 4y ago
> it is a self-correcting problem because as prices go up people will no longer have as much money. It’s not as simple as that, and thinking about the second and third order follow-ons is important. History has taught us it goes something like this: 1. People have more money, so the majority spend it (instead of saving it). 2. Companies, seeing more demand, but can’t expand supply as quickly, raise prices. 3. People are feeling good cause their companies are doing well, but wait… we should get a raise and get some of that profit! 4. see #1. At some point, this cycle gets out of control and we finally realize “inflation is too high”. For example, when companies can produce a good at a rate X, they can up prices at rate 1.05X. But suddenly, they run out of resources and can only produce at constant, instead of rate X, but continue to raise prices due to “projected” demand. You have to break the cycle somewhere, and it’s painful no matter where you start, from unemployment or raise taxes or add regulations. The US Fed only has 1 tool out of the 3, as congress is the ones with power to raise taxes or add regulation.
- raydiatian 4y ago
  I haven’t studied Econ too much, but I know differential equations. Is there any economic theory suggesting a stable curve that doesn’t oscillate around the mean (but rather tightens up right onto the “mean” whatever that is) is desirable? I get we’re also talking planet scale complexity, and it’s not like that can just be baked in overnight.
  - barry-cotter 4y ago
    The costs of inflation are mostly in surprise, adjustment, monitoring or uncertainty. A stable rate puts all of those at or near zero. High, stable, predictable inflation would be better than usually low but unstable inflation. For a perfectly fine introduction to why inflation is bad see the link below. https://quickonomics.com/the-costs-of-inflation/#:~:text=The%20Costs%20of%20Inflation%201%201.%20Shoeleather%20Costs,Distortions%20...%205%205.%20Confusion%20and%20Inconvenience%20 https://quickonomics.com/the-costs-of-inflation/#:~:text=The...
    - deleted 4y ago
      [deleted]
- saghm 4y ago
  > For example, when companies can produce a good at a rate X, they can up prices at rate 1.05X. But suddenly, they run out of resources and can only produce at constant, instead of rate X, but continue to raise prices due to “projected” demand. > You have to break the cycle somewhere, and it’s painful no matter where you start, from unemployment or raise taxes or add regulations. I know your explanation is simplified, but as you describe it, it seems like the obvious solution is to just stop raising the prices? I feel like there must be something more complicated at play, because "we need more unemployment so that the companies don't have to stop raising their prices due to incorrect predictions" is ridiculous.
  - rembicilious 4y ago
    It seems like capping prices would cap inflation, but I can’t think of any great mechanism to accomplish such a cap. Central bank interest rates and taxes are controlled by relatively few people. Prices are controlled by hundreds of thousands of people.
pcai 4y ago
inflation is only initially caused by money supply. once inflation expectations become embedded, it becomes a self-reinforcing perpetual motion machine. e.g. imagine you negotiate a 13% raise because inflation was 13% last year (btw so did everyone else). congrats - everyone just guaranteed that they will have enough money to create 13% inflation next year, when the cycle will repeat unemployment solves this because it's a "-100% raise" and takes spending power out of the economy and inflation is generally considered bad because among other things it distorts markets for savings and loans
- barry-cotter 4y ago
  > it becomes a self-reinforcing perpetual motion machine. Only until expectations catch up with the reality of the money supply. If there isn’t enough money in the business’s account to pay that 13% raise people get fired or the contract gets renegotiated, or the business goes under.
  - pcai 4y ago
    once inflation is embedded in the economy the velocity of money matters more than the supply, because the sticky price effect causes a spiral. there will be enough money in that business's account because they will do the obvious thing and increase prices by 13% - after all, their costs are up and their customers are making more money so they can easily absorb the increase. here is a simplified illustration of the phenomenon https://archive.nytimes.com/krugman.blogs.nytimes.com/2008/05/31/embedded-vs-non-embedded-inflation/ https://archive.nytimes.com/krugman.blogs.nytimes.com/2008/0...
paulpauper 4y ago
Higher unemployment is generally deflationary according to mainstream economic theory and empirical evidence
- rogersnm 4y ago
  Correlation or causation though? If it's correlation then higher unemployment is not in and of itself deflationary, it's just that whatever causes higher unemployment also causes reduced inflation. A non-causal link makes more intuitive sense than a direct causal link: as we go from monetary stimulus (having too much money) to monetary contraction (having too little money), demand for labour cools, as does the rate of increases in the price level.
jnwatson 4y ago
Inflation isn’t caused by too much money. It is caused by too much money velocity. That’s why the last huge injection of money in 2008 didn’t cause inflation. Folks sat on their money and didn’t spend it. Raising interest rates isn’t about causing unemployment (directly at least). It is about causing capital investment to be less lucrative than tying the money up in treasuries, reducing money velocity.
- thrown_22 4y ago
  So why not go for the even simpler solution of forcing everyone to use checks which only clear once a week? If money velocity causes inflation forcing people to use less efficient methods of exchanging money should stop it.
  - refurb 4y ago
    Because people will compensate and take out more money.
    - thrown_22 4y ago
      It's almost like velocity of money doesn't exist or something.
- pcai 4y ago
  spot on about money velocity. in addition to capital investment there's also a lot of impact by manipulating current consumption that responds to interest rates - like the housing market, which is mostly consumption.
- rogersnm 4y ago
  > It is about causing capital investment to be less lucrative than tying the money up in treasuries Money isn't tied up in treasuries, money (loosely bank deposits and cash) and treasuries are two distinct concepts. You can trade money in exchange for treasuries, but then the previous holder of the treasuries has the money, and you have the treasuries, it doesn't tie the money up. The amount of value captured in treasuries is a function of the total government debt outstanding, and a way to increase that value is to issue more Government debt (in which case, the money goes to the Government to then spend, it still isn't tied up), however the Government is actually disincentivised to do this as their cost of borrowing (interest rates) goes up. > That’s why the last huge injection of money in 2008 didn’t cause inflation. The "injection of money in 2008" (the creation of central bank reserves) didn't cause inflation because the overall quantity of broad money still fell over that time period (https://fred.stlouisfed.org/series/DDOI07USA648NWDB https://fred.stlouisfed.org/series/DDOI07USA648NWDB). This was because of the "credit crunch" occurring at the time, where commercial banks where massively reducing their lending activities. The same is not true now, the creation of additional central bank reserves in the past 2 years has directly translated into more broad money, and we have inflation as a result.
mudrockbestgirl 4y ago
> So what is the real problem with inflation? Is it the economic inequality it brings to those who have to live on fixed income? Yes, that's part of it. Inflation is a race. It's not a problem for whoever gets access to the newly created money first. It's a tax on people who have fixed income (or cash reserves) of some kind, because they will be the last group the new money flows to. It's not about the increase in money supply, which doesn't really matter because the market will adjust prices, it's about how the newly created money flows through the economy.
lordnacho 4y ago
The problem is not that prices keep going up, is that they do so unevenly among various goods and services. This adds a dimension of instability that makes it hard to decide what to do for everyone.
rogersnm 4y ago
> If inflation is caused by people having too much money then it is a self-correcting problem because as prices go up people will no longer have as much money. Soon enough they will not have too much money at all. The problem is a situation of run-away inflation can arise. This happens because the vast majority of the money supply is created by commercial banks lending activities (not central bank reserves as many seem to believe) - i.e. whenever any commercial bank lends, it creates new money. When inflation goes up sharply, real interest rates can become sharply negative (as they are presently), and this provides an incentive to borrow money at negative real rates, where you profit by not having to repay as much in the future as you borrowed in real terms. This borrowing/lending activity itself then serves to further increase the money supply, until such time as interest rates are raised sufficiently so as to bring the (expected) real interest rate back into positive territory, thereby removing the profit incentive that drives marginal money creation.
- nverno 4y ago
  Why isn't the Fed raising the reserve rate (apparently it was set to 0 in 2020[1]) to reduce commercial banks creating new money? [1] https://www.investopedia.com/terms/b/bank-reserve.asp#citation-11 https://www.investopedia.com/terms/b/bank-reserve.asp#citati...
  - rogersnm 4y ago
    The Fed is doing exactly that: https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS
    - nverno 4y ago
      Ah thankyou, do you think it will spike anything like it did in the 80s? [edit: I see she discusses this in article as well, now]
      - rogersnm 4y ago
        Predicting the future is always difficult, there are elements of now that are similar to the past, and there are elements that are different. It also helps to have experienced those past events and been able to learn lessons from them. It seems highly likely that inflation will remain at its current elevated level for at least another 12 months, beyond that horizon, the trajectory will be determined by what happens between now and then.
neilwilson 4y ago
Inflation is never caused by there being 'too much money'. It's caused by people spending and choosing to pay the higher prices on offer, rather than shopping around, saying 'no deal' or saving. A $100 in a drawer can't cause inflation. It's not a stock problem; it's a flow problem. Inflation is always, everywhere, a lack of effective competition. In situations of excess supply you have very little to no inflation. Firms are too scared to push prices for fear of losing market share. We don't need hair shirt people going around confiscating assets from people. What we need is more investment to create more capacity to supply, and anti-trust action in any areas where a monopoly has arisen. We don't need an Office of Budget Responsibility, we need an Office of Price Competition. The target should be to maintain leptokurtic turnover vs price curves in all markets. Then we'll have stable prices.
- rogersnm 4y ago
  > It's not a stock problem; it's a flow problem. It's arguably both a stock problem and a flow problem (MV = PQ). If the stock is constant and the flow increases, you get inflation. If the flow is constant and the stock increases, you get inflation. > Inflation is always, everywhere, a lack of effective competition. In situations of excess supply you have very little to no inflation. Excess supply at a given price level almost by definition means prices should trend downwards (it is price that ultimately balances supply and demand, and therefore it is too high a price that causes the relative excess of supply/lack of demand). The price of commodities around the world is going up, by definition this cannot be due to a lack of competition - there must be something else at play.
  - CraigJPerry 4y ago
    >> If the flow is constant and the stock increases, you get inflation That seems like it’s missing a variable to describe when increased supply is spent vs when it is saved. If stock increases but is not channeled through flow, i.e. i take a loan at 2% to save in my bank’s savings offer of 5.25% then flow stays the same (i still spend on the same things each month) but money supply went up and inflation remained uninfluenced by my activities as supply slowly regresses to almost prior state while i pay off each month. Not quite prior stage because i get to save the extra from interest rate arbitrage.
c7b 4y ago
Think about it: if inflation is caused by a higher growth rate of the money supply than the real output growth rate, as you suggest, then how would higher prices change anything about that? The money that you leave in the shop doesn't leave the system, it just flows to employees, suppliers and owners of the business, ie to other people. It's still very much in the system, the money supply hasn't changed at all. Inflation is anything but self-correcting, as countless episodes of hyperinflation have demonstrated: a thousand percent a year, ten thousand, ten billion percent - we've seen it all [0]. And that is the real problem with inflation: it truly has no upper bound. And above certain levels, it's very hard to bear. [0] https://en.wikipedia.org/wiki/Hyperinflation https://en.wikipedia.org/wiki/Hyperinflation
- rogersnm 4y ago
  > how would higher prices change anything about that? Higher prices reflect a new equilibrium between the quantity of money and the quantity of goods and services being produced. Until that revised equilibrium is reached, you generally suffer from shortages of goods and rising prices. > It's still very much in the system, the money supply hasn't changed at all. The money supply doesn't need to decrease for inflation to stop, it just needs to stop increasing on an output-adjusted basis (and even then you need to wait for the equilibrium to be roughly reached before price levels stabilise).
1vuio0pswjnm7 4y ago
"I've been following the discussion on US TV and they say we need more unemployment." The Federal Reserve Chairman actually said this in a speech several months ago. Maybe if we sacrifice a lamb, things will get better. For this unemployment "solution" to work, more people have to be out of work. Sacrificial lambs in 2022. As things improve, "the rising tide will lift all boats". Except for the sacrificial lambs who will sink like stones.
- Aunche 4y ago
  Please share a source. I googled this with several different variations of quoting and only saw your HN comment
  - AnimalMuppet 4y ago
    What the Fed actually said is that they need to raise interest rates to get inflation under control, even though that will likely cause greater unemployment. Various people twist this into the Fed saying that unemployment is the goal, instead of a negative side effect. I don't know why people twist things in this way, but I've seen people repeatedly do so.
    - galaxyLogic 4y ago
      It is easy to understand that way. If people lose their jobs that will reduce demand which will reduce inflation. The goal of Fed is to reduce inflation and one way of getting there is to slow down the economy which causes more unemployment. But Fed has another goal too which is preventing unemployment. They are in a twist.
  - ac29 4y ago
    What he said was "there will very likely be some softening of labor market conditions", which was interpreted to mean increased unemployment. source with video: https://twitter.com/CNBC/status/1563172126945067009 https://twitter.com/CNBC/status/1563172126945067009
lkrubner 4y ago
Imagine a country that has no international trade of any kind. If this country has inflation, the inflation has to be because of an excess of dollars over what can, in the short term, be supplied. (Over the long-term the stimulus of spending should lead to an increase in supply, which is why every nation prefer inflation to be mildly positive rather than mildly negative.) But imagine a country that imports 25% of GDP and exports 25% of GDP, so that trade makes up 50% of the GDP. Now it can have an increase in inflation without a change in its monetary policy. For instance, if it buys a critical supply from a country, and that other country has an appreciating currency, then suddenly the imports will be more expensive. This is with no change to domestic monetary policy.
arc-in-space 4y ago
(Much has been said in the other comments, but I find them mostly incomplete) > If inflation is caused by people having too much money then it is a self-correcting problem because as prices go up people will no longer have as much money. (...) So what is the real problem with inflation? Great question. The "real problem" with inflation depends on what type of inflation it is - either demand side, which is what the Fed can control, or supply side, in the form of rising energy or food prices due to external shocks. Right now we actually have both. The latter directly worsens standards of living (it causes prices to rise but wages stay the same), and the former is a bit more subtle; it taxes savings and causes various instabilities through the economy due to the changing value of future money, such as eroding the value of a loan for borrowers. (But in the long term prices and wages do re-adjust, as you point out; the problem is short term.) > I've been following the discussion on US TV and it seems they are saying we need more unemployment. The TV is hopelessly confused. We do need a monetary tightening to stop the economy from overheating(demand-side inflation), which will unfortunately worsen unemployment, but that isn't the main mechanism here. The inflation is a consequence of a mistake that has already been made by the Fed - overly expansionary monetary policy since 2021 - and the steps required to fix it will cause unemployment to temporarily rise. And yes, this is going to suck. But the more the Fed waits, the worse it gets.
- BoiledCabbage 4y ago
  You were right, up until you were wrong. Most peeps looking at this situation ignore (or are unaware) of the first level issue. It's it demand side or is it supply side. Demand side can rebalance eventually and is less harmful. Supply side means everyone is now poorer and it's more painful on top of also including a unequal distribution of that pain. The 1970s was supply side - driven most significantly by the fallout of the oil shocks. > The inflation is a consequence of a mistake that has already been made by the Fed - overly expansionary monetary policy since 2021 However you miss the next important level of distinction in inflation. Inflation in what? Basic goods and services or investments/ assets? People have been claiming that the Fed's policy (and QE) would kick off horrible inflation in goods and services now every year since 2009 and it never happened. When did goods and services inflation start? During the supply side shutdowns of Covid when hundreds of economies worldwide began producing less due to people remaining home, getting sick, retiring early, dying and factories and shops closing. Then goods and services inflation kicked into high gear with yet again the oil spike. Oil price doubled in roughly 18 months, peaking earlier this year. And yet again we see goods and services inflation. The inflation that's hitting common families is (as usual) supply driven. Now is you're a crypto investor, or a real estate investor, or looking to buy a house, or own stocks, then yes you have legit complaint about the demand driven asset bubble and subsequent popping due to the Fed's policy of cheap money. But the reason trips to the grocery store, filing up a tank, and every day costs are more expensive now is due to supply side.
roenxi 4y ago
> So what is the real problem with inflation? Is it the economic inequality it brings to those who have to live on fixed income? 1) Humans aren't perfectly rational. A lot of people who don't understand exponential curves will end up going broke - like people who earned money and "saved" it by storing it in a bank account. To put it bluntly, a bunch of old people will be left destitute despite working hard and saving. This also affects wage earners who aren't keen negotiators. They'll quickly end up with a below-market wage and might not realise what is going on. 2) Price signals take time to propagate because the economic hive mind doesn't move at the speed of light, it moves at the speed of takes-a-few-months. There will be wild mis-allocations as people work out how to measure goods in something reliable that isn't dollars. 3) The new money has to start somewhere, that group will get a massive advantage in allocating resources. They probably aren't good at it, because if they were they wouldn't need free money, so they'll cause massive waste. 4) Triggering high inflation is bad strategy for making things better, so if it is being used the people running the show are probably not the most competent of chaps. They'll be making a lot of mistakes. Eg, usually a high-inflation strategy will get coupled with other tricks to destroy savings - think gold confiscation or wealth taxes - as people try to respond sanely to money printing. If you run the numbers on how capital gains tax interacts with inflation you have a "hey! wait a minute..." moment if you like saving money.
nostrademons 4y ago
It's not really self-correcting. When a consumer spends their money at inflated prices, it doesn't disappear. It goes to the business owner, who just received inflated prices for their goods. They, in turn, usually need to pay their suppliers, who can charge them inflated prices and make all their windfall profits disappear. In my view, the main problems with inflation are: 1. It introduces a transaction cost tax. Every time a business raises prices, they need to spend time re-printing menus, marketing materials, websites, etc. They need to spend time renegotiating contracts. They need to re-figure their cost structure, and see if it still makes sense to use the same suppliers. 2. It disincentivizes long-term investment or planning over short-term consumption. If money's going to be worth less later, spend it now, regardless of whether you need what you're spending it on. Any long-range plans or savings will likely be invalidated by changing cost structures anyway. As a concrete example, in times of high inflation the rational thing for an employee to do is to completely ignore their actual work and spend all their time focusing on getting a new job. Existing employees usually fall behind inflation, because they aren't actively negotiating their labor contracts and usually have no negotiating leverage anyway. The folks who make it up are those who job-hop. There is some employer out there willing to pay more than your current one; go find them, ask for 20% more than your current salary, and reap the windfall. But if everybody does this, no actual work gets done, exacerbating any supply shortages. People become so incentivized to chase higher dollar values that they don't pay any attention to what those dollars represent.
- galaxyLogic 4y ago
  > It goes to the business owner, who just received inflated prices for their goods. They, in turn, usually need to pay their suppliers, who can charge them inflated price The first business receiving inflated prices does not really affect what their suppliers are charging them does it? When a business makes more money and if there is competition they can afford to sell at a lower price and still make profit. And they can invest in making production cheaper which will eventually decrease prices, one could think. Good points about why inflation is bad. I was just wondering if it is self-correcting problem then it can not be very bad. It seems like a complicated problem. Except supply-side inflation is easy to understand.

nyokodo 4y ago

> People will then have even less money after paying the grocery and gas-bills. Precisely. The less money people have the lower prices have to go for sales to be possible so increased unemployment is a downward force on prices but isn’t all that successful right now when there’s also a massive skilled labor shortage in the vicinity of record expansions of the money supply.

rightbyte 4y ago
Instead of forcing some people into unemployment wouldn't raising taxes a little bit on everyone have the same effect?
- happymellon 4y ago
  Yes, but the people who raise taxes are not the people who understand economics.

bfung 4y ago

> it is a self-correcting problem because as prices go up people will no longer have as much money. It’s not as simple as that, and thinking about the second and third order follow-ons is important. History has taught us it goes something like this: 1. People have more money, so the majority spend it (instead of saving it). 2. Companies, seeing more demand, but can’t expand supply as quickly, raise prices. 3. People are feeling good cause their companies are doing well, but wait… we should get a raise and get some of that profit! 4. see #1. At some point, this cycle gets out of control and we finally realize “inflation is too high”. For example, when companies can produce a good at a rate X, they can up prices at rate 1.05X. But suddenly, they run out of resources and can only produce at constant, instead of rate X, but continue to raise prices due to “projected” demand. You have to break the cycle somewhere, and it’s painful no matter where you start, from unemployment or raise taxes or add regulations. The US Fed only has 1 tool out of the 3, as congress is the ones with power to raise taxes or add regulation.

raydiatian 4y ago
I haven’t studied Econ too much, but I know differential equations. Is there any economic theory suggesting a stable curve that doesn’t oscillate around the mean (but rather tightens up right onto the “mean” whatever that is) is desirable? I get we’re also talking planet scale complexity, and it’s not like that can just be baked in overnight.
- barry-cotter 4y ago
  The costs of inflation are mostly in surprise, adjustment, monitoring or uncertainty. A stable rate puts all of those at or near zero. High, stable, predictable inflation would be better than usually low but unstable inflation. For a perfectly fine introduction to why inflation is bad see the link below. https://quickonomics.com/the-costs-of-inflation/#:~:text=The%20Costs%20of%20Inflation%201%201.%20Shoeleather%20Costs,Distortions%20...%205%205.%20Confusion%20and%20Inconvenience%20 https://quickonomics.com/the-costs-of-inflation/#:~:text=The...
  - deleted 4y ago
    [deleted]
saghm 4y ago
> For example, when companies can produce a good at a rate X, they can up prices at rate 1.05X. But suddenly, they run out of resources and can only produce at constant, instead of rate X, but continue to raise prices due to “projected” demand. > You have to break the cycle somewhere, and it’s painful no matter where you start, from unemployment or raise taxes or add regulations. I know your explanation is simplified, but as you describe it, it seems like the obvious solution is to just stop raising the prices? I feel like there must be something more complicated at play, because "we need more unemployment so that the companies don't have to stop raising their prices due to incorrect predictions" is ridiculous.
- rembicilious 4y ago
  It seems like capping prices would cap inflation, but I can’t think of any great mechanism to accomplish such a cap. Central bank interest rates and taxes are controlled by relatively few people. Prices are controlled by hundreds of thousands of people.

pcai 4y ago

inflation is only initially caused by money supply. once inflation expectations become embedded, it becomes a self-reinforcing perpetual motion machine. e.g. imagine you negotiate a 13% raise because inflation was 13% last year (btw so did everyone else). congrats - everyone just guaranteed that they will have enough money to create 13% inflation next year, when the cycle will repeat unemployment solves this because it's a "-100% raise" and takes spending power out of the economy and inflation is generally considered bad because among other things it distorts markets for savings and loans

barry-cotter 4y ago
> it becomes a self-reinforcing perpetual motion machine. Only until expectations catch up with the reality of the money supply. If there isn’t enough money in the business’s account to pay that 13% raise people get fired or the contract gets renegotiated, or the business goes under.
- pcai 4y ago
  once inflation is embedded in the economy the velocity of money matters more than the supply, because the sticky price effect causes a spiral. there will be enough money in that business's account because they will do the obvious thing and increase prices by 13% - after all, their costs are up and their customers are making more money so they can easily absorb the increase. here is a simplified illustration of the phenomenon https://archive.nytimes.com/krugman.blogs.nytimes.com/2008/05/31/embedded-vs-non-embedded-inflation/ https://archive.nytimes.com/krugman.blogs.nytimes.com/2008/0...

paulpauper 4y ago

Higher unemployment is generally deflationary according to mainstream economic theory and empirical evidence

rogersnm 4y ago
Correlation or causation though? If it's correlation then higher unemployment is not in and of itself deflationary, it's just that whatever causes higher unemployment also causes reduced inflation. A non-causal link makes more intuitive sense than a direct causal link: as we go from monetary stimulus (having too much money) to monetary contraction (having too little money), demand for labour cools, as does the rate of increases in the price level.

jnwatson 4y ago

Inflation isn’t caused by too much money. It is caused by too much money velocity. That’s why the last huge injection of money in 2008 didn’t cause inflation. Folks sat on their money and didn’t spend it. Raising interest rates isn’t about causing unemployment (directly at least). It is about causing capital investment to be less lucrative than tying the money up in treasuries, reducing money velocity.

thrown_22 4y ago
So why not go for the even simpler solution of forcing everyone to use checks which only clear once a week? If money velocity causes inflation forcing people to use less efficient methods of exchanging money should stop it.
- refurb 4y ago
  Because people will compensate and take out more money.
  - thrown_22 4y ago
    It's almost like velocity of money doesn't exist or something.
pcai 4y ago
spot on about money velocity. in addition to capital investment there's also a lot of impact by manipulating current consumption that responds to interest rates - like the housing market, which is mostly consumption.
rogersnm 4y ago
> It is about causing capital investment to be less lucrative than tying the money up in treasuries Money isn't tied up in treasuries, money (loosely bank deposits and cash) and treasuries are two distinct concepts. You can trade money in exchange for treasuries, but then the previous holder of the treasuries has the money, and you have the treasuries, it doesn't tie the money up. The amount of value captured in treasuries is a function of the total government debt outstanding, and a way to increase that value is to issue more Government debt (in which case, the money goes to the Government to then spend, it still isn't tied up), however the Government is actually disincentivised to do this as their cost of borrowing (interest rates) goes up. > That’s why the last huge injection of money in 2008 didn’t cause inflation. The "injection of money in 2008" (the creation of central bank reserves) didn't cause inflation because the overall quantity of broad money still fell over that time period (https://fred.stlouisfed.org/series/DDOI07USA648NWDB https://fred.stlouisfed.org/series/DDOI07USA648NWDB). This was because of the "credit crunch" occurring at the time, where commercial banks where massively reducing their lending activities. The same is not true now, the creation of additional central bank reserves in the past 2 years has directly translated into more broad money, and we have inflation as a result.

mudrockbestgirl 4y ago

> So what is the real problem with inflation? Is it the economic inequality it brings to those who have to live on fixed income? Yes, that's part of it. Inflation is a race. It's not a problem for whoever gets access to the newly created money first. It's a tax on people who have fixed income (or cash reserves) of some kind, because they will be the last group the new money flows to. It's not about the increase in money supply, which doesn't really matter because the market will adjust prices, it's about how the newly created money flows through the economy.

lordnacho 4y ago

The problem is not that prices keep going up, is that they do so unevenly among various goods and services. This adds a dimension of instability that makes it hard to decide what to do for everyone.

rogersnm 4y ago

> If inflation is caused by people having too much money then it is a self-correcting problem because as prices go up people will no longer have as much money. Soon enough they will not have too much money at all. The problem is a situation of run-away inflation can arise. This happens because the vast majority of the money supply is created by commercial banks lending activities (not central bank reserves as many seem to believe) - i.e. whenever any commercial bank lends, it creates new money. When inflation goes up sharply, real interest rates can become sharply negative (as they are presently), and this provides an incentive to borrow money at negative real rates, where you profit by not having to repay as much in the future as you borrowed in real terms. This borrowing/lending activity itself then serves to further increase the money supply, until such time as interest rates are raised sufficiently so as to bring the (expected) real interest rate back into positive territory, thereby removing the profit incentive that drives marginal money creation.

nverno 4y ago
Why isn't the Fed raising the reserve rate (apparently it was set to 0 in 2020[1]) to reduce commercial banks creating new money? [1] https://www.investopedia.com/terms/b/bank-reserve.asp#citation-11 https://www.investopedia.com/terms/b/bank-reserve.asp#citati...
- rogersnm 4y ago
  The Fed is doing exactly that: https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS
  - nverno 4y ago
    Ah thankyou, do you think it will spike anything like it did in the 80s? [edit: I see she discusses this in article as well, now]
    - rogersnm 4y ago
      Predicting the future is always difficult, there are elements of now that are similar to the past, and there are elements that are different. It also helps to have experienced those past events and been able to learn lessons from them. It seems highly likely that inflation will remain at its current elevated level for at least another 12 months, beyond that horizon, the trajectory will be determined by what happens between now and then.

neilwilson 4y ago

Inflation is never caused by there being 'too much money'. It's caused by people spending and choosing to pay the higher prices on offer, rather than shopping around, saying 'no deal' or saving. A $100 in a drawer can't cause inflation. It's not a stock problem; it's a flow problem. Inflation is always, everywhere, a lack of effective competition. In situations of excess supply you have very little to no inflation. Firms are too scared to push prices for fear of losing market share. We don't need hair shirt people going around confiscating assets from people. What we need is more investment to create more capacity to supply, and anti-trust action in any areas where a monopoly has arisen. We don't need an Office of Budget Responsibility, we need an Office of Price Competition. The target should be to maintain leptokurtic turnover vs price curves in all markets. Then we'll have stable prices.

rogersnm 4y ago
> It's not a stock problem; it's a flow problem. It's arguably both a stock problem and a flow problem (MV = PQ). If the stock is constant and the flow increases, you get inflation. If the flow is constant and the stock increases, you get inflation. > Inflation is always, everywhere, a lack of effective competition. In situations of excess supply you have very little to no inflation. Excess supply at a given price level almost by definition means prices should trend downwards (it is price that ultimately balances supply and demand, and therefore it is too high a price that causes the relative excess of supply/lack of demand). The price of commodities around the world is going up, by definition this cannot be due to a lack of competition - there must be something else at play.
- CraigJPerry 4y ago
  >> If the flow is constant and the stock increases, you get inflation That seems like it’s missing a variable to describe when increased supply is spent vs when it is saved. If stock increases but is not channeled through flow, i.e. i take a loan at 2% to save in my bank’s savings offer of 5.25% then flow stays the same (i still spend on the same things each month) but money supply went up and inflation remained uninfluenced by my activities as supply slowly regresses to almost prior state while i pay off each month. Not quite prior stage because i get to save the extra from interest rate arbitrage.

c7b 4y ago

Think about it: if inflation is caused by a higher growth rate of the money supply than the real output growth rate, as you suggest, then how would higher prices change anything about that? The money that you leave in the shop doesn't leave the system, it just flows to employees, suppliers and owners of the business, ie to other people. It's still very much in the system, the money supply hasn't changed at all. Inflation is anything but self-correcting, as countless episodes of hyperinflation have demonstrated: a thousand percent a year, ten thousand, ten billion percent - we've seen it all [0]. And that is the real problem with inflation: it truly has no upper bound. And above certain levels, it's very hard to bear. [0] https://en.wikipedia.org/wiki/Hyperinflation https://en.wikipedia.org/wiki/Hyperinflation

rogersnm 4y ago
> how would higher prices change anything about that? Higher prices reflect a new equilibrium between the quantity of money and the quantity of goods and services being produced. Until that revised equilibrium is reached, you generally suffer from shortages of goods and rising prices. > It's still very much in the system, the money supply hasn't changed at all. The money supply doesn't need to decrease for inflation to stop, it just needs to stop increasing on an output-adjusted basis (and even then you need to wait for the equilibrium to be roughly reached before price levels stabilise).

1vuio0pswjnm7 4y ago

"I've been following the discussion on US TV and they say we need more unemployment." The Federal Reserve Chairman actually said this in a speech several months ago. Maybe if we sacrifice a lamb, things will get better. For this unemployment "solution" to work, more people have to be out of work. Sacrificial lambs in 2022. As things improve, "the rising tide will lift all boats". Except for the sacrificial lambs who will sink like stones.

Aunche 4y ago
Please share a source. I googled this with several different variations of quoting and only saw your HN comment
- AnimalMuppet 4y ago
  What the Fed actually said is that they need to raise interest rates to get inflation under control, even though that will likely cause greater unemployment. Various people twist this into the Fed saying that unemployment is the goal, instead of a negative side effect. I don't know why people twist things in this way, but I've seen people repeatedly do so.
  - galaxyLogic 4y ago
    It is easy to understand that way. If people lose their jobs that will reduce demand which will reduce inflation. The goal of Fed is to reduce inflation and one way of getting there is to slow down the economy which causes more unemployment. But Fed has another goal too which is preventing unemployment. They are in a twist.
- ac29 4y ago
  What he said was "there will very likely be some softening of labor market conditions", which was interpreted to mean increased unemployment. source with video: https://twitter.com/CNBC/status/1563172126945067009 https://twitter.com/CNBC/status/1563172126945067009

lkrubner 4y ago

Imagine a country that has no international trade of any kind. If this country has inflation, the inflation has to be because of an excess of dollars over what can, in the short term, be supplied. (Over the long-term the stimulus of spending should lead to an increase in supply, which is why every nation prefer inflation to be mildly positive rather than mildly negative.) But imagine a country that imports 25% of GDP and exports 25% of GDP, so that trade makes up 50% of the GDP. Now it can have an increase in inflation without a change in its monetary policy. For instance, if it buys a critical supply from a country, and that other country has an appreciating currency, then suddenly the imports will be more expensive. This is with no change to domestic monetary policy.

arc-in-space 4y ago

(Much has been said in the other comments, but I find them mostly incomplete) > If inflation is caused by people having too much money then it is a self-correcting problem because as prices go up people will no longer have as much money. (...) So what is the real problem with inflation? Great question. The "real problem" with inflation depends on what type of inflation it is - either demand side, which is what the Fed can control, or supply side, in the form of rising energy or food prices due to external shocks. Right now we actually have both. The latter directly worsens standards of living (it causes prices to rise but wages stay the same), and the former is a bit more subtle; it taxes savings and causes various instabilities through the economy due to the changing value of future money, such as eroding the value of a loan for borrowers. (But in the long term prices and wages do re-adjust, as you point out; the problem is short term.) > I've been following the discussion on US TV and it seems they are saying we need more unemployment. The TV is hopelessly confused. We do need a monetary tightening to stop the economy from overheating(demand-side inflation), which will unfortunately worsen unemployment, but that isn't the main mechanism here. The inflation is a consequence of a mistake that has already been made by the Fed - overly expansionary monetary policy since 2021 - and the steps required to fix it will cause unemployment to temporarily rise. And yes, this is going to suck. But the more the Fed waits, the worse it gets.

BoiledCabbage 4y ago
You were right, up until you were wrong. Most peeps looking at this situation ignore (or are unaware) of the first level issue. It's it demand side or is it supply side. Demand side can rebalance eventually and is less harmful. Supply side means everyone is now poorer and it's more painful on top of also including a unequal distribution of that pain. The 1970s was supply side - driven most significantly by the fallout of the oil shocks. > The inflation is a consequence of a mistake that has already been made by the Fed - overly expansionary monetary policy since 2021 However you miss the next important level of distinction in inflation. Inflation in what? Basic goods and services or investments/ assets? People have been claiming that the Fed's policy (and QE) would kick off horrible inflation in goods and services now every year since 2009 and it never happened. When did goods and services inflation start? During the supply side shutdowns of Covid when hundreds of economies worldwide began producing less due to people remaining home, getting sick, retiring early, dying and factories and shops closing. Then goods and services inflation kicked into high gear with yet again the oil spike. Oil price doubled in roughly 18 months, peaking earlier this year. And yet again we see goods and services inflation. The inflation that's hitting common families is (as usual) supply driven. Now is you're a crypto investor, or a real estate investor, or looking to buy a house, or own stocks, then yes you have legit complaint about the demand driven asset bubble and subsequent popping due to the Fed's policy of cheap money. But the reason trips to the grocery store, filing up a tank, and every day costs are more expensive now is due to supply side.

roenxi 4y ago

> So what is the real problem with inflation? Is it the economic inequality it brings to those who have to live on fixed income? 1) Humans aren't perfectly rational. A lot of people who don't understand exponential curves will end up going broke - like people who earned money and "saved" it by storing it in a bank account. To put it bluntly, a bunch of old people will be left destitute despite working hard and saving. This also affects wage earners who aren't keen negotiators. They'll quickly end up with a below-market wage and might not realise what is going on. 2) Price signals take time to propagate because the economic hive mind doesn't move at the speed of light, it moves at the speed of takes-a-few-months. There will be wild mis-allocations as people work out how to measure goods in something reliable that isn't dollars. 3) The new money has to start somewhere, that group will get a massive advantage in allocating resources. They probably aren't good at it, because if they were they wouldn't need free money, so they'll cause massive waste. 4) Triggering high inflation is bad strategy for making things better, so if it is being used the people running the show are probably not the most competent of chaps. They'll be making a lot of mistakes. Eg, usually a high-inflation strategy will get coupled with other tricks to destroy savings - think gold confiscation or wealth taxes - as people try to respond sanely to money printing. If you run the numbers on how capital gains tax interacts with inflation you have a "hey! wait a minute..." moment if you like saving money.

nostrademons 4y ago

It's not really self-correcting. When a consumer spends their money at inflated prices, it doesn't disappear. It goes to the business owner, who just received inflated prices for their goods. They, in turn, usually need to pay their suppliers, who can charge them inflated prices and make all their windfall profits disappear. In my view, the main problems with inflation are: 1. It introduces a transaction cost tax. Every time a business raises prices, they need to spend time re-printing menus, marketing materials, websites, etc. They need to spend time renegotiating contracts. They need to re-figure their cost structure, and see if it still makes sense to use the same suppliers. 2. It disincentivizes long-term investment or planning over short-term consumption. If money's going to be worth less later, spend it now, regardless of whether you need what you're spending it on. Any long-range plans or savings will likely be invalidated by changing cost structures anyway. As a concrete example, in times of high inflation the rational thing for an employee to do is to completely ignore their actual work and spend all their time focusing on getting a new job. Existing employees usually fall behind inflation, because they aren't actively negotiating their labor contracts and usually have no negotiating leverage anyway. The folks who make it up are those who job-hop. There is some employer out there willing to pay more than your current one; go find them, ask for 20% more than your current salary, and reap the windfall. But if everybody does this, no actual work gets done, exacerbating any supply shortages. People become so incentivized to chase higher dollar values that they don't pay any attention to what those dollars represent.

galaxyLogic 4y ago
> It goes to the business owner, who just received inflated prices for their goods. They, in turn, usually need to pay their suppliers, who can charge them inflated price The first business receiving inflated prices does not really affect what their suppliers are charging them does it? When a business makes more money and if there is competition they can afford to sell at a lower price and still make profit. And they can invest in making production cheaper which will eventually decrease prices, one could think. Good points about why inflation is bad. I was just wondering if it is self-correcting problem then it can not be very bad. It seems like a complicated problem. Except supply-side inflation is easy to understand.