3 ms·
inflation is only initially caused by money supply. once inflation expectations become embedded, it becomes a self-reinforcing perpetual motion machine. e.g. i
by 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 agoonce 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...