4 ms·

Demand destruction mostly. The thesis is that there is more demand than supply of basically everything (not least oil) causing a positive feedback loop on pric

Demand destruction mostly. The thesis is that there is more demand than supply of basically everything (not least oil) causing a positive feedback loop on prices. Crush asset prices, reduce labor bargaining power, induce layoffs - this all reduces demand for everything back to what we can supply today, which will cause lower prices in time. Prices have already stopped going up month over month in aggregate. They don’t say it because it sucks. Focusing on the supply side would have been far more palatable but there fed was backed into a corner where it needed to be seen to be acting, and they only have one tool to use. The fed can’t build oil wells.

lamontcg 4y ago
The really pedestrian explanation is that the Fed just crashes the economy into a wall. It doesn't really have a magic wand, it just creates a recession (and I've definitely argued with people on here who think the Fed has the magical ability to steer us around inflation and recessions without causing any kind of crisis--but I'm old enough to have heard all that about Alan Greenspan back in 1999). But then to completely switch gears and get even more technical about how raising interest rates results in a slowdown--the higher interest rates immediately raises borrowing costs for stuff like cars and houses and makes them more expensive. But at the same time there's a lot of bad business investment on the margins that rolls over their loans on a 1-2 year period (similar to an ARM on a house). Those loans are going to start refinancing at higher rates. When you look at stuff like the vacancy rate of commercial real estate in SF and Portland, those are going to have loans like this behind them which are only being propped up by low rates. As rates rise, the firms behind those properties risk going bankrupt and the ones at the margins will, which turns into losses for the creditor banks, tightening all kinds of appetite for risk and availability of credit. Those effects wash over the system creating layoffs and reducing demand for goods in a positive feedback loop--things like advertising spends also decline, hitting companies like Google and Meta. That's the actual cause-and-effect that creates the slowdown going from raising the cost of borrowing to financial problems at FAANGs. Of course the current round of layoffs is mostly anticipatory. They aren't really hurting yet, although they're certainly seeing their growth numbers start to turn down.
cplusplusfellow 4y ago
And we have zero support on any of those topics from the current administration, which is solely focused on NOT supplying BTUs to the market. Some see this as a good thing, so welcome to the outcomes they’ve been wanting. Time will tell if Americans actually prefer this.
- arcticbull 4y ago
  Personally I am in favor of high gas prices in order to incentivize switching away from fossil fuels. However, it does require the government meaningfully invest in a replacement (nuclear, other renewables, etc) - and that the government shouldn't allow a transient spike to derail the longer trend. More supply of oil is needed now in order to support the long-term transition away. IMO ofc.
  - cplusplusfellow 4y ago
    You can be in favor of this, but don’t act like it’s not a cause of inflation.
- mindslight 4y ago
  > current administration, which is solely focused on NOT supplying BTUs to the market What? Did you somehow miss that huge climate bill, which drastically increased the subsidies for solar and other forms of energy independence? It seems like the bickering is over the form of "BTUs". I myself would have been happier if the climate bill didn't prematurely end the consumer biomass subsidies (eg for wood stoves, etc). But your blanket characterization is a bit ridiculous.
  - cplusplusfellow 4y ago
    Like it or not, better for the climate or not, but solar and "other forms of energy independence" subsidies will not power a Caterpillar D9. The world still needs diesel right now, and we're discussing inflation that is happening right now. When we've successfully build construction & transportation equipment that can use electrons, then we can discuss their utility. What we're bickering about is the timeline.
avalys 4y ago
Exactly. This is not a mystery, this is how this system is intended to work.
WalterBright 4y ago
> The thesis is that there is more demand than supply of basically everything (not least oil) causing a positive feedback loop on prices. That's a myth. Inflation is caused by a river of money poured into the economy. Supply&Demand forces then devalue the money, i.e. inflation. There is no feedback loop. Stop pouring the money in, and inflation will stop.
- sofixa 4y ago
  > Inflation is caused by a river of money poured into the economy. Supply&Demand forces then devalue the money, i.e. inflation. Inflation isn't a purely monetary phenomenon. You can have price increases resulting in inflation due to supply and demand issues in various products, and especially more so when the issues in question are a pandemic that disrupted supply lines and a war impacting energy and food exporters and thus prices. Combine that with the increased monetary supply and you have problems.
  - WalterBright 4y ago
    Inflation is a general price increase. That doesn't happen with disrupted supply lines. The proof of this is prices under inflation ratchet upwards - they don't come back down after the crisis is over.
    - sofixa 4y ago
      > Inflation is a general price increase. That doesn't happen with disrupted supply lines Yes it does. If the supply lines impacted are critical (e.g. food or energy) every other product and service's prices will also increase because they're based on it. > The proof of this is prices under inflation ratchet upwards - they don't come back down after the crisis is over. That is usually true, but usually there is a general price readjustment - inflation ends at a certain place, but deflation isn't welcome so it never gets to that, monetary value and prices just stay at the new, stabilised normal.
stephen_g 4y ago
Yeah, and it's crazy because there isn't much evidence of demand induced inflation in any of the advanced economies... Here in Australia we have massive inflation in the cost of energy (for obvious reasons given world events), but at the same time, the mining, oil & gas companies all have spiraling profits too, making massive windfall profits on the increases (they still manage to structure their businesses to pay almost no tax though...) Meanwhile, real wages, which have been fairly stagnant compared to profits over the last decades, are now down.
- 300bps 4y ago
  it's crazy because there isn't much evidence of demand induced inflation There are two fundamental components to inflation. Supply and demand. The mere fact that we have inflation means that either supply is too low or demand is too high. Your statement seems to be saying, "there is evidence that 100% of the inflation we are experiencing is from supply side". That obviously isn't true. Meanwhile, real wages, which have been fairly stagnant compared to profits over the last decades, are now down. In the U.S., this is meaningless because at the low-salary end we had direct stimulus and tax rebates. In the mid salary end we had direct stimulus, tax rebates and modest asset (home/stock) appreciation. In the high salary end we had PPP loans (direct stimulus on steroids) and huge asset appreciation. All of this leads to more money available which increases demand. Near me, beach rentals have gotten up to $25,000 per week for a house. A ridiculous sum of money to stay at a house for a week! But if you're "making" $25,000 per month in the stock market? Doesn't seem so crazy anymore and it's why rentals have gotten up that high.
- jbay808 4y ago
  Shelter inflation appears to be largely demand-induced, is the largest component of the CPI, and is highly elevated. I believe this is even more true in Australia and Canada than it is in the USA.
  - arcticbull 4y ago
    This is a major cause of inflation but it's mostly a local zoning issue, not a monetary policy issue. These countries straight up refuse to build supply enough to meet demand. (1) many folks have convinced themselves housing can be both a good investment and affordable when these are antithetical goals and... (2) they've also convinced themselves that this is the one market in the history of time where supply and demand magically don't exist, and that increasing supply simply won't reduce prices for some reason.

lamontcg 4y ago

The really pedestrian explanation is that the Fed just crashes the economy into a wall. It doesn't really have a magic wand, it just creates a recession (and I've definitely argued with people on here who think the Fed has the magical ability to steer us around inflation and recessions without causing any kind of crisis--but I'm old enough to have heard all that about Alan Greenspan back in 1999). But then to completely switch gears and get even more technical about how raising interest rates results in a slowdown--the higher interest rates immediately raises borrowing costs for stuff like cars and houses and makes them more expensive. But at the same time there's a lot of bad business investment on the margins that rolls over their loans on a 1-2 year period (similar to an ARM on a house). Those loans are going to start refinancing at higher rates. When you look at stuff like the vacancy rate of commercial real estate in SF and Portland, those are going to have loans like this behind them which are only being propped up by low rates. As rates rise, the firms behind those properties risk going bankrupt and the ones at the margins will, which turns into losses for the creditor banks, tightening all kinds of appetite for risk and availability of credit. Those effects wash over the system creating layoffs and reducing demand for goods in a positive feedback loop--things like advertising spends also decline, hitting companies like Google and Meta. That's the actual cause-and-effect that creates the slowdown going from raising the cost of borrowing to financial problems at FAANGs. Of course the current round of layoffs is mostly anticipatory. They aren't really hurting yet, although they're certainly seeing their growth numbers start to turn down.

cplusplusfellow 4y ago

And we have zero support on any of those topics from the current administration, which is solely focused on NOT supplying BTUs to the market. Some see this as a good thing, so welcome to the outcomes they’ve been wanting. Time will tell if Americans actually prefer this.

arcticbull 4y ago
Personally I am in favor of high gas prices in order to incentivize switching away from fossil fuels. However, it does require the government meaningfully invest in a replacement (nuclear, other renewables, etc) - and that the government shouldn't allow a transient spike to derail the longer trend. More supply of oil is needed now in order to support the long-term transition away. IMO ofc.
- cplusplusfellow 4y ago
  You can be in favor of this, but don’t act like it’s not a cause of inflation.
mindslight 4y ago
> current administration, which is solely focused on NOT supplying BTUs to the market What? Did you somehow miss that huge climate bill, which drastically increased the subsidies for solar and other forms of energy independence? It seems like the bickering is over the form of "BTUs". I myself would have been happier if the climate bill didn't prematurely end the consumer biomass subsidies (eg for wood stoves, etc). But your blanket characterization is a bit ridiculous.
- cplusplusfellow 4y ago
  Like it or not, better for the climate or not, but solar and "other forms of energy independence" subsidies will not power a Caterpillar D9. The world still needs diesel right now, and we're discussing inflation that is happening right now. When we've successfully build construction & transportation equipment that can use electrons, then we can discuss their utility. What we're bickering about is the timeline.

avalys 4y ago

Exactly. This is not a mystery, this is how this system is intended to work.

WalterBright 4y ago

> The thesis is that there is more demand than supply of basically everything (not least oil) causing a positive feedback loop on prices. That's a myth. Inflation is caused by a river of money poured into the economy. Supply&Demand forces then devalue the money, i.e. inflation. There is no feedback loop. Stop pouring the money in, and inflation will stop.

sofixa 4y ago
> Inflation is caused by a river of money poured into the economy. Supply&Demand forces then devalue the money, i.e. inflation. Inflation isn't a purely monetary phenomenon. You can have price increases resulting in inflation due to supply and demand issues in various products, and especially more so when the issues in question are a pandemic that disrupted supply lines and a war impacting energy and food exporters and thus prices. Combine that with the increased monetary supply and you have problems.
- WalterBright 4y ago
  Inflation is a general price increase. That doesn't happen with disrupted supply lines. The proof of this is prices under inflation ratchet upwards - they don't come back down after the crisis is over.
  - sofixa 4y ago
    > Inflation is a general price increase. That doesn't happen with disrupted supply lines Yes it does. If the supply lines impacted are critical (e.g. food or energy) every other product and service's prices will also increase because they're based on it. > The proof of this is prices under inflation ratchet upwards - they don't come back down after the crisis is over. That is usually true, but usually there is a general price readjustment - inflation ends at a certain place, but deflation isn't welcome so it never gets to that, monetary value and prices just stay at the new, stabilised normal.

stephen_g 4y ago

Yeah, and it's crazy because there isn't much evidence of demand induced inflation in any of the advanced economies... Here in Australia we have massive inflation in the cost of energy (for obvious reasons given world events), but at the same time, the mining, oil & gas companies all have spiraling profits too, making massive windfall profits on the increases (they still manage to structure their businesses to pay almost no tax though...) Meanwhile, real wages, which have been fairly stagnant compared to profits over the last decades, are now down.

300bps 4y ago
it's crazy because there isn't much evidence of demand induced inflation There are two fundamental components to inflation. Supply and demand. The mere fact that we have inflation means that either supply is too low or demand is too high. Your statement seems to be saying, "there is evidence that 100% of the inflation we are experiencing is from supply side". That obviously isn't true. Meanwhile, real wages, which have been fairly stagnant compared to profits over the last decades, are now down. In the U.S., this is meaningless because at the low-salary end we had direct stimulus and tax rebates. In the mid salary end we had direct stimulus, tax rebates and modest asset (home/stock) appreciation. In the high salary end we had PPP loans (direct stimulus on steroids) and huge asset appreciation. All of this leads to more money available which increases demand. Near me, beach rentals have gotten up to $25,000 per week for a house. A ridiculous sum of money to stay at a house for a week! But if you're "making" $25,000 per month in the stock market? Doesn't seem so crazy anymore and it's why rentals have gotten up that high.
jbay808 4y ago
Shelter inflation appears to be largely demand-induced, is the largest component of the CPI, and is highly elevated. I believe this is even more true in Australia and Canada than it is in the USA.
- arcticbull 4y ago
  This is a major cause of inflation but it's mostly a local zoning issue, not a monetary policy issue. These countries straight up refuse to build supply enough to meet demand. (1) many folks have convinced themselves housing can be both a good investment and affordable when these are antithetical goals and... (2) they've also convinced themselves that this is the one market in the history of time where supply and demand magically don't exist, and that increasing supply simply won't reduce prices for some reason.