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An increase in asset prices is not inflation, it's a good investment. AAPL isn't in the CPI basket, Apples are. Homes are up in price because zoning rules prec

An increase in asset prices is not inflation, it's a good investment. AAPL isn't in the CPI basket, Apples are. Homes are up in price because zoning rules preclude development of new houses sufficient to meet demand, creating an imbalance in supply vs. demand. Interest rates only shift that equilibrium. Concretely, Japan's monetary and interest rate policy has been almost the same as the US for decades however they haven't seen an increase in housing prices in nominal terms since 1990. They federalize zoning so councils can't preclude you from building safe and reasonable housing, and this allows supply to meet demand. Housing is driving inflation in the US, not responding to it - remember, inflation is the measured drop in purchasing power calculated from prices. Zoning causes house prices to go up, which in turn means the purchasing power of the dollar is calculated to be lower. Punitive zoning rules are inflationary. [1] https://en.wikipedia.org/wiki/San_Francisco_housing_shortage https://en.wikipedia.org/wiki/San_Francisco_housing_shortage

nodemaker 4y ago
Lol so according to you the money supply can increase 10x but as long as the cost of apples (or things in the CPI basket) is same, there is no inflation. Am i right? I think you are trying to say that CPI and Inflation are the same thing.
- arcticbull 4y ago
  Money in a fractional reserve system operates not on a push model but on a pull model. You do not 'push' money into the system. Money is created when loans (and corresponding obligations to repay said loan) are created. The increase in supply was driven by an increase in demand. Your model is incomplete. You'll have to work a specific example - how would the supply suddenly triple? Who would get that money? What would they do with it? > I think you are trying to say that CPI and Inflation are the same thing. I think you are trying to say that money supply growth is inflation, it is not. Even the rejected Austrian school would agree.
  - SideQuark 4y ago
    We're not in a fractional reserve system. Banks can borrow arbitrarily from the fed, and routinely do so, and don't have reserve ratios. Many countries have moved to this model over the past few decades, including the US. The Fed has papers on this explaining the how and why of the newer system.
  - lumb63 4y ago
    The increase in money supply was absolutely not driven by an increase in demand. Supply increases were used to grow demand. Why else would it be called “stimulus”? The supply did grow and the money went to banks, to the US government, etc. You can look at the Federal Reserve’s balance sheet and see entries for US treasury bonds, mortgage backed securities, etc. The US government then went and spent that on things, and the value of mortgage-backed securities increased which decreases the return on the investment and thus encourages banks to take on higher-risk investments. These activities drive inflation. So, no, an increase in the amount of money isn’t inflation, but a higher quantity of money supply times velocity does, by definition.
- HDThoreaun 4y ago
  Yep, if goods(not capital) don't change in value there is no inflation.
somewhereoutth 4y ago
Zoning may have localised effects, but in general house prices are determined by incomes (módulo) interest rates. People pay as much as they can afford to get the best house they can afford. This amount is then translated into house prices by interest rates. 1K/month at 3% gives a wildly different price than at 6%. Compounding this has been the 'funny money' sloshing around the system looking for safe assets to park in - said funny money induced by the liquidity pumped in by low interest rates. SF is pricey because of high engineers' earnings, foreign cash inflows, on a background of low rates.
wskinner 4y ago
A change in the CPI is a symptom of underlying inflation (devaluation of the currency) but it is not the only symptom which can occur. Capital asset prices rising due to changes in the supply and demand of capital assets can also be a symptom of inflation. Different prices may be earlier or later indicators of inflation. Because financial markets are highly liquid, and their participants are close to the underlying source of the devaluation of the currency (the central bank), they tend to be earlier indicators. So to say that an increase in asset prices is not inflation may technically be correct, but it is misleading. An increase in asset prices can be an indicator that inflation is already occurring (e.g. in 2020), and that inflation may take much longer to show up in the CPI.
cycomanic 4y ago
The zoning effects are US specific, why then have house prices increased in pretty most all western countries, also they can't explain the huge jump in housing prices during covid. The whole zoning discussion ignores the fact that investing in housing became hugely popular in the last decade, largely due to monetary policy as well as faverable tax policies.
- ProfessorLayton 4y ago
  While zoning is indeed a major problem in the US, ultimately the problem worldwide is that supply isn't meeting demand. If supply was able to meet demand, then prices would be stable and housing wouldn't become an investment vehicle.

nodemaker 4y ago

Lol so according to you the money supply can increase 10x but as long as the cost of apples (or things in the CPI basket) is same, there is no inflation. Am i right? I think you are trying to say that CPI and Inflation are the same thing.

arcticbull 4y ago
Money in a fractional reserve system operates not on a push model but on a pull model. You do not 'push' money into the system. Money is created when loans (and corresponding obligations to repay said loan) are created. The increase in supply was driven by an increase in demand. Your model is incomplete. You'll have to work a specific example - how would the supply suddenly triple? Who would get that money? What would they do with it? > I think you are trying to say that CPI and Inflation are the same thing. I think you are trying to say that money supply growth is inflation, it is not. Even the rejected Austrian school would agree.
- SideQuark 4y ago
  We're not in a fractional reserve system. Banks can borrow arbitrarily from the fed, and routinely do so, and don't have reserve ratios. Many countries have moved to this model over the past few decades, including the US. The Fed has papers on this explaining the how and why of the newer system.
- lumb63 4y ago
  The increase in money supply was absolutely not driven by an increase in demand. Supply increases were used to grow demand. Why else would it be called “stimulus”? The supply did grow and the money went to banks, to the US government, etc. You can look at the Federal Reserve’s balance sheet and see entries for US treasury bonds, mortgage backed securities, etc. The US government then went and spent that on things, and the value of mortgage-backed securities increased which decreases the return on the investment and thus encourages banks to take on higher-risk investments. These activities drive inflation. So, no, an increase in the amount of money isn’t inflation, but a higher quantity of money supply times velocity does, by definition.
HDThoreaun 4y ago
Yep, if goods(not capital) don't change in value there is no inflation.

somewhereoutth 4y ago

Zoning may have localised effects, but in general house prices are determined by incomes (módulo) interest rates. People pay as much as they can afford to get the best house they can afford. This amount is then translated into house prices by interest rates. 1K/month at 3% gives a wildly different price than at 6%. Compounding this has been the 'funny money' sloshing around the system looking for safe assets to park in - said funny money induced by the liquidity pumped in by low interest rates. SF is pricey because of high engineers' earnings, foreign cash inflows, on a background of low rates.

wskinner 4y ago

A change in the CPI is a symptom of underlying inflation (devaluation of the currency) but it is not the only symptom which can occur. Capital asset prices rising due to changes in the supply and demand of capital assets can also be a symptom of inflation. Different prices may be earlier or later indicators of inflation. Because financial markets are highly liquid, and their participants are close to the underlying source of the devaluation of the currency (the central bank), they tend to be earlier indicators. So to say that an increase in asset prices is not inflation may technically be correct, but it is misleading. An increase in asset prices can be an indicator that inflation is already occurring (e.g. in 2020), and that inflation may take much longer to show up in the CPI.

cycomanic 4y ago

The zoning effects are US specific, why then have house prices increased in pretty most all western countries, also they can't explain the huge jump in housing prices during covid. The whole zoning discussion ignores the fact that investing in housing became hugely popular in the last decade, largely due to monetary policy as well as faverable tax policies.

ProfessorLayton 4y ago
While zoning is indeed a major problem in the US, ultimately the problem worldwide is that supply isn't meeting demand. If supply was able to meet demand, then prices would be stable and housing wouldn't become an investment vehicle.