4 ms·

> Inflation is excess demand for goods and services Correction, inflation is either from excess demand or constrained supply - the reasons for inflation matter

by jarym 3y ago

> Inflation is excess demand for goods and services Correction, inflation is either from excess demand or constrained supply - the reasons for inflation matter when trying to address the problem.

trashtester 3y ago
> inflation is either from excess demand or constrained supply Inflation is always about the balance between supply and demand > the reasons for inflation matter when trying to address the problem Less than one might think based on the either or thinking. Even when a change in supply causes inflation, reducing the demand side will bring it back down. The exception being for specific items where demand is not very elastic in the short term, such as fuel or basic food items. But even increasing interest rates (a demand side intervention) may not affect those prices by much, it will affect other prices enough that aggregate demand can stay low.
somewhereoutth 3y ago
My understanding is that, at the whole economy level, it is in fact neither of these things, but instead too much money in circulation. If the government prints more money, then the amount of goods/services each unit will buy will fall. Through ultra low interest rates and QE, governments have been doing a lot of money printing.
- kasey_junk 3y ago
  That is an economic theory expressed by a particular economic school but it is not universally believed by economists. And like most economic theories it’s very hard to (in)validate in the real world.
  - influx 3y ago
    What are the arguments here? If it didn’t cause inflation, the USA should abolish taxes and just print trillions of dollars and buy everything in the world, and give each resident a million dollars a month as basic income.
    - consilient 3y ago
      You're conflating several distinct things here: - The nominal quantity of money ("print trillions of dollars") - Aggregate demand ("buy everything in the world") - The velocity of money ("give each resident a million dollars a month") Increases in the quantity * velocity of money drive inflation in the long run: prices do not equilibrate immediately but have to be dragged up (or not, as the case may be) by supply and demand.
      - jtbayly 3y ago
        So what are the arguments for why not to just print as much money as the government needs? If many people believe printing trillions of dollars doesn’t matter, then I’d like to hear why. I’d like to not have taxes…
        closeparen 3y ago
        The government needs money to buy goods and services. Extra cash chasing the same pool of goods and services is definitely inflationary. It also needs money to do weird, dark magic with bank balance sheets so that businesses can continue to acquire the capital to maintain and grow the supply of goods and services. It’s less clear what extra money sloshing around the financial system does. In the post-2008 era, people were freaking out about it not doing enough.
      - influx 3y ago
        I appreciate your response, if I wanted to educate myself quickly here, is there a layman's textbook you would recommend?
    - zhoujianfu 3y ago
      Some people (including me) actually do think this is exactly what the USA should do. I think people think printing money causes inflation, and in general “know” that you shouldn’t “spend more than you make”… but I think things are different when you can print money. It would actually be a very efficient means of fund raising (vs the current tax code), as well as fighting income inequality (the basic income), and even if it did cause inflation, that’s basically just a very efficient progressive wealth tax (when coupled with a universal basic income).
  - somewhereoutth 3y ago
    'All models are wrong, but some are useful'. In terms of policy making, the independent central banks of many countries (e.g. BoE) have been mandated to follow this model pretty closely - when inflation (a primary metric against which they are judged) rises (like now), interest rate increases and 'QT' are the response. I'd prefer to see fiscal policy being used more - then the expansion/contraction of the money supply can be better directed for social good, and interest rates can remain nearer their 'natural' level in terms of correct pricing of time/risk.
- hammock 3y ago
  Governments don’t create money, commercial banks do. Read the Bank of England paper
  - somewhereoutth 3y ago
    Indeed! But governments can control the money creation process by adjusting interest rates (specifically the rate that banks can borrow from the central bank), and market operations like QE
- brookst 3y ago
  This is more of a political / philosophical view than economic. It's a less rigid extrapolation of the gold standard argument. Not to equate the two, but there's a connection.
  - somewhereoutth 3y ago
    Ah the gold standard was about pegging the amount of money in circulation to the quantity of Gold 'in the world', roughly speaking. Of course with a growing economy this makes no sense, as you need more money to facilitate this growing exchange of goods and services, and so the gold standard is inherently deflationary (see also Bitcoin). (Fiat) Money of course is just a signalling mechanism, it is not 'real' - money supply / velocity / inflation are concepts for understanding the mechanism, not much politics or philosophy involved.

by jarym 3y ago

> Inflation is excess demand for goods and services Correction, inflation is either from excess demand or constrained supply - the reasons for inflation matter when trying to address the problem.

trashtester 3y ago

> inflation is either from excess demand or constrained supply Inflation is always about the balance between supply and demand > the reasons for inflation matter when trying to address the problem Less than one might think based on the either or thinking. Even when a change in supply causes inflation, reducing the demand side will bring it back down. The exception being for specific items where demand is not very elastic in the short term, such as fuel or basic food items. But even increasing interest rates (a demand side intervention) may not affect those prices by much, it will affect other prices enough that aggregate demand can stay low.

somewhereoutth 3y ago

My understanding is that, at the whole economy level, it is in fact neither of these things, but instead too much money in circulation. If the government prints more money, then the amount of goods/services each unit will buy will fall. Through ultra low interest rates and QE, governments have been doing a lot of money printing.

kasey_junk 3y ago
That is an economic theory expressed by a particular economic school but it is not universally believed by economists. And like most economic theories it’s very hard to (in)validate in the real world.
- influx 3y ago
  What are the arguments here? If it didn’t cause inflation, the USA should abolish taxes and just print trillions of dollars and buy everything in the world, and give each resident a million dollars a month as basic income.
  - consilient 3y ago
    You're conflating several distinct things here: - The nominal quantity of money ("print trillions of dollars") - Aggregate demand ("buy everything in the world") - The velocity of money ("give each resident a million dollars a month") Increases in the quantity * velocity of money drive inflation in the long run: prices do not equilibrate immediately but have to be dragged up (or not, as the case may be) by supply and demand.
    - jtbayly 3y ago
      So what are the arguments for why not to just print as much money as the government needs? If many people believe printing trillions of dollars doesn’t matter, then I’d like to hear why. I’d like to not have taxes…
      - closeparen 3y ago
        The government needs money to buy goods and services. Extra cash chasing the same pool of goods and services is definitely inflationary. It also needs money to do weird, dark magic with bank balance sheets so that businesses can continue to acquire the capital to maintain and grow the supply of goods and services. It’s less clear what extra money sloshing around the financial system does. In the post-2008 era, people were freaking out about it not doing enough.
    - influx 3y ago
      I appreciate your response, if I wanted to educate myself quickly here, is there a layman's textbook you would recommend?
  - zhoujianfu 3y ago
    Some people (including me) actually do think this is exactly what the USA should do. I think people think printing money causes inflation, and in general “know” that you shouldn’t “spend more than you make”… but I think things are different when you can print money. It would actually be a very efficient means of fund raising (vs the current tax code), as well as fighting income inequality (the basic income), and even if it did cause inflation, that’s basically just a very efficient progressive wealth tax (when coupled with a universal basic income).
- somewhereoutth 3y ago
  'All models are wrong, but some are useful'. In terms of policy making, the independent central banks of many countries (e.g. BoE) have been mandated to follow this model pretty closely - when inflation (a primary metric against which they are judged) rises (like now), interest rate increases and 'QT' are the response. I'd prefer to see fiscal policy being used more - then the expansion/contraction of the money supply can be better directed for social good, and interest rates can remain nearer their 'natural' level in terms of correct pricing of time/risk.
hammock 3y ago
Governments don’t create money, commercial banks do. Read the Bank of England paper
- somewhereoutth 3y ago
  Indeed! But governments can control the money creation process by adjusting interest rates (specifically the rate that banks can borrow from the central bank), and market operations like QE
brookst 3y ago
This is more of a political / philosophical view than economic. It's a less rigid extrapolation of the gold standard argument. Not to equate the two, but there's a connection.
- somewhereoutth 3y ago
  Ah the gold standard was about pegging the amount of money in circulation to the quantity of Gold 'in the world', roughly speaking. Of course with a growing economy this makes no sense, as you need more money to facilitate this growing exchange of goods and services, and so the gold standard is inherently deflationary (see also Bitcoin). (Fiat) Money of course is just a signalling mechanism, it is not 'real' - money supply / velocity / inflation are concepts for understanding the mechanism, not much politics or philosophy involved.