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It’s becoming increasingly clear that deficit spending is not, in fact, the main driver of inflation. Just look at the recent past. We’ve been deficit spending

by drxzcl 3y ago

It’s becoming increasingly clear that deficit spending is not, in fact, the main driver of inflation. Just look at the recent past. We’ve been deficit spending since 08 without any appreciable inflation. Then fuel and commodities prices surge because of war-induced shortages and BOOM! prices rocket double digits.

amacneil 3y ago
During the past few decades, inflationary forces of deficit spending were offset by deflationary forces of globalization (everything became cheaper as we moved all production to China and other countries). Now we are seeing the effects of that offset being removed.
- AlexandrB 3y ago
  This seems self-contradictory. If inflation is caused by an increase in the money supply, why would lower prices counteract it? It's not like cheap goods reduce the money supply.
  - AnimalMuppet 3y ago
    It's not just the increase of the money supply. It's the increase of the money supply faster than the "stuff" of the economy increases. Globalization didn't just make stuff cheaper. Supply and demand says that the price would not go down (regardless of the cost of manufacturing) if there wasn't more of it than there had been. Globalization increased the "stuff" part of the economy.
    - JackFr 3y ago
      > It's not just the increase of the money supply. It's the increase of the money supply faster than the "stuff" of the economy increases. This. Inflation always is too much money chasing too few goods. Secular shortages give you too few goods. Loose monetary policy (or fiscal policy) give you too much money. (A tight monetary policy can immunize effects of a loose fiscal policy - if there is institutional will.)
  - seadan83 3y ago
    A plane provides lift while flying which then counter-acts gravity pushing it down - it stays at the same altitude. Increasing money supply & lower prices can happen at the same time. Though, my understanding is that the post-pandemic inflation was driven by (A) a supply crunch [1], & (B) increased profit taking [2]. For (A), recall that boats were queued up off of LA with a months long backlog - there just wasn't the stuff available for people to buy. For (B), see [2] as a reference which states corporate profit contributed "a lot" to inflation in 2021 Then (C), a war broke out with a major energy producer as one of the participants. This pushes global prices up, particular energy prices which then increase transport and all other costs. As far as (D), money printing; my understanding is that really is yet to be seen what kind of impact that would have and it will take some hindsight to know. It looks to me like this point is overall a subject of active debate (so, we don't really know the impact of money printing just yet). [1] https://www.kansascityfed.org/research/economic-bulletin/corporate-profits-contributed-a-lot-to-inflation-in-2021-but-little-in-2022/ https://www.kansascityfed.org/research/economic-bulletin/cor... [2] https://www.usbank.com/investing/financial-perspectives/market-news/supply-chain-issues-contribution-to-inflation.html https://www.usbank.com/investing/financial-perspectives/mark...
  - WillPostForFood 3y ago
    Inflation is measured by looking at basket of goods. If you increase money supply, but replace expensive goods in the basket with cheap imported goods, inflations stays low. It is not to say there are no effects on the economy. I.e., lower priced goods don't counteract the effects of increased money supply, they counteract the effect of increased money supply on the measurement of inflation.
- ajross 3y ago
  > Now we are seeing the effects of that offset being removed. You realize that inflation is back at baseline, right? Were those effects added back to the economy somehow and I missed it? I remain amazed that people continue this argument: the "transient" camp was correct. Inflation came, for largely the reasons that the boring economists[1] said, and went away, likewise. No one is going to be able to claim to have a good numeric model on this stuff (feedback systems are hard), but if nothing else the "Here is a Simple Rule to Explain Economics that Confirms all your Priors" rhetoric should be ejected, right? [1] As opposed to the partisan axe grinders. Next time, maybe believe the tweedy professors in preference to the talking heads?
  - readthenotes1 3y ago
    "You realize that inflation is back at baseline, right?" Not in the US or GB. From which country are you writing?
    - ajross 3y ago
      Last US CPI report was 3.7% YoY and a little better than that in seasonally-adjusted monthly numbers. That's well inside one standard deviation of the historical average (which is something like 2.9% I think). There's space for yelling about specifics within the economics community, but the current conditions are absolutely not consistent with a description of "high inflation" that matches the rhetoric being deployed above.
      - readthenotes1 3y ago
        So only twice the baseline?
        ajross 3y ago
        My division says 28% higher than historical average? Are you trying to cite a different number? Look, seriously, please stop: inflation is not high. Period. It's in a range that we would have considered perfectly normal at almost any time in the last hundred years. The only reason people are bent out of shape about it is that it was high, briefly, for about 11-13 months or so, and they internalized the debate about it based on a partisan frame that's very difficult to escape. But please try.
deleted 3y ago
[deleted]
boppo1 3y ago
> We’ve been deficit spending since 08 without any appreciable inflation. The S&P 500. You think that bull run was really just because of the goods and services made? Hell no, it was QE and LIRP.
- adventured 3y ago
  The price of gold has skyrocketed since the good economy years of the 1990s. Heavy deficit spending, in this latest era, began during the Bush Admin, post 9/11. That's another dead giveaway. Gold is overwhelmingly priced in USD and it began to shoot up rapidly with the Bush deficits, and it has never gone back down to anything near those levels. As they destroy the USD over time, gold will gradually set new higher highs (with some moves backwards occasionally). You can also see the USD destruction during the Bush years, when you look at the GDP, priced in dollars, of other economies. Their GDP figures soar at dramatic rates when set in USD, because of how much damage is being done to that specific currency. So for example the Czech economy went from $67b in 2001, to $156b for 2006; now does anyone actually believe their economy grew by ~132% in five years? It did not, that's the dollar destruction in action (and you can see that exact same thing in most non-US economies at that exact same time; it represents the USD losing enormous value).
  - throw0101b 3y ago
    > The price of gold has skyrocketed since the good economy years of the 1990s. Heavy deficit spending, in this latest era, began during the Bush Admin, post 9/11. There was huge deficit spending under Reagan, and gold remained flat. There was little deficit spending under Clinton (who managed to create a US budget surplus), and gold remained flat. No correlation in either direction there. * https://goldbroker.com/charts/gold-price/usd#historical-chart https://goldbroker.com/charts/gold-price/usd#historical-char... There was huge deficit spending for the Bush years of 2001-2008, and yet gold didn't really jump in his first term, though it did rise in his second. Gold went up in Obama's first term, but tanked in his second—even with QE and its supposed "Money printer go brrrr" effects. People were complaining that the 2% inflation target was too low during and after Obama (and into Trump's administration) because of concerns about ZIRP and ZLB: * https://www.imf.org/external/pubs/ft/wp/2014/wp1492.pdf https://www.imf.org/external/pubs/ft/wp/2014/wp1492.pdf * https://www.epi.org/publication/is-2-percent-too-low/ https://www.epi.org/publication/is-2-percent-too-low/ * https://en.wikipedia.org/wiki/Zero_interest-rate_policy https://en.wikipedia.org/wiki/Zero_interest-rate_policy Personally, over the course of 40+ years of various monetary rate and fiscal spending policies, I see zero correlation between them and the price of gold. I think it's better to look at behaviour finance (and animal spirits) for the reasons for the changes in gold prices.
levzettelin 3y ago
> It's becoming increasingly clear that pumping water into a lake is not, in fact, the main driver of flooding. > Just look at the recent past. We've been pumping water into the lake since 08 without any appreciable flooding. > Then the dam broke and BOOM! floodings rocket double digits. The war-induced shortages may be the proximate cause of inflation, but maybe it wasn't a good idea to keep pumping that water in the first place, in particular, with the knowledge that dams always break sooner or later anyway.
keep_reading 3y ago
> It’s becoming increasingly clear that deficit spending is not, in fact, the main driver of inflation. By which metrics lead you to conclude that pumping trillions of printed dollars into the economy is relatively harmless?
readthenotes1 3y ago
No appreciable inflation? Just look at the stock market, art, and any other asset class pursued by the wealthy. It wasn't until the pandemic and some of the money was sent to poor and middle class people that the prices in the grocery store rose. However, long before that the price of the grocery store market cap had inflated.
_heimdall 3y ago
That's really impossible to say, we simply don't know what the economy would have looked like without the deficit spending. With the large budget imbalances we've seen recently it seems reasonable to expect that increase in the money supply and new demand to have some impact of the economy. If it didn't, I'd argue we need to fundamentally rethink the core concepts of economics all together. Now whether the spending was a larger than the impact of wars I have no idea. I'd also be very suspicious of any research that attempts to model such a drastic alternate reality and come up with any meaningful comparison.

by drxzcl 3y ago

amacneil 3y ago

During the past few decades, inflationary forces of deficit spending were offset by deflationary forces of globalization (everything became cheaper as we moved all production to China and other countries). Now we are seeing the effects of that offset being removed.

AlexandrB 3y ago
This seems self-contradictory. If inflation is caused by an increase in the money supply, why would lower prices counteract it? It's not like cheap goods reduce the money supply.
- AnimalMuppet 3y ago
  It's not just the increase of the money supply. It's the increase of the money supply faster than the "stuff" of the economy increases. Globalization didn't just make stuff cheaper. Supply and demand says that the price would not go down (regardless of the cost of manufacturing) if there wasn't more of it than there had been. Globalization increased the "stuff" part of the economy.
  - JackFr 3y ago
    > It's not just the increase of the money supply. It's the increase of the money supply faster than the "stuff" of the economy increases. This. Inflation always is too much money chasing too few goods. Secular shortages give you too few goods. Loose monetary policy (or fiscal policy) give you too much money. (A tight monetary policy can immunize effects of a loose fiscal policy - if there is institutional will.)
- seadan83 3y ago
  A plane provides lift while flying which then counter-acts gravity pushing it down - it stays at the same altitude. Increasing money supply & lower prices can happen at the same time. Though, my understanding is that the post-pandemic inflation was driven by (A) a supply crunch [1], & (B) increased profit taking [2]. For (A), recall that boats were queued up off of LA with a months long backlog - there just wasn't the stuff available for people to buy. For (B), see [2] as a reference which states corporate profit contributed "a lot" to inflation in 2021 Then (C), a war broke out with a major energy producer as one of the participants. This pushes global prices up, particular energy prices which then increase transport and all other costs. As far as (D), money printing; my understanding is that really is yet to be seen what kind of impact that would have and it will take some hindsight to know. It looks to me like this point is overall a subject of active debate (so, we don't really know the impact of money printing just yet). [1] https://www.kansascityfed.org/research/economic-bulletin/corporate-profits-contributed-a-lot-to-inflation-in-2021-but-little-in-2022/ https://www.kansascityfed.org/research/economic-bulletin/cor... [2] https://www.usbank.com/investing/financial-perspectives/market-news/supply-chain-issues-contribution-to-inflation.html https://www.usbank.com/investing/financial-perspectives/mark...
- WillPostForFood 3y ago
  Inflation is measured by looking at basket of goods. If you increase money supply, but replace expensive goods in the basket with cheap imported goods, inflations stays low. It is not to say there are no effects on the economy. I.e., lower priced goods don't counteract the effects of increased money supply, they counteract the effect of increased money supply on the measurement of inflation.
ajross 3y ago
> Now we are seeing the effects of that offset being removed. You realize that inflation is back at baseline, right? Were those effects added back to the economy somehow and I missed it? I remain amazed that people continue this argument: the "transient" camp was correct. Inflation came, for largely the reasons that the boring economists[1] said, and went away, likewise. No one is going to be able to claim to have a good numeric model on this stuff (feedback systems are hard), but if nothing else the "Here is a Simple Rule to Explain Economics that Confirms all your Priors" rhetoric should be ejected, right? [1] As opposed to the partisan axe grinders. Next time, maybe believe the tweedy professors in preference to the talking heads?
- readthenotes1 3y ago
  "You realize that inflation is back at baseline, right?" Not in the US or GB. From which country are you writing?
  - ajross 3y ago
    Last US CPI report was 3.7% YoY and a little better than that in seasonally-adjusted monthly numbers. That's well inside one standard deviation of the historical average (which is something like 2.9% I think). There's space for yelling about specifics within the economics community, but the current conditions are absolutely not consistent with a description of "high inflation" that matches the rhetoric being deployed above.
    - readthenotes1 3y ago
      So only twice the baseline?
      - ajross 3y ago
        My division says 28% higher than historical average? Are you trying to cite a different number? Look, seriously, please stop: inflation is not high. Period. It's in a range that we would have considered perfectly normal at almost any time in the last hundred years. The only reason people are bent out of shape about it is that it was high, briefly, for about 11-13 months or so, and they internalized the debate about it based on a partisan frame that's very difficult to escape. But please try.

deleted 3y ago

[deleted]

boppo1 3y ago

> We’ve been deficit spending since 08 without any appreciable inflation. The S&P 500. You think that bull run was really just because of the goods and services made? Hell no, it was QE and LIRP.

adventured 3y ago
The price of gold has skyrocketed since the good economy years of the 1990s. Heavy deficit spending, in this latest era, began during the Bush Admin, post 9/11. That's another dead giveaway. Gold is overwhelmingly priced in USD and it began to shoot up rapidly with the Bush deficits, and it has never gone back down to anything near those levels. As they destroy the USD over time, gold will gradually set new higher highs (with some moves backwards occasionally). You can also see the USD destruction during the Bush years, when you look at the GDP, priced in dollars, of other economies. Their GDP figures soar at dramatic rates when set in USD, because of how much damage is being done to that specific currency. So for example the Czech economy went from $67b in 2001, to $156b for 2006; now does anyone actually believe their economy grew by ~132% in five years? It did not, that's the dollar destruction in action (and you can see that exact same thing in most non-US economies at that exact same time; it represents the USD losing enormous value).
- throw0101b 3y ago
  > The price of gold has skyrocketed since the good economy years of the 1990s. Heavy deficit spending, in this latest era, began during the Bush Admin, post 9/11. There was huge deficit spending under Reagan, and gold remained flat. There was little deficit spending under Clinton (who managed to create a US budget surplus), and gold remained flat. No correlation in either direction there. * https://goldbroker.com/charts/gold-price/usd#historical-chart https://goldbroker.com/charts/gold-price/usd#historical-char... There was huge deficit spending for the Bush years of 2001-2008, and yet gold didn't really jump in his first term, though it did rise in his second. Gold went up in Obama's first term, but tanked in his second—even with QE and its supposed "Money printer go brrrr" effects. People were complaining that the 2% inflation target was too low during and after Obama (and into Trump's administration) because of concerns about ZIRP and ZLB: * https://www.imf.org/external/pubs/ft/wp/2014/wp1492.pdf https://www.imf.org/external/pubs/ft/wp/2014/wp1492.pdf * https://www.epi.org/publication/is-2-percent-too-low/ https://www.epi.org/publication/is-2-percent-too-low/ * https://en.wikipedia.org/wiki/Zero_interest-rate_policy https://en.wikipedia.org/wiki/Zero_interest-rate_policy Personally, over the course of 40+ years of various monetary rate and fiscal spending policies, I see zero correlation between them and the price of gold. I think it's better to look at behaviour finance (and animal spirits) for the reasons for the changes in gold prices.

levzettelin 3y ago

> It's becoming increasingly clear that pumping water into a lake is not, in fact, the main driver of flooding. > Just look at the recent past. We've been pumping water into the lake since 08 without any appreciable flooding. > Then the dam broke and BOOM! floodings rocket double digits. The war-induced shortages may be the proximate cause of inflation, but maybe it wasn't a good idea to keep pumping that water in the first place, in particular, with the knowledge that dams always break sooner or later anyway.

keep_reading 3y ago

> It’s becoming increasingly clear that deficit spending is not, in fact, the main driver of inflation. By which metrics lead you to conclude that pumping trillions of printed dollars into the economy is relatively harmless?

readthenotes1 3y ago

No appreciable inflation? Just look at the stock market, art, and any other asset class pursued by the wealthy. It wasn't until the pandemic and some of the money was sent to poor and middle class people that the prices in the grocery store rose. However, long before that the price of the grocery store market cap had inflated.

_heimdall 3y ago

That's really impossible to say, we simply don't know what the economy would have looked like without the deficit spending. With the large budget imbalances we've seen recently it seems reasonable to expect that increase in the money supply and new demand to have some impact of the economy. If it didn't, I'd argue we need to fundamentally rethink the core concepts of economics all together. Now whether the spending was a larger than the impact of wars I have no idea. I'd also be very suspicious of any research that attempts to model such a drastic alternate reality and come up with any meaningful comparison.