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During the past few decades, inflationary forces of deficit spending were offset by deflationary forces of globalization (everything became cheaper as we moved

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.

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.