Whence inflation?

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000
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Re: Whence inflation?

Post by 000 »

bedon wrote: Thu Oct 08, 2020 11:18 pm Deflation is pretty tough to fight - Japan has been fighting deflation since the beginning of the 90's. Economists are generally more scared from deflation than they are from inflation (not hyperinflation).
Well, but it's the recession that's the problem, not the deflation itself. Recession is the cause and you can't fight it with monetary policy. In the case of Japan, policy changes to allow for increased competition and disruption of zombie companies could have been the answer, but entrenched interests prevented it from happening. Hmmm... what other country does that sound like?

I will also note that many of the perpetually poor countries of the world exist in a similar anticompetitive / corruption spiral, which has coexisted just fine with both inflationary and deflationary periods in those countries.
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Re: Whence inflation?

Post by bottlecap »

vitaflo wrote: Thu Oct 08, 2020 9:25 pm I always assumed increasing income inequality meant decreasing inflation, regardless of the total money available. The rich just sit on their money, and the poor don't have enough to increase the demand for anything.
When the money supply increases, who does the money go to? The poor? Nope. The banks lend it to the rich before anyone else. They are the most credit-worthy. The rich don’t sit on it. They invest it in the market or invest it in business schemes at low rates. They are the first - and only - ones to truly benefit. That drives inequality.

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Re: Whence inflation?

Post by Alchemist »

nedsaid wrote: Thu Oct 08, 2020 9:03 pm I have made the radical statement that the U.S. Federal Debt really doesn't finance anything. I said that the interest paid on Treasury instruments helps the Fed target interest rates and also is a factor in supporting the value of the dollar. All other things being equal, relatively high interest rates compared to other currencies helps keep a currency strong compared to other currencies with lower interest rates. The Federal Debt is also a risk free way for local and State governments, private businesses, and private individuals to stash their savings. Paper currency is really nothing more than a zero percent interest loan, our currency says "Federal Reserve Note."

Maybe I am just getting crazy as I get older but standard textbook explanations of how all of this works falls short.
That radical statement is more or less the way MMT views the situation. I for one think the MMT folks have it correct, or at least more correct than mainstream economics.
000 wrote: Thu Oct 08, 2020 11:03 pm Isn't deflation easier for the government to fight than inflation (easier to increase than decrease the money supply)?
They can both be quite pernicious. Just printing money does not help stop deflation. You have to get people spending again. The government can help by using new money (deficits) to spend into the economy. The deeper the downturn, the larger the stimulus needs to be. But you need to get that extra cash into the hands of those who will spend it. Increasing bank reserves does nothing to help stave off deflation.

Anymore along this line will cross into discussion of government policy so I'll stop here.
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Re: Whence inflation?

Post by Enganerd »

bottlecap wrote: Thu Oct 08, 2020 11:17 pm
willthrill81 wrote: Thu Oct 08, 2020 8:22 pm
z3r0c00l wrote: Thu Oct 08, 2020 8:12 pm
fwellimort wrote: Thu Oct 08, 2020 7:27 pm I don't know about you all but in major cities, inflation has been quite rampant the past 10 years.
Even goods. Prices of avocado sandwiches are quite something today.
I live in NYC and have not seen prices increase by all that much in the last 10 years. Housing is getting cheaper if anything and I get avocados 4 for $5. Maybe people are having personal lifestyle creep and confusing that with inflation? This whole hidden inflation conspiracy theory falls flat upon further investigation. Everything is incredibly cheap including gas, electronics, clothing... Heck I can go out now and buy a 65 inch 4K tv for under $500. As someone just said above, deflation is our likely fate here, and that is what the FED is worried about. A vicious deflationary cycle is very likely with this much unemployment, that's how this could become a depression.
I agree that the notion of a big inflation conspiracy is unfounded by real data.
I’m not shocked that you agree with someone that agrees with you.

I guess your concept of "real data" is all in how you define inflation. You tend to agree with the definition the politicians prefer, but the fact that you can get a tv for cheap is not a product of deflation or noninflation, but because of increases in productivity not accounted for by government measures of inflation. Productivity advances significantly mask the affects of inflation, regardless of whether we're talking about TVs or sandwiches. It’s just that major advances in productivity in certain industries significantly understate the effect of inflation overall.

JT
How to measure inflation is definitely a nuanced topic. Simply trusting CPI is hard because technology is deflationary. OTOH stating that new money inflates asset prices (investment vehicles) so that needs to be considered inflation is nonsensical to me. That would imply there are no real returns (return over inflation), simply the best investment vehicle kept up with inflation and the others did not.
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Re: Whence inflation?

Post by bottlecap »

Enganerd wrote: Fri Oct 09, 2020 6:00 am How to measure inflation is definitely a nuanced topic. Simply trusting CPI is hard because technology is deflationary. OTOH stating that new money inflates asset prices (investment vehicles) so that needs to be considered inflation is nonsensical to me. That would imply there are no real returns (return over inflation), simply the best investment vehicle kept up with inflation and the others did not.
I would say the way inflation is measured is nonsensical as opposed to nuanced.

And new money CAN be spent on assets. In recent years, that certainly seems to be the case.

I don’t understand what you mean that if new money is used to purchase assets the it must be that there are no real returns. Real growth can still occur. If, for example, all the recent "stimulus" payments were used to purchase shares of the total stock market index, there would be no increase in the CPI and the price of the asset (stocks) would be pushed up artificially (not real). The businesses would still be running and the economy still churning, allowing the potential for some amount of real growth in (this example) the stock market.

Some of the new money is surely being invested in assets and affecting asset prices. There are new posts every day about folks having extra or play money and seeking advice on where to invest it. That’s unlikely a coincidence. Similarly, residential real estate prices rose 8-9% on average over the last year and have hit a new highs as of July. During a time while the economy was supposedly shuttered due to COVID-19.

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Re: Whence inflation?

Post by z3r0c00l »

bottlecap wrote: Thu Oct 08, 2020 11:17 pm
I’m not shocked that you agree with someone that agrees with you.

I guess your concept of "real data" is all in how you define inflation. You tend to agree with the definition the politicians prefer, but the fact that you can get a tv for cheap is not a product of deflation or noninflation, but because of increases in productivity not accounted for by government measures of inflation. Productivity advances significantly mask the affects of inflation, regardless of whether we're talking about TVs or sandwiches. It’s just that major advances in productivity in certain industries significantly understate the effect of inflation overall.

JT
Hate to agree with politicians on something but I don't understand how cheaper goods and services almost across the board are not an indication that inflation has been muted. In fact I think they are forces that are actively reducing inflation overall. A normal American today can go out and get more appliance for their $100 than they could have in 2010. Heck probably more than they could have in 1980 when $100 meant something. And they can get almost as much food, clothing, housing, medicine, or education as in 2010.

What else is much more expensive now than 10 years ago? (Meaning more than 20-30% over 2010 prices, which would be consistent with low inflation as measured by the CPI.) I don't even see that healthcare, housing, or college have gone up more than 2-3% per year in the past 10 years.

And what do we care if stocks, bonds, and gold are where the secret inflation is going? No one needs to buy them to live a good life, unlike food, gas, housing, clothes, electronics. Those of us in the stock and bond game know the risks involved and in fact they are costly in part because we now live in a world of low inflation and low interest rates.
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Re: Whence inflation?

Post by Grt2bOutdoors »

z3r0c00l wrote: Thu Oct 08, 2020 8:12 pm
fwellimort wrote: Thu Oct 08, 2020 7:27 pm I don't know about you all but in major cities, inflation has been quite rampant the past 10 years.
Even goods. Prices of avocado sandwiches are quite something today.
I live in NYC and have not seen prices increase by all that much in the last 10 years. Housing is getting cheaper if anything and I get avocados 4 for $5. Maybe people are having personal lifestyle creep and confusing that with inflation? This whole hidden inflation conspiracy theory falls flat upon further investigation. Everything is incredibly cheap including gas, electronics, clothing... Heck I can go out now and buy a 65 inch 4K tv for under $500. This was how much a 20 inch color TV cost in 1985. (Without adjusting for inflation.)

As someone just said above, deflation is our likely fate here, and that is what the FED is worried about. A vicious deflationary cycle is very likely with this much unemployment, that's how this could become a depression.
NYC is a victim of its poor policies. We have office rents falling because at this point in time very few are venturing into the offices, instead choosing to work from home. It’s said only 10 percent of office workers are actually in the office. There is a glut of office space, a glut of over building in NY. Essentially the city is closed for business. The city is in a fiscal mess of their own doing. The one thing that hasn’t deflated are property taxes and rents. Office rents yes, residential not really.
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Re: Whence inflation?

Post by z3r0c00l »

Grt2bOutdoors wrote: Fri Oct 09, 2020 7:57 am
z3r0c00l wrote: Thu Oct 08, 2020 8:12 pm
fwellimort wrote: Thu Oct 08, 2020 7:27 pm I don't know about you all but in major cities, inflation has been quite rampant the past 10 years.
Even goods. Prices of avocado sandwiches are quite something today.
I live in NYC and have not seen prices increase by all that much in the last 10 years. Housing is getting cheaper if anything and I get avocados 4 for $5. Maybe people are having personal lifestyle creep and confusing that with inflation? This whole hidden inflation conspiracy theory falls flat upon further investigation. Everything is incredibly cheap including gas, electronics, clothing... Heck I can go out now and buy a 65 inch 4K tv for under $500. This was how much a 20 inch color TV cost in 1985. (Without adjusting for inflation.)

As someone just said above, deflation is our likely fate here, and that is what the FED is worried about. A vicious deflationary cycle is very likely with this much unemployment, that's how this could become a depression.
NYC is a victim of its poor policies. We have office rents falling because at this point in time very few are venturing into the offices, instead choosing to work from home. It’s said only 10 percent of office workers are actually in the office. There is a glut of office space, a glut of over building in NY. Essentially the city is closed for business. The city is in a fiscal mess of their own doing. The one thing that hasn’t deflated are property taxes and rents. Office rents yes, residential not really.
This thread is about inflation not specific policies, so the only question is if prices have gone up, not why they failed to go up. Show me a place in the country where housing has gone up more than 2-3% annualized since 2010. I am sure there are pockets here and there but not country-wide and not where I live. Housing costs were flat or dropping in NYC before the virus too. I would guess because they overheated during the housing bubble of the 2000's but that really isn't the question. The OP is asking why no inflation and some are suggesting it is secret, hidden inflation and the government is using an index that hides in on purpose. I am saying the inflation really isn't there and that CPI is a good measure for the normal American who does care mostly about goods and services.
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Re: Whence inflation?

Post by jeffyscott »

z3r0c00l wrote: Fri Oct 09, 2020 7:27 am
bottlecap wrote: Thu Oct 08, 2020 11:17 pm
I’m not shocked that you agree with someone that agrees with you.

I guess your concept of "real data" is all in how you define inflation. You tend to agree with the definition the politicians prefer, but the fact that you can get a tv for cheap is not a product of deflation or noninflation, but because of increases in productivity not accounted for by government measures of inflation. Productivity advances significantly mask the affects of inflation, regardless of whether we're talking about TVs or sandwiches. It’s just that major advances in productivity in certain industries significantly understate the effect of inflation overall.

JT
Hate to agree with politicians on something but I don't understand how cheaper goods and services almost across the board are not an indication that inflation has been muted. In fact I think they are forces that are actively reducing inflation overall. A normal American today can go out and get more appliance for their $100 than they could have in 2010. Heck probably more than they could have in 1980 when $100 meant something. And they can get almost as much food, clothing, housing, medicine, or education as in 2010.
Yeah, that seemed like a pretty bizarre argument - that prices are lower because of productivity increase, not because inflation is low :confused . If prices are lower they are lower, that's deflation. If they are higher that's inflation. The reason why does not matter.
What else is much more expensive now than 10 years ago? (Meaning more than 20-30% over 2010 prices, which would be consistent with low inflation as measured by the CPI.) I don't even see that healthcare, housing, or college have gone up more than 2-3% per year in the past 10 years.
For the most part manufactured products have gotten cheaper, while services have gotten more expensive. Those relating inflation to the bizarrely specific price of their favorite sandwich, are paying more because they want the service of someone else making their sandwich for them. If they were buying the ingredients and making their own sandwich, they'd probably be seeing much less inflation in the cost of the sandwich.
And what do we care if stocks, bonds, and gold are where the secret inflation is going? No one needs to buy them to live a good life, unlike food, gas, housing, clothes, electronics. Those of us in the stock and bond game know the risks involved and in fact they are costly in part because we now live in a world of low inflation and low interest rates.
Yes, those things have nothing to do with the CPI, it's a consumer price index. So an index of things that are consumed, financial assets are not consumed. The CPI is meant to measure the "cost of living", not the cost of accumulating wealth.
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Re: Whence inflation?

Post by Nowizard »

Financially, at least in terms of the market, isn't the key the impact of inflation, whether accurately or inaccurately stated, on the stock market rather than other pocketbook issues? That is my interpretation, at least as far as investing in the current market is concerned. It suggests that discussions of inflation at the moment are hypothetical in that sense, though many may wish to prepare for what has been predicted for quite a long period of time.

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Re: Whence inflation?

Post by DartThrower »

It's easy to conflate the signaling function of prices with inflation. If prices are too high in a given city, move to a city with lower prices. If prices of McMansions are too high, move to a smaller house or even into an apartment. Prices are critical in determining resource allocation in a market based economy. This function is very easy to confuse with inflation. Another challenge is in the measurement of qualitative changes over time. Does a square ft of house space built today provide the same utility as a square ft built in 1990? What are the exact effects of depreciation? What about advances in technology? The market uses prices to attempt to figure all these things out simultaneously. Just as we need tremendous humility in claiming to know about stock market moves, we need at least as much humility in understanding what prices and inflation really mean.

Globalization adds another layer of complexity. Is it possible for any nation to "export" its unemployment or export its deflation? Are US policies just playing catch up with other nations which have already depreciated their currencies? Not making any kind of political statement here, just trying to look at the economics. The availability of imported goods and services impacts the sensitivity US consumers have to domestic price changes. The lower cost of imorts could reign in domestic inflation. This could happen even in the face of US monetary stimulus. The tipping point could be reached if or when we experience global inflation someday.

Unlike in the 70s, financial transactions today happen at lightning speed. It may be that inflation won't be a problem until, suddenly, it is.
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Re: Whence inflation?

Post by bottlecap »

jeffyscott wrote: Fri Oct 09, 2020 8:15 am
z3r0c00l wrote: Fri Oct 09, 2020 7:27 am
bottlecap wrote: Thu Oct 08, 2020 11:17 pm
I’m not shocked that you agree with someone that agrees with you.

I guess your concept of "real data" is all in how you define inflation. You tend to agree with the definition the politicians prefer, but the fact that you can get a tv for cheap is not a product of deflation or noninflation, but because of increases in productivity not accounted for by government measures of inflation. Productivity advances significantly mask the affects of inflation, regardless of whether we're talking about TVs or sandwiches. It’s just that major advances in productivity in certain industries significantly understate the effect of inflation overall.

JT
Hate to agree with politicians on something but I don't understand how cheaper goods and services almost across the board are not an indication that inflation has been muted. In fact I think they are forces that are actively reducing inflation overall. A normal American today can go out and get more appliance for their $100 than they could have in 2010. Heck probably more than they could have in 1980 when $100 meant something. And they can get almost as much food, clothing, housing, medicine, or education as in 2010.
Yeah, that seemed like a pretty bizarre argument - that prices are lower because of productivity increase, not because inflation is low :confused . If prices are lower they are lower, that's deflation. If they are higher that's inflation. The reason why does not matter.
I like to address merits of thoughts, not dismiss them. Let's do that.

What you're describing here is a bit of a fallacy of what is "unseen": "Well, prices didn't rise that much so clearly little inflation has occurred."

Well, if without the new money, prices would have dropped because of increases in efficiency, then you are in fact experiencing an effect of inflation even thought you don't see it.

If advances in productivity would have lowered the price of your $5 widget to $4.85, but today the price is $5.05, you "see" 1% inflation. You say, not bad! But I see 4% inflation and prefer having $4.85 widget.

This ignores other factors that effect inflation as well, such as the improvement or decline in quality of certain goods.

You see this as "bizarre" because all anyone ever talks about is price inflation. I suggest that is by design.

Also consider: Even the small amount of inflation you see is also pretty big if you consider the arguments of many that average wages haven't kept up with price inflation over the last 50 years. Regardless of arguments that increases in the money supply have contributed to this phenomena, you can't deny that inflation that you don't personally "see" can have negative affects on others not quite so fortunate.

Your bizarre friend,

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Re: Whence inflation?

Post by jeffyscott »

bottlecap wrote: Fri Oct 09, 2020 9:01 amIf advances in productivity would have lowered the price of your $5 widget to $4.85, but today the price is $5.05, you "see" 1% inflation. You say, not bad! But I see 4% inflation and prefer having $4.85 widget.
Sorry, but if the price of the thing went from $5 to $5.05 that is 1% inflation. Math is not an opinion and inflation is the change in the price of a product or service.
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Re: Whence inflation?

Post by Valuethinker »

jeffyscott wrote: Fri Oct 09, 2020 9:46 am
bottlecap wrote: Fri Oct 09, 2020 9:01 amIf advances in productivity would have lowered the price of your $5 widget to $4.85, but today the price is $5.05, you "see" 1% inflation. You say, not bad! But I see 4% inflation and prefer having $4.85 widget.
Sorry, but if the price of the thing went from $5 to $5.05 that is 1% inflation. Math is not an opinion and inflation is the change in the price of a product or service.
Hedonic adjustments are made in calculating price inflation.

Consider your PC now compared to your PC in 1970 ( mine was called "a slide rule" and I still have my father's).

Would you rather have a course of chemotherapy for leukemia in 1970 or now?

How about your cellphone now compared to the one you bought in 1985?

On the other hand, your New York Times is pretty much the same paper it was in 1970. Maybe a bit thinner. Tin of Heinz baked beans pretty much the same (probably more sugar in it now).
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Re: Whence inflation?

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jeffyscott wrote: Fri Oct 09, 2020 8:15 amIf they were buying the ingredients and making their own sandwich, they'd probably be seeing much less inflation in the cost of the sandwich.
The blogger that I referenced is doing just that. And the overall inflation rate over the basic food items he's been tracking for 12 years matches up pretty well with CPI.
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Re: Whence inflation?

Post by willthrill81 »

Nowizard wrote: Fri Oct 09, 2020 8:20 am Financially, at least in terms of the market, isn't the key the impact of inflation, whether accurately or inaccurately stated, on the stock market rather than other pocketbook issues? That is my interpretation, at least as far as investing in the current market is concerned.
The consumer price index (CPI) is meant to be just that, a measure of the prices consumers pay. It's not an investor price index.
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Re: Whence inflation?

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wrote: Fri Oct 09, 2020 8:15 am If prices are lower they are lower, that's deflation. If they are higher that's inflation. The reason why does not matter.
There's the answer to the OP's question. It doesn't matter that Fed money printing is the reason why prices rise.

For the record, I use a different definition of inflation. Inflation is a decrease in the value of money. Deflation is an increase in the value of money. Under this definition monetary policy is the primary if not the only cause of inflation.

But inflation is not the only cause of price increases. The price of something is the ratio of the value of the thing to the value of money. If the price of something is $5 its value is five times the value of a dollar. The price could increase either because the value of the thing increases or because the value of money decreases.

I interpret the opening post as asking if the increase in the supply of money will inevitably cause a decrease in the value of money. My answer: not inevitably. If the increase in supply offsets an increase in demand it will not be inflationary (under the definition of inflation I use).

I admit, though, that jeffyscott's definition is how the word is used today. See
On the Origin and Evolution of the Word Inflation

Ron
Last edited by Oicuryy on Fri Oct 09, 2020 10:15 am, edited 1 time in total.
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Re: Whence inflation?

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Oicuryy wrote: Fri Oct 09, 2020 10:12 am
wrote: Fri Oct 09, 2020 8:15 am If prices are lower they are lower, that's deflation. If they are higher that's inflation. The reason why does not matter.
There's the answer to the OP's question. It doesn't matter that Fed money printing is the reason why prices rise.
But that's what the data I presented in the OP demonstrate: a dramatic increase in the money supply over the last ten years has not led to higher inflation. Presumably, this appears to be at least largely due to the velocity of money falling precipitously.
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Re: Whence inflation?

Post by dknightd »

I'm not even sure how to define "inflation". I suppose in the broadest sense it could be considered an increase in prices, but could it not also be considered a devaluation of currency?

Does the price increase because the product costs more? Or does the price increase because the dollar is worth less? Or is that just two ways of looking at the same thing?

There were discussions above about education and medical care. Both of which IMO have increased at a rate faster than CPI. Does that mean CPI is not a good indicator of "inflation", or does that mean the costs of health care and education are inflated because we are consuming more. I suspect the latter. Education costs have been going up faster than CPI because students want more luxuries. Same with medical costs. In the end does it really matter? The cost of some things will go up faster than the cost of other things. Which I guess is why the CPI allows for substitutions. And any average is useless unless you are the average consumer.

Our personal spending has gone down this year. In part because we did not want to travel. In part because restaurants and music venues are closed. We used the "extra" money to pay down our mortgage - so gave it back to the bank.

There will be pent up demand I assume. I think it is too early to determine how the pandemic will affect things. You will notice that willthrill81's graphs have a discontinuity near 2020. I do not know if the shaded areas are actual or projected.

It might be my perception, but I think the price of some shelf stable products have increased lately. I looked (not very hard) but I suspect the cost of paper products and shelf stable food have increased more than CPI over the last 9 months.

One last thought. The concept of inflation, and how it might effect your life, probably depends on if you are working or retired.
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Re: Whence inflation?

Post by willthrill81 »

dknightd wrote: Fri Oct 09, 2020 10:20 amI suppose in the broadest sense it could be considered an increase in prices, but could it not also be considered a devaluation of currency?
An increase in nominal prices (i.e. how many dollars and cents something costs) for the same item is, by definition, inflation. Your second question is a potential cause of inflation but not inflation itself.
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Re: Whence inflation?

Post by luckyducky99 »

willthrill81 wrote: Thu Oct 08, 2020 9:21 pm
nedsaid wrote: Thu Oct 08, 2020 8:55 pm Ben Felix has a good video out on YouTube: Understanding the Fed's "Money Printer" (QE, the Stock Market, and Inflation).

He says something someone controversial but it has been established elsewhere, that is bank reserves have no effect upon actual bank lending. What constrains bank lending is the profitability of its loans not the amount of reserves held by the bank. Money is created out of thin air when the bank creates a loan which in turn becomes someone's deposit.

If bank reserves have no effect upon lending, there really is no money multiplier effect and there really is no velocity of money. At least that is what crossed my mind, perhaps others can comment and shed light on this.
Reserves did impact lending for many years because commercial banks were required to hold 10% in reserve. The Fed eliminated that requirement back in March.
As announced on March 15, 2020, the Board reduced reserve requirement ratios to zero percent effective March 26, 2020. This action eliminated reserve requirements for all depository institutions.
I'm quite surprised that I didn't hear about that until I just discovered it. It seems rather momentous.

Does this mean that a commercial bank can lend an infinite amount of money? I'd have to think no, but what constrains them now?
My understanding is that reserve requirements and capital requirements are different things. In a footnote on the Fed page you linked, it describes the accounts to which reserve requirements apply (er, used to apply):
Total transaction accounts consists of demand deposits, automatic transfer service (ATS) accounts, NOW accounts, share draft accounts, telephone or preauthorized transfer accounts, ineligible bankers acceptances, and obligations issued by affiliates maturing in seven days or less. Net transaction accounts are total transaction accounts less amounts due from other depository institutions and less cash items in the process of collection.
So reserve requirements count against bank liabilities that could become immediately (or almost) due in the form of withdrawals, like savings and checking accounts. This is unrelated to loans that banks make.

Capital requirements are what constrain a bank's ability to lend, since they count against the bank's risk assets, like loans. If a bank were to make too many loans and become undercapitalized, the regulators would get upset.

Edit:
nedsaid wrote: Thu Oct 08, 2020 10:33 pm I suppose what constrains bank lending is regulation, banks are highly regulated. If a bank tried to make infinite loans, at some point regulators would step in.
^ This. For a long, fun read, all the way from back to the days when "capital" meant "gold and silver in the vault" to now.
https://www.clevelandfed.org/newsroom-a ... ments.aspx
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Re: Whence inflation?

Post by dknightd »

willthrill81 wrote: Fri Oct 09, 2020 10:26 am
dknightd wrote: Fri Oct 09, 2020 10:20 amI suppose in the broadest sense it could be considered an increase in prices, but could it not also be considered a devaluation of currency?
An increase in nominal prices (i.e. how many dollars and cents something costs) for the same item is, by definition, inflation. Your second question is a potential cause of inflation but not inflation itself.
That makes sense to me. Thanks
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Re: Whence inflation?

Post by dknightd »

Inflation is bad. I do not like paying more for things.
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Re: Whence inflation?

Post by Oicuryy »

willthrill81 wrote: Fri Oct 09, 2020 10:26 am An increase in nominal prices (i.e. how many dollars and cents something costs) for the same item is, by definition, inflation.
What word do we use for the difference between the increase in nominal prices and the increase in real prices?

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Re: Whence inflation?

Post by jeffyscott »

Oicuryy wrote: Fri Oct 09, 2020 10:12 am
wrote: Fri Oct 09, 2020 8:15 am If prices are lower they are lower, that's deflation. If they are higher that's inflation. The reason why does not matter.
There's the answer to the OP's question. It doesn't matter that Fed money printing is the reason why prices rise.

For the record, I use a different definition of inflation. Inflation is a decrease in the value of money. Deflation is an increase in the value of money. Under this definition monetary policy is the primary if not the only cause of inflation.

But inflation is not the only cause of price increases. The price of something is the ratio of the value of the thing to the value of money. If the price of something is $5 its value is five times the value of a dollar. The price could increase either because the value of the thing increases or because the value of money decreases.
That seems like it is just two ways of looking at the same thing? If I could buy 100 widgets for $1000 last year and now I would only get 99, the value of the dollar has gone from 0.1 widgets to 0.099 widgets and the price of a widget has gone from $10 to $10.10. Not sure why that would mean the only cause can be monetary policy, though?
I interpret the opening post as asking if the increase in the supply of money will inevitably cause a decrease in the value of money. My answer: not inevitably. If the increase in supply offsets an increase in demand it will not be inflationary (under the definition of inflation I use).

I admit, though, that jeffyscott's definition is how the word is used today. See
On the Origin and Evolution of the Word Inflation
As you and your link note, to many, including me, when the terms "inflation/deflation" are used today it means changes to the CPI (and certainly, at least, changes to prices). It might be clearer if instead of saying: "Many are convinced that an increased money supply will inevitably lead to higher inflation" it was instead stated as: "Many are convinced that an increased money supply will inevitably lead to higher (consumer) prices", assuming that is the intent of the comment.

I was expecting that history to say "inflation" originally basically came from the idea of "inflating" the supply of money. It almost does, but not quite, because under the historical definition, it could be caused by an increase in the quantity of money or a decrease in the supply of goods and services.
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Re: Whence inflation?

Post by dknightd »

I'm not going to buy a bigger TV just because it is cheaper now than it was 10 years ago
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Re: Whence inflation?

Post by Oicuryy »

jeffyscott wrote: Fri Oct 09, 2020 11:45 am That seems like it is just two ways of looking at the same thing? If I could buy 100 widgets for $1000 last year and now I would only get 99, the value of the dollar has gone from 0.1 widgets to 0.099 widgets and the price of a widget has gone from $10 to $10.10. Not sure why that would mean the only cause can be monetary policy, though?
Suppose all we know is that the (nominal) price of a widget went from $10.00 to $10.10. If that is all we know, we don't know if the value of widgets went up 1% or the value of dollars went down 1%. Either would cause a 1% increase in price.

But the value of a dollar is the unit used to measure the value of everything. If the value of dollars goes down 1% and the value of everything stays the same, then the price of everything will go up 1%.

Imagine measuring length with a shrinking yardstick. As the yardstick shrinks the measured length of everything increases but the actual length does not. Dollars are a shrinking yardstick for measuring value. As the value of dollars shrinks the measured value -- the price -- of everything increases but the actual value does not.

IMO, the word inflation would be more useful if it meant only the increase in the price of everything due to a decrease in the value of dollars. But now it is used to mean any increase in any price for any reason.

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Re: Whence inflation?

Post by prairieman »

This might be my favorite thread since joining this forum!
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Re: Whence inflation?

Post by z3r0c00l »

dknightd wrote: Fri Oct 09, 2020 11:58 am I'm not going to buy a bigger TV just because it is cheaper now than it was 10 years ago
Too bad because a large TV is a much better experience, up to some maximum size appropriate for the room it is in. Many of us who get this concept have always been locked into having a smaller TV than they want because either there were no screens large enough or they cost too much. Watching films on a 24 inch CRT was simply not a great expedience, and I am reminded of that each time I watch them on my 54 inch LED.
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Re: Whence inflation?

Post by AlwaysLearningMore »

"The understatements in the consumer price index (CPI) are even more egregious. Years ago, the cost of living was changed to include "owner-equivalent rent," which sharply reduced the reported inflation rate during the recent housing boom. The concept of product substitution was also incorporated, meaning essentially that if top-grade hamburger gets too expensive, we substitute a cheaper grade. And (this is really true!) we don't count cost increases that are attributable to increased quality ("hedonic adjustments"). That is, if airfares double but air travel service is deemed twice as efficient, the calculated cost of air travel is unchanged." John C. Bogle, Enough, page 101.

The CPI for those over 62 years of age may well differ from those younger https://tinyurl.com/y4jeqyog
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Re: Whence inflation?

Post by jeffyscott »

Oicuryy wrote: Fri Oct 09, 2020 12:48 pm
jeffyscott wrote: Fri Oct 09, 2020 11:45 am That seems like it is just two ways of looking at the same thing? If I could buy 100 widgets for $1000 last year and now I would only get 99, the value of the dollar has gone from 0.1 widgets to 0.099 widgets and the price of a widget has gone from $10 to $10.10. Not sure why that would mean the only cause can be monetary policy, though?
Suppose all we know is that the (nominal) price of a widget went from $10.00 to $10.10. If that is all we know, we don't know if the value of widgets went up 1% or the value of dollars went down 1%. Either would cause a 1% increase in price.

But the value of a dollar is the unit used to measure the value of everything. If the value of dollars goes down 1% and the value of everything stays the same, then the price of everything will go up 1%.

Imagine measuring length with a shrinking yardstick. As the yardstick shrinks the measured length of everything increases but the actual length does not. Dollars are a shrinking yardstick for measuring value. As the value of dollars shrinks the measured value -- the price -- of everything increases but the actual value does not.

IMO, the word inflation would be more useful if it meant only the increase in the price of everything due to a decrease in the value of dollars. But now it is used to mean any increase in any price for any reason.

Ron
I don't understand what you are getting at, is there some other way of valuing dollars aside from what they can be exchanged for?

I don't think so, a dollar is simply worth whatever it can be exchanged for and that value varies with the overall level of prices. We measure the overall level of prices (i.e. the value of a dollar) by the CPI (or the PCE, if you're the Fed).
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Re: Whence inflation?

Post by garlandwhizzer »

There is inflation now, substantial inflation, but it's not in CPI. It's in investment asset prices--stocks, bonds, real estate, gold, etc., all of which by historical measures are very generously priced especially relative to a struggling economy. Bonds are at the lowest yields in history which is to say the highest prices ever. Hyper-aggressive FED policy has acted to prevent economic collapse and it has done so. Money which can be borrowed for next to nothing has concentrated in the investing class as investment assets appreciate and the underlying economy struggles. The investing class uses all that money to further drive up prices of both risk and safe assets.

This situation also allows zombie companies to survive which would not have occurred in past eras with unemployment this high in an economic contraction. Estimates are that corporate profit levels will finally exceed 2019 levels in 2022. In the absence of FED action (massive purchases of corporate bonds down to BBB ratings, something that would never have been even contemplated a few decades ago) the corporate bond market would have likely gone into a self-reinforcing collapse in March 2020. We survived but now we have more zombie companies than ever, alive only on credit which they'll probably never be able to pay off. Investors meanwhile have been riding an exuberant bull market, choosing to ignore the considerable market distortions that underlie this wonderful action accepting the FED as the ultimate backstop to both risk and safe assets.

I don't think we've ever been in exactly this position before. I hope it keeps working out well for investors but there is no track record to go by about how all this extraordinary FED action (trillions in QE, corporate and mortgage backed bond purchases), in combination with aging demographics and massive debt at all levels will ultimately unfold in the future. Modern Monetary Theory tells us don't worry, be happy, but IMO there is more risk than is generally perceived by enthusiastic investors in current financial markets. That doesn't mean that the risks will actually show up in future lousy returns. There has always been considerable risk in markets. If you're holding a well-thought-out all weather portfolio I believe this situation, like essentially all others, does not call for major changes.

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Re: Whence inflation?

Post by Seasonal »

willthrill81 wrote: Thu Oct 08, 2020 5:53 pm
Seasonal wrote: Thu Oct 08, 2020 5:50 pm
willthrill81 wrote: Thu Oct 08, 2020 10:22 am The Federal Reserve's rapid and intense response to the economic situation caused by COVID-19 has alarmed many investors, making them very concerned about inflation. Many are convinced that an increased money supply will inevitably lead to higher inflation. This post is a humble questioning of that logic.
Many people have what they regard as common sense models of the economy firmly implanted in their thinking. Two of the most prominent are that a larger base money supply will inevitably lead to inflation and that the government budget is just like a household budget. As far as I can tell, nothing is likely to convince the vast majority of those people otherwise.

BTW, the billion prices project is occasionally useful for those who don't trust the CPI.
Maybe we can change the views of at least a few of those who frequent this forum and read this thread.
It's possible.

Many posts use a frequently seen tactic - redefining inflation. Inflation is a general increase in the price of goods and services. Pointing out that some limited number of goods or services have increased in price is not necessarily inflation. Stocks and bonds are not goods or services.

One of my favorite examples of this tactic is to say an increase in the money supply will necessarily cause an increase in inflation and then define inflation as an increase in the money supply.

Good luck!
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Re: Whence inflation?

Post by dknightd »

z3r0c00l wrote: Fri Oct 09, 2020 1:21 pm
dknightd wrote: Fri Oct 09, 2020 11:58 am I'm not going to buy a bigger TV just because it is cheaper now than it was 10 years ago
Too bad because a large TV is a much better experience, up to some maximum size appropriate for the room it is in. Many of us who get this concept have always been locked into having a smaller TV than they want because either there were no screens large enough or they cost too much. Watching films on a 24 inch CRT was simply not a great expedience, and I am reminded of that each time I watch them on my 54 inch LED.
You should probably buy a new TV at least once a year. Bigger, better, how can you go wrong?
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Re: Whence inflation?

Post by z3r0c00l »

dknightd wrote: Fri Oct 09, 2020 3:26 pm
z3r0c00l wrote: Fri Oct 09, 2020 1:21 pm
dknightd wrote: Fri Oct 09, 2020 11:58 am I'm not going to buy a bigger TV just because it is cheaper now than it was 10 years ago
Too bad because a large TV is a much better experience, up to some maximum size appropriate for the room it is in. Many of us who get this concept have always been locked into having a smaller TV than they want because either there were no screens large enough or they cost too much. Watching films on a 24 inch CRT was simply not a great expedience, and I am reminded of that each time I watch them on my 54 inch LED.
You should probably buy a new TV at least once a year. Bigger, better, how can you go wrong?
No I have a really big one already, at least large for the size of this room. So products are not only better and cheaper on the face of it, they also last longer now. Currently on the same fridge that was installed here 30 years ago. Life is remarkably inexpensive today when compared to the past, especially food. In the 1800's an average wage earner just made enough to cover the cost of food for the family. Extra income such as from child labor went towards housing and a pittance spent on clothing and other items.
Last edited by z3r0c00l on Fri Oct 09, 2020 3:40 pm, edited 3 times in total.
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Re: Whence inflation?

Post by dknightd »

dknightd wrote: Fri Oct 09, 2020 3:26 pm
z3r0c00l wrote: Fri Oct 09, 2020 1:21 pm
dknightd wrote: Fri Oct 09, 2020 11:58 am I'm not going to buy a bigger TV just because it is cheaper now than it was 10 years ago
Too bad because a large TV is a much better experience, up to some maximum size appropriate for the room it is in. Many of us who get this concept have always been locked into having a smaller TV than they want because either there were no screens large enough or they cost too much. Watching films on a 24 inch CRT was simply not a great expedience, and I am reminded of that each time I watch them on my 54 inch LED.
You should probably buy a new TV at least once a year. Bigger, better, cheaper, how can you go wrong?
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Re: Whence inflation?

Post by dknightd »

Many years ago I did not have internet or cell phone. Now I do, and I like them.

So I volunteered to add them to my cost of living.

Is that inflation, or more consumption? I suspect a little of both. . .
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Re: Whence inflation?

Post by ray.james »

To me this chart clearly shows where all the money went:

https://www.multpl.com/s-p-500-pe-ratio

real assets and stocks. Current P/E is at 30. I understand relative to bond rate this may make sense, but for how long?

Speaking of bonds, Illinois is now borrowing from Fed rather than capital markets at lower rates. The reason I mention this, at federal level the current account deficit is at 16%! It is not in single digits anymore like previous recessions. It is the power of compounding - in reverse.
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Re: Whence inflation?

Post by JackoC »

Valuethinker wrote: Fri Oct 09, 2020 9:52 am
jeffyscott wrote: Fri Oct 09, 2020 9:46 am
bottlecap wrote: Fri Oct 09, 2020 9:01 amIf advances in productivity would have lowered the price of your $5 widget to $4.85, but today the price is $5.05, you "see" 1% inflation. You say, not bad! But I see 4% inflation and prefer having $4.85 widget.
Sorry, but if the price of the thing went from $5 to $5.05 that is 1% inflation. Math is not an opinion and inflation is the change in the price of a product or service.
Hedonic adjustments are made in calculating price inflation.
True but that's a different point. Inflation is a rise in the general price level of consumer goods and services. To get an accurate number you must consider the effect of products which didn't exist before and/or whose features have changed significantly, which might be difficult to attain complete agreement on. But inflation is based on the price at which items are available in the market, not the change in what they could have sold for assuming a constant wage level and return on capital. So in the case given inflation is not a (hedonically adjusted) change from 5>4.85 because the item could have been sold at 4.85 with higher productivity combined with the previously prevailing wage level and return on capital. Inflation is a (hedonically adjusted) change from 5>5.05, the change in what the product actually sold for. Over the very long run the ability to produce products with fewer resources due to introduction of new technology has generally eventually gone to rises in the real wage level rather than falls in the price level or permanent changes in the return on capital. In some periods productivity gains were part of the explanation for deflation*, but you don't need to know productivity changes to measure inflation/deflation, just the prices at which goods and services sell, accounting for changes in the characteristics of those goods and services.

*for example in US from Civil War to end of 19th century, increases in productivity combined with slow growth of money supply came out as a rise in the real wage level with a fall in the price level (latter almost 50% cumulatively from 1865-1900). But deflation was simply the price level change, that's what it means.
Last edited by JackoC on Fri Oct 09, 2020 4:35 pm, edited 2 times in total.
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Re: Whence inflation?

Post by marcopolo »

dknightd wrote: Fri Oct 09, 2020 3:44 pm Many years ago I did not have internet or cell phone. Now I do, and I like them.

So I volunteered to add them to my cost of living.

Is that inflation, or more consumption? I suspect a little of both. . .
It is deflation.
You could have bought gigabit internet service many years ago. You might have experienced sticker shock.
Now, it is quite affordable in most of the country.

The fact that you did not purchase it because it was so expensive back then does not change the fact that the price has dropped tremendously.
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Re: Whence inflation?

Post by Oicuryy »

jeffyscott wrote: Fri Oct 09, 2020 2:09 pm I don't understand what you are getting at, is there some other way of valuing dollars aside from what they can be exchanged for?

I don't think so, a dollar is simply worth whatever it can be exchanged for and that value varies with the overall level of prices. We measure the overall level of prices (i.e. the value of a dollar) by the CPI (or the PCE, if you're the Fed).
Right, that's the problem! We don't have a way to directly measure the value of dollars. So we can't directly see the changes in the value of dollars.

We have to infer changes in the value of dollars by looking at changes in prices. But we can't just look at the price of one thing or a few things like avocados and TVs. We need to look at the change in the overall (or general) level of prices. We use changes in the overall level of prices as our measure of changes in the value of dollars.

Too bad we don't have a word for changes in the value of dollars.

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Re: Whence inflation?

Post by willthrill81 »

jeffyscott wrote: Fri Oct 09, 2020 2:09 pm I don't think so, a dollar is simply worth whatever it can be exchanged for and that value varies with the overall level of prices.
Yep. It's called fiat money and has no intrinsic value. It only has value because we collectively agree that it does.
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Re: Whence inflation?

Post by ScubaHogg »

willthrill81 wrote: Fri Oct 09, 2020 4:47 pm
jeffyscott wrote: Fri Oct 09, 2020 2:09 pm I don't think so, a dollar is simply worth whatever it can be exchanged for and that value varies with the overall level of prices.
Yep. It's called fiat money and has no intrinsic value. It only has value because we collectively agree that it does.
And to be fair because the government will accept it in payment for one’s tax bill
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Re: Whence inflation?

Post by willthrill81 »

ScubaHogg wrote: Fri Oct 09, 2020 4:54 pm
willthrill81 wrote: Fri Oct 09, 2020 4:47 pm
jeffyscott wrote: Fri Oct 09, 2020 2:09 pm I don't think so, a dollar is simply worth whatever it can be exchanged for and that value varies with the overall level of prices.
Yep. It's called fiat money and has no intrinsic value. It only has value because we collectively agree that it does.
And to be fair because the government will accept it in payment for one’s tax bill
When people say that dollars are backed by the full faith and credit of the U.S. government, the only thing that really means is that the U.S. government will take your dollars in payment for taxes (and actually demands that you do so rather than try to use yen, pesos, euros, etc.).
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Re: Whence inflation?

Post by Oicuryy »

willthrill81 wrote: Fri Oct 09, 2020 10:14 am But that's what the data I presented in the OP demonstrate: a dramatic increase in the money supply over the last ten years has not led to higher inflation. Presumably, this appears to be at least largely due to the velocity of money falling precipitously.
The Equation of Exchange is always true by definition. But it doesn't tell us which is cause and which is effect. The increase in M (M2) was accompanied by increases in P (GDP deflator) and Q (real GDP) and by a decrease in V.

Image
https://fred.stlouisfed.org/graph/?g=wzur

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Re: Whence inflation?

Post by bhsince87 »

I know where inflation has been outrageous for me: health insurance.

I've been tracking ACA packages for 5-6 years. Over that time, the cost for my wife and I went from $14,000 per year with a $2,000 deductible, to $28,000 with a $4,000 deductible. Plus now there are copays and higher generic prescription costs.

And that $32k is about half of our annual total budget, so it's impact is huge.

I saw something similar going on with employer-paid insurance. Some of that was passed along to the employees, but many employers just ate the majority of the increase, so a lot of people didn't notice it.

The next largest increase in or budget is property taxes. They went from $5,000 to $7,000.

And I essentially have no choice but to pay both of those.
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Re: Whence inflation?

Post by BisterMean »

I think some people have it right. It's not being spent. Look at all the Bogleheads, they save it.

The next question is, when you all will start spending it (in retirement, whatever), will inflation go up? Pretty sure the answer is yes.

We're all in a rat race to maintain the value of our money. It's all relative. If we all hit 65 at the same point in time, retired, and started dipping into our savings, inflation would skyrocket that day.

Looking forward to realizing my "gains" throughout the years are equal to your "gains" and then we're both left with no real gains.
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Re: Whence inflation?

Post by 000 »

BisterMean wrote: Fri Oct 09, 2020 5:19 pm I think some people have it right. It's not being spent. Look at all the Bogleheads, they save it.

The next question is, when you all will start spending it (in retirement, whatever), will inflation go up? Pretty sure the answer is yes.

We're all in a rat race to maintain the value of our money. It's all relative. If we all hit 65 at the same point in time, retired, and started dipping into our savings, inflation would skyrocket that day.

Looking forward to realizing my "gains" throughout the years are equal to your "gains" and then we're both left with no real gains.
I agree with this. Those who are saying asset inflation doesn't matter are missing the whole reason for investing in stocks, etc. in the first place.
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Re: Whence inflation?

Post by palaheel »

Dude2 wrote: Thu Oct 08, 2020 12:44 pm Honestly the concept that more money created inflation never sat well with me although I was willing to suspend my disbelief. I mean, take a game of Monopoly. If the bank holds an infinite supply of money, who cares? You still get $200 when you pass Go. :)
In Monopoly, prices are fixed, supply is fixed, there is no lending, and the bank almost always is the asset seller. It does make one wonder what the game would be like if some of those constraints were removed.
Nothing to say, really.
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Re: Whence inflation?

Post by Grt2bOutdoors »

z3r0c00l wrote: Fri Oct 09, 2020 8:05 am
Grt2bOutdoors wrote: Fri Oct 09, 2020 7:57 am
z3r0c00l wrote: Thu Oct 08, 2020 8:12 pm
fwellimort wrote: Thu Oct 08, 2020 7:27 pm I don't know about you all but in major cities, inflation has been quite rampant the past 10 years.
Even goods. Prices of avocado sandwiches are quite something today.
I live in NYC and have not seen prices increase by all that much in the last 10 years. Housing is getting cheaper if anything and I get avocados 4 for $5. Maybe people are having personal lifestyle creep and confusing that with inflation? This whole hidden inflation conspiracy theory falls flat upon further investigation. Everything is incredibly cheap including gas, electronics, clothing... Heck I can go out now and buy a 65 inch 4K tv for under $500. This was how much a 20 inch color TV cost in 1985. (Without adjusting for inflation.)

As someone just said above, deflation is our likely fate here, and that is what the FED is worried about. A vicious deflationary cycle is very likely with this much unemployment, that's how this could become a depression.
NYC is a victim of its poor policies. We have office rents falling because at this point in time very few are venturing into the offices, instead choosing to work from home. It’s said only 10 percent of office workers are actually in the office. There is a glut of office space, a glut of over building in NY. Essentially the city is closed for business. The city is in a fiscal mess of their own doing. The one thing that hasn’t deflated are property taxes and rents. Office rents yes, residential not really.
This thread is about inflation not specific policies, so the only question is if prices have gone up, not why they failed to go up. Show me a place in the country where housing has gone up more than 2-3% annualized since 2010. I am sure there are pockets here and there but not country-wide and not where I live. Housing costs were flat or dropping in NYC before the virus too. I would guess because they overheated during the housing bubble of the 2000's but that really isn't the question. The OP is asking why no inflation and some are suggesting it is secret, hidden inflation and the government is using an index that hides in on purpose. I am saying the inflation really isn't there and that CPI is a good measure for the normal American who does care mostly about goods and services.
Depends if you are renting or own in NYC. Prices are up more than 2-3 percent annually in NYC for both rent and buying, but as you say it depends where in NYC. Since NYC is composed of 5 boroughs- go look at the price of real estate over the last 10 years and you’ll see just how much prices have risen. The prices are up substantially in Brooklyn, Staten Island, Queens and Manhattan, I can’t speak for the Bronx. I’d be interested in seeing your source that shows housing costs declining in NYC. It also matters if you live in a rent regulated apartment - then I can see why your housing costs are not rising as fast. My family’s property tax bills based on assessed values shows prices increasing substantially and recent property sales show the same.

CPI is a poor inflation predictor as it overweights manufacturing and underweight the actual cost of services. I had a plumber over today, the going rate is $275 an hour, ten years ago it was half that number. The same for other service trades. The price of computers and TVs doesn’t matter much as most people are not buying new TVs every year or even ten years. There is plenty of service inflation.
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