The constant low (but steady) inflation that we now see as normal under the 2% inflation targeting in a major contributor to the significant rise in prices for interest-rate sensitive assets. (Interesting tangent: John Taylor on why he selected 2% as a target: https://economicsone.com/2018/01/09/the-feds-inflation-targe... )
Except inflation is actually significantly higher the basket is just poorly assembled and exclude major drivers like food gas real rent and most importantly medical costs
I am curious what inflation would be with universal healthcare, a healthy amount of affordable housing, primarily renewables for energy, and EVs negating the need for gas/oil. It feels like central banks are going to lose against technology deflation, but I'm not an economist so I can't say for sure.
I suppose it depends on how those programs are funded/achieved. If they are funded via something that acts as monetary stimulus (just print the money to pay for it) then I imagine there would be a heavy burden of resulting inflation.
The USA benefited economically by taking over from Great Britain & France control of world trade, then economically subjugated the other countries involved in the agreement. It was going to break down eventually. The fact that Bretton Woods lasted as long as it did is rather impressive. The USA was the only country to benefit from the agreement. It was only begrudgingly signed by the other participates.
I think this gets a lot right, but it's poorly reasoned.
For example, the author talks about a "massive labor supply shock", but doesn't really address why this massive increase in labor supply wasn't offset by an equivalent increase in demand for labor. That's crucial. Otherwise, the labor supply shock would not put downward pressure on wages.
He also mentions the effect of floating exchange rates but doesn't bother to write even a single sentence on why that's directly relevant (maybe because it increases global competition driving down wages and driving up expected profits? I honestly don't know).
The author also conflates asset inflation with consumer inflation, implying that moderate consumer inflation somehow helps the rich at the expense of everyone else, when in fact, it's just the opposite.
In general, I would say that monetary stimulus does increase inequality, but fiscal stimulus can have the opposite effect.
However, the author mysteriously doesn't question why governments have preferred monetary stimulus over fiscal stimulus. That would be far more revealing.
This analysis is superficial at best. It gets enough right to be mildly interesting, but misses some pretty key points.
Nice to have a reminder why I don't waste my time reading financial analysis newsletters.
> rising prices disproportionately affects the poor who must spend a greater percentage of their income on needed goods.
Inflation has a cause, and often that cause is beneficial to the working class. For instance, a rise in the minimum wage or increased workers' union power would increase prices, and disproportionately benefit the poor. If assets don't increase in value, inflation erodes the wealth of the investor class.
Indeed. The Great Depression was precipitated by deflation in Europe, with deflation being a side-effect of the gold standard. Deflation leads to labor cuts (why invest if you can get richer sitting on your money?), which Europe struggled with throughout the 1920s. And eventually the Europeans deflated themselves into poverty; they stopped buying American goods and stopped investing in American stocks, and the whole house of cards came crumbling down.
We've had modern capitalism for, what, 150-200 years, now? And the one consistent thing we know about capitalism is that money accumulates at the top. Moderate inflation is one way to counter that dynamic, albeit an increasingly ineffective one. Inflation makes people feel insecure, but like with everything else the "security" of a very low inflation or deflationary environment will benefit capitalists far more than labor.
How does moderate inflation counter money clustering at the top?
It seems to me that it exacerbates the problem as 'the top' are fixated on assets and inflation tends to inflate those: "The rich get richer."
The working class, on the other hand, faces higher consumer prices with a delay in increasing wages and, having less 'disposable' income, is strongly affected. "and the poor get poorer"
Also, the lower-to-middle class must somehow navigate stocks or some assets in a 401k/IRA just to protect the purchasing power of whatever nestegg they try to grow (whether it's retirement, or putting kids thru college). Can't just keep that money safe in a savings account (paying 0.1%), it will erode.
> How does moderate inflation counter money clustering at the top?
Because inflation creates a use-it-or-lose-it scenario. With inflation you have to invest your money, otherwise your net wealth will decrease.
Returns from investments are also delayed for investors. Inflation can be difficult for everybody, but no matter what the situation is wealthy investors will have an easier time accumulating and holding wealth than others. This is no surprise, so saying that inflation can hurt the poor is not saying anything. What matters is that deflation is evenworse for labor, as is the instability from naive attempts to keep things at 0%.
The point is that if you want to maximize the redistribution of wealth, you need to coax the investor class to actually invest in things. Moderate inflation is one tool in that toolbox. It's not the only tool, and maybe not even the best tool, but moderate inflation has that function. The problem is that there are many other dynamics at play, too.
Showing that wealth inequality has exploded since the 1970s-1980s, overlaying graphs that show a contemporaneous correlation with inflation targets or whatever your boogeyman, and then suggestively wiggling your eyebrows, doesn't prove anything causative. It may suggest that your inflation targets are ineffective, but doesn't tell you why. (Don't forget that the Bretton Woods systems ended because of the pressure increasing global trade was putting on the dollar and the American economy.)
A multitude of things have been ongoing since the 1970s and 1980s--explosions in global trade and the global economy, massive tax decreases for the wealthy, dismantling of pension systems, etc. All of these things are known and were expected to put downward pressure on wages. They're more than sufficient to explain the trend, and there's no reason to believe that the trend contradicts what we know about the basics of economics. What we are learning is that there are other systemic forces that were previously unknown or poorly understood and which are more powerful than believed.
People keep banging on QE, QE, QE. But global asset wealth is about $300 trillion. QE in both the U.S. and Europe at best injected a few trillion. Why is so much cash just sitting around? Maybe because there's $300 trillion of it! Where is most of it coming from? The industrialization of the so-called third-world. Why is so much of it sitting in the U.S. and European countries? Because of dollar-denominated trade, corruption, risk averseness, and a host of other complex factors.
The labor class is intrinsically vulnerable. It doesn't take much of a change in investor behavior to really screw them over, and you don't need wild conspiracy theories or new physics to explain it. The explanations are out in the open.
as for other causes: you are arguing minimum wage benefits the poor but raises prices as does increase in union power. I don't quite follow...
Minimum Wage: It seems you are ignoring ("the forgotten man") workers displaced by minimum wage (and increased barrier to entry of no/low-skill labor). Then arguing that the increased income for those who receive it as a raise either offsets the inevitable price increase in consumer goods or is worth it due to the time it takes for the consumer goods to find equilibrium with the new minimum. You may well say this is preferable to monetary stimulus which the banks and rich receive first and get the benefit of the time it takes for a new equilibrium to be reached.
Union power: benefit to protected union workers, subsidized by all consumers (who must pay the increased price of goods the union effects). this works out to just be special treatment. Granted, some may prefer we treat this class (working-poor, low-middle class) as special as opposed to that class (ie rich, upper-middle class). To each their own.
> Inflation has a cause, and often that cause is beneficial to the working class
While what you are saying might be applicable at other times, it does not follow that inflation can only be caused by things good for the working class.
Current inflation seems to be the result of an ongoing housing bubble, and other mandatory finance-based expenses. This is decidedly bad for the working class, or really everybody who doesn't already own the inflating assets.
This inflation also seems like the direct result of the overt policy to erase the natural deflation of manufacturing and technology to keep everyone working "full time", when human labor is needed less and less.
> This inflation also seems like the direct result of the overt policy to erase the natural deflation of manufacturing and technology to keep everyone working "full time", when human labor is needed less and less.
A low minimum wage combined with in-work welfare benefits essentially subsidises labour for employers, and is deflationary. Inflation would be naturally higher if not for such government policy.
> 1. inflating the money supply[0] has a usual consequence of price inflation[1].
Except this hasn't been the case for well over a decade in the U.S., and for several decades in Japan. The money doesn't trickle down, it just sits in reserve because nobody wants to invest it in capital goods, labor, etc.
And monetary policy doesn't even seem to be the primary culprit of asset inflation. Profits sit in reserve, too, and the past 15+ years of global profits have been enormous.
Say what you will about Elon Musk's financial profligacy, but the man plows money into capital goods and labor. And the fact that he's plowing other people's money is what makes it so laudable. We need more salesmen like him who can convince investors to actually invest.
The FED did something different the last recession. The "last 15 years," as you say, have been different because the FED started paying interest on excess reserves. This is the reason for the new money to just sit. It provides incentive NOT to lend, a risk free return for the commercial banks. It has counteracted the loose monetary policy.
this has been the reason we haven't seen the usual price inflation from QE
This same factor (FED giving interest on excess reserves) can also account for profits sitting in reserve.
But I suppose now it seems like I'm arguing both ways... (Inflation! & NOT Inflation!) I'll have to take a step back.
+1 on Elon Musk, or at least the sentiment you described
I don't know what this means - investors are on a constant search for yield especially now and that has taken them into riskier assets. The trend of the last decade is exactly opposite what you are saying.
That said, you are correct that rising money supply doesn't automatically translate into rising prices
It's true that monetary policy is pushing up asset prices, so that while there is little to no inflation in consumer goods and wages, the real costs of education and housing have increased.
This is kinda like a pincer movement on the well being of the millenial generation.
That being said, being part of a depression isn't that great for welfare either.
At the moment, there just aren't many credible alternatives to 'zero interest rates forever' monetary policy, and so the phenomena described in this article is likely to get worse before it gets better.
It's worth pointing out that concurrently with the breakdown of Bretton Woods agreements were the OPEC oil price hikes. The change in price of energy contributed a huge amount to the change in price of everything else.
In addition, in the US, we had the "guns and butter" years of the Great Society and the Vietnam war. One can only pump so much fiscal stimulus into an economy before one gets inflation.
> This constant inflation helps to explain much of the rising inequality in the United States, as well as the rising costs for interest-rate-sensitive assets like education and housing.
This goes against my current understanding of inflation. I thought that high inflation benefits _borrowers_ (ie not the upper class) because it reduces the effective interest rate of loans. Is this taking that a step further and saying that the reduced cost of borrowing money actually increases asset prices because of inflated demand, resulting in increased wealth for asset-holders and unobtainable prices for asset-purchasers?
It only benefits borrowers with outstanding loans, created prior to the inflationary period. Most of what would be considered the millennial generation most likely didn’t buy houses and such prior to the recession and the start of quantitative easing etc.
wages seem to be the last thing that rise with general inflation, and as such don't rise as much as other prices, especially the ones mentioned: housing, schooling.
I think the data bears this out, looking at 'real wages' vs inflation-adjusted cost of housing/schooling.
I could see how other sorts of stimulus would be preferable in this case though. All depends on who gets the benefit of spending new money on old prices.
Going back a comment, it depends on if you got into the loan (school, house) before the inflation. Or locked in a low rate. Always nice to pay back money that's worth much less.
When I went to the bank to get a small loan for home remodeling I got an offer with a 10% interest rate. The idea that low 0% interest rates actually influence consumer behaviour feels like a joke to me now.
There are a massive number of boomers who saved a big ol’ pile of money. You can’t save money without someone else willing to borrow it and they still want it to be worth something when they go to retire. They are a large voting block so they pushed policies to make that happen.
My guess is that boomers on the tail end are going to get screwed when they no longer have the political power to support those policies and the millennials cast off the yoke but the boomers on the leading edge will do fantastic.
Volatility works out for people who save (who park capital in liquid assets that aren't doing work in order to have wheat for the eventual famine). These guys. They save, short like heck when the market is falling, and swoop in to save the day. What a great time to be selling 0% loans.
Personal Savings Rate (PSR) stratified by greatest generation and not greatest generation is also relevant.
Are relatively fixed living expenses higher now? Yes. Is my generation just blowing what they could invest into interest-bearing investments on unnecessary stuff from Amazon? Yes. And expensive meals and drinks.
How have corporate profits and wages changed?
In their day, you put you gosh-danged money aside. For later. So that you have money later.
And that is why you should buy my book, entitled: "Invest in things with long term returns: don't buy shtuff you don't f need, save for tomorrow; and other financial advice"
Which brings me to: the cost of college textbooks and a college education in terms of average hourly wages.
By the way, over the longer term, index funds are likely to outperform funds. Gold may be likely to outperform the stock market. And, over the recent term -- this is for all you suckers out there -- cryptocurrencies have outperformed all stock and commodities markets. How much total wealth is being created on an annual basis here?
Payday loans have something like 300% APY.
How does 2% inflation affect trade when other central banking cabals haven't chosen the same target? "Devaluation"! "Treachery"!
30 comments
[ 2.8 ms ] story [ 87.9 ms ] threadThe constant low (but steady) inflation that we now see as normal under the 2% inflation targeting in a major contributor to the significant rise in prices for interest-rate sensitive assets. (Interesting tangent: John Taylor on why he selected 2% as a target: https://economicsone.com/2018/01/09/the-feds-inflation-targe... )
Edit: More info: https://www.imf.org/external/about/histend.htm
For example, the author talks about a "massive labor supply shock", but doesn't really address why this massive increase in labor supply wasn't offset by an equivalent increase in demand for labor. That's crucial. Otherwise, the labor supply shock would not put downward pressure on wages.
He also mentions the effect of floating exchange rates but doesn't bother to write even a single sentence on why that's directly relevant (maybe because it increases global competition driving down wages and driving up expected profits? I honestly don't know).
The author also conflates asset inflation with consumer inflation, implying that moderate consumer inflation somehow helps the rich at the expense of everyone else, when in fact, it's just the opposite.
In general, I would say that monetary stimulus does increase inequality, but fiscal stimulus can have the opposite effect.
However, the author mysteriously doesn't question why governments have preferred monetary stimulus over fiscal stimulus. That would be far more revealing.
This analysis is superficial at best. It gets enough right to be mildly interesting, but misses some pretty key points.
Nice to have a reminder why I don't waste my time reading financial analysis newsletters.
it is?
so: Moderate consumer inflation helps 'everyone else' at the expense of 'the rich?'
How?
I always figured:
1. inflating the money supply[0] has a usual consequence of price inflation[1].
2. rising prices disproportionately affects the poor who must spend a greater percentage of their income on needed goods.
--- to sum: Monetary Stimulus = highly regressive tax ---
[0] "monetary stimulus"
[1] assets and consumer goods
edited: formatting
Inflation has a cause, and often that cause is beneficial to the working class. For instance, a rise in the minimum wage or increased workers' union power would increase prices, and disproportionately benefit the poor. If assets don't increase in value, inflation erodes the wealth of the investor class.
We've had modern capitalism for, what, 150-200 years, now? And the one consistent thing we know about capitalism is that money accumulates at the top. Moderate inflation is one way to counter that dynamic, albeit an increasingly ineffective one. Inflation makes people feel insecure, but like with everything else the "security" of a very low inflation or deflationary environment will benefit capitalists far more than labor.
It seems to me that it exacerbates the problem as 'the top' are fixated on assets and inflation tends to inflate those: "The rich get richer."
The working class, on the other hand, faces higher consumer prices with a delay in increasing wages and, having less 'disposable' income, is strongly affected. "and the poor get poorer"
Also, the lower-to-middle class must somehow navigate stocks or some assets in a 401k/IRA just to protect the purchasing power of whatever nestegg they try to grow (whether it's retirement, or putting kids thru college). Can't just keep that money safe in a savings account (paying 0.1%), it will erode.
Because inflation creates a use-it-or-lose-it scenario. With inflation you have to invest your money, otherwise your net wealth will decrease.
Returns from investments are also delayed for investors. Inflation can be difficult for everybody, but no matter what the situation is wealthy investors will have an easier time accumulating and holding wealth than others. This is no surprise, so saying that inflation can hurt the poor is not saying anything. What matters is that deflation is even worse for labor, as is the instability from naive attempts to keep things at 0%.
The point is that if you want to maximize the redistribution of wealth, you need to coax the investor class to actually invest in things. Moderate inflation is one tool in that toolbox. It's not the only tool, and maybe not even the best tool, but moderate inflation has that function. The problem is that there are many other dynamics at play, too.
Showing that wealth inequality has exploded since the 1970s-1980s, overlaying graphs that show a contemporaneous correlation with inflation targets or whatever your boogeyman, and then suggestively wiggling your eyebrows, doesn't prove anything causative. It may suggest that your inflation targets are ineffective, but doesn't tell you why. (Don't forget that the Bretton Woods systems ended because of the pressure increasing global trade was putting on the dollar and the American economy.)
A multitude of things have been ongoing since the 1970s and 1980s--explosions in global trade and the global economy, massive tax decreases for the wealthy, dismantling of pension systems, etc. All of these things are known and were expected to put downward pressure on wages. They're more than sufficient to explain the trend, and there's no reason to believe that the trend contradicts what we know about the basics of economics. What we are learning is that there are other systemic forces that were previously unknown or poorly understood and which are more powerful than believed.
People keep banging on QE, QE, QE. But global asset wealth is about $300 trillion. QE in both the U.S. and Europe at best injected a few trillion. Why is so much cash just sitting around? Maybe because there's $300 trillion of it! Where is most of it coming from? The industrialization of the so-called third-world. Why is so much of it sitting in the U.S. and European countries? Because of dollar-denominated trade, corruption, risk averseness, and a host of other complex factors.
The labor class is intrinsically vulnerable. It doesn't take much of a change in investor behavior to really screw them over, and you don't need wild conspiracy theories or new physics to explain it. The explanations are out in the open.
a good thing?
> inflation has a cause
that was #1 in my comment: monetary stimulus
as for other causes: you are arguing minimum wage benefits the poor but raises prices as does increase in union power. I don't quite follow...
Minimum Wage: It seems you are ignoring ("the forgotten man") workers displaced by minimum wage (and increased barrier to entry of no/low-skill labor). Then arguing that the increased income for those who receive it as a raise either offsets the inevitable price increase in consumer goods or is worth it due to the time it takes for the consumer goods to find equilibrium with the new minimum. You may well say this is preferable to monetary stimulus which the banks and rich receive first and get the benefit of the time it takes for a new equilibrium to be reached.
Union power: benefit to protected union workers, subsidized by all consumers (who must pay the increased price of goods the union effects). this works out to just be special treatment. Granted, some may prefer we treat this class (working-poor, low-middle class) as special as opposed to that class (ie rich, upper-middle class). To each their own.
Am I missing something?
While what you are saying might be applicable at other times, it does not follow that inflation can only be caused by things good for the working class.
Current inflation seems to be the result of an ongoing housing bubble, and other mandatory finance-based expenses. This is decidedly bad for the working class, or really everybody who doesn't already own the inflating assets.
This inflation also seems like the direct result of the overt policy to erase the natural deflation of manufacturing and technology to keep everyone working "full time", when human labor is needed less and less.
A low minimum wage combined with in-work welfare benefits essentially subsidises labour for employers, and is deflationary. Inflation would be naturally higher if not for such government policy.
Except this hasn't been the case for well over a decade in the U.S., and for several decades in Japan. The money doesn't trickle down, it just sits in reserve because nobody wants to invest it in capital goods, labor, etc.
And monetary policy doesn't even seem to be the primary culprit of asset inflation. Profits sit in reserve, too, and the past 15+ years of global profits have been enormous.
Say what you will about Elon Musk's financial profligacy, but the man plows money into capital goods and labor. And the fact that he's plowing other people's money is what makes it so laudable. We need more salesmen like him who can convince investors to actually invest.
this has been the reason we haven't seen the usual price inflation from QE
This same factor (FED giving interest on excess reserves) can also account for profits sitting in reserve.
But I suppose now it seems like I'm arguing both ways... (Inflation! & NOT Inflation!) I'll have to take a step back.
+1 on Elon Musk, or at least the sentiment you described
That said, you are correct that rising money supply doesn't automatically translate into rising prices
It's true that monetary policy is pushing up asset prices, so that while there is little to no inflation in consumer goods and wages, the real costs of education and housing have increased.
This is kinda like a pincer movement on the well being of the millenial generation.
That being said, being part of a depression isn't that great for welfare either.
At the moment, there just aren't many credible alternatives to 'zero interest rates forever' monetary policy, and so the phenomena described in this article is likely to get worse before it gets better.
In addition, in the US, we had the "guns and butter" years of the Great Society and the Vietnam war. One can only pump so much fiscal stimulus into an economy before one gets inflation.
All these things mattered.
This goes against my current understanding of inflation. I thought that high inflation benefits _borrowers_ (ie not the upper class) because it reduces the effective interest rate of loans. Is this taking that a step further and saying that the reduced cost of borrowing money actually increases asset prices because of inflated demand, resulting in increased wealth for asset-holders and unobtainable prices for asset-purchasers?
Millennials would benefit from higher inflation, so long as that inflation was reflected in wages.
I think the data bears this out, looking at 'real wages' vs inflation-adjusted cost of housing/schooling.
I could see how other sorts of stimulus would be preferable in this case though. All depends on who gets the benefit of spending new money on old prices.
Going back a comment, it depends on if you got into the loan (school, house) before the inflation. Or locked in a low rate. Always nice to pay back money that's worth much less.
My guess is that boomers on the tail end are going to get screwed when they no longer have the political power to support those policies and the millennials cast off the yoke but the boomers on the leading edge will do fantastic.
Personal Savings Rate (PSR) stratified by greatest generation and not greatest generation is also relevant. Are relatively fixed living expenses higher now? Yes. Is my generation just blowing what they could invest into interest-bearing investments on unnecessary stuff from Amazon? Yes. And expensive meals and drinks.
How have corporate profits and wages changed?
In their day, you put you gosh-danged money aside. For later. So that you have money later.
And that is why you should buy my book, entitled: "Invest in things with long term returns: don't buy shtuff you don't f need, save for tomorrow; and other financial advice"
Which brings me to: the cost of college textbooks and a college education in terms of average hourly wages.
By the way, over the longer term, index funds are likely to outperform funds. Gold may be likely to outperform the stock market. And, over the recent term -- this is for all you suckers out there -- cryptocurrencies have outperformed all stock and commodities markets. How much total wealth is being created on an annual basis here?
Payday loans have something like 300% APY.
How does 2% inflation affect trade when other central banking cabals haven't chosen the same target? "Devaluation"! "Treachery"!