The USA needs to sell roughly 15 million new cars a year to maintain an adequate supply of used cars. Falling below that target will cause used car prices to rise in the following years.
Not necessarily. Cars that go out of circulation can be made road worthy, if demand for them is there. Having a supply of new cars means old second hand cars get retired even if they could be made just as road worthy as any other second hand cars.
What happened 12 years ago? 2008 happened, and resulted in a decade of incredibly low new-vehicle output. Add in the Cash for Clunkers program, and used inventory levels are about as low as they’ve ever been. This is the same as the housing market, the result of a decade of underbuilding.
Couple that with stimulus money making down payments easy, and low interest rates keeping monthly payments low, and you have a recipe for prices to take off like a rocket, from both ends of the supply-demand curve.
Right, that doesn't sound like a supply chain issue, that sounds like a decade of structural issues leading to a perfect setup for structural inflation
Pumping this much free money into the economy is going to cause prices to go up. We’re seeing labor prices go up.
Whether minimum wage should be 12 or 15 is tangential. We’re seeing where people will not take a job unless it pays significantly more than the can draw from COVID benefits. Those pay premiums mean your groceries, coffee, fast food, then rent, then real estate, etc., etc., is going to cost more.
Did you see the article/comment from Chipotle's CEO about the impact of increasing wages? Going up to $15/hour would increase menu prices between 2-3%.
Labor prices have been low forever. Businesses have been taking advantage of low labor costs for service jobs literally for decades, pocketing the profits while expecting the government to fill the gaps with welfare/SNAP/EITC etc. And a good portion of this labor segment has decided (after experiencing the COVID lockdowns) that they don't need to put up with crap wages for a crap job.
I worked in the restaurant biz for over two decades, and it disgusts me how much it (and other service jobs) take advantage of employees. I was repeatedly told that every time the minimum wage went up, we'd have to lay off employees, or cut benefits etc. And every time, net income went up for every place I worked. It's just BS.
Yes but the treatment is potentially very different. Having the Fed use its blunt monetary tools to control a price increase might not make sense if that increase is caused by a specific supply-chain issue.
“Inflation is still inflation” is like a doctor saying “a headache is still a headache” and ignoring the fact that one patient’s headache is caused by an operable brain tumor, while the other drank too much the night before.
Inflation is a summary statistic, or, if you like, an effect rather than a cause. Though of course as it flows downstream it becomes a cause of the next round of effects. But still, fundamentally, it's an effect rather than a cause. All of the inflation has "reasons" behind it. That doesn't make it "not inflation".
Unfortunately "Inflation from too much money chasing too few goods" is often in people's mind with only a focus on too much money, and rarely any thought to too few goods - especially when we know right now it's almost certainly to a huge degree temporary supply dips in goods - with waves of covid still rising in international supply, as well as the logistics of companies dropping production during pandemic (e.g. w/ automotive chips).
It's also a metrics problem - you can see inflation increases which are easy to equate to units of money, but I don't think there's as universal an index of supply. Likely some industrial output index over time would better quantify how much inflation is pandemic disruption of supply, vs money supply. I predict it's mostly supply disruption.
I was considering selling my car 6 months ago, so I checked the KBB used car private party price/value, and it was around $12,500. That same report today says it is $15,500.
(6 year old hatchback with top trim, very low mileage.)
The Fed is unlikely to intervene in the short term because they have acknowledged that undershooting their 2% average inflation target means they have to allow it to overshoot from time to time. We're still working out supply shortages and imbalances. But, I expect they're only going to start tightening once we've exceeded 3% or more on an annualized basis.
They are considering this "Transitory" meaning they think it will drop with no changes to the Fed's behavior. Yes, 4.2% is high inflation, but it has been lower then target for years now, so you might consider this "reflation", or higher then normal inflation in order to catch up to normal after years of lower then normal inflation.
Also, as another comment points out most of this increase comes from increases in used automobiles, gasoline, and airline fares. This can all be explained by supply issues and large drop in those item last year at this time. The Fed's behavior have minimal effects on that.
> Yes, 4.2% is high inflation, but it has been lower then target for years now, so you might consider this "reflation"
That’s not really an argument that it factually is transitory, and I don’t think there is any real good reason to think “catch-up” inflation is any better than the regular kind.
(OTOH, the context of the COVID rebound is a strong reason to think it is likely transitory.)
Its YoY but its still viewed as transitory. Given that the period also saw the economic rebound from the COVID sharp drop, including the fastest quarter of economic growth ever recorded in the US, followed by two more unusually strong growth quarters, it’s not hard to see why. Unless that’s a sustained trajectory rather than just a rebound from one-time impairment, you wouldn’t expect strong demand-pull inflation to continue.
Why would they intervene? Increased inflation was one of the reasons for passing so much stimulus. Several years of 3-5% inflation means the government's debt is 20-25% smaller relatively speaking. The Fed has been trying to get to 2% for nearly a decade and they're on the record saying that +2% inflation (read 3-5%) is okay by them for an extended period of time since that would make up for the lack of inflation during the 2010s.
Because if banks have underwritten fixed-rate mortgages to people at 3% APR and inflation goes above 3%, then banks begin to lose money. Nobody wants banks to become insolvent.
The Fed's job is hitting 2% inflation because that is basically what a healthy economy needs over the long term. The Fed has no obligation to help the US government shrink its debts.
Inflation is caused by demand exceeding supply. 2% inflation means demand is exceeding supply by exactly 2% and that is a good thing because it means there is wiggle room for people to find jobs, there is wiggle room to let the economy shift from one industry to another, it means there is demand for technology that increases productivity.
Sure, but that’s the Fed. It’s odd to pin this in the Biden administration when it’s a Trump appointee running the Fed while a Biden Treasurer (and former Obama Fed chairwoman) raises and retracts the spectre of rate increases.
They can't. If the ten year note even reverted to the historical average of 4.9%, it would require 30% of the present budget just to service the interest.
Rates will never appreciably rise, they can't or all borrowers will be crushed
Unfortunate that the article mentions nothing about policymakers approving $12+ trillion in monetary and fiscal support to deal with covid. To put that to perspective, the US GDP is $21 trillion and Chinese GDP is $14 trillion
> While Federal Reserve officials and economists acknowledge the temporary boost, it’s unclear whether a more durable pickup in inflationary pressures is underway against a backdrop of soaring commodities costs, trillions of dollars in government economic stimulus and incipient signs of higher labor costs.
I still have issue with the characterization. It's "against the backdrop of ... trillions of dollars" as though increased price levels and increasing the money supply by 25% are unrelated.
Many times these articles write about stimulus and people think its the $1600 checks some people received. But what doesn't get reported is what the lion share of the money actually went to, buying up financial assets from banks.
> what doesn't get reported is what the lion share of the money actually went to, buying up financial assets from banks
Fiscal stimulus is more powerful than the monetary kind. When the Fed buys a bond, at the end of the day, it’s buying up bonds. Someone must give up 80 to 99.99999¢ of wealth for $1 of liquidity. When Congress spends $1, it’s creating money. It may have to tax or borrow down the road, but that’s then, not now.
Also, not sure how one can say monetary policy isn’t reported. It receives nearly weekly attention on even non-financial forums like Hacker News, and features far more prominently in financial, economic and crackpot rags.
> I still have issue with the characterization. It's "against the backdrop of ... trillions of dollars" as though increased price levels and increasing the money supply by 25% are unrelated.
No, its explicitly providing relevant context, which is the polar opposite in every respect to implying that they are umrelated.
There's an important message here: the money expands by that much and inflation is .. 4%?
That shows the limits of a single number. It also shows up the "transmission mechanism" has been damaged; it doesn't affect wages or prices largely because so much effort has been expended over the last 40 years to prevent wages going up at all.
I would argue that much of the money expansion went to asset prices. Just look at the stock market, which is up 30% from PRE-covid levels. If you factor in reduced reduced demand from lockdown measures, then the market increase is even more astonishing. I wrote about the asset price increases before [0]
This is unfortunate since it's essentially helping relatively wealthy asset holders as opposed to those most likely to be affected negatively by covid.
I agree. The economy is complex. You can’t tie 12 trillion of spending directly to inflation. Negative side effects manifest in ways we don’t expect. In this case, drastically increasing wealth inequality.
It’s interesting to me that software developers don’t intrinsically realize this more than your average person. Nobody knows better than us that making changes to a complex system can have catastrophic downstream effects and has to be extensively tested first.
Most people assume that economics is like a washing machine where you have a few dials and knobs. Sometimes you need to tighten a screw here, apply some grease there, etc.
But in reality, economics is more akin a complex biological system. We have a very rudimentary understanding of how it actually works. Sure, we can create drugs that calm us down or excite us, but we have very limited understanding of the underlying biological system. For instance, we still can't agree what the optimal diet for humans is with wildly contradictory regiments.
It's a great analogy, especially since at the end of the day economic shifts are rooted in... illogical meatbags (us).
Economists like to pretend it's a science, and there are certainly scientific and experimentally-valid findings, but the innermost terms and interactions will always be obsfuscated. Like psychology, except with higher stacks of layered complexity.
It's not as bad as steel deciding to change its tensile strength on a whim (because it heard other steel say so!), but it's not far off.
From what I've seen, there are a lot of people in tech circles expressing anti-capitalist sentiment. However, very few of these people know or care how the economy works. This is very unfortunate, because I think it's useful to try and understand how the system works if you want to have any hope of improving it. Or at least, if you understand how things are trending, you might be able to better prepare and protect yourself and your friends/family.
The average person doesn't understand what inflation is, why it happens, how it affects them and how the government uses inflation to reduce the significance of its debt. The average person also tends to believe government inflation numbers which, IMO, are manipulated and do not represent what is actually happening in the world. For instance, home prices (and thus rents) are rapidly increasing, and housing costs, for most people, are the biggest expense they have to think about, accounting for sometimes more than 50% of their take home pay.
> From what I've seen, there are a lot of left-wing people in tech circles expressing an opposition to capitalism. However, very few of these people know or care how the economy works.
From what I've seen, there are a lot of right-wing people in tech circles expressing a support for capitalism. However, very few of these people know or care how the economy works.
(A particular subgroup understands finance/trading pretty well, and mistakes understanding weather for understanding climate.)
> From what I've seen, there are a lot of right-wing people in tech circles expressing a support for capitalism. However, very few of these people know or care how the economy works.
Fair point. Most people don't know or care how the economy works, left or right. My main point was: it's to your advantage to know how the system works, and it's maybe even more important to understand how it works if you hope to change it.
If you don't understand what is inflation and its impact, or basic economics, then politicians can take advantage of your lack of knowledge, in the same way a shady car mechanic can take advantage of uninformed customers. They might pretend that certain policies will help lower-income people when what they are doing is most beneficial to the ultra-rich.
> They might pretend that certain policies will help lower-income people when what they are doing is most beneficial to the ultra-rich.
Sure, like, for instance, they might pretend that reducing fiscal stimulus that both redistributes wealth downward and fuels inflation (but does the former more than the latter) helps the lower-income by reducing inflation when it really lowers their real post-transfer income while raising it for those in the higher income classes that benefit less or not at all from the transfer but are still effected by price levels.
Money has to go somewhere. When the economy is shut down, there are few places to put money outside of the stock market. In short, people are willing to pay more for stocks, because the alternatives are not there at the same levels they used to be. Supply & Demand, basically.
They're up because housing has virtually no supply and massive demand, though. Houses are terrible assets as investment vehicles as they have very low returns and high disposal costs. They're really a last resort unless you want to be a landlord.
I disagree with this comment. Real estate can provide solid 5-7% after tax returns (in parts of the US) and due to leverage and low mortgage rates, a small annual increase in price can greatly increase the value of your investment.
Most people only think of real estate as local, so if you look for returns in nyc or SF, you’ll be disappointed. But if you are willing to invest in property across the US you can find areas with much lower prices and higher rents.
Or the 4% number is bullshit and we are in worse shape than the government and an overly sympathetic media would like to admit. Time will tell. Meanwhile if you look at individual commodities, some of them are quietly skyrocketing in price. Copper, steel, lumber, and a number of others.
It's also possible that there's simply a long delay between flooding a struggling economy with cash and seeing the resulting tax on the middle class that we call inflation.
A monetary expansion of similar magnitude happened after the GFC, and inflation didn't rise above this level for a decade... There just isn't that much of a relationship between base money and CPI as Friedman imagined 50 years ago.
(Because banks also control credit supply and only give it to creditworthy borrowers... The Fed can drop rates to zero and give banks limitless money and they still won't lend it out to deadbeats.)
It's a 2 way street. Fed can drop rates to zero but still people are too risk averse and have a negative outlook so they won't seek to submerge themselves with debt.
2008 GFC is not comparable because QE (buying long term bonds to push down interest rates) does not result in a noticeable increase in the supply of money.
Printing money and sending it to people does. Refer to the chart below.
This is why a single chart on imgur is bad and you should go to real sources. The way M2 was calculated changed in May 2020, a fact that should be on every reputable page containing that graph.
Also in a lot of ways M2 on its own is meaningless (money sitting under a mattress not being used doesn’t affect the economy) - velocity of money is more useful. Of course, inflation is complex and multicausal so this isn’t the whole picture, but it’s more useful than raw M2 supply.
Most QE immediately after 2008 was just filling bank reserves. It helps banks but the money is only available to those who borrow.
>Printing money and sending it to people does.
That money wasn't printed, it was borrowed because the Fed cannot do that. Only the US government can do that. The Fed may have bought treasury bonds but those still have to be paid back.
> The Fed may have bought treasury bonds but those still have to be paid back.
Do you mean that when securities owned by the Fed mature, the Fed will destroy the money that it had created to buy them?
In practice, I don't think that has really been happening. They have just been reinvesting proceeds in new securities (at least the principal; they send some (all?) interest to the Treasury).
This may change at some point, but so far the Fed has periodically increased its balance sheet while never substantially reducing it [1]. If that continues long term, the Fed's "temporary" money is effectively permanent.
It's been maddening watching economists whom I respect making proclamations (one way or the other) with high degrees of confidence that inflation is or isn't a problem. They have no idea, because anyone who actually knows what they are doing knows that there isn't enough data yet.
Agreed. We do have some data though. We know how much new debt we've taken on in the last 18 months. We certainly won't be able to afford to raise rates to combat any inflation.
I studied applied economics in college. It's actually how I got into professional programming, due to coding for simulations as part of my major.
It is way, way too early, based on my experience, to make any formal claims about why a given number is X instead of Y based on Z theory.
People who are claiming there is going to be runaway inflation don't have enough data to suggest this, and your assertion is equally lacking in data to justify it.
As always, economics gets contaminated by political biases, because so many prominent economists, including a hero of mine in college, Paul Krugman, have followed the profitable path of becoming full time political hacks. Likewise for Lafferty on the right and many others.
Inflationary pressures typically, in historical terms and yes, in the simulations I used to model, have a lag and then start to build upon each other. We haven't had nearly enough time to properly assess any of this.
Rest assured, if/when it does manifest, each side will have very firm talking points blaming the other, informing their sycophants exactly how to talk out of their rear ends about how it's the other team, and how their policies would have prevented it.
For the next couple weeks we are going to hear nothing but the word 'inflation'. This mantra is an excuse to raise interest rates and crash the economy. Expect crazier and crazier events to happen in a short time.
According to that tracker, only $6.9 trillion has been dispersed, not the full $12 trillion.
I think my ad blocker doesn't jive with the site, as I can only see the first part that shows the three summary bars in the bar chart. Apologies if I'm missing something.
You also have to keep in mind a few things:
1. Liquidity - how much of this (probably most of federal reserve spending) has gone to maintaining liquidity in the global financial system? That's not going to contribute too much to inflation. If you have the reserve currency, and nobody is willing to lend because they're in fear of going bankrupt or running out of cash while the economies of the globe were shut down, then you wind up having to inject tons of cash into the global economy to keep it liquid. The alternative is armageddon.
2. Low interest rates. When the U.S. government borrows money it pays an interest rate. While the $6 trillion number (or $12 trillion for that matter) may seem very high, it matters how much the U.S. is paying in interest on these loans. Can the U.S. government meet it's debt obligations? Yes? Good to go then. GDP (which sucks anyway) will rise and past debt will be inflated away. Similar to everyone rushing to buy a house, low interest rates are an opportune time for the government to borrow money too. Republicans are hemming and hawing about it, but if Trump was president they'd be doing the same deal.
3. It also matters what ROI you get for spending. Nobody seems to be talking about that. If the government borrows $100 at 0.4% interest or maybe even 0% interest and then turns that into a larger investment in the broad American economy, that's almost surely a good use of money even if it increases the overall debt load if it's actually increasing GDP.
I wish I could find it again, and maybe some enterprising HN reader will have it available, but there was an blog post I found interesting regarding how much the U.S. could borrow. They argued it was probably an unlimited amount of money. If nothing else it's just an interesting take.
We should be sensitive to government spending and actions of the Federal Reserve, but we need to do so smartly. Everyone running around screaming inflation! inflation! are missing the mark. My default in the financial space is when everybody is saying something is true, it's likely not. There's a lot of money to be made convincing lots of people of the truth of something that isn't true and while they're distracted you take lots and lots of profits at the institutional scale (hedge funds, etc.).
Yeah, the economy is going so great we've only had 2 armed uprisings in as many years with 2 orders of magnitude growth in housing cost versus wage growth or housing cost versus population growth while over half of the usable land area of the country is zoned for non-poors
I thank God for the Republicrats printing a third of the national debt and mailing checks directly to their cronies every time I open Zillow and realize I have effectively earned negative income for a lifetime of labor
It's not just about 12+ trillion added to spending, real costs of business have increased, driving up prices, such as the need to retrofit work environments and provide PPE, production slowdowns due to the need to rotate staff or when an outbreak occurs: Meat prices spiked very high when significant portions of of the meat processing industry went offline, and those prices haven't gone down. The entire supply/demand curve for many product classes have changed as a result of people staying home and buying different things.
Yes, Pumping this much money into the economy it's hard to avoid inflation, but there's more factors to it than just that variable.
Looks like meat prices spiked in Q2, peaking around June/July, and have fallen again. They're still elevated from this time two years ago, but they did go down.
As anecdata, I saw several local restaurants raise price a buck or two on burgers last year when supplies were crunched, and they promptly lowered them a handful of months later.
They may have lowered prices back down due to lack of customers with COVID precautions still in place.
However beef prices can be somewhat regional. Where I am anything other than ground beef is mostly still at least $2/lb more than usual. Ground beef is it a little more than usual.
See, that sounds scary. But isn't "we printed a whole lot of money and didn't get high inflation" equivalent to "if we hadn't printed all that money, we would've had deflation"?
(This is not a rhetorical question meant to imply you're wrong, I genuinely am not sure. It seems crazy that we could run the money printer like we have and not cause dire problems, but it also seems like that's what's happening.)
Deflationary periods and natural recessions hurt in the short term, but they are also the most consistent periods in American history where wealth inequality decreases as the economy corrects and reallocates capital [0]. Staving them off at all costs for the last few decades via easy monetary policy is arguably one of the greatest contributors to the rise in wealth inequality, alongside poorly graduated income tax brackets and (to a lesser degree) automation.
Not always. My grandparents were poor, but lived within their small means. I remember them telling me how horrible it was to live through the 1970s inflation that decimated the small amount of savings that they had.
But like I said about the no universally good or bad, inflation is good for effectively reducing debt.
Inflation helps debtors (because the real value of the nominal debt is reduced by inflation - debtors borrowed "high value" money and later, after inflation, can pay it off with "low value" money) and hurts creditors (same reason, just the effect is reversed).
Rich people are (mostly) creditors. Poor people are (mostly) debtors. Inflation tends to hurt rich people (creditors) and help poor people (debtors). The people who run the economy are almost universally rich, and are (coincidentally, I'm sure /s) almost universally opposed to any increase in inflation.
Side note: assets (real estate, gold, ...) are mostly inflation-neutral since their prices go up at the same rate as the prices of everything else.
Where poor people do get hurt is when consumer prices go up and wages don't but that's not inflation - inflation is when the price of everything goes up, including labor i.e. wages.
You can have debt (a car bill) and still have savings ($500 in the bank). That savings is often an emergency fund, and when the effectiveness of that fund is reduced, so is your ability to respond to an emergency.
Not sure if this is tongue in cheek, but no. Inflation relatively benefits those who have a higher percentage of their net worth in assets than cash (i.e. the rich). It also benefits those who have a lot of debt. Before the Fed got into the habit of keeping artificially low interest rates as a means to originate inflation (and fund Congress), this might have benefited the poor (at least those credit-worthy enough to take on meaningful debt). But now, the depreciation of debts in an inflationary environment also tends to disproportionally benefit the wealthy, who have easy access to cheap credit and frequently use it.
At a high level I agree, but monetary policy isn't the only way to affect wealth inequality either. And the question I'm wrestling with is not, "Was/is two decades of relatively easy money a bad policy?" but "Why hasn't the last year or two of very easy money caused huge problems?".
And for bonus points, the follow-up question is: could we have done this anytime? Did the Covid economic downturn necessitate these drastic measures, or could we have adopted 2020 monetary policies in, say, 2018 or 2014 with the same results (skyrocketing stock market, skyrocketing inequality, but relatively stable inflation) and we never did it before because we never had a good excuse?
> Why hasn't the last year or two of very easy money caused huge problems?
See the other comment I posted on this article. Commodities have skyrocketed. But the price of the beef in your Big Mac was negotiated years ago, so consumer prices lag raw materials as multi-year supply chain contracts are updated.
> could we have adopted 2020 monetary policies in, say, 2018 or 2014 with the same results (skyrocketing stock market, skyrocketing inequality, but relatively stable inflation) and we never did it before because we never had a good excuse?
The economic shock of the pandemic no doubt slowed the velocity of money for a time, which further slowed the consumer inflationary effect. But that velocity has increased amongst lockdown fatigue and reopening in the US, while the money printed is still here. We're seeing it manifest in real estate, stocks, and commodities. "The everything bubble" is just a way of saying (wealth inequality x inflation).
To answer that question we need to consider top down Vs bottom up.
What Congress does is bottom up. After the stimulus went out, the amount of retail sales skyrocketed[0]. The first round single-handedly rebounded us back to where we were before CO-VID, and the second pushed us single-handedly up ~4 years worth of gains. This has a large effect on CPI inflation, but it's limited to when Congress can pass their bills. However with interest rates at basically nothing, they can afford to keep writing them forever if they don't care about the consequences.
What the Fed does on the other hand when they lower the interest rate and buy bonds is top down. This money is funneled directly into the already wealthy. You see the more wealth inequality there is, the more goes to the wealthy, the less these top down has any effect on inflation. You're right, when you give money to the wealthy they save it, it's like pushing on a string, asset prices rise and this doesn't effect inflation, and they could have done it at any time.
So you need to ask yourself, why now? The Fed is deeply concerned with what they are seeing with housing. You see the more wealth inequality there is, the more they need to make sure that their money stays in the monopoly money that is stocks, and out of the real economy. Once the wealthy work out that steel and lumber and housing have a better overall return than stocks, that's exactly when things that the CPI tracks finally takes off.
Most of the time this is triggered by a supply shock. In the 1970s it was oil. If only 5% of the population can eat because of a famine, food is going to be priced such that only 5% can afford it. If the top 5% have billions, well, then food is priced in the billions.
So what the Fed is seeing with housing is the wealthy are buying excessively. That's a big problem because that pushes housing demand to unsustainable levels which ultimately leaves people homeless. They don't like that. They want stocks to be the best. So they respond by making asset prices run higher, which gets the wealthy to reconsider and keep their money in the stock market. So the Fed actually hates inequality, but exacerbating inequality is the easiest way to do their job.
“The annual CPI figure surged to 4.2%, the most since 2008 though a figure distorted by the comparison to the pandemic-depressed index in April 2020. This phenomenon -- known as the base effect -- will skew the May figure as well, likely muddling the ongoing inflation debate.”
We’re coming off of years of missing the 2% inflation target, combined with a pandemic that crashed everything through the floor. Seems like we have some room to let the economy re-open and wait for supply chains to settle out, before the Fed moves in and crushes things to give us another five years of missed inflation targets.
Yeah, I don't think the "base effect" is relevant here. These aren't employment percentages or something. Inflation is cumulative. How low or high it was last year isn't really relevant; 4.2% is simply high, full stop. I don't care if it's an "improvement" from 20% last year, it would still be high. I don't care if it was 1% last year, it would still be high. Comparing it to last year might be relevant for other things, of course, but it's not at all the "base effect" where a company claiming 30% growth year-over-year isn't really getting 30% because there's just a "base effect" of seriously depressed revenue last year... 4.2% inflation is just 4.2% inflation, full stop.
> 4.2% is simply high, full stop. I don't care if it's an "improvement" from 20% last year, it would still be high
Big part of that is gasoline and cars, both of which had non-monetary supply chain issues.
Oversimplifying monetary policy is nice for dinner tables and political grandstanding. That is why independent central banks have the track record they do.
The problem with the usual more money = more inflation argument is that you would have to restrict yourself to a certain subset of the monetary supply that is relevant to inflation but everyone wants to talk about the broadest definition of monetary supply that also encompasses a subset that is completely irrelevant to inflation.
The base effect is relevant. The consumer price index is 267 right now, 256 a year ago and 255.5 two years ago.
So the average inflation over two years is 4.5% or 2.2% annualised -- a quite normal pace of price inflation.
The main reason why inflation was near-zero in 2020-04 and too high in 2021-04 is oil prices dropping from $70 to $0, and then recovering back to $70, with the corresponding effects on gasoline prices. Had oil prices staid stable at $70, year-over-year CPI figures would have fluctuated much less and would now be 1-2 percentage points lower. That is the base effect.
When a company in 2021 reports revenue growth of 30%, it's not really 30% growth, with all the conclusions about the company you'd normally come to based on that data, and calling "base effect!" on it is reasonable. The number has no real use.
This inflation is real. The base effect doesn't make it less real. Prices have really gone up, in the relevant time period. Your choice to average it out across a particular two year window isn't invalid on its own terms, but it starts raising a lot of other questions about which years you pick and how much data massaging you can do by picking your choice of start and end and all that other sort of stuff, and it produces numbers that may also be real, but are different numbers.
By contrast, if the company reports absolute revenue in 2021, the base effect does nothing to that number. The revenue is the revenue.
Likewise, the inflation measurement is perfectly valid. Inflation, as defined by the measure (since by no means would I claim that it's somehow the only option or the objectively best option) really is what it is.
What conclusions you come to based on that, well, we'd be arguing about that regardless of whether there's a "base effect" or not anyhow. But I'm generally underwhelmed by argumentation that appears to be trying to explain away, rather than explain. Start with the brute facts and move out from there, rather than immediately cutting to trying to argue away the brute facts.
(To be clear, I'm not making any particular implicit argument. I don't currently have a solid opinion on this matter; it is still a fairly large range of possibilities to me. In general, usually some space and time is needed to even begin to "explain" any economic fact.)
The question is not what you call it, but what you do about it. If we had a temporary pandemic-induced price crash and then everything returned to pre-pandemic normal, then the answer is probably "not much". But some people are concerned that this is the start of a crisis and want the Fed to raise interest rates. Deciding between those two very different policy outcomes is the important thing here, not quibbling about semantics.
LOL, a 50 or even 100 BP rate hike (neither of which is in the current realm of possibility) would be a minor speed bump, it certainly wouldn't "crush" anything. Most long treasury yields could double and they would still be well below historical averages.
Given the increased debt loads on most projects, a 100 bps increase from ~0% to 1% could have just as much impact as a 100 bps increase from 5->6%. In fact the effect may be larger as a 0.25% -> 1% increase is a 4x relative increase in interest rates vs. a 20% increase.
It's possible that the only way out of the current situation is a steady inflation which reduces the nominal debt load.
The “stimulous” checks increase demand for goods, not services, which, combined with supply chain issues drives inflation. When you get that “free” money, people are buying that new tv they have wanted and not thinking about a haircut. Credit card debt is also falling rapidly.
Maybe not a haircut, but at least anecdotally there's more demand for services like home repairs. People have been home all the time to be annoyed by whatever's broken, and they don't have to take a whole day off work to meet the repair person.
There is more demand for homes and home improvements, but again, thats what's driving goods, like lumber, cement, etc. I would argue those are as much goods as services.
Not only in the US. Everywhere.
If you look at prices for raw materials (metals, food, wood etc) there is a large increase visible.
In combination with huge amounts of extra printed money leads to a significant inflation globally.
Exactly. The prices of a handful commodities that underpin the economy have jumped. But all commodities are tied to all other commodities to some extent. We're gonna see those increases disperse into the rest of the economy.
The trillion dollar question is which increases will persist and to what extent.
Inflation is a complicated subject and is not as exact a science as some believe. For instance see this adjustment based on increase in quality:
"Let’s pick the Toyota Camry as a direct comparison to reduce the size/type changes. The starting MSRP for the automatic was $12,258 in 1990. The starting MSRP in 2020 was $24,425. That’s a 100% price increase, almost exactly. That’s about 2.5% per year.
Certainly we can allow for a substantial amount of quality adjustment in the new car CPI calculation. The new Camry has power everything, a navigation system, better safety features, and better gas mileage. But is the quality/size adjustment enough to reduce the actual price appreciation from 100% down to just 22% on a quality-adjusted basis during this three-decade period, as official new car CPI says was the case?"
With cars, I think it is important to factor in how long it lasts.
If a car lasts twice as long shouldn't it have half as much impact on CPI?
I don't think that makes it too much of a stretch.
The quality argument is a bit irrelevant because a 1990 Camry would be illegal to sell if it were made today. Obviously it's a good thing that safety, efficiency and emissions standards are going up, but those things aren't free.
I can only recall 3 forced upgrades, passive passenger restraints, which turned out to be airbags. Minimum MPG, across all cars sold (SUVs could be worse as long as other models improved). and crash survival, which turned out to be crumple zones.
I wouldn't say irrelevant, but maybe "weak signal". I agree wholeheartedly that there are other aspects (like those regulations) that were not free. But a bunch of other stuff came along that was probably about the same price. Better paint. Plastic bits more resistant to being out in the sun. Navigation.
I would claim, Corolla targeted the same market. Inexpensive sedan, probably a family's first car, and you could plan on that car being one of the kids' first car. So it probably targeted the same proportion of budget. On the other hand, the size of that market wasn't constant.
There are a zillion confounding factors.
I thought a little about gas itself, which I don't recall much regulation change around (but I might be forgetting) but I'd think gas in 1990 is about the same as gas in 2021. Seems like it was about 90 cents? just about 3 dollars now? (hand wavy numbers). Of course there was a war in the interim, and oil shale became feasible for a while. So that has its own confounding factors.
Everything is changing all the time. Inflation seems like a thing, but it kinda feels like using epicycles to describe movements of the stars. It kinda works, but there is more going on in underlying system.
I'm far from an expert, hell, this is mostly me relying on my selective memory. It feels like stuff is more expensive. but younger me might have had more energy and lower standards.
I dunno. I guess this comment is just armchair observations. I think there is something going on, but it's a really complicated system, and I'm not Kepler.
>I can only recall 3 forced upgrades, passive passenger restraints, which turned out to be airbags. Minimum MPG, across all cars sold (SUVs could be worse as long as other models improved). and crash survival, which turned out to be crumple zones.
This is a bad way to frame it. All of those things have dozens to hundreds of downstream effects on the rest of the system. Large components (say nothing of sub assemblies) of a 1990 car could not be used in any practical way to build a road legal 2021 car (without comically inefficient workarounds) because the design revisions needed for modern regulatory compliance between then and now are so extensive.
Heck, the physical dimensions of a typical 1990 car probably preclude compliance with current pedestrian safety requirements.
There were also dozens of minor revisions to the regulatory standards cars must meet in that time (headlight performance, noise emissions, etc).
You can buy used cars and keep maintaining them. The car I bought is so cheap it barely even makes financial sense to repair it after 10 years, it's financially better to get the latest model once they hit the used car market.
Most informed economic commentary I've read fully expected a brief spike in inflation, but does not expect any kind of runaway inflation over the medium and long-term. I'm just not worried, especially with the twin biases of news reporting: sensationalism and favorable coverage of the views of big finance.
From what I've been reading (disclaimer - over the past few hours) the types of stocks you target during periods of inflation changes. You're also playing a bit of a guessing game, because your return will be less than other investments if an inflationary period does not actually realize.
Not sure why this is down voted. Real estate is a common hedge against inflation. It's just much more complex of an investment vehicle and you can't just jump in and out of real estate like you can stocks.
While I don't know why it was downvoted "Buy real property if you can" is pretty crummy advice, unless you think an investor doesn't have to do any due diligence and should "just buy" stuff.
How do you know what property to buy? How much property should you own as a percent of your net worth? What is the expected return of the property? What is the likelyhood you will lose money on the property versus the likelyhood you will make money?
Those are all important questions not addressed by "Buy real property if you can"
As for Reits, there's not a lot of financial advisors advocating high investments in Reits. For example the Vanguard Target Retirement fund of funds have very little. The Schwab Intelligent Portfolio seem to call for 5% REITS in an example I pulled up online.
Maybe you know something Vanguard and Schwab does not, but again, there's that question of due diligence.
I think what the original commenter meant was that news outlets generally echo what big finance says. Meaning that they favor the views of big finance (as opposed to favoring coverage of the views of others).
My guess is that those who run large financial institutions came of age when inflation was much higher and a difficult beast to tame. Therefore they see the inflation boogeyman around every corner even though it hasn’t been like that in a long time. (That’s not to say high inflation won’t come at some point, but so far the doom and gloom merchants have been wrong for decades).
You see this inflation mania most clearly with the ECB, which essentially is controlled by Germans. They fear a Weimar Republic-style hyperinflation above all else. So some of the policies coming out of the 2008 crisis reflected this, instead of being flexible enough to cope with the actual conditions and challenges of the day.
Yea, but let's metaphor the boogey man issue to driving a car. When you drive, you're often avoiding collisions. Mostly passively. If you drive faster than the car in front of you, you will crash. If you dont brake at a red light, you will crash. Most people dont crash most of the time because they respect the threat. You cant just go, "you know, I haven't crashed in 5 years. I dont have to brake at this red light." Sure, inflation issues aren't that prevalent in the past few decades. Doesn't mean you stop assuming it's not a possibility. You do things to avoid it. The longer you do that, the longer you avoid problems. You cant stop your precautions just because it's been a while, then whine why the problem reemerged.
I never said it’s no longer a possibility. Just that for every news event that happens, there is an immediate chorus of “inflation!!!!” no matter the circumstances. Some economists argue that there is indeed considerable inflation right now- except it’s in financial assets owned mostly by the wealthy, like the stock market trading at high P/Es, housing (inflated in multiple countries, not just the US due to easy credit). There was also a headline recently that VC investing is record high at the moment. So there’s inflation, just not in consumer staples.
The reason it is so feared is because it's next to impossible to contain once it starts without causing massive economic hardship.
In fact, the Fed could likely do next to nothing about inflation with our country's current debt levels.
Even at a historically average rate of 8%, our federal government would either go bankrupt, cut most spending, or massively raise taxes, causing a severe economic retraction. (Our $26T in debt would require half of the entire federal budget to service our debt at such rates.)
Many of our largest corporations would also fold, unable to service their massive debts. It'd be a disaster.
That's why people fear runaway inflation, even if it hasn't been a problem for several decades. Once you can identify it as a problem, it's too late.
Isn't it why Japan, Europe and now the USA have 0/negative rates? The government literally makes money to borrow money. They can't default with negative or zero rates. They are basically being bailed out by the "economy".
It's sensible to be afraid of hyper-inflation. At some point the economic actors are going to be fed up with it and off-load their investments.
QE and the repo operations the Fed does are “providing liquidity” to activity that would (presumably) normally happen anyway. I’d assume this would be the reason. You can argue the activity wouldn’t happen if interest rates weren’t kept artificially low.
Another thing is these security purchases are largely insulated from what is used to calculate inflation. These are exchanges between banks and funds and similar.
Historical: Except in those cases most printed money went to banks, buying their bad loans. Which had already affected house prices by 2008, and only affected asset and commodity prices, which did rise in price since 2008.
This time round you have more and more stimulus going to ordinary people, who will spend it on ordinary goods like food. That will create a different type of inflation.
(I’m not endorsing either type of bailout/stimulus btw)
It's a fair point. But on the other hand, we had substantially depressed demand in a lot of industries for a year+ due to the pandemic.
And while some of that money found alternate outlets (home improvement, streaming services [0]), the uptick in savings indicated a lot of it pooled [1], and the postponed evictions and rent / loan payments resulted in delayed debt obligations (which are difficult to find numbers on, in total?).
Log into your terminal, type in 'BCOMAGSP Index'. Hit Go. Then hit 'Max.'
Look at the spike in 2010.
Then tell me about the runaway food inflation that happened then.
EDIT: Just to be clear on my point: Yes I agree that people are hedging inflation via commodity futures (like they do after most recessions), but that doesn't mean they're right. In the same way stock prices are often a bad indication of a company's actual value.
I know at least 3 households who spent all their stimulus dollars paying down debt. And those are the only households I know how they spent it, so 100%.
Decreasing debt to income ratio will stimulate demand, but not in a shock like fashion. Most people don't want to jump back into debt again.
People with big medical bills (because of COVID for example), used it to pay off their medical debts.
People with big credit card debt, student loan debt, car loan debt, mortgages, probably used a lot of it to pay that off.
Other than that, people with homes and cars might have deferred repairs and renovations. So some of that is going to where it would have gone anyway. And why price of wood skyrocketed.
> more than 20% of all US dollars that ever existed were created in the last 2 years and there are “no worries”? I’d like to learn more why.
Because they were created to fight deflation (only barely successfully, as a year ago unadjusted inflation was about 0 and within seasonal adjustment it was negative) and if there are signs of sustained rather than transitory inflation, the Fed will suck them right back up.
It’s like people think monetary policy either only happens in the past or only happens in one direction.
> You can make a very strong argument that monetary policy for the last 20 years has has little effect on CPI and strong effects on asset prices.
If you disagree with policymakers about what the likely course of inflation would have been without the policy intervention, maybe, but I've yet to see anyone make the argument for that disagreement, just assert it as if it were an undisputable fact. So, yeah, if you assume the deflation QE was ddsigned to fight would not have happened without QE, then you are forced to conclude that the low with-QE inflation meant QE didn’t cause inflation beyond what would have existed without it. But that’s largely just assuming the conclusion.
You can't take the official inflation numbers at face value. If you look at real inflation it's been closer to 4-5% a year since 2009.
Which means if you had $100,000 in cash under your mattress in 2009, you can now generally buy half as much with it. Less in education, healthcare. More in consumer tech. About half in Big Macs or housing.
Given that GDP growth has averaged 2% per year, if inflation was 4-5% that would mean the US economy was having 2-3% deflation in real terms.
During the economic devastation of 2009 there was negative 0.35% inflation. Can you imagine what kind of economic apocalypse would occur with negative 2%?
It's too late to edit this now, but broad money supply increased at 5% per year. Official CPI says that broad prices rose by about 2.5% per year on average since 1990, while the source I linked thinks there’s a good case that it’s closer to 3% or more. In other words, prices went up more like 150% (2.5x) rather than 100% (2x) in total during that three decade compounded annual period.
4-5% annualized inflation would be crazy - but some things have gone up more than that. If your a young person starting out in need of an education and a home - you'll see more than 3% inflation for yourself personally.
Most informed economics are worse than a coinflip at predicting the future, so you might actually want to negate their opinions to get closer to the truth. Or at the very least, disregard a speciality who consistently gets things wrong
This is borderline trolling because you're not really saying anything specific. Mainstream modern economics doesn't "consistently get things wrong", you just might not notice or care when it consistently gets things right. Because it's boring and well, predictable.
To back up the commenter's statement: most well informed economists kept pushing that China would sell US Treasury Bonds pennies on the dollar to "ruin" the US economy.
Anyone with a half a brain and some real world business knowledge would realize: Do you really want to be the guy who mentions, let alone put into motion, that losing hundreds of billions of dollars worth of receipts to make a negotiation situation worse, is a good idea? At that, selling bonds at a discount helps open up for allied nations to suck up those bonds to make more future money themselves. Thus powering the US negotiation side even more.
And did they play the bond game? Obviously not. They're not stupid. "I'm going to burn my money just to piss you guys off!"
Seriously, many public figure economists are idiots. Not all. The good one's public discourse gets reserved to small press geopolitical publications. Even then, they always acknowledge how fickle an economy can be and how easy it is to be blindsided.
So yea, high inflation in the next 5-10 years is a real possibility, especially as the stimulus bond payments start to mount.
So you never actually read the articles, "China's economic/negotiation weapon against Trump". CNN, MSNBC and many other news agencies were pushing that narrative.
This story has been going on for years, and it's always been a Nothing Burger:
> Matthew Yglesias notes[1] an uptick in Very Serious People warning that China might lose confidence in America and start dumping our bonds. He focuses on China’s motives, which is useful. But the crucial point, which he touches on only briefly at the end, is that whatever China’s motives, the Chinese wouldn’t hurt us if they dumped our bonds — in fact, it would probably be good for America.
No, I don't watch CNN or MSNBC, because I'm European, but the OP was talking about "most well-informed economists", not media outlets, and I was curious who these economists are, being an economist myself.
Yeah but the money supply is an instrument of the Fed to control inflation. The fact that it has gone up indicates the Fed is attempting to increase the inflation rate, which makes sense because the rate is below the 2% target. So, I'm not sure what this argument is trying to tell us...
Milton Friedman and Monetarists were wrong: velocity is not constant, and it does affect inflation.
> Indeed, from 1982 to 1985, Friedman repeat- edly predicted a major revival of inflation that never occurred. In 1982 he predicted 8 percent inflation for 1983; the outcome was around 4 percent (FORT, 03/19/84). In July 1983, Friedman wrote, “We shall be fortunate indeed if we escape either a return to double-digit inflation or renewed recession in 1984” (NW, 07/25/83). In August 1983, he said, “U.S. inflation rates will rise appreciably in 1984, although it’s not yet determined where they’ll go from there” (TSN, 08/30/83). In April 1984, Friedman said, “I believe [the CPI] will be rising in the neighborhood of 8 to 10 percent in 1985.”33 Even in November 1985, Friedman said that “Inflation is not dead. It will emerge once again and will be higher next year than it is this year. We almost surely are currently at the bottom of this inflationary episode and are likely to be starting up again” (NYDN, 11/13/85). Defying these predictions, inflation was consistently below 5 percent in every month from 1983 to 1986; moreover, apart from a brief uptick in early 1984, inflation continued to decline after 1982, and was lower in 1986 than it was in 1985.
Random length lumber futures are up 200% since the pandemic began. Copper and soybean futures are both up 60%. Industrial steel is up 133%. Industrial silicon is up 70%. Sunflower oil +114%. Wheat +20%. Platinum +29%. Gold +20%. Aluminum +32%. Energy futures +30%. Natural gas +42%.
SPX is up 25%, despite almost certainly taking a productivity hit as a whole. The money is definitely flowing, and consumer prices will be a lagging indicator as multi-year supply chain contracts expire and are renegotiated on the higher raw materials prices.
There is no runanaway inflation because it is specific to asset classes, and, critically we have managed to export a great deal on inflation abroad.
Look at asset prices outside of the US. A cursory look at home values in specific markets within colombia, Mexico, Russia and Argentina tell you a lot of where things are going, post COVID
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[ 1.9 ms ] story [ 295 ms ] threadThat being said, if you happen to have an extra car, now is probably the best time to sell it in recent history.
Couple that with stimulus money making down payments easy, and low interest rates keeping monthly payments low, and you have a recipe for prices to take off like a rocket, from both ends of the supply-demand curve.
Pumping this much free money into the economy is going to cause prices to go up. We’re seeing labor prices go up.
Whether minimum wage should be 12 or 15 is tangential. We’re seeing where people will not take a job unless it pays significantly more than the can draw from COVID benefits. Those pay premiums mean your groceries, coffee, fast food, then rent, then real estate, etc., etc., is going to cost more.
Labor prices have been low forever. Businesses have been taking advantage of low labor costs for service jobs literally for decades, pocketing the profits while expecting the government to fill the gaps with welfare/SNAP/EITC etc. And a good portion of this labor segment has decided (after experiencing the COVID lockdowns) that they don't need to put up with crap wages for a crap job.
I worked in the restaurant biz for over two decades, and it disgusts me how much it (and other service jobs) take advantage of employees. I was repeatedly told that every time the minimum wage went up, we'd have to lay off employees, or cut benefits etc. And every time, net income went up for every place I worked. It's just BS.
https://www.restaurantdive.com/news/chipotle-cfo-15-minimum-...
“Inflation is still inflation” is like a doctor saying “a headache is still a headache” and ignoring the fact that one patient’s headache is caused by an operable brain tumor, while the other drank too much the night before.
It's also a metrics problem - you can see inflation increases which are easy to equate to units of money, but I don't think there's as universal an index of supply. Likely some industrial output index over time would better quantify how much inflation is pandemic disruption of supply, vs money supply. I predict it's mostly supply disruption.
(6 year old hatchback with top trim, very low mileage.)
Also, as another comment points out most of this increase comes from increases in used automobiles, gasoline, and airline fares. This can all be explained by supply issues and large drop in those item last year at this time. The Fed's behavior have minimal effects on that.
That’s not really an argument that it factually is transitory, and I don’t think there is any real good reason to think “catch-up” inflation is any better than the regular kind.
(OTOH, the context of the COVID rebound is a strong reason to think it is likely transitory.)
Inflation is caused by demand exceeding supply. 2% inflation means demand is exceeding supply by exactly 2% and that is a good thing because it means there is wiggle room for people to find jobs, there is wiggle room to let the economy shift from one industry to another, it means there is demand for technology that increases productivity.
Rates will never appreciably rise, they can't or all borrowers will be crushed
https://www.covidmoneytracker.org/
>>trillions of dollars in government economic stimulus
> While Federal Reserve officials and economists acknowledge the temporary boost, it’s unclear whether a more durable pickup in inflationary pressures is underway against a backdrop of soaring commodities costs, trillions of dollars in government economic stimulus and incipient signs of higher labor costs.
I still have issue with the characterization. It's "against the backdrop of ... trillions of dollars" as though increased price levels and increasing the money supply by 25% are unrelated.
Many times these articles write about stimulus and people think its the $1600 checks some people received. But what doesn't get reported is what the lion share of the money actually went to, buying up financial assets from banks.
Fiscal stimulus is more powerful than the monetary kind. When the Fed buys a bond, at the end of the day, it’s buying up bonds. Someone must give up 80 to 99.99999¢ of wealth for $1 of liquidity. When Congress spends $1, it’s creating money. It may have to tax or borrow down the road, but that’s then, not now.
Also, not sure how one can say monetary policy isn’t reported. It receives nearly weekly attention on even non-financial forums like Hacker News, and features far more prominently in financial, economic and crackpot rags.
No, its explicitly providing relevant context, which is the polar opposite in every respect to implying that they are umrelated.
That shows the limits of a single number. It also shows up the "transmission mechanism" has been damaged; it doesn't affect wages or prices largely because so much effort has been expended over the last 40 years to prevent wages going up at all.
This is unfortunate since it's essentially helping relatively wealthy asset holders as opposed to those most likely to be affected negatively by covid.
[0] https://mleverything.substack.com/p/where-did-the-12-trillio...
It’s interesting to me that software developers don’t intrinsically realize this more than your average person. Nobody knows better than us that making changes to a complex system can have catastrophic downstream effects and has to be extensively tested first.
But in reality, economics is more akin a complex biological system. We have a very rudimentary understanding of how it actually works. Sure, we can create drugs that calm us down or excite us, but we have very limited understanding of the underlying biological system. For instance, we still can't agree what the optimal diet for humans is with wildly contradictory regiments.
Economists like to pretend it's a science, and there are certainly scientific and experimentally-valid findings, but the innermost terms and interactions will always be obsfuscated. Like psychology, except with higher stacks of layered complexity.
It's not as bad as steel deciding to change its tensile strength on a whim (because it heard other steel say so!), but it's not far off.
The average person doesn't understand what inflation is, why it happens, how it affects them and how the government uses inflation to reduce the significance of its debt. The average person also tends to believe government inflation numbers which, IMO, are manipulated and do not represent what is actually happening in the world. For instance, home prices (and thus rents) are rapidly increasing, and housing costs, for most people, are the biggest expense they have to think about, accounting for sometimes more than 50% of their take home pay.
From what I've seen, there are a lot of right-wing people in tech circles expressing a support for capitalism. However, very few of these people know or care how the economy works.
(A particular subgroup understands finance/trading pretty well, and mistakes understanding weather for understanding climate.)
Fair point. Most people don't know or care how the economy works, left or right. My main point was: it's to your advantage to know how the system works, and it's maybe even more important to understand how it works if you hope to change it.
If you don't understand what is inflation and its impact, or basic economics, then politicians can take advantage of your lack of knowledge, in the same way a shady car mechanic can take advantage of uninformed customers. They might pretend that certain policies will help lower-income people when what they are doing is most beneficial to the ultra-rich.
Sure, like, for instance, they might pretend that reducing fiscal stimulus that both redistributes wealth downward and fuels inflation (but does the former more than the latter) helps the lower-income by reducing inflation when it really lowers their real post-transfer income while raising it for those in the higher income classes that benefit less or not at all from the transfer but are still effected by price levels.
now this is just downright seductive. bravo
It can't possibly go to asset prices. For every buyer there has to be a seller.
It's stuck in bank reserves
What if the stock market is up because revenue and growth are up?
Most people only think of real estate as local, so if you look for returns in nyc or SF, you’ll be disappointed. But if you are willing to invest in property across the US you can find areas with much lower prices and higher rents.
It's also possible that there's simply a long delay between flooding a struggling economy with cash and seeing the resulting tax on the middle class that we call inflation.
I doubt this comment will age well. Macroeconomic effects don't happen instantly.
(Because banks also control credit supply and only give it to creditworthy borrowers... The Fed can drop rates to zero and give banks limitless money and they still won't lend it out to deadbeats.)
Printing money and sending it to people does. Refer to the chart below.
https://i.imgur.com/G35HlC9.png
https://www.federalreserve.gov/releases/h6/current/default.h...
Also in a lot of ways M2 on its own is meaningless (money sitting under a mattress not being used doesn’t affect the economy) - velocity of money is more useful. Of course, inflation is complex and multicausal so this isn’t the whole picture, but it’s more useful than raw M2 supply.
https://fred.stlouisfed.org/series/M2V
If I have $1k under the mattress I probably won't risk $100 on a share of CORP. If I have $100k under a mattress, I'm more willing to take a swing.
>Printing money and sending it to people does.
That money wasn't printed, it was borrowed because the Fed cannot do that. Only the US government can do that. The Fed may have bought treasury bonds but those still have to be paid back.
That is new money. Trillions of it.
Do you mean that when securities owned by the Fed mature, the Fed will destroy the money that it had created to buy them?
In practice, I don't think that has really been happening. They have just been reinvesting proceeds in new securities (at least the principal; they send some (all?) interest to the Treasury).
This may change at some point, but so far the Fed has periodically increased its balance sheet while never substantially reducing it [1]. If that continues long term, the Fed's "temporary" money is effectively permanent.
[1] https://fred.stlouisfed.org/series/WALCL
https://fred.stlouisfed.org/series/M2SL
It's been maddening watching economists whom I respect making proclamations (one way or the other) with high degrees of confidence that inflation is or isn't a problem. They have no idea, because anyone who actually knows what they are doing knows that there isn't enough data yet.
It is way, way too early, based on my experience, to make any formal claims about why a given number is X instead of Y based on Z theory.
People who are claiming there is going to be runaway inflation don't have enough data to suggest this, and your assertion is equally lacking in data to justify it.
As always, economics gets contaminated by political biases, because so many prominent economists, including a hero of mine in college, Paul Krugman, have followed the profitable path of becoming full time political hacks. Likewise for Lafferty on the right and many others.
Inflationary pressures typically, in historical terms and yes, in the simulations I used to model, have a lag and then start to build upon each other. We haven't had nearly enough time to properly assess any of this.
Rest assured, if/when it does manifest, each side will have very firm talking points blaming the other, informing their sycophants exactly how to talk out of their rear ends about how it's the other team, and how their policies would have prevented it.
I think my ad blocker doesn't jive with the site, as I can only see the first part that shows the three summary bars in the bar chart. Apologies if I'm missing something.
You also have to keep in mind a few things:
1. Liquidity - how much of this (probably most of federal reserve spending) has gone to maintaining liquidity in the global financial system? That's not going to contribute too much to inflation. If you have the reserve currency, and nobody is willing to lend because they're in fear of going bankrupt or running out of cash while the economies of the globe were shut down, then you wind up having to inject tons of cash into the global economy to keep it liquid. The alternative is armageddon.
2. Low interest rates. When the U.S. government borrows money it pays an interest rate. While the $6 trillion number (or $12 trillion for that matter) may seem very high, it matters how much the U.S. is paying in interest on these loans. Can the U.S. government meet it's debt obligations? Yes? Good to go then. GDP (which sucks anyway) will rise and past debt will be inflated away. Similar to everyone rushing to buy a house, low interest rates are an opportune time for the government to borrow money too. Republicans are hemming and hawing about it, but if Trump was president they'd be doing the same deal.
3. It also matters what ROI you get for spending. Nobody seems to be talking about that. If the government borrows $100 at 0.4% interest or maybe even 0% interest and then turns that into a larger investment in the broad American economy, that's almost surely a good use of money even if it increases the overall debt load if it's actually increasing GDP.
I wish I could find it again, and maybe some enterprising HN reader will have it available, but there was an blog post I found interesting regarding how much the U.S. could borrow. They argued it was probably an unlimited amount of money. If nothing else it's just an interesting take.
We should be sensitive to government spending and actions of the Federal Reserve, but we need to do so smartly. Everyone running around screaming inflation! inflation! are missing the mark. My default in the financial space is when everybody is saying something is true, it's likely not. There's a lot of money to be made convincing lots of people of the truth of something that isn't true and while they're distracted you take lots and lots of profits at the institutional scale (hedge funds, etc.).
I thank God for the Republicrats printing a third of the national debt and mailing checks directly to their cronies every time I open Zillow and realize I have effectively earned negative income for a lifetime of labor
Yes, Pumping this much money into the economy it's hard to avoid inflation, but there's more factors to it than just that variable.
Looks like meat prices spiked in Q2, peaking around June/July, and have fallen again. They're still elevated from this time two years ago, but they did go down.
However beef prices can be somewhat regional. Where I am anything other than ground beef is mostly still at least $2/lb more than usual. Ground beef is it a little more than usual.
(This is not a rhetorical question meant to imply you're wrong, I genuinely am not sure. It seems crazy that we could run the money printer like we have and not cause dire problems, but it also seems like that's what's happening.)
Charts: [0] https://www.federalreserve.gov/releases/z1/dataviz/dfa/distr... https://fred.stlouisfed.org/series/WFRBST01134
You can’t say inflation or deflation is universally good or bad. They have many effects.
But like I said about the no universally good or bad, inflation is good for effectively reducing debt.
Rich people are (mostly) creditors. Poor people are (mostly) debtors. Inflation tends to hurt rich people (creditors) and help poor people (debtors). The people who run the economy are almost universally rich, and are (coincidentally, I'm sure /s) almost universally opposed to any increase in inflation.
Side note: assets (real estate, gold, ...) are mostly inflation-neutral since their prices go up at the same rate as the prices of everything else.
Where poor people do get hurt is when consumer prices go up and wages don't but that's not inflation - inflation is when the price of everything goes up, including labor i.e. wages.
All of these things can be true simultaneously.
And for bonus points, the follow-up question is: could we have done this anytime? Did the Covid economic downturn necessitate these drastic measures, or could we have adopted 2020 monetary policies in, say, 2018 or 2014 with the same results (skyrocketing stock market, skyrocketing inequality, but relatively stable inflation) and we never did it before because we never had a good excuse?
See the other comment I posted on this article. Commodities have skyrocketed. But the price of the beef in your Big Mac was negotiated years ago, so consumer prices lag raw materials as multi-year supply chain contracts are updated.
> could we have adopted 2020 monetary policies in, say, 2018 or 2014 with the same results (skyrocketing stock market, skyrocketing inequality, but relatively stable inflation) and we never did it before because we never had a good excuse?
The economic shock of the pandemic no doubt slowed the velocity of money for a time, which further slowed the consumer inflationary effect. But that velocity has increased amongst lockdown fatigue and reopening in the US, while the money printed is still here. We're seeing it manifest in real estate, stocks, and commodities. "The everything bubble" is just a way of saying (wealth inequality x inflation).
What Congress does is bottom up. After the stimulus went out, the amount of retail sales skyrocketed[0]. The first round single-handedly rebounded us back to where we were before CO-VID, and the second pushed us single-handedly up ~4 years worth of gains. This has a large effect on CPI inflation, but it's limited to when Congress can pass their bills. However with interest rates at basically nothing, they can afford to keep writing them forever if they don't care about the consequences.
What the Fed does on the other hand when they lower the interest rate and buy bonds is top down. This money is funneled directly into the already wealthy. You see the more wealth inequality there is, the more goes to the wealthy, the less these top down has any effect on inflation. You're right, when you give money to the wealthy they save it, it's like pushing on a string, asset prices rise and this doesn't effect inflation, and they could have done it at any time.
So you need to ask yourself, why now? The Fed is deeply concerned with what they are seeing with housing. You see the more wealth inequality there is, the more they need to make sure that their money stays in the monopoly money that is stocks, and out of the real economy. Once the wealthy work out that steel and lumber and housing have a better overall return than stocks, that's exactly when things that the CPI tracks finally takes off.
Most of the time this is triggered by a supply shock. In the 1970s it was oil. If only 5% of the population can eat because of a famine, food is going to be priced such that only 5% can afford it. If the top 5% have billions, well, then food is priced in the billions.
So what the Fed is seeing with housing is the wealthy are buying excessively. That's a big problem because that pushes housing demand to unsustainable levels which ultimately leaves people homeless. They don't like that. They want stocks to be the best. So they respond by making asset prices run higher, which gets the wealthy to reconsider and keep their money in the stock market. So the Fed actually hates inequality, but exacerbating inequality is the easiest way to do their job.
[0]: https://fred.stlouisfed.org/series/MRTSSM44X72USS
We’re coming off of years of missing the 2% inflation target, combined with a pandemic that crashed everything through the floor. Seems like we have some room to let the economy re-open and wait for supply chains to settle out, before the Fed moves in and crushes things to give us another five years of missed inflation targets.
Big part of that is gasoline and cars, both of which had non-monetary supply chain issues.
Oversimplifying monetary policy is nice for dinner tables and political grandstanding. That is why independent central banks have the track record they do.
So the average inflation over two years is 4.5% or 2.2% annualised -- a quite normal pace of price inflation.
The main reason why inflation was near-zero in 2020-04 and too high in 2021-04 is oil prices dropping from $70 to $0, and then recovering back to $70, with the corresponding effects on gasoline prices. Had oil prices staid stable at $70, year-over-year CPI figures would have fluctuated much less and would now be 1-2 percentage points lower. That is the base effect.
This inflation is real. The base effect doesn't make it less real. Prices have really gone up, in the relevant time period. Your choice to average it out across a particular two year window isn't invalid on its own terms, but it starts raising a lot of other questions about which years you pick and how much data massaging you can do by picking your choice of start and end and all that other sort of stuff, and it produces numbers that may also be real, but are different numbers.
By contrast, if the company reports absolute revenue in 2021, the base effect does nothing to that number. The revenue is the revenue.
Likewise, the inflation measurement is perfectly valid. Inflation, as defined by the measure (since by no means would I claim that it's somehow the only option or the objectively best option) really is what it is.
What conclusions you come to based on that, well, we'd be arguing about that regardless of whether there's a "base effect" or not anyhow. But I'm generally underwhelmed by argumentation that appears to be trying to explain away, rather than explain. Start with the brute facts and move out from there, rather than immediately cutting to trying to argue away the brute facts.
(To be clear, I'm not making any particular implicit argument. I don't currently have a solid opinion on this matter; it is still a fairly large range of possibilities to me. In general, usually some space and time is needed to even begin to "explain" any economic fact.)
LOL, a 50 or even 100 BP rate hike (neither of which is in the current realm of possibility) would be a minor speed bump, it certainly wouldn't "crush" anything. Most long treasury yields could double and they would still be well below historical averages.
https://www.macrotrends.net/2521/30-year-treasury-bond-rate-...
It's possible that the only way out of the current situation is a steady inflation which reduces the nominal debt load.
It increases both; consumers receiving them but both goods and services, after all.
The trillion dollar question is which increases will persist and to what extent.
https://www.lynalden.com/inflation/
Inflation is a complicated subject and is not as exact a science as some believe. For instance see this adjustment based on increase in quality:
"Let’s pick the Toyota Camry as a direct comparison to reduce the size/type changes. The starting MSRP for the automatic was $12,258 in 1990. The starting MSRP in 2020 was $24,425. That’s a 100% price increase, almost exactly. That’s about 2.5% per year.
Certainly we can allow for a substantial amount of quality adjustment in the new car CPI calculation. The new Camry has power everything, a navigation system, better safety features, and better gas mileage. But is the quality/size adjustment enough to reduce the actual price appreciation from 100% down to just 22% on a quality-adjusted basis during this three-decade period, as official new car CPI says was the case?"
I wouldn't say irrelevant, but maybe "weak signal". I agree wholeheartedly that there are other aspects (like those regulations) that were not free. But a bunch of other stuff came along that was probably about the same price. Better paint. Plastic bits more resistant to being out in the sun. Navigation.
I would claim, Corolla targeted the same market. Inexpensive sedan, probably a family's first car, and you could plan on that car being one of the kids' first car. So it probably targeted the same proportion of budget. On the other hand, the size of that market wasn't constant.
There are a zillion confounding factors.
I thought a little about gas itself, which I don't recall much regulation change around (but I might be forgetting) but I'd think gas in 1990 is about the same as gas in 2021. Seems like it was about 90 cents? just about 3 dollars now? (hand wavy numbers). Of course there was a war in the interim, and oil shale became feasible for a while. So that has its own confounding factors.
Everything is changing all the time. Inflation seems like a thing, but it kinda feels like using epicycles to describe movements of the stars. It kinda works, but there is more going on in underlying system.
I'm far from an expert, hell, this is mostly me relying on my selective memory. It feels like stuff is more expensive. but younger me might have had more energy and lower standards.
I dunno. I guess this comment is just armchair observations. I think there is something going on, but it's a really complicated system, and I'm not Kepler.
This is a bad way to frame it. All of those things have dozens to hundreds of downstream effects on the rest of the system. Large components (say nothing of sub assemblies) of a 1990 car could not be used in any practical way to build a road legal 2021 car (without comically inefficient workarounds) because the design revisions needed for modern regulatory compliance between then and now are so extensive.
Heck, the physical dimensions of a typical 1990 car probably preclude compliance with current pedestrian safety requirements.
There were also dozens of minor revisions to the regulatory standards cars must meet in that time (headlight performance, noise emissions, etc).
If you build cheaper cars but nobody can insure them economically, for example, you're not gonna get a lot of takers.
https://www.bls.gov/charts/consumer-price-index/consumer-pri...
Highlights that explain the overall 4.2% jump:
* Used cars and trucks 21.0%
* Gasoline (all types) 49.6%
* Airline fare 9.6%
Table A. Percent changes in CPI for All Urban Consumers (CPI-U): U.S. city average
https://www.bls.gov/news.release/cpi.nr0.htm* https://www.investing.com/rates-bonds/usa-government-bonds
* https://fred.stlouisfed.org/series/DGS10
Current issues:
1. Illegal immigrants driving down wages
2. Paying citizens to stay home
3. Remove the need to pay rent
4. To get workers companies hire illegals or pay higher wages
5. Oil / energy prices increase -> higher delivery costs and prices
5. Wages increase leading to price increases
7. Biden proposed expanding federal debt by 50%, people don't want to buy our bonds
8. Pushing students home for the year, keeping more people out of the work place (further creating scarcity of workers)
> people staying home reducing workforce
these two should cancel each other out no?
What prevents the government from eliminating Trump's trade war tarrifs and increasing immigration?
Yes, there are unorthodox ways to defeat inflation.
Seems to me number 4 invalidates number 1. The companies who refuse to pay a livable income are driving down wages.
https://news.ycombinator.com/item?id=27123086 (102 points/175 comments)
I'm horrifically ignorant of economics. Why is the "runaway inflation" story favorable to big finance?
You could opt for a REIT instead.
https://www.investopedia.com/terms/r/reit.asp
How do you know what property to buy? How much property should you own as a percent of your net worth? What is the expected return of the property? What is the likelyhood you will lose money on the property versus the likelyhood you will make money?
Those are all important questions not addressed by "Buy real property if you can"
As for Reits, there's not a lot of financial advisors advocating high investments in Reits. For example the Vanguard Target Retirement fund of funds have very little. The Schwab Intelligent Portfolio seem to call for 5% REITS in an example I pulled up online.
Maybe you know something Vanguard and Schwab does not, but again, there's that question of due diligence.
You see this inflation mania most clearly with the ECB, which essentially is controlled by Germans. They fear a Weimar Republic-style hyperinflation above all else. So some of the policies coming out of the 2008 crisis reflected this, instead of being flexible enough to cope with the actual conditions and challenges of the day.
In fact, the Fed could likely do next to nothing about inflation with our country's current debt levels.
Even at a historically average rate of 8%, our federal government would either go bankrupt, cut most spending, or massively raise taxes, causing a severe economic retraction. (Our $26T in debt would require half of the entire federal budget to service our debt at such rates.)
Many of our largest corporations would also fold, unable to service their massive debts. It'd be a disaster.
That's why people fear runaway inflation, even if it hasn't been a problem for several decades. Once you can identify it as a problem, it's too late.
It's sensible to be afraid of hyper-inflation. At some point the economic actors are going to be fed up with it and off-load their investments.
What's the process for containing inflation, and what's its mechanism of action?
Another thing is these security purchases are largely insulated from what is used to calculate inflation. These are exchanges between banks and funds and similar.
Because inflation is the sum of money supply + velocity + consumer expectations + goods production + international monetary markets?
Which explains why historical attempts to point to any one and say "Inflation is coming / not coming!" have fared poorly.
This time round you have more and more stimulus going to ordinary people, who will spend it on ordinary goods like food. That will create a different type of inflation.
(I’m not endorsing either type of bailout/stimulus btw)
And while some of that money found alternate outlets (home improvement, streaming services [0]), the uptick in savings indicated a lot of it pooled [1], and the postponed evictions and rent / loan payments resulted in delayed debt obligations (which are difficult to find numbers on, in total?).
So as usual, arrows pointing both ways.
[0] https://www.familyhandyman.com/article/home-improvement-spen...
[1] https://fred.stlouisfed.org/graph/?g=DXqc (2019-2021 savings rate)
https://fred.stlouisfed.org/series/CPIUFDSL
Log into your terminal, type in 'BCOMAGSP Index'. Hit Go. Then hit 'Max.'
Look at the spike in 2010.
Then tell me about the runaway food inflation that happened then.
EDIT: Just to be clear on my point: Yes I agree that people are hedging inflation via commodity futures (like they do after most recessions), but that doesn't mean they're right. In the same way stock prices are often a bad indication of a company's actual value.
Decreasing debt to income ratio will stimulate demand, but not in a shock like fashion. Most people don't want to jump back into debt again.
People with big medical bills (because of COVID for example), used it to pay off their medical debts.
People with big credit card debt, student loan debt, car loan debt, mortgages, probably used a lot of it to pay that off.
Other than that, people with homes and cars might have deferred repairs and renovations. So some of that is going to where it would have gone anyway. And why price of wood skyrocketed.
Because they were created to fight deflation (only barely successfully, as a year ago unadjusted inflation was about 0 and within seasonal adjustment it was negative) and if there are signs of sustained rather than transitory inflation, the Fed will suck them right back up.
It’s like people think monetary policy either only happens in the past or only happens in one direction.
You can make a very strong argument that monetary policy for the last 20 years has has little effect on CPI and strong effects on asset prices.
If you disagree with policymakers about what the likely course of inflation would have been without the policy intervention, maybe, but I've yet to see anyone make the argument for that disagreement, just assert it as if it were an undisputable fact. So, yeah, if you assume the deflation QE was ddsigned to fight would not have happened without QE, then you are forced to conclude that the low with-QE inflation meant QE didn’t cause inflation beyond what would have existed without it. But that’s largely just assuming the conclusion.
Which means if you had $100,000 in cash under your mattress in 2009, you can now generally buy half as much with it. Less in education, healthcare. More in consumer tech. About half in Big Macs or housing.
Source: https://www.lynalden.com/inflation/
No, it has not:
* https://awealthofcommonsense.com/2021/01/inflation-truthers/
Given that GDP growth has averaged 2% per year, if inflation was 4-5% that would mean the US economy was having 2-3% deflation in real terms.
During the economic devastation of 2009 there was negative 0.35% inflation. Can you imagine what kind of economic apocalypse would occur with negative 2%?
What you are saying makes no sense whatsoever.
Pedantic, but the that would be “contraction” not “deflation”. (Contraction = declining real output, deflation = declining nominal prices.)
4-5% annualized inflation would be crazy - but some things have gone up more than that. If your a young person starting out in need of an education and a home - you'll see more than 3% inflation for yourself personally.
Anyone with a half a brain and some real world business knowledge would realize: Do you really want to be the guy who mentions, let alone put into motion, that losing hundreds of billions of dollars worth of receipts to make a negotiation situation worse, is a good idea? At that, selling bonds at a discount helps open up for allied nations to suck up those bonds to make more future money themselves. Thus powering the US negotiation side even more.
And did they play the bond game? Obviously not. They're not stupid. "I'm going to burn my money just to piss you guys off!"
Seriously, many public figure economists are idiots. Not all. The good one's public discourse gets reserved to small press geopolitical publications. Even then, they always acknowledge how fickle an economy can be and how easy it is to be blindsided.
So yea, high inflation in the next 5-10 years is a real possibility, especially as the stimulus bond payments start to mount.
Who's saying that?
> Matthew Yglesias notes[1] an uptick in Very Serious People warning that China might lose confidence in America and start dumping our bonds. He focuses on China’s motives, which is useful. But the crucial point, which he touches on only briefly at the end, is that whatever China’s motives, the Chinese wouldn’t hurt us if they dumped our bonds — in fact, it would probably be good for America.
* https://krugman.blogs.nytimes.com/2013/10/18/the-china-debt-...
* https://archive.is/4Q95O
* The Fed who wants 2% inflation rate
* 12 months of inflation that were very low, dipping to 0.1%. [1]
* Re-opening of much of the economy
* Massive consumer spending
* Lots of issues with manufacturing & shipping over the past few months
* Drought effecting crop prices [2]
I don't think that counts as a coin flip.
1 - https://www.usinflationcalculator.com/inflation/current-infl...
2 - https://www.drought.gov/current-conditions
* The largest annual increase of the money supply in the history of the US, far larger than even WWII, with no end in sight.
* https://fred.stlouisfed.org/series/M2V
* https://en.wikipedia.org/wiki/Money_supply#Link_with_inflati...
Milton Friedman and Monetarists were wrong: velocity is not constant, and it does affect inflation.
> Indeed, from 1982 to 1985, Friedman repeat- edly predicted a major revival of inflation that never occurred. In 1982 he predicted 8 percent inflation for 1983; the outcome was around 4 percent (FORT, 03/19/84). In July 1983, Friedman wrote, “We shall be fortunate indeed if we escape either a return to double-digit inflation or renewed recession in 1984” (NW, 07/25/83). In August 1983, he said, “U.S. inflation rates will rise appreciably in 1984, although it’s not yet determined where they’ll go from there” (TSN, 08/30/83). In April 1984, Friedman said, “I believe [the CPI] will be rising in the neighborhood of 8 to 10 percent in 1985.”33 Even in November 1985, Friedman said that “Inflation is not dead. It will emerge once again and will be higher next year than it is this year. We almost surely are currently at the bottom of this inflationary episode and are likely to be starting up again” (NYDN, 11/13/85). Defying these predictions, inflation was consistently below 5 percent in every month from 1983 to 1986; moreover, apart from a brief uptick in early 1984, inflation continued to decline after 1982, and was lower in 1986 than it was in 1985.
* PDF: https://files.stlouisfed.org/files/htdocs/publications/revie...
Vroom offered me $42,722 for it today
SPX is up 25%, despite almost certainly taking a productivity hit as a whole. The money is definitely flowing, and consumer prices will be a lagging indicator as multi-year supply chain contracts expire and are renegotiated on the higher raw materials prices.
Look at asset prices outside of the US. A cursory look at home values in specific markets within colombia, Mexico, Russia and Argentina tell you a lot of where things are going, post COVID