First off: it's not Congress that controls the money supply, it's the Fed. They're independent.
> The price for that has yet to be paid.
What price is that? Inflation? Japan's M2 has risen a lot, and it hasn't seen any for decades:
* https://fred.stlouisfed.org/series/MYAGM2JPM189S
* https://fred.stlouisfed.org/series/FPCPITOTLZGJPN
Japan's interest rate has been below 1% since April 1995:
* https://fred.stlouisfed.org/series/INTDSRJPM193N
From 2002 to 2006 it was 0.1%.
The equation for inflation is: M x V = P x Q
Everyone talks about "printing money" (money supply: M) with the Fed, but no one seems to pay attention to velocity (V). Which has dropped off a cliff:
* https://fred.stlouisfed.org/series/M2V
The Austrian, Milton Friedman Monetarists have been squawking about inflation for ten years:
> We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.
* https://economics21.org/html/open-letter-ben-bernanke-287.ht...
Meanwhile the Keynesians have been saying it wouldn't be a problem. Both sides made predictions, results are in, the experiment is over:
Start listening to Keynesians.
Houses are up massively, land, cars, stocks, crypto, etc.
The inflation measurement is off. But the inflation is here.
* https://awealthofcommonsense.com/2021/01/inflation-truthers/
* https://news.ycombinator.com/item?id=25644580
If you don't believe the government-published CPI you can confirm their work, as others have done:
* https://en.wikipedia.org/wiki/MIT_Billion_Prices_project
For your items:
* Monthly carrying costs haven't changed much: prices up, but mortgage rates are down. Plus average square footage has gone up, so you're getting more.
* Land depends on location, and urban prices have gone up because it's more cool to live in the city now than in the 1970s and 1980s. I live in Toronto, so I know all about land/housing prices over the last 10-15 years.
* Modern cars have more power, while burning less fuel, and being safer, and on average lasting longer, for the same money. I own a 2003 Golf that I paid $30K for (in 2003). What's available for $30K is a lot better, and the equivalent dollars today is closer to $40K—which gets you some sweet things.
* I was invested in 2008: I've seen stocks go up and down.
* Crypto is a Ponzi scheme.
> Is there a framework we should be describing this with besides the broad “inflation” term?
If asset prices are higher than what they "should" be, then one generally calls that a bubble.
Further, the resources needed as raw material are finite (unless we start asteroid mining), as is the energy needed in the process: we have only so many gigawatts we can produce at one time.
More plants can be built, but those take resources as well: some of the very same resources that are needed to build the cars we're talking about.
I agree but that doesn't explain why Bitcoin had multiple bubbles and survived all of them. Bitcoin is highly deflationary. Bitcoins are lost all the time. The supply is only growing very slowly. It's also an "immature" asset compared to gold so a large influx of a new class of investors can drive the price up.
For the same reason people still go to astrologers or think that during the playoffs the can't shave or their favourite team will lose: cognitive biases and wishful thinking.
* https://en.wikipedia.org/wiki/List_of_cognitive_biases
The fact that the bubbles happen so often and and so drastically is another reason that I avoid it: volatility is generally a proxy measurement of risk, and what reward am I gaining by taking on this risk?
Everyone is bullish on it at >US$ 40K, but people seem to have forgotten that it dropped by half in two days in March 2020:
* https://www.cnbc.com/2020/03/13/bitcoin-loses-half-of-its-va...
If someone wants to have it in their 'portfolio' at some small percentage as part of their "play money" that's one thing, but to make it a significant portion seems foolish to me.
I do feel a bit of FOMO, and may eventually create a trading account with like 5% of my portfolio for playing around in WSB and Crypto and such, but right now I'm fully invested in index and bond funds (80/20), so don't really have spare cash available for any of these temptations.
I've never heard anybody educated on the matter make this statement. It's always from someone that doesn't understand it and therefore thinks it's a scam.
It has failed as a payment system, as a currency, as a reserve currency, a remittance channel, a timestamping service, a settlement layer, a bank for the "unbanked", a cypherpunk liberator, a money laundering tool, a drugs-by-mail tool, a unit of accounting, a store of value, and as a "disruptive" fintech technology.
What exactly is the value in holding Bitcoin (or whatever)? My only hope is having someone in future come along and take it off my hands at a higher value than I bough it.
When I think of crypto/Bitcoin, I am reminded of Warren Buffett's view on gold:
> Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce – gold’s price as I write this – its value would be $9.6 trillion. Call this cube pile A.
> Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
[…]
> A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops – and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.
It is more akin to tulip mania, dependent on inflated futures with diminishing utility.
Presently though, it's better than cash, which finds itself in a similar position.
As someone with another couple of decades until retirement I'd love a crash about now so that I could "buy low".
I bought it when I graduated and my first job was in an office park with little transit. Since then I've mostly worked in more urban areas, so I've been able to take transit or pedal, and so mostly use the car on weekends.
A lot of younger people don't seem to realize that this is new. That you used to be able to put your money in a bank and not lose it. While rock-bottom interest rates are good in some ways, I don't see this as a positive trend overall, especially given how shark-filled the financial waters are for most people. I'm a big fan of the Vegas dictum - "there's a patsy at every table, and if you don't know who the patsy is, it's you". As a retail investor, you're pretty much always the patsy.
Unfortunately we're seeing land prices and stock prices and crypto (etc) bid up instead of, say, a massive build out of factories and solar farms and multistory houses. (EDIT: We are seeing lots of houses being built, actually. Lumber is near all-time highs.)
But why did this apparently only become the case after 2008? Positive real returns without gambling were acceptable before that, and we still got a gigantic speculative bubble, so why does it suddenly become reasonable to encourage bubbles even more? Was it just a coordination problem? An initial panic reaction to slash to zero, and then no central bank being willing to go first and unwind it?
As you say, the other major part of this problem is the inability or unwillingness to steer money toward productive investment rather than speculation. Here in the UK it's housing that's the killer; my suspicion is that governments have become addicted to the jam-today enabled by the money created for mortgage loans, which will then have to be paid off on some other poor sucker's watch.
The Fed provides loans to banks who then provide loans to companies so that they can grow faster. It's about increasing efficiency, not about total possible upside.
However, there is a point after which businesses have enough loans for all the investments they have planned. Every single dollar after that is too much and does nothing.
The next step is to spend money in a way that creates more investment opportunities for those companies. In short you want to balance supply and demand.
The simplest spending target would be to pick a industry that is not in competition with private industry. My personal favorite are renewables and other infrastructure because you will not displace existing companies through government spending.
Carbon taxes also create an incentive to borrow more money and do productive work but they do gnaw at CO2 spewing private industry which is the entire point but there are vested interests that don't want to lose their money.
What you are calling inflation is actually the opposite. It's deflation. When hoarding assets becomes more profitable than working, the real world economy starts dying and CPI reflects that very well.
Workers benefit from inflation because inflation is generally followed by productive investments. Driving prices of consumer goods up makes it profitable to produce them which makes it profitable to employ people to produce them.
Deflation makes it harder to run a profitable business but it also makes it easier to run a non profitable business (that also includes overvalued businesses that do not earn enough to justify their valuation).
The only group I have seen making predictions over the last 10+ years who seem to be successful are the people suggesting that central banks do NGDP level targeting instead of what they're doing right now.
> I see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”
* https://krugman.blogs.nytimes.com/2009/01/06/stimulus-arithm...
Austerity does hurt economic growth:
* https://krugman.blogs.nytimes.com/2012/04/24/austerity-and-g...
From what I've read on the topic, it's hardly ever been a good idea, especially in depressed economies:
* https://en.wikipedia.org/wiki/Austerity:_The_History_of_a_Da...
> That is, Keynsians tend to over-focus on fiscal policy and ignore the monetary side
AFAICT, Keynesians are both-and thinkers. Monetary is done first, but once you hit zero rates, then what more can you do from that angle? Printing money is only useful when you also have velocity, which has at first decreased and lately fallen off a cliff:
* https://fred.stlouisfed.org/series/M2V
At that point you have to move to fiscal. Krugman examined this in 1998 when Japan entered the quagmire before everyone else:
* https://www.brookings.edu/bpea-articles/its-baaack-japans-sl...
> are the people suggesting that central banks do NGDP level targeting instead of what they're doing right now.
Who is writing publicly on this topic, either in weblogs, articles, or Tweets?
See, this is one of those claims that is interesting to me because I never see anyone proposing what a "non-anemic" level would look like. No matter what gets proposed for fiscal spending, the response is "that won't be enough; we should spend more", without quantifying more.
As a scientific claim, it's unfalsifiable, fundamentally, which makes it hard to work with usefully.
> Austerity does hurt economic growth:
First off, there's a lot of cherry-picking going on. The US did "austerity" things, people claimed the result would be disastrous.... and it wasn't. Europe did austerity, but _also_ very tight central bank policy at the same exact time; results were not great, but it's hard to blame this on just "austerity" given the central bank behavior.
Just to be clear, I am not claiming that austerity _improves_ economic growth, which seems to be what the wikipedia link you post is about. I'm claiming that the specific predictions made about austerity by adherents of specific economics intellectual movements in the last 10-15 years did not in fact match what actually happened.
> but once you hit zero rates, then what more can you do from that angle?
Tons, if you want to, because you are not limited to short-term rates as your policy instrument. Those rates are correlated with monetary policy (in the short term; anti-correlated in the long term), not causative.
Note that at the point when we hit "zero rates" central banks were doing all sorts of monetary tightening (positive interest rates on reserves!, the Fed raising its policy rate 9 times over the course of a few years and consistently missing its inflation target on the low side in the process, etc).
https://en.wikipedia.org/wiki/Negative_interest_on_excess_re... is absolutely a thing you can do to increase V when you hit "zero rates". But more importantly, a large part of monetary policy is expectations management. If people expect you to undershoot your inflation targets, they act accordingly and it actually gets harder to hit the targets.
> Who is writing publicly on this topic, either in weblogs, articles, or Tweets?
https://www.themoneyillusion.com/ has been writing about it for a while now. Less recently, as the idea has gained more widespread traction; a lot more around the 2008 financial crisis and aftermath.
Is the real question here "what is this and why is it supposed to be a good idea" or "who are these people who are making better predictions"?
Velocity of money is a measure of economic activity. If Q is the GDP and constant, prices will go up if economic activity goes up. So only if economic activity does not pick up, will the prices not go up.
* https://www.marketwatch.com/investing/index/bcom?countryCode...
Real estate is an asset: the CPI measures carrying costs, and those are fairly level. You get more automobile now for your money than in the past: I paid $30K for my 2003 Golf, and for the same $30K I get more safety, more horsepower, and better mileage.
I agree that health care and education (in the US) are the main areas where costs have risen.
They are slowly making it a foregone conclusion that any policy that favors companies with actual operating returns over inflating ratios will necessarily crush everyone's retirement portfolios, and therefore any such move would be politically untenable.
It discourages hoarding. You can make capital gains off of so many different reasons that have nothing to do with the performance of the stock. It's insane.
Meanwhile dividends are entirely dependent on the income of a company. You can't cheat dividends because it's the company that has to pay them, not other investors that can drive irrational behavior.
But this is only the beginning: If the US gets that $1 trillion debt, that money didn't just vanish. It gets spent in the economy, people consume things, stay employed etc., infrastructure gets developed and so on. ROI is usually there after only a few years: "Research [...] showed that one dollar of public money spent during the 2007-09 crisis could generate 2.5 dollars of output in five year’s time." https://theconversation.com/how-much-bang-for-a-buck-working...
So for every $100 the country borrows in the current climate, it only has to pay back a $37 in 50 years while getting returns of over $200 in 10 years.
The majority of dollars in existence do not come from the printing presses of the Fed.
The majority of dollars in existence appear from thin air on the balance sheets of fractional reserve banks, when they lend money, for business loans, personal loans, and mortgages.
During a recession, people borrow less money, and businesses tighten their belts. In order to prevent the monetary supply from shrinking (thus causing deflation[1]), the fed generally needs to start printing money.
Now, we may say that they printed too much money, or that the money did not go to the best possible places for it, but from 30,000 feet, turning on the printing presses was a sound move.
[1] Deflation is utterly horrible, and should be avoided at all costs.
Ceteris is not paribus at all. If we're complaining about potential inflation rather than worrying about the raging pandemic and a full-blown depression like unto the Great Depression, we're in comparatively good shape!
That is correct. What you're missing is that a large fraction of created money used to come from banks lending money. During a recession, or a pandemic, that lending tightens, which slows the rate at which money is created, and speeds the rate at which money starts getting destroyed.
It's why the fed prints money during recessions, and destroys money during economic booms.
The equation for inflation is: M x V = P x Q
Everyone talks about "printing money" (money supply: M) with the Fed, but no one seems to pay attention to velocity (V). Which has dropped off a cliff:
> The velocity of money (or the velocity of circulation of money) is a measure of the number of times that the average unit of currency is used to purchase goods and services within a given time period.[3]
* https://en.wikipedia.org/wiki/Velocity_of_money
Good video by a CFA trainer:
* https://www.youtube.com/watch?v=l0mh7cCjwDU
The first 10 minutes (maybe 20) probably has the most pertinent information to this discussion, but I've found the entire video to be interesting on inflation.
The traditional thing to do is raise interest rates when things start getting hot.
But having "too much" economic activity is in some ways better than not enough with people being unemployed and such.
If there are more jobs than workers those workers will pick the highest paying jobs. That's inflation.
Here, I'll give you a simplified example. There is this game called prosperous universe. You can buy FE (Iron) to make BBH (construction material). People need BBH to build factories or farms or whatever. When everyone is producing BBH the demand for FE goes up. There is only a limited amount of FE on the market. You are buying the cheapest FE first. Eventually all the cheap FE is gone and only the expensive FE remains. The price of FE has risen. That's inflation. How do other players respond? They start investing into production of FE because there is a very clear profit motive.
Every factory you build in the game needs workers. By building factories you directly decrease unemployment.
I can also give you the opposite example. There is a high end facility that creates ES (Einsteinium) but there is very little demand for it. You run the factory for a month and start stockpiling a months worth of production. Then you demolish the factory because you don't need it anymore. Those workers are now unemployed.
You have to consider that unemployment has a greater impact on your finances than the inability to make money off of a checking/savings account. Actually, the interest rates are generally high enough that your returns cover inflation so in practice you are not losing anything.
They may at some point become "too confident" and start feeling that the 'party' may never end. So they go out and spend more and more: on new clothes, on renovations, or second (or third) houses, on new cars, boats, etc.
However, there's only so much capacity for (say) manufacturing: only so many cars can be built, and if you really want one, then you'll be will to pay $40K to get the new shiny instead of trying to haggle down to $37K. There's only so many housing builders and lumber that is available: and if you want more square footage, they'll be setting the price that you have to pay.
I'm not sure how old you are, but in the 2006-2007 timeframe there was a lot of "irrational exuberance" before people over-extended themselves.
The movie The Big Short is an entertaining and fairly accurate take.
That sounds correct, under the assumptions of classical economics.
Inflation is the cost of things going up. Classically, price is considered an equilibrium of supply and demand. If I print money, but don't use it to demand goods, why would the price of goods change?
Reality is more complex than classical economics (and I should note, I'm not an economist). Expectations of inflation (due to say, seeing a giant pile of cash coming off the printing press) can trigger prices to rise.
But hopefully that helps to explain why it's generally accepted that velocity plays an important role in inflation, not simply supply of money.
Sure, rationality suggests that printing dollars will reduce the value of dollars. But kickstarting inflation is in some ways the entire point, no? And it has remained consistently below FR targets for the past decade (I believe, I'm not an economist and I'm not looking at any charts)
Ten years ago, I bake a loaf of bread, and sell it for a dollar. Then I invent an amazing machine that can produce the same bread more cheaply. I'm about to drop my bread prices, but you mint some new coins and add them into circulation. So I keep the price at a dollar per loaf.
I scrutinize my bread supply chain to the last detail. I optimize the flour, I optimize the temperature. I fire all the workers and replace them with machines. I'm saving every penny I can. Loaves get made faster! Loaves get made cheaper! Bread is flying off the conveyor belt!
You pull a lever and crank up the printing press. Dollars are being added in the millions, in the billions!
The price of bread stays at a dollar; has the currency been debased? I honestly don't know.
i say no it hasn't. Imagine a third person, who mows lawn for $1 an hour. He has not improved his lawn mowing during this time period which the baker has made improvements to bread making. So the work of mowing the lawn for $1 should stay the same regardless of what the bakers did - and therefore, the lawn mower being able to buy bread for $1 is not unreasonable.
The currency has not been debased. However, the potential for it to debase in the future has grown massively.
One day politicians are going to discover sensible policy (maybe Biden will do it, I don't know) and somehow magically increase inflation. That same day will open all floodgates on all dams.
The correct strategy would be to increase taxes and interest rates and cut stimulus spending once that has happened and we'll be fine. Crying hyperinflation is not the right strategy.
Just because cheap, crappy electronics and egg McMuffins don't appreciate in cost and stay crappy and cheap does NOT mean inflation is low. Anyone can play stupid games where you say inflation is low if you only pick certain goods made by robots or poor people overseas.
(As a note, local wages have risen less than the government's calculation of inflation, which is primarily food and secondarily consumer goods)
You're not wrong, but I ran into an interesting observation: yes the prices for many high-end institutions have gone up, but those are 'list' prices.
How many people pay list? How many people get bursaries and offsets from endowments?
I'd be interested in seeing those stats.
By recognizing what the real limits to borrowing are you also gain an understanding of what to spend the borrowed money on.
Interest rates is the manipulated variable, inflation is the observed.
Appreciate you catching that.
How much house can a dollar buy versus twenty years ago? If the dollar was indeed rising in value over time, a dollar would buy more house today than in 2000. Before we left the gold standard, a dollar indeed held its purchasing power over decades. The price of gold is effectively an inverse measure of the value of a dollar given that the amount of gold is basically fixed.
A better question might be, how much would you have volunteered to pay twenty years ago for the functionality an iPhone gets you today? In 2001, if today's iPhone were being sold, what price would have made it a successful product among average consumers? (Not, say, the military or super-wealthy).
I think... Less than $10,000 for certain, less than $5,000 most likely. In that sense the price has certainly come down, but semiconductors and electronics has obviously gone through rapid technological scaling and deflation is expected in that sector.
We’ve printed trillions of dollars and Congress is en route to print trillions more. The price for that has yet to be paid.