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.