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Inflation

When I was searching for information about inflation and its causes I ran
across this video that argues differently on the subject. What do you think
of it.

"The root cause (of inflation) is the printing of money to cover government deficits".

That can't be right. Everybody else is saying that I am wrong when I say that.
 
"The root cause (of inflation) is the printing of money to cover government deficits".

That can't be right. Everybody else is saying that I am wrong when I say that.

From September 2008 to to September 2014 the monetary base in the U.S. rose by a factor of four. Over the same period, the CPI rose by 8 percent. Does printing money matter? Sure. But it's not a simple relation at all. (Except maybe in a hyperinflation, which isn't relevant in any developed economy.)
 
When I was searching for information about inflation and its causes I ran
across this video that argues differently on the subject. What do you think
of it.

Yes that affects inflation.

There are multiple things that affect inflation. My post was not meant to imply corporate greed is the sole cause of inflation, merely a contributing factor.

If a company has their costs for a product rise 5% but they determine they can get away with raising prices 10% then for that particular product a minimum of 50% of the price inflation was corporate greed. Now let's say that 5% cost increase was because their supplier of steel raised their prices. However, let's say the steel company's cost only actually rose by 2% but they know they can get away with a 5% increase.

Now the real cost increase of that final product was only 2% but the price jumped 10% making 80% of the price inflation corporate greed.

I don't have good data on how much prices are raised above cost increases. Anecdotally I've seen claims similar to the scenario above as far as how much of the price increases are really just corporate greed but again those can't be verified. We do have congressional reports and leaked corporate memos to tell us that it absolutely occurs, just not to what extent.
 
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Yes that affects inflation.

There are multiple things that affect inflation. My post was not meant to imply corporate greed is the sole cause of inflation, merely a contributing factor.

If a company has their costs for a product rise 5% but they determine they can get away with raising prices 10% then for that particular product a minimum of 50% of the price inflation was corporate greed. Now let's say that 5% cost increase was because their supplier of steel raised their prices. However, let's say the steel company's cost only actually rose by 2% but they know they can get away with a 5% increase.

Now the real cost increase of that final product was only 2% but the price jumped 10% making 80% of the price inflation corporate greed.

I don't have good data on how much prices are raised above cost increases. Anecdotally I've seen claims similar to the scenario above as far as how much of the price increases are really just corporate greed but again those can't be verified. We do have congressional reports and leaked corporate memos to tell us that it absolutely occurs, just not to what extent.

But why would that be possible. Only 3 reasons I can think of:

1) Demand for that product increased
2) They have no competition*
3) Disrupted supply chains reducing total supply

*and this is the big failing of our government, allowing too many corporations to merge creating monopolies... or duopolies where collusion, while illegal, is easy.
 
Yes that affects inflation.

There are multiple things that affect inflation. My post was not meant to imply corporate greed is the sole cause of inflation, merely a contributing factor.

If a company has their costs for a product rise 5% but they determine they can get away with raising prices 10% then for that particular product a minimum of 50% of the price inflation was corporate greed. Now let's say that 5% cost increase was because their supplier of steel raised their prices. However, let's say the steel company's cost only actually rose by 2% but they know they can get away with a 5% increase.

Now the real cost increase of that final product was only 2% but the price jumped 10% making 80% of the price inflation corporate greed.

I don't have good data on how much prices are raised above cost increases. Anecdotally I've seen claims similar to the scenario above as far as how much of the price increases are really just corporate greed but again those can't be verified. We do have congressional reports and leaked corporate memos to tell us that it absolutely occurs, just not to what extent.

It's amazing how corporate greed has been dormant for almost 40 years.
 
It's amazing how corporate greed has been dormant for almost 40 years.

Or maybe it's always been there but not done at a large enough scale to drastically affect inflation. Maybe when inflation is low it's harder for companies to raise prices significantly above that inflation level. I wonder what sort of conditions would allow for a large number of corporations to get away with significantly inflating prices within a small time span. Maybe like a pandemic, and a resulting global supply chain shortage. Maybe this includes raw materials used across numerous industries. Maybe a war affecting oil prices which in turn affects everything else. Maybe when there are tons of ongoing criseses and inflation is already high from other factors, then companies can get away with a much higher price hike compared to milder times and a 1% inflation rate.
 
From September 2008 to to September 2014 the monetary base in the U.S. rose by a factor of four. Over the same period, the CPI rose by 8 percent. Does printing money matter? Sure. But it's not a simple relation at all. (Except maybe in a hyperinflation, which isn't relevant in any developed economy.)
I think the video pointed out that the CPI doesn't take into account stocks, bonds, land prices etc. Those rose much higher than the CPI (though not necessarily four fold).

I agree that it is more complicated than just "print money BOOM! inflation".
 
I think the video pointed out that the CPI doesn't take into account stocks, bonds, land prices etc. Those rose much higher than the CPI (though not necessarily four fold).

I agree that it is more complicated than just "print money BOOM! inflation".

What you say is totally correct. But the inflation measures are supposed to measure the value of current spending, not of assets.
 
What you say is totally correct. But the inflation measures are supposed to measure the value of current spending, not of assets.
Let's not get into a battle of dictionaries here. If the money supply rises faster than the GDP then it is going to put pressure on prices somewhere.
 
One major flaw in how Inflation is measured is in how the "basket of goods" hasn't changed to account for current times: costs for digital products have not gone up.
 
Well, energy prices are somewhat volatile, so they are excluded from "core inflation" but I see in the news that oil prices dropped by 9%-10% this week, which might be a sign of inflation starting to cool off.

Oil slides 2%, posts second weekly decline as supply fears recede
Oil dropped by about 2% on Friday, logging a second weekly decline, due to concern about weakened demand in China and further increases to U.S. interest rates.

Brent crude settled at $87.62 a barrel, falling $2.16, or 2.4%. U.S. West Texas Intermediate (WTI) crude settled at $80.08 a barrel, losing $1.56, or 1.9%.

Both benchmarks posted weekly losses, with Brent down about 9% and WTI roughly 10%.

On the bad side, while inflation may be cooling, there are fears of a recession. Much of the weakness in demand seems to be coming from China.
 
It's amazing how corporate greed has been dormant for almost 40 years.

Yeah. Though I can't say that corporate greed isn't a factor, if it were the cause of inflation, we would always have inflation. It's not as if corporations suddenly transformed from altruistic enterprises to greedy ones. The reality is that if you're a corporate manager, being greedy is your job.

As for deficit spending, the way I see it, the effect depends very much on monetary policy. If monetary policy is loose, it contributes to inflation. If monetary policy is tight, government borrowing acts more like a tax, as government debt instruments compete with the private sector for investment money.
 
Well, energy prices are somewhat volatile, so they are excluded from "core inflation" but I see in the news that oil prices dropped by 9%-10% this week, which might be a sign of inflation starting to cool off.

Oil slides 2%, posts second weekly decline as supply fears recede


On the bad side, while inflation may be cooling, there are fears of a recession. Much of the weakness in demand seems to be coming from China.

That is the tightrope that central banks have to walk, and frequently fall off. Too loose, and inflation starts ramping up. Too tight, and the economy starts to shrink. There are a lot of positive feedbacks and a lot of inertia. Think of it as driving a big truck, where the only possible inputs are full throttle and full brake. I think it's very likely that this episode of inflation will be followed by a deep recession.
 
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That is the tightrope that central banks have to walk, and frequently fall off. Too loose, and inflation starts ramping up. Too tight, and the economy starts to shrink. There are a lot of positive feedbacks and a lot of inertia. Think of it as driving a big truck, where the only possible inputs are full throttle and full brake. I think it's very likely that this episode of inflation will be followed by a deep recession.

Yes. Interests rates have been so low (some argue "unnaturally" low) for the past decades, and that incentivates expenditure. Our economies have been surfing on waves of cheap debt, public and private. Those waves tend to shrink due to the effect of raising the interest rates, which is what central banks are doing to mitigate the inflation, and that tends to negatively affect the economic activity.

But that's not the worst case scenario. Worst case scenario is more inflation.
 
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When I was searching for information about inflation and its causes I ran
across this video that argues differently on the subject. What do you think
of it.


Some good, some bad.

The fundamental cause or inflation is when you have too much money chasing after too few goods and services.

He keeps saying central banks print money in order to support government deficits, which is completely false. Central banks in developed countries print money in order to maintain target inflation rates, government don't play a role in this decision making.


He says that an increase in the price of oil doesn't cause inflation, but this is mistaken at least in the short and mid term. Increases in the price of oil mean the demand for oil is outpacing supply. Since oil is an essential commodity for creating and\or transporting nearly every product existence a shortage of oil can restrict the amount of goods and services produced. Since inflation can either be a result of too much money or too few goods limited supply of a key commodity like oil can indeed cause inflation. The caveat is that in the long term markets will shift to either supply more oil or reduce the amount of oil required to produce goods\services, so the inflationary impact of an increase in oil prices doesn't last forever.

He says deflation in the consumer electronics sector shows that deflation isn't really a problem if it's expected. This goes against his previous assumption that inflation must be evaluated over all products not just a few. Secondly, he is fundamental wrong about the cost of computers, cell phones, etc dropping every year. What typically happens isn't prices dropping but capabilities going up. A mid-range phone won't cost any less 2 years from now, but it will be more capable.

The problem with deflation is that real interest rates can't be negative. If inflation is 3% you can lend at 5% and make a profit. If inflation is 0% you can lend at 2% and make a profit. In these cases the profit margin remains constant. If, however, inflation is at -3% you do not make a profit lending at -1%. In fact when inflation is at -3% you make a 3% profit just by keeping your money. It may be worth lending if you charge 5% so it's not like lending stops altogether but investors are less willing to lend. But, in a deflationary economy, when the economy slows down interest rates go up which slows the economy even more. This is the opposite of what happens in an inflationary economy, where interest rates act to help moderate the economy.


He claims "we are not good at using the money supply to control inflation" but the evidence is the exact opposite. Since 1979 when the US federal reserve started using the approach of trying to maximize economic growth while maintaining ~2% inflation, US inflation has been remarkably stable and very close to 2%.

He suggests we should use a set rule for increasing money supply, but this approach has generally failed or at least been much less effective than the approach currency in use. The problem is that even the Federal Reserve can't directly control the money supply, it can only control the base money supply. Other factors in the economy act as a multiplier so the effective money supply can't be controlled directly or easily forecast. It turns out that the best way to judge whether the money supply is growing to quickly or too slowly is to look at inflation rates.

He advocates for using a gold standard because this limits the number of dollars that can be printed. This has turned out to be a bug, not a feature. A fixed base money supply means you get wild swings in the effective money supply and therefor wild swings in inflation as the economy speeds up or slows down. This goes against the very principle he is advocating where inflation needs to constant and predictable.

He says that in 2020 the US money supply increased by $4 trillion between March 2020 and July 2020, but this is not correct or at least misleading. The definitions for M1 and M2 money changed in May 2020 which created a discontinuity at that time. Base money supply increased a lot in 2020 but because due to the slowing economy and associated decreases in the velocity of money broader measures of money supply grew at close to normal rates and resulted in inflation that was close to normal rates.


As to why we are experiencing inflation now, a lot of if does go back to the increases in base money supply that happened in 2020. Broader money supply measures are a function of base money supply and a multiplier that arise from monetary velocity. When the economy picks up speed the multiplier increases so effective money supply has increased at higher than normal rates since 2020 which has resulted in inflation. In addition supply chain issues and people not coming back the labor market has decreased the available goods and service. The overall effect us that we have more money chasing fewer goods which means inflation.
 
He keeps saying central banks print money in order to support government deficits, which is completely false. Central banks in developed countries print money in order to maintain target inflation rates, government don't play a role in this decision making.
Consistent - since you disagreed with me originally.

But you are still wrong - unless you can show that government borrowing doesn't put pressure on interest rates and that rising interest rates have no effect on inflation.

The Fed's charter may be to control inflation but government profligacy is the primary driver of the Fed's QE activities.
 
Consistent - since you disagreed with me originally.

But you are still wrong - unless you can show that government borrowing doesn't put pressure on interest rates and that rising interest rates have no effect on inflation.

The Fed's charter may be to control inflation but government profligacy is the primary driver of the Fed's QE activities.

This is 100% pure CT. Government spending has NOTHING to do with the monetary policy set by the fed, anyone who says the Fed is "printing money to finance enlivenment debt"is a flat out crackpot.
 
Corporate greed isn't a thing, corps always try to maximize profit.

However, if you are needing to raise prices because your inputs have gone up in price you don't want to be timid about it. Why? Because if you screw up and don't raise the prices enough then you are going to need to raise prices again. If you guessed wrong and didn't raise them enough you could wipe our entire quarters of profit fairly easily. That being said raising them too much for the wrong product will kill you as well. In other words too much inflation sucks for everyone.
 
This is 100% pure CT. Government spending has NOTHING to do with the monetary policy set by the fed, anyone who says the Fed is "printing money to finance enlivenment debt"is a flat out crackpot.
Inability to show that government borrowing doesn't put pressure on interest rates and that rising interest rates have no effect on inflation is noted.
 
Inability to show that government borrowing doesn't put pressure on interest rates and that rising interest rates have no effect on inflation is noted.

Your claim, you need to provide proof for your conspiracy theory.

Allow me to remind everyone of what I wrote and how you responded as you attempt to move goalposts:

Some good, some bad.

He keeps saying central banks print money in order to support government deficits, which is completely false. Central banks in developed countries print money in order to maintain target inflation rates, government don't play a role in this decision making.
government profligacy is the primary driver of the Fed's QE activities.
 
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The sooner we dump the Friedman Doctrine, the better.

Not likely, however.

I mean this has nothing to do with the Friedman doctrine. Executives are hired to get financial results by shareholders. In cases where shareholders don't want this we usually just call the structure something else (like a non-profit).

Regardless no business can survive with zero or negative margins for too long. So even if profit wasn't a thing the uncertainty that inflation adds to the bottom line means pricing will be aggressive. Uncertainty, inflation, rising input and labor costs all put error bars on pricing. No company wants to be the one holding the bag and charging too low a price in a screwy economy.

BTW in my opinion holding interest rates at close to zero for almost 20 years is a historic experiment. I don't think we even realize how large the bubble is here because everyone got used to insane prices a long time ago.

Remember when a P/E of 10 was considered normal?

Remember when a normal house might cost 200k? That was 20+ years ago when interest rates were still sort of realistic. Stuff has inflated so much we've gotten used to insanity.
 
Your claim, you need to provide proof for your conspiracy theory.
I know your pet theory is that the Fed and the government are two separate entities that exist in isolation to one another and that the actions of one will have no impact on the actions of the other.

But the real world doesn't work that way.
 
I know your pet theory is that the Fed and the government are two separate entities that exist in isolation to one another and that the actions of one will have no impact on the actions of the other.

But the real world doesn't work that way.

Do you know what an arms length organization is in government? Short of a change to legislation the US government cannot legally dictate what the Fed should do. Furthermore the Fed has a legal mandate to limit inflation while maximizing economic growth. It cannot legally do what you are suggesting and buy government securities with the intention of financing the US government.

This isn't some "pet theory" it's basic facts about the Fed. Your claims that the Fed operates in some other way are and have always been nothing but a crackpot conspiracy theory.
 
I mean this has nothing to do with the Friedman doctrine. Executives are hired to get financial results by shareholders.

That's exactly what the Friedman Doctrine is.

In cases where shareholders don't want this we usually just call the structure something else (like a non-profit).

Regardless no business can survive with zero or negative margins for too long.

It may surprise you to know there's an enormous gulf between corporate greed and zero profit.

It's entirely possible to preserve reasonable profits with social responsibility, living wages, and stronger employee benefits.
________________________

Meanwhile, the stubbornness of inflation in NZ has led to the Reserve Bank increasing the cash rate to 4.75%, with a top expected next year of 5.5 or 5.75%.
 
It may surprise you to know there's an enormous gulf between corporate greed and zero profit.

Corporate greed isn't the issue, the issue is competitive and efficient markets. If markets are competitive and efficient greed is irrelevant. WRT social and environmental issues it's incumbent on governments to establish an effective regulatory regime and ensure everyone follows the same rules.

The latter is often prone to sabotage by politicians beholden to special interest and voters who have been fundamental mislead as to what free markets do and how they work, but this is more of a issue with our democracy than it is an issue with corporate governance. Not that corporate governance isn't an issue as well, the Principle-Agent problem is very real.
 
Let me know when you want to deal with my actual argument. :rolleyes:

What argument? You haven't made any just a Gish gallop of incorrect assertions.

The question at hand, however, is from your post below where you admit you have said the Fed prints money to cover government deficits, something that is patently illegal given the Feds mandates.

"The root cause (of inflation) is the printing of money to cover government deficits".

That can't be right. Everybody else is saying that I am wrong when I say that.

BTW people said you were wrong because you are. ;)
 
Since you didn't read the arguments the first time, I am not going to repeat them.
I read them, they were crap. Nothing but hand waving and attempts to move the goalposts and muddy the waters.
 
Don't try and "fix" my posts.
I will fix them every time they contain falsehoods. You have never responded to the actual content of my posts. You have just assumed that they are "crap" (anybody can say that without reading a single word) and posted accordingly.
 
I will fix them every time they contain falsehoods. You have never responded to the actual content of my posts. You have just assumed that they are "crap" (anybody can say that without reading a single word) and posted accordingly.

By "falsehoods" you mean facts you want to lie about. Your argument was crap, it remains crap and you "fixing" peoples comments on it and lying about about won't change things.
 
How about the pair of you get a room somewhere else?

We get it, you disagree. 'Nuff said.
 
How about the pair of you get a room somewhere else?

We get it, you disagree. 'Nuff said.

I don't think you can call addressing blatant falsehoods like "the Fed prints money in order to cover federal deficits" as mere disagreement. A major function of these boards is still to debunk this type of misinformation when it occurs.
 
As usual, you are reacting rather than thinking. The government doesn't print money so the effect of borrowing to fund its deficit is higher interest rates. The Central bank has to buy back some of this government debt to counteract this and that is inflationary.
This is what I posted about deficit spending. The misinformation is yours.
 
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