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Inflation

This is what I posted about deficit spending. The misinformation is yours.


Sure just point to some other post instead of the one we are talking about, everyone is too stupid to catch on right :rolleyes: Here is what's at issue.

"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.

Everyone says you are wrong when you say that because you ARE wrong when you say that.

Even the post you do quote is wrong:

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.

Higher interest rates is not the end result of deficits, deficits stimulate economic growth and increase the velocity of money. Government deficits mean you have more money chasing the same goods and services which can be somewhat inflationary inflationary. The Fed DOES NOT respond to this buy buying government bonds, it responds by slowing it's purchases of government bonds and allowing interest rates to rise. These actions counteract inflation they do not create inflation.
 
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Some standard economics on all this

I wonder if some very standard economics might help clarify things here. (Not that anyone is obliged to believe something just because it is accepted among economists.)

When the government conducts expansionary fiscal policy (increasing spending or cutting taxes) that usually causes an increased deficit, although it need not always. Expansionary fiscal policy pushes up interest rates (the technical term is the IS curve moves to the right) unless the Fed holds the interest rate constant...which is not uncommon. (During World War II and until 1951 there was an understanding between the Fed and the Treasury that the Fed would hold interest rates constant.) In order to hold the interest rate constant, the Fed buys bonds and increases the money supply. The bonds bought are not always government bonds and the amount bought need not correspond to the increase in the deficit. (In recent years, the Fed has also bought private bonds.)

So in the U.S. expansionary fiscal policy is not tied directly to monetary policy. Nonetheless, it sometimes has the indirect effect of inducing expansionary monetary policy in order to hold down interest rate increases.

Mostly, the Fed is independent of the executive branch. But the Fed does understand politics and is sensitive to what the President wants. There have been times in the past when the Fed was much less independent.

The situation is sometimes different in other countries. In particular hyperinflations are generally associated with the central bank printing money to pay for government spending.
 
I wonder if some very standard economics might help clarify things here. (Not that anyone is obliged to believe something just because it is accepted among economists.)

When the government conducts expansionary fiscal policy (increasing spending or cutting taxes) that usually causes an increased deficit, although it need not always. Expansionary fiscal policy pushes up interest rates (the technical term is the IS curve moves to the right) unless the Fed holds the interest rate constant...which is not uncommon. (During World War II and until 1951 there was an understanding between the Fed and the Treasury that the Fed would hold interest rates constant.) In order to hold the interest rate constant, the Fed buys bonds and increases the money supply. The bonds bought are not always government bonds and the amount bought need not correspond to the increase in the deficit. (In recent years, the Fed has also bought private bonds.)

So in the U.S. expansionary fiscal policy is not tied directly to monetary policy. Nonetheless, it sometimes has the indirect effect of inducing expansionary monetary policy in order to hold down interest rate increases.

Mostly, the Fed is independent of the executive branch. But the Fed does understand politics and is sensitive to what the President wants. There have been times in the past when the Fed was much less independent.

The situation is sometimes different in other countries. In particular hyperinflations are generally associated with the central bank printing money to pay for government spending.
A good explanation though "expansionary fiscal policy" might need more fleshing out.

Deficit spending is not necessarily stimulus spending unless new money comes in as a result. Otherwise it is just competing with other borrowers for the same funds.

If bonds get sold overseas then this "new money" may be money that came from overseas. If the Fed has a TT&L account at a bank then the bank can create new deposits in that account to purchase a bond (again, new money).

But ultimately, if the government runs budget deficits perpetually, the Fed will have to step in to counteract some of the negative effects of this.
 
I wonder if some very standard economics might help clarify things here. (Not that anyone is obliged to believe something just because it is accepted among economists.)

When the government conducts expansionary fiscal policy (increasing spending or cutting taxes) that usually causes an increased deficit, although it need not always. Expansionary fiscal policy pushes up interest rates (the technical term is the IS curve moves to the right) unless the Fed holds the interest rate constant...which is not uncommon. (During World War II and until 1951 there was an understanding between the Fed and the Treasury that the Fed would hold interest rates constant.) In order to hold the interest rate constant, the Fed buys bonds and increases the money supply. The bonds bought are not always government bonds and the amount bought need not correspond to the increase in the deficit. (In recent years, the Fed has also bought private bonds.)

So in the U.S. expansionary fiscal policy is not tied directly to monetary policy. Nonetheless, it sometimes has the indirect effect of inducing expansionary monetary policy in order to hold down interest rate increases.

Mostly, the Fed is independent of the executive branch. But the Fed does understand politics and is sensitive to what the President wants. There have been times in the past when the Fed was much less independent.

The situation is sometimes different in other countries. In particular hyperinflations are generally associated with the central bank printing money to pay for government spending.

Central banks in most developed countries nearly all use some form of inflation targeting, and even before they had a specific target the Fed had it's dual mandate of maximizing employment while keeping inflation low.

An Independent Central Bank has been a precondition for IMF aid for several decades at least and many other forms of international aid have similar requirements. The result is that very few countries now don't have independent Central Banks with a mandate to keep inflation low, and that means they ill allow interest rates to rise rater than risk inflation. It may have been common at one point but the days where central banks would try to counteract interest rate changes are mostly gone.
 
Labor costs point to corporate profit as main inflation driver

The continued drop in labor costs has economists pointing to private sector profits as a main driver of inflation, undercutting arguments from the Federal Reserve regarding its plan to bring down consumer prices that remain around 40-year highs.

Unit labor costs, which are measured by the Labor Department to determine how much businesses are paying for workers to produce their goods and services, have been getting outpaced by profits over several quarters, leading economists to call out a trend
 
Those interested in a bit of history on the link between the Fed and deficits might find the Marketplace story at https://www.marketplace.org/2022/12/13/how-a-divorce-between-the-treasury-and-fed-helped-build-the-modern-economy/ interesting.

This was linked in your article, but goes into more detail

https://www.federalreservehistory.org/essays/treasury-fed-accord

The short summary is that the era where the Fed would engage in interest rate pegging ended 70 years ago, and since then inflation has been a primary concern with bond rates left to do as they will on the open market.
 
Useful link.

The Fed has almost always engaged in interest rate targeting, rather than focusing on any measure of the money supply. I use the term "targeting" rather than "pegging" because the Fed moves the interest rate up or down depending on how it wants top nudge the economy.

While the Fed does worry about both unemployment and inflation, when inflation looks to get out of control that typically takes priority. This has been true probably since some time in the 70s.
 
Useful link.

The Fed has almost always engaged in interest rate targeting, rather than focusing on any measure of the money supply. I use the term "targeting" rather than "pegging" because the Fed moves the interest rate up or down depending on how it wants top nudge the economy.

While the Fed does worry about both unemployment and inflation, when inflation looks to get out of control that typically takes priority. This has been true probably since some time in the 70s.

The interest rate targeting the Fed does now is an intermediate target, it's used to set expectation and hit the inflation target they want but it isn't an end goal. Inflation and employment are the real targets they are trying to hit and they allow interest rates to move up and down gradually to meet these real targets.

Keep in mind what kicked off this discussion was the claim that the Fed is still trying to peg interest rates at a specific value even at the expense of inflation. The links in question make it clear the Fed hasn't operated that way in 70 years, and even when they did it was primarily an emergency response to WWII
 
Sure just point to some other post instead of the one we are talking about, everyone is too stupid to catch on right :rolleyes: Here is what's at issue.



Everyone says you are wrong when you say that because you ARE wrong when you say that.

Even the post you do quote is wrong:



Higher interest rates is not the end result of deficits, deficits stimulate economic growth and increase the velocity of money. Government deficits mean you have more money chasing the same goods and services which can be somewhat inflationary inflationary. The Fed DOES NOT respond to this buy buying government bonds, it responds by slowing it's purchases of government bonds and allowing interest rates to rise. These actions counteract inflation they do not create inflation.

Mostly good, but bond rates don't really counteract inflation, they are a reaction to it. The key here is that the Fed responds to inflation by raising short term-rates. Since a lot of business activity is financed by short-term rates this acts as a brake on the economy; suddenly a lot of deals that looked good under a lower rate environment don't pencil anymore.
 
Mostly good, but bond rates don't really counteract inflation, they are a reaction to it. The key here is that the Fed responds to inflation by raising short term-rates. Since a lot of business activity is financed by short-term rates this acts as a brake on the economy; suddenly a lot of deals that looked good under a lower rate environment don't pencil anymore.

True, but I was referring to the Feds actions wrt to buying bonds or not the bond rates themselves. When the Fed buys bonds it expands the base money supply which creates inflation. This also tends to lowers bond rates. Similarly when the Fed slows it's purchase of bonds, it allows bond rates to rise. This also slows the expansion of the money supply which tends to reduce inflation.

It's also not the case the higher short term rates are what puts the breaks in economic growth. The higher short term rates are more of a symptom not a cause. Short term rates go up because capital is more difficult to obtain because the money supply is tighter. It's the tighter money supply that is restricting economic growth and inflation rather then the bond rates themselves. Nonetheless, bond and interest rates make for a convenient predictable intermediate target on the way to balancing employment and inflation.

The Fed *could* do what psionl0 suggested and try to peg interest rates at low levels in the face of government deficits, and doing so would be inflationary, and it was inflationary 70 years ago when the the Fed lacked it's current independence. The point however is that this is not what the Fed does now nor has it done anything like this since the mid 50's.

IMO current inflation is an outgrowth of supply chain issues reducing outputs and base monetary expansion back in 2020 to try combat the economic effects of Covid. Since the velocity of money was low in 2020 it took a much bigger increase base money supply that normal to have a positive economic impact but now that the economy is normalizing the abnormally high base is creating inflation.
 
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snip

It's also not the case the higher short term rates are what puts the breaks in economic growth. The higher short term rates are more of a symptom not a cause. Short term rates go up because capital is more difficult to obtain because the money supply is tighter. It's the tighter money supply that is restricting economic growth and inflation rather then the bond rates themselves. Nonetheless, bond and interest rates make for a convenient predictable intermediate target on the way to balancing employment and inflation.

I'm curious why you think that a tight money supply makes capital harder to get or restricts economic growth other than through its effects on interest rates. (Talking about the U.S. and similar situations, not hyperinflations.) All the economic models I know have the effect work through the interest rate. I'm not at all sure how one would statistically figure out whether the effect is direct or through the interest rate.
 
I'm curious why you think that a tight money supply makes capital harder to get or restricts economic growth other than through its effects on interest rates. (Talking about the U.S. and similar situations, not hyperinflations.) All the economic models I know have the effect work through the interest rate. I'm not at all sure how one would statistically figure out whether the effect is direct or through the interest rate.

Money supply follows the law of supply and demand. In capital markets interest\bond rates can be thought of as the cost of money while money supply is the supply side of the equation.


If you have 20 buyers for 20 widgets, at $1 per widget and suddenly the widget supply drops to 10, the price for each widget goes up until you only have 10 willing buyers. From an individual buyers perspective they are making a personal decision based on the price of the widget, but in reality there are still only 10 widgets so the price is set by supply and demand not what any individual buyer is willing to pay.

The same thing happens in financial markets when the money supply tightens. The cost AKA interest\bond rates rise until the demand matches the available supply. Under no circumstance is it possible for the interest rate to not match up with the money supply available for investment and investor demand for that money. Interest rates can change who is investing and what they invest in but the amount invested is still dependent on the supply of money rather than the current interest\bond rate.
 
But money isn't the same as capital. Money is a particular asset. There are many other real and financial assets. Equating money supply and money demand is done by the interest rate adjusting. It's the interest rates that then affect investment decisions.
 
You guys are just whining. Joe Biden and Janet Yellen told us explicitly in July of 2021 that inflation was just transitory. You need to have patience because Joe Biden and Janet Yellen told us that the inflation reduction act will stop inflation in its tracks. The new omnibus spending bill is also sure to stop inflation. If it doesn't slow down inflation, it's Trump's fault right?
 
You guys are just whining. Joe Biden and Janet Yellen told us explicitly in July of 2021 that inflation was just transitory. You need to have patience because Joe Biden and Janet Yellen told us that the inflation reduction act will stop inflation in its tracks. The new omnibus spending bill is also sure to stop inflation. If it doesn't slow down inflation, it's Trump's fault right?

I didn't know they stacked straw that high! You trying to squeeze an inch on us somewhere?
 
Eggs at my local supermarket today were $5.99/dozen. Apparently caused by avian flu killing so many chickens, but eggs are such a staple that this is going to cause ripple effects on things like baked goods.
 
Inconclusive yet - a lot of that will be the price of oil, which is down over 25% from its peak.
 
Which would mean that a lot of it was the price of oil to begin with.

It was.

Here's the chart for core inflation, which excludes food and energy prices (including oil, of course):

https://ycharts.com/indicators/us_core_inflation_rate

Good pick - that shows a 1% fall, against the wider 2% you showed above. Half the fall being oil feels about right.

USA also has the unfortunate situation that workers aren't receiving pay rises near the rate of inflation, only getting 4.8% in the year to December '22. When you factor in a fall in hours worked, it seems fairly clear workers are bearing the brunt of stopping inflation by having the blood squeezed out of them.
 
The December inflation report is out:

Prices fell in December as inflation continues to moderate

For the first time in nearly three years, inflation fell on a monthly basis.

Consumer prices decreased by 0.1% in December, the Bureau of Labor Statistics reported Thursday in its Consumer Price Index. The last time prices were lower than the previous month was May 2020.

The closely watched inflation gauge also showed that year-over-year prices continued to cool last month, slowing to 6.5%, from 7.1% in November. It’s the smallest annual increase since May 2021.

Stripping out food and energy prices, which tend to be more volatile, core CPI came in at 5.7%, down from November’s 6% annual rate.
 

Here is something interesting on the report to me

https://www.bls.gov/news.release/cpi.t02.htm

Almost exactly 1 third of the CPI-U calculation is cost of shelter which were up .8% for the month. Homeowners are almost entirely protected from that. So, for a homeowner, costs went down not by .1% but by .4% if my math is correct. For ever dollar I held, I made 4 tenths of a cent return in December (thats not really how deflation works but there you go).

And for the year inflation was only ~4.3% if you exclude cost of shelter. For those of use who outright own a home, or on a fixed rate mortgage, 2022 was not all that bad by my reckoning.

And looking at the trackers: https://tipswatch.files.wordpress.com/2023/01/small_dec.jpg

CPI-U has been pretty low each month since July.
 
I see our good pals in the House of Saud have decided to help out Mr Putin by cutting production 1M barrels a day.
 
Recently there was a wave of avian influenza that resulted in hens dying and egg prices rising. However, the rise in egg prices may have had just as much to do with corporate greed as with reduced supply.

Cal-Maine Foods, which controls about 20% of the U.S. egg market, announced last week that its revenue for the quarter ending February 25 rose 109% to $997.5 million, while profit for the same period skyrocketed 718% to $323.2 million.

...

"While working families paid record prices for eggs, Cal-Maine raked over 700% more in profits—without reporting a single case of avian flu," Sen. Elizabeth Warren (D-Mass.) tweeted on Thursday. "We need to crack down on corporate price gouging to provide Americans with relief at the grocery store."

https://www.commondreams.org/news/why-are-egg-prices-so-high
 
Recently there was a wave of avian influenza that resulted in hens dying and egg prices rising.

Pfft.

Come to New Zealand, where an insane policy by the government has resulted in such short supply of eggs they are now $1 each. That's up about 300% in the space of 6 months.
 
I see our good pals in the House of Saud have decided to help out Mr Putin by cutting production 1M barrels a day.

At least somebody is doing the right thing. If only we could get the rest to follow suit...

I've always wondered about politicians (or anyone) who say that we need to cut down on fossil fuels to combat global warming but then complain when the price of fossil fuels goes up.
 
I've always wondered about politicians (or anyone) who say that we need to cut down on fossil fuels to combat global warming but then complain when the price of fossil fuels goes up.

The problem is, it needs to be done in a planned manner.

Pushing the price of petrol up this way disadvantages the poorest people, who can't afford electric vehicles, while Tesla drivers sit and laugh.
 
The biggest study of ‘greedflation’ yet looked at 1,300 corporations to find many of them were lying to you about inflation

The article also mentions another study from back in June

A June study by the International Monetary Fund (IMF) found that 45% of eurozone inflation in 2022 could be attributed to domestic profits. Companies in a position to benefit most from higher commodity prices and supply-demand mismatches raised their profits by the most, the study found.

I wouldn't be surprised if the numbers were similar for the US. Just shy of half the inflation was just corporate greed.
 
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