Dumb Question about Inflation
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  Dumb Question about Inflation
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Author Topic: Dumb Question about Inflation  (Read 446 times)
c r a b c a k e
CrabCake
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« on: June 08, 2022, 07:25:14 AM »

When the concept of inflation was first explained to me, it was through the example of printing more money causing the notes to become less valuable in themselves - so it is entirely linked with money supply. But i also am aware that inflation is also linked with oil and grain prices, and other factors that decrease the purchasing power of each pounds sterling, despite this being incidental to the money supply. In fact, ever since I've been aware of the Bank of England, it has almost consistently been printing out huge amounts of monetary stimulus with very little effect on inflation, and it has only been external factors relating to an increased cost of goods and services that have triggered inflation. So is the initial idea of inflation being around printing money a red herring?
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jaichind
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« Reply #1 on: June 08, 2022, 07:29:45 AM »

It is not just money supply but also the velocity of money.  In 20202-2021, the massive monetary stimulus also occurred at the same time in the collapse of the velocity of money (people are not spending them because they are locked up in their homes) so inflation was under control.  



Now that the velocity of money is rising again there is an inflationary surge.

Note that during the 2008-2009 crisis due to massive private sector deleveraging various central banks pumped up the money supply to counter that money implosion and as a result there was no inflationary surge many on the Right, including myself, warned would come.
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Benjamin Frank
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« Reply #2 on: June 08, 2022, 08:27:36 AM »

It is not just money supply but also the velocity of money.  In 20202-2021, the massive monetary stimulus also occurred at the same time in the collapse of the velocity of money (people are not spending them because they are locked up in their homes) so inflation was under control.  

Now that the velocity of money is rising again there is an inflationary surge.

Note that during the 2008-2009 crisis due to massive private sector deleveraging various central banks pumped up the money supply to counter that money implosion and as a result there was no inflationary surge many on the Right, including myself, warned would come.

Yes, 2008-2009 and the 'velocity of money' 'thing' all fit into what bankers and economists refer to with the uncertainty that lowering the interest rate will get more people to borrow as like 'pushing on a string.'

"A metaphor attributed to John Maynard Keynes maintains that using monetary policy to fight a severe recession is like “pushing on a piece of string."

So, this was the same idea during Covid: just because the Federal Reserve printed up a whole load of money, it could not force the money to be spent in 'the real economy.'  There is a great deal of evidence though the money was spent by wealthy investors pushing up asset prices and that's why the stock market (DJIA) went as high as it did and why 'cryptocurrencies' became a thing.
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Southern Senator North Carolina Yankee
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« Reply #3 on: June 14, 2022, 04:53:15 PM »

It is not just money supply but also the velocity of money.  In 20202-2021, the massive monetary stimulus also occurred at the same time in the collapse of the velocity of money (people are not spending them because they are locked up in their homes) so inflation was under control.  

Now that the velocity of money is rising again there is an inflationary surge.

Note that during the 2008-2009 crisis due to massive private sector deleveraging various central banks pumped up the money supply to counter that money implosion and as a result there was no inflationary surge many on the Right, including myself, warned would come.

Yes, 2008-2009 and the 'velocity of money' 'thing' all fit into what bankers and economists refer to with the uncertainty that lowering the interest rate will get more people to borrow as like 'pushing on a string.'

"A metaphor attributed to John Maynard Keynes maintains that using monetary policy to fight a severe recession is like “pushing on a piece of string."

So, this was the same idea during Covid: just because the Federal Reserve printed up a whole load of money, it could not force the money to be spent in 'the real economy.'  There is a great deal of evidence though the money was spent by wealthy investors pushing up asset prices and that's why the stock market (DJIA) went as high as it did and why 'cryptocurrencies' became a thing.

That said demand for goods went up, while demand for services collapsed.

We saw massive inflation in the price of computer components beginning in mid to late 2020, as people shifted to home leisure.
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America Needs Dionysus
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« Reply #4 on: June 14, 2022, 05:32:10 PM »

With the caveat that I’m far from an expert on macroeconomics:

As I understand it, high levels of inflation are basically an issue of supply and demand. They occur when supply cannot keep up with demand; this can be a result of demand being stimulated, or of supply being restricted, or of both. The current inflation is due to ‘pent-up’ demand from the pandemic being released, so to speak, at the same time as global supply chain issues and shortages. On the flip side, you can get a deflationary spiral when consumer confidence collapses, most notoriously as in the Great Depression, though this is very rare, but when it does happen, often far more catastrophic than high levels of inflation.

This is why raising interest rates is the main tool available to central bankers to control inflation; it reduces demand by encouraging people to save and disincentivising them from borrowing, leading to them being less willing and able to spend.

Ultimately, this does all link in with the money supply; an increase in demand for instance, can often be seen as the money supply increasing e.g. people being paid more or receiving government stimulus.
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Benjamin Frank
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« Reply #5 on: June 15, 2022, 07:05:17 AM »

With the caveat that I’m far from an expert on macroeconomics:

As I understand it, high levels of inflation are basically an issue of supply and demand. They occur when supply cannot keep up with demand; this can be a result of demand being stimulated, or of supply being restricted, or of both. The current inflation is due to ‘pent-up’ demand from the pandemic being released, so to speak, at the same time as global supply chain issues and shortages. On the flip side, you can get a deflationary spiral when consumer confidence collapses, most notoriously as in the Great Depression, though this is very rare, but when it does happen, often far more catastrophic than high levels of inflation.

This is why raising interest rates is the main tool available to central bankers to control inflation; it reduces demand by encouraging people to save and disincentivising them from borrowing, leading to them being less willing and able to spend.

Ultimately, this does all link in with the money supply; an increase in demand for instance, can often be seen as the money supply increasing e.g. people being paid more or receiving government stimulus.

The mainstream view in economics is that an increase in demand does not increase the money supply, only the velocity of money.

Only the Federal Reserve can increase the money supply by either printing more money or by lowering reserve ratios.

This view is challenged by the notion that with modern technology, private banks don't need any reserves, but can simply loan/create money out of thin air.  The Bank of England refers to this as 'Fountain Pen Money.'

I don't know people being paid more or receiving government stimulus are the main beneficiaries of private banks creating money out of thin air.
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Benjamin Frank
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« Reply #6 on: June 15, 2022, 08:25:03 AM »

It is not just money supply but also the velocity of money.  In 20202-2021, the massive monetary stimulus also occurred at the same time in the collapse of the velocity of money (people are not spending them because they are locked up in their homes) so inflation was under control.  

Now that the velocity of money is rising again there is an inflationary surge.

Note that during the 2008-2009 crisis due to massive private sector deleveraging various central banks pumped up the money supply to counter that money implosion and as a result there was no inflationary surge many on the Right, including myself, warned would come.

Yes, 2008-2009 and the 'velocity of money' 'thing' all fit into what bankers and economists refer to with the uncertainty that lowering the interest rate will get more people to borrow as like 'pushing on a string.'

"A metaphor attributed to John Maynard Keynes maintains that using monetary policy to fight a severe recession is like “pushing on a piece of string."

So, this was the same idea during Covid: just because the Federal Reserve printed up a whole load of money, it could not force the money to be spent in 'the real economy.'  There is a great deal of evidence though the money was spent by wealthy investors pushing up asset prices and that's why the stock market (DJIA) went as high as it did and why 'cryptocurrencies' became a thing.

That said demand for goods went up, while demand for services collapsed.

We saw massive inflation in the price of computer components beginning in mid to late 2020, as people shifted to home leisure.

I don't doubt that's true. Of course, computer chips were also effected by supply chain problems, however, there was no net increase in the inflation rate.
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Benjamin Frank
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« Reply #7 on: June 15, 2022, 04:04:05 PM »

With the caveat that I’m far from an expert on macroeconomics:

As I understand it, high levels of inflation are basically an issue of supply and demand. They occur when supply cannot keep up with demand; this can be a result of demand being stimulated, or of supply being restricted, or of both. The current inflation is due to ‘pent-up’ demand from the pandemic being released, so to speak, at the same time as global supply chain issues and shortages. On the flip side, you can get a deflationary spiral when consumer confidence collapses, most notoriously as in the Great Depression, though this is very rare, but when it does happen, often far more catastrophic than high levels of inflation.

This is why raising interest rates is the main tool available to central bankers to control inflation; it reduces demand by encouraging people to save and disincentivising them from borrowing, leading to them being less willing and able to spend.

Ultimately, this does all link in with the money supply; an increase in demand for instance, can often be seen as the money supply increasing e.g. people being paid more or receiving government stimulus.

The mainstream view in economics is that an increase in demand does not increase the money supply, only the velocity of money.

Only the Federal Reserve can increase the money supply by either printing more money or by lowering reserve ratios.

This view is challenged by the notion that with modern technology, private banks don't need any reserves, but can simply loan/create money out of thin air.  The Bank of England refers to this as 'Fountain Pen Money.'

I don't know people being paid more or receiving government stimulus are the main beneficiaries of private banks creating money out of thin air.

The distinction between the 'velocity of money' and the money creation process gets to the difference between money and physical currency.  'Money" itself is placed into further ever broader categories of M1, M2, M3 and M4. All of that is more technical than is required to understand the basic process.

While, again, this is in dispute in the modern era given the roll private banks play, the basic of the money creation process works like this.

Let's say the Federal Resevere places $10,000 into the economy by buying a bond held by a private bank.  Since this is new money to the private bank A and since this is money received from a deposit, the private bank is free to loan out the whole $10,000.

The money is loaned out to person X who then goes and buys something with it at store A. Store A receives the money and puts it in Bank B.  With a 10% reserve ratio, Bank B can loan out 90% of the $10,000 ($9,000.)

Bank C will eventually loan out 90% of $9,000 or $8,100.

This process plays out, assuming no currency drain (money that is not placed back in a private bank) with $100,000 in new money created from the $10,000 in currency that the Federal Reserve put into the economy by buying the bond from private Bank A.

Leaving out 'currency drain'  this process has a simple arithmetic formula of:
Currency printed by Federal Reserve/reserve ratio

in this case: $10,000/0.1 = $100,000

If Reserve Ratios were reduced to 5% instead of 10% the arithmetic formula would simply be:
$10,000/0.05 =$200,000

So, the Federal Reserve, based on mainstream thinking, controls the money supply process. What private banks and citizens control is the 'velocity of money.'

In this case, that is, how long before the $10,000 in new currency that the Federal Reserve
used to by the bond is turned into $100,000.  The Federal Reserve can only regulate the 'velocity of money' by raising and lowering its interest rates. (It can also do so by raising and lowering the 'overnight rate' that banks lend at to other banks, but again, that is more technical than need be and doesn't alter the distinction between expanding the 'money supply' and the 'velocity of money.'
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« Reply #8 on: July 01, 2022, 12:53:46 AM »

At any rate, the colloquial definition of inflation refers to costs growing faster than buying power for the average consumer. In some cases this refers to unscrupulous banks expanding the money supply without any material gains not closing to wages. Another cause is supply chain shocks inducing bottlenecks in aggregate supply and thus an increase in prices vis a vis unyielding demand. Inflation can even occur when otherwise strong consumer spending closes to retained earnings with no growth in wages/salaries expenses, both diminishing consumer buying power and exacerbating wealth concentration.

Which do you see as the primary cause of inflation today? That's more a Rorschach of your worldview than anything else.
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Robinson Crusoe
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« Reply #9 on: July 03, 2022, 06:01:26 PM »

If you print money and the money isn't in circulation, inflation doesn't occur. But yes, in general, any increase in the money supply is inherently inflationary
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