[HN Gopher] The Ultimate Guide to Inflation
___________________________________________________________________
The Ultimate Guide to Inflation
Author : jger15
Score : 187 points
Date : 2021-05-09 20:42 UTC (2 hours ago)
(HTM) web link (www.lynalden.com)
(TXT) w3m dump (www.lynalden.com)
| vowelless wrote:
| As usual, an amazing article by Lyn Alden. I love her work. One
| of my favorite articles of last year was this:
| https://www.lynalden.com/fraying-petrodollar-system/
| lupire wrote:
| This a gem:
|
| > John Williams' Shadow Stats, for example, calculates that
| annual price inflation has been around 5-10% for the past decade
| if it was calculated as it used to be. Interestingly, he has not
| raised his subscription price for his data at all since at least
| 2008.
|
| Of course, it's bit of an unfair jab because he might be growing
| his subscriber base, or isn't getting paying customers but
| doesn't care.
| crb002 wrote:
| M2/Population
| https://twitter.com/SMT_Solvers/status/1391506520488153091/p...
|
| That is an unprecedented hockey stick.
| lupire wrote:
| That's a recent spike, not a hockey stick.
|
| A hockey stick requires far more than just a 30% lift in an
| anomalous year.
| ubertoop wrote:
| Interesting but, I don't really think I understand what this
| is. Would you mind explaining it in lay terms?
| anm89 wrote:
| There is no one definition of "money". M0, M1, M2, M3, MZM
| are various metrics which have been proposed over time for
| trying to track the supply of USD all with varying
| definitions. M2 is frequently used as the simplest and best
| general case proxy for "how much USD is out in circulation"
| in a way that tracks credit + currency.
|
| So saying the M2 is high relative to population means that we
| have been "printing money" (increasing the USD money supply)
| at a high rate relative to population.
| R0b0t1 wrote:
| It describes a very sharp increase in created money. The
| poster of the linked tweet is implying this is unique and we
| will see negative economic effects (like inflation) because
| of it.
|
| Parent to that tweet is arguing we have not seen those
| effects despite past federal reserve action and so there is
| no worry.
|
| The wider context to this conversation is that some people
| [who?] believe federal reserve policy is flawed and supported
| by systemic bias in the reporting of economic indicators like
| GDP.
| neffy wrote:
| If the comparison is with 2008, the answer is that the
| "money" was created on different sides of the balance sheet
| for different purposes. (We all remember that banks are
| effectively statistically multiplexing asset cash against
| liability deposits, nu?)
|
| 2008 the Fed printed $2 trillion asset cash(M0) and used it
| to buy bad debt off the banks books, and put the debt in a
| runoff fund. No discernible impact on M2. (well, it stopped
| it imploding).
|
| 2020 Fed prints ~$4 trillion of liability deposits, and
| hands it out to all and sundry to pay their rents, and
| support the stock market.
|
| M2 goes vertical. Which it has never done for the US in the
| last 100 odd years. So this time it will actually be
| different.
| vmception wrote:
| For people that want to understand this better:
|
| "Print" is a misnomer, as only the US Mint prints paper
| currency and mints metal coins which is a very tiny
| sliver of the M0 money supply.
|
| So to rephrase what actually happens: "in 2008, thr
| Federal Reserve decided to buy a notional amount of $2
| trillion in bonds and debt securities, every time it
| bought some it created the same amount of new US dollars
| at the time of transaction which becomes owned by the
| seller. Increasing the money supply upon payment."
|
| Its primary mechanism for controlling the money supply
| and people's behavior is by purchasing a predetermined
| amount and category of assets from people. Unless
| authorized by Congress to do something specific.
|
| Congress does not usually touch the Federal Reserve Act,
| as the whole point of the Federal Reserve system was to
| remove politics from management of the money supply. But
| they obviously can and always could alter the Federal
| Reserve's charter and in 2020 they let the Federal
| Reserve give money directly to individuals in some of the
| stimulus programs.
| dlp211 wrote:
| It's not created money. We didn't just print this money.
| The money is printed on collateral, that is private
| industry traded assets for US dollars.
|
| This graph also completely ignores that the US dollar is
| the de facto reserve currency of the world, so dividing
| dollars by US population is fairly meaningless in 2021.
| kebman wrote:
| Yes, don't worry guys. The Federal Reserve has got you
| covered. And if things get too expensive, you can always
| just ask for a raise, amirite! :)
|
| Anyway, here's a cash crop chart for corn that has more
| than doubled in price since last year. Once the cost of
| making finished products with these crops increase, you can
| be sure that shop prices will also reflect it. Some of
| these charts are even growing exponentially.
|
| ^1:
| https://www.barchart.com/futures/quotes/ZCY00/interactive-
| ch...
| Edman274 wrote:
| If you zoom out to 20 years it shows that back in 2011
| the same thing happened; did we have hyperinflation in
| 2011 or huge price increases in food in 2011?
| kebman wrote:
| I didn't say we'd have hyper-inflation. I said we'd have
| inflation, and the banks are saying that too, btw. What
| we're seeing now isn't just some seasonal pump, but a
| huge across the board pump. Of course, if wages also
| reflect that increase, then there's not much of a
| problem. But what we're facing today is massive
| unemployment, and a massive amount of money sitting un-
| touched in banks, sometimes with negative interest.
| Negative interest plus more inflation equals less
| purchasing power for you either way you try to argue. So
| what we're witnessing now is a massive transfer of
| wealth. The only thing most normies can hope for, is a
| higher price on Doge.
| lottin wrote:
| M2 is a measure of the money supply. There are different
| measures of the money supply, which roughly speaking are M0
| (cash), M1 (M0+current accounts), M2 (M1+savings accounts)
| and M3 (M2+money market instruments). The fact that they have
| divided M2 by the population seems a little strange, but
| basically the graphic shows the amount of "money"
| (cash+current accounts) per person over a time period in the
| US.
| SigmundA wrote:
| Per Capita is a pretty common way to normalize a statistic
| to account for population growth / change right?
| lottin wrote:
| Yes, but the money supply is rarely reported in per
| capita terms. (It's not that it doesn't make sense, it's
| just unusual.)
| nabla9 wrote:
| That hockey stick is neutralized by reverse hokey stick.
|
| Velocity of M2 Money Stock/Population
| https://fred.stlouisfed.org/graph/fredgraph.png?g=DPfD
| [deleted]
| crb002 wrote:
| https://fred.stlouisfed.org/graph/?g=DPg0 <-- I added the
| population velocity.
| nabla9 wrote:
| It should be Velocity of M2 Money Stock/Population
|
| not Population/Velocity of M2 Money Stock like you did.
| hogFeast wrote:
| I have no idea why so many people quote velocity but it is an
| output, not an input.
|
| Saying that velocity is falling when supply isn't interesting
| or relevant. The question is whether supply is growing in
| excess of demand (as ever).
| XorNot wrote:
| Because money which isn't spent doesn't contribute to
| inflation. It _might_ contribute to inflation, but prices
| don 't increase in reaction to possible buyers, only actual
| buyers (or the expectation of actual buyers, but that's a
| short term effect since if the customer doesn't materialize
| you've still got bills to pay).
| sbelskie wrote:
| You're correct that the recent uptick is unprecedented, but
| given that the other graph (shared by Nobel prize winning
| economist) shows no stable relationship between M2 and
| inflation, why does it matter? He might be wrong and you might
| be right, but that graph alone doesn't tell that story.
| lottin wrote:
| These morons are trying to pump a certain crypto-token by
| instilling inflation fears, but since inflation has been a
| non-issue in the US since the 1970s, they are now trying to
| shift the focus to the money supply as if it had any
| relevance at all.
| crb002 wrote:
| M2/Heavy Truck Sales. Note the huge growth inside a recession
| of money chasing an industrial sink.
|
| https://fred.stlouisfed.org/graph/?g=DPfB
| treeman79 wrote:
| Didn't see healthcare.
|
| My dads carefully planned retirement was ruined because he never
| imagined how expensive it would get.
|
| I pay 1400 a month for a family. Still doesn't cover a lot.
| spaetzleesser wrote:
| And even if you are insured there is a good chance that a
| serious illness will eat up your retirement savings.
| huitzitziltzin wrote:
| Healthcare is a component of the CPI, outlined here:
|
| https://www.bls.gov/cpi/factsheets/medical-care.htm
|
| Since I am a health economist, I can tell you that it is
| subject to many of the same problems other goods face: prices
| increase and this is generally observable (though much harder
| in healthcare than other areas!), while quality improves all
| the time but measuring quality is quite hard, perhaps also
| harder than in other classes of goods.
| okoslaatoo wrote:
| I upvoted you.
| david-gpu wrote:
| Please be aware of the HN guidelines [0]. For example,
|
| > Please don't comment about the voting on comments. It never
| does any good, and it makes boring reading.
|
| [0] https://news.ycombinator.com/newsguidelines.html
| lotsofpulp wrote:
| I have no idea how families that earn less than $100k are
| saving enough money for healthcare expenses / loss of income in
| their years between 50 and 65 (or whatever age Medicare will
| start at in the future).
|
| Unless you have a cushy government job with those benefits or a
| high paying white collar job, those years are the most likely
| for you to lose income due to age, health reasons, etc and any
| new job you get probably won't have any benefits, or decent
| ones.
| lupire wrote:
| They aren't. That's what the "tax the rich" stuff is all
| about.
| okoslaatoo wrote:
| inflation 150 years is not enough history. inflation is part of
| game theory.
| hogFeast wrote:
| You should use 150 years across multiple countries i.e. 150
| years * N countries.
|
| In-sample annual probability of Weimar is well under 0.5% so it
| is still a tricky topic to reason about even if you have a
| bigger sample.
| kebman wrote:
| Don't make it more complicated than it actually is, or you'll
| end up like Erasmus Montanus. The causality of hyper-
| inflation is a pretty simple principle to understand. And the
| effects are visible. I was there, in pre-war Yugoslavia, when
| my mother cashed in 1000 NOK for what to my 12 year old eyes
| looked like Scrooge McDuck amounts of Yugo Dinars. We had to
| get extra bags to carry it all. Meanwhile everywhere we
| turned, people were in despair because all value was
| evaporating. And what was left over, was heavily rationed.
| polskibus wrote:
| Please elaborate and /or share some links for someone
| interested in this angle.
| nabla9 wrote:
| >My base case going forward continues to be that with the
| combination of sizable broad money supply growth, along with
| public opinion pushing the pendulum back away from globalization,
| consumer price inflation is likely to be higher in the 2020s
| decade than in the 2010s decade.
|
| The biggest news is that Fed changes its inflation targeting
| goal. It's now average inflation targeting 2.0%. This means that
| Fed allows inflation run above 2.0% for some time until average
| matches the goal.
| cortesoft wrote:
| I've wondered what the effect our modern digital economy has had
| on consumer price inflation.
|
| Normally, an increase in money supply would cause consumer goods
| to increase in price, since more people are able to buy them and
| there is a limit on how much of any particular physical good is
| available.
|
| This isn't the case, however, for digital goods. If there are
| suddenly 100 million new people who want to buy a Netflix
| subscription, it isn't like we are going to see the price of a
| Netflix subscription go up because there isn't enough Netflix to
| go around. The marginal cost for a new subscriber is practically
| zero, so there should be no price increase caused by a shortage.
|
| It would be easy to see that inflation would be essentially zero
| if ALL goods people wanted to buy were digital ones... no amount
| of demand can eat up the supply, since supply is practically
| infinite.
|
| Of course, in the real world, some goods are digital and some are
| physical. If you gave everyone $5000, some of that would go to
| Netflix subscriptions, which wouldn't effect consumer prices, and
| some would go to buying TVs to play Netflix on, which WOULD cause
| inflation.
|
| I am curious how much of our current "low inflation even with an
| increasing money supply" is caused by our increasing spending on
| non-exclusionary goods.
| bob33212 wrote:
| We are entering a Post Scarcity Economy. A lot of fiction books
| write about how this plays out. Regardless of what happens a
| lot of economic theory becomes less relevant.
|
| https://en.wikipedia.org/wiki/Post-
| scarcity_economy#:~:text=....
| spaetzleesser wrote:
| Post scarcity only for certain things. Things like living
| space are becoming scarcer and more expensive.
| klipt wrote:
| Living space in rural areas is cheap. Living space near
| good jobs is what's scarce.
| david_dan wrote:
| 'Living Space' is also an illusion.
|
| In a near perfect VR world, (which we will achieve during
| singularity), everyone will have infinite 'living' space
| tomrod wrote:
| We still have to pay for food, shelter, transportation,
| clothing, and other physical things.
|
| Our inner world is richer, and we consume non-decreasing goods.
| But everything is tied to something in the physical world, even
| if it's the hardware and energy running it.
| cortesoft wrote:
| Right, which is why the "100% digital" world was just a
| thought experiment.... we don't live in that world, but we do
| live in a world where an increasing percentage of our money
| is spent on non-exclusionary goods.... that has to have an
| effect on inflation.
| david_dan wrote:
| Nope.
|
| Every Physical atom in the universe is nothing but Energy.
|
| The universe itself has infinite energy.
|
| So, in a Singularity World (where Robots produce everything,
| including other Robots), the marginal cost for everything
| (like Netflix videos) will collapse to $0.
| pessimizer wrote:
| > If there are suddenly 100 million new people who want to buy
| a Netflix subscription, it isn't like we are going to see the
| price of a Netflix subscription go up because there isn't
| enough Netflix to go around.
|
| No, it would go up because they would make more profits with
| fewer subscribers and a higher margin.
| dntrkv wrote:
| Economies of scale dictate the opposite.
| gruez wrote:
| >I am curious how much of our current "low inflation even with
| an increasing money supply" is caused by our increasing
| spending on non-exclusionary goods.
|
| Not much? Based on the CPI weights given by the BLS[1] at least
| 82.238% of the CPI is from non digital goods. This is based on
| summing up the top level categories which are definitely not
| digital, ie. Food and beverages, Housing, Apparel,
| Transportation, Medical care. If you drill down into the
| remaining categories (Education and communication, Recreation,
| Other goods and services) and eliminate non-digital goods from
| there you can probably get that percentage even higher.
|
| [1] https://www.bls.gov/cpi/tables/relative-importance/2020.htm
| cortesoft wrote:
| Yeah, that doesn't say how much of actual consumer spending
| goes into the goods that are included in the CPI. Even if the
| CPI were based 100% on non-digital goods, the percentage of
| purchases that go towards CPI goods could be falling.
| vmception wrote:
| These organizations would be expected to have some marginal
| cost increases from running data centers and physical hardware
| cost increases and they would calculate passing these on to
| consumers. Or as an excuse to. But I guess that is covered by
| your example and understanding that their physical costs being
| non-digital goods. So, fun thought exercise.
| cortesoft wrote:
| Yeah, that is why I intentionally said "practically zero"
| instead of actually zero, because there are some marginal
| costs. They are just orders of magnitude less than what they
| are for physical goods.
|
| But yeah, I am just curious how that math all works out on a
| macro scale.
| itslennysfault wrote:
| This is a good point, and there is also no finite limit
| which is what typically makes the supply and demand machine
| go brrrrrrrr.
|
| Netflix pays some % of their monthly subscription fee for
| servers. The amount really doesn't matter, and they can add
| the entire planet as subscribers before running out of
| servers so the supply is infinite for all practical
| purposes.
| alex_smart wrote:
| >The marginal cost for a new subscriber is practically zero, so
| there should be no price increase caused by a shortage.
|
| Yeah, I don't think that that argument works at all. The price
| does not increase due to "shortage", it increases due to an
| increase in consumers' willingness to pay. Going by the Netflix
| example, if Netflix realizes that not too many people will
| cancel their subscriptions if they were to increase the price
| by, say, 1 dollar, they would certainly increase the price.
|
| Consumers' WTP is the reason why digital goods are priced
| differently in different markets. Many digital goods are sold
| for much cheaper in India compared to developed countries
| because the Indian market is much more price sensitive. For
| instance, Netflix costs only about half as much in India as it
| does in America.
| lupire wrote:
| Businesses charge what customers are willing to pay. If they
| have more money, they are willing to pay more. Competitiuis the
| countervailing force, but Netflix has exclusives and serials
| and network effects (fandoms and friends)
| cortesoft wrote:
| Sure, but that doesn't say anything about inflation.
|
| The standard formula for profit is (units sold * price per
| unit) - (fixed costs + marginal costs * units sold)....
| Netflix, like every other company, wants to maximize that
| profit.
|
| For most non-digital companies, the marginal cost is
| significant, and follows a u-shaped curve... at first,
| marginal costs decrease as you sell more units, since you can
| get intermediate goods for cheaper prices as you buy in bulk.
| At a certain point, however, the marginal price starts
| increasing again as you start to hit various bottlenecks and
| intermediate goods start becoming more expensive as you
| consume all the easy to produce supply. In other words, you
| can't scale linearly.
|
| Digital goods have a much flatter uptick on that marginal
| cost graph, and I am very curious what that means at the
| macro economic level.
| alex_smart wrote:
| It means that in your formula, the (units sold * price per
| unit) term dominates the profit formula. So, the price is
| mostly determined by the consumer's willing to pay.
| echelon wrote:
| Downsides aside, won't inflation help exports and keep USD-
| denominated trade attractive?
|
| It's not like we're the only economy suffering. We might be doing
| the best of the whole lot.
| kebman wrote:
| Well, the ECB is _also_ printing, and the overseas cooperation
| is pretty good. But it 's still visible on the currency charts
| that something is going on. Just go to Trading View and have a
| look. Also compare when money printing started after the "Rony
| Crash" in March 2020, and when a lot of stocks, commodities,
| and not least Bitcoin started mooning like crazy soon after.
| What you're witnessing is a giant transfer of wealth.
| nradov wrote:
| Inflation only improves the balance of trade if we inflate
| faster than our trading partners. Lately many countries have
| been engaged in a competitive currency devaluation race to the
| bottom.
| kebman wrote:
| Well, since March 2020 the Euro has increased in value to the
| US Dollar.
| banbanbang wrote:
| Find it comical that Wall Street and Fed are keeping gold muted
| while everything else has gone parabolic. Tells you where their
| priorities are in this cycle.
| lotsofpulp wrote:
| Good article with lots of data. I would like to see data on price
| increases by category of household expenses broken down by metro
| region of the US going back 3 or 4 decades.
|
| I feel like nationwide statistics are not very useful once the
| gap between certain regions gets so wide.
| devops000 wrote:
| After talking so much about inflation we will surely have
| inflation. It's a self-fulfilled profecy. I am going to issue a
| debit.
| JKCalhoun wrote:
| Curious about the yacht pictured in the article. Appears to be
| owned by the Emir of Qatar.
| anm89 wrote:
| So awesome to see Lyn Alden at the top of Hacker News. She is an
| absolute genius!
|
| If you aren't familiar with her work and thinking I think a good
| introduction interview is:
| https://www.youtube.com/watch?v=f_JmGLMjIOk&t=35s
|
| Fun fact: She is an electrical / industrial engineer by trade,
| not an economist.
| deanak wrote:
| So far it's a lot of words and graphs with a tenuous grip on
| reality in a few places:
|
| > There are, however, some groups in lower income brackets that
| do poorly in inflationary environments. If someone doesn't have
| a lot of money and lives on a fixed income in retirement, they
| have a lot of vulnerability to inflation. Those sorts of folks
| should consider owning inflation hedges to protect their
| lifestyle, if they expect that high levels of inflation have a
| reasonable probability of occurring.
|
| If you think someone in a low tax bracket on fixed income has
| the spare money to invest in anything, you're not understanding
| the words "low income" or "fixed."
|
| > Capital had political control from the late 1800s through the
| 1920s. Labor had political control from the 1930s through the
| 1970s. Capital again had political control from the 1980s
| through the 2010s. I'm not sure what's next but signs are
| increasingly pointing towards labor regaining some influence,
| and it's a topic I continue to monitor.
|
| What?
| xyzzyz wrote:
| > If you think someone in a low tax bracket on fixed income
| has the spare money to invest in anything, you're not
| understanding the words "low income" or "fixed."
|
| The low fixed income often _comes_ from investment. For
| example, you save money in 401k, then as you near retirement,
| you shift investments into safer instruments ie. bonds. The
| result is exactly low fixed income and vulnerability to
| inflation.
| silexia wrote:
| I agree. I made a great bet at the beginning of the pandemic,
| but then the Fed hurt me with it's quick action. I didn't
| understand macroeconomics, but Lyn Alden has really helped me
| understand it better with her long form articles.
| vmception wrote:
| I wonder if the Court of Claims would cover trading losses
| from the Fed's actions
|
| I should look up the judges to get a feel for their
| predilections
|
| I wanted to see S&P 12,000 for a moment
| sbelskie wrote:
| How would the Fed fulfilling its mandate give anyone a case
| for recovering their trading losses?
| vmception wrote:
| A different part of the Federal government has a mandate
| of paying people harmed by the Federal Governments
| actions.
|
| Just make the argument and see.
|
| Google Scholar has all of that court's cases online in
| plain text.
| sbelskie wrote:
| But if the government raises taxes you don't get to sue
| for lost expected income (absent some specific
| extenuating circumstances), do you?
| jbay808 wrote:
| I really liked her article on understanding Japanification,
| which I probably found linked from HN too. I'd never heard of
| her before but I immediately added her to my favourites.
|
| https://www.lynalden.com/economic-japanification/
| RickJWagner wrote:
| So many factors going in right now...
|
| Government printing money nonstop. Material shortages (real and
| manufactured). Demands for increased wages.
|
| It's going to be a bad time to be on fixed income.
| omalleyt wrote:
| Time to buy gold.
___________________________________________________________________
(page generated 2021-05-09 23:00 UTC)