Set this theory against the fact that there was zero net inflation in the US from 1800 to 1914, and endemic inflation since. What changed in 1914? The US switched to a fiat money system.
Clearly, it has something to do with fiat money.
(The Revolutionary Government also had massive inflation, and the Confederacy, too. What characteristic did they share? Fiat money.)
If shortages caused inflation, then one would expect to see corresponding deflation when those shortages eased. But that doesn't happen.
The 1800s were hardly an economic paradise though, the wild inflation/deflation cycles were destructive. Long-term stable, 2-3% inflation appears to be a good thing. It's not overly destructive to savings, but it's an incentive to invest in something productive in the long-term.
Deflation does occur when shortages ease in those sectors (see oil & gas prices), but inflation due to shortages does increase the general price level (including wage prices) and there is a degree of 'price stickiness' in the economy (workers generally don't get pay cuts - layoffs are easier perhaps) so the higher price level remains. You might expect below average inflation in the short term, but inflation expectations probably linger to some degree.
Deflation occurred on the gold standard, as prices are not that sticky. Besides, a general price increase doesn't occur without an increase in the supply of money relative to the value in the economy. That doesn't happen unless the printing press is run.
> The 1800s were hardly an economic paradise though, the wild inflation/deflation cycles were destructive.
Every one of those was caused by government meddling with the currency.
Why is 9% inflation (what we have today) not destructive? It certainly is destructive to my finances.
> a general price increase doesn't occur without an increase in the supply of money relative to the value in the economy.
It's still entirely possible for the value to vanish rather than the supply of money causing inflation. The disappearance of Russian gas from Western markets, for example. Energy is such a critical input that an energy price increase manifests as a general price increase.
A demand for zero inflation is a demand that $1 now and $1 in a decade should buy you the same amount of gas, which .. will not continue forever.
It doesn't actually require extra physical printed money? Have you heard of "petrodollar recycling?"
The money can come from a shift in the debt/savings profile, in the reallocation of business investment, or a shift in the demand for speculative assets. It's not really a coincidence that as the fuel price has gone up the gold price has gone down not up: https://goldprice.org/gold-price-history.html
There's a big spike around 2020 for inflation fears, but the gold price doesn't track the price level numbers in ways that hard money fans want it to.
> Besides, a general price increase doesn't occur without an increase in the supply of money relative to the value in the economy.
Not quite true, they are correlated but not linked 1:1 see 2020 and WW2. Think of economics a bit like the dual nature of light, not one theory can explain it. The 'Austrian'-school types believe this though, so maybe be where you have heard it?
> Why is 9% inflation (what we have today) not destructive? It certainly is destructive to my finances.
No, I didn't say 9% was good. It obviously reduces the value of savings materially, 2-3% y/y doesn't.
Inflation is not hard to understand. It is always a monetary phenomenon. When the money supply increases faster than the value in the economy, you get inflation (because of Law of Supply & Demand, which no government has yet succeeded in repealing).
The rising cost of gas does not cause inflation, because when gas prices go up, you have less money to spend, and hence other prices come down.
I'm guessing the underlying point both of you are making, re: 2-3% vs 9% you is that it's inflation... set against popular access to investments that meet or exceed that rate.
I don't mind 3% inflation, when I have low-risk investments that earn >3%.
I do mind 9% inflation, when my low-risk options earn <6%.
(To pull some random demonstrative numbers out of a hat)
And I think it's specifically the broadness of access to the sub- or supra- inflation investment opportunity that matters. If only some, limited-access opportunities exist, then it still hurts.
Which I guess is another way of saying economic-growth-vs-inflation is the important metric, with a dash of central bank policy.
In defense of fiat money... it is a powerful tool in the hands of a responsible macroeconomic manager. Emphasis on powerful & responsible.
We have approximately 0% inflation today (at least, the monthly—not the headline 12-month trailing, but the actual amount for the month—number for the last two months has been between 0% and 0.1%; 0% to a little over 1% annualized.)
The 12-month trailing is 8.3%, but it takes a while for the 12-month trailing to reflect current conditions, when there is a change, for reasons explained by the name.
> So whenever monthly inflation goes up, it's transitory, and when it doesn't, there is no inflation.
No, when consumer prices (not inflation) goes up, there is inflation, and when they don’t, as they have not (overall) in the last two months, there isn't. That’s the definition of inflation.
> Meanwhile, prices on a lot of things I buy doubled.
So... assuming that's over a 12-month period, there are some things that you buy that have been affected vastly more by inflation than even the highest overall sector of the CPI (fuel oil, +68.8% over 12 months.)
Not sure what general importance you want assigned to this or why.
The government changes the period of inflation as convenient. When inflation is rising rapidly, they push annual inflation figures. When inflation is moderating, they push monthly figures.
Inflation follows the money printing with a lag of around 13 months. The government just printed a trillion dollars to erase student loan debt. Get ready for another round of inflation. Also the "Inflation Reduction Act", another free-spending bill which will add another chunk to inflation.
> The government changes the period of inflation as convenient.
No, it doesn’t. At least, the present administration hasn't been.
> When inflation is rising rapidly, they push annual inflation figures. When inflation is moderating, they push monthly figures.
The present administration has been fairly consistently focusing on the monthly 12-month trailing figure, which has also been the headline number for, well, ever.
> Inflation follows the money printing with a lag of around 13 months.
Looking at the history of monetary policy changes, QE rounds, and monthly inflation rates, there’s absolutely no support for that at all.
That's just obvious enough that we might have already done it. We might, for instance, have looked at the inflation data 13 months after Q1, Q2, Q3, and Q4. And based on that data, we might have reached conclusions that are spectacularly different from yours.
If you want to convince us, you're going to have to do more than just say "look at the data" and repeat your previous point. Specifically what data are you looking at, and over what time frame, and how do you think it demonstrates your position?
The CPI is not calculated honestly. If you use the CPI tabulation from the 1970s inflation will be way higher than what the current govt statistics from BLS state. For example, Owner’s Equivalent Rent is used, not actual rent that many families are struggling to pay. In addition, the Fed’s core inflation number is ex food and energy prices, which is also misleading.
None of your argument supports that it isn't calculated honestly, just that you don't like the particular choices. And it doesn't help that you misrepresent them.
> For example, Owner’s Equivalent Rent is used, not actual rent that many families are struggling to pay.
Actual rent is used for renters. Owner’s equivalent rent (imputed rent) is used instead of asset purchase costs to assess the consumption cost of housing separate from the cost of acquiring a durable asset for homeowners.
> In addition, the Fed’s core inflation number is ex food and energy prices, which is also misleading.
The headline number is the full CPI, not core CPI. Core CPI is also reported, and may be used for some purposes by certain consumers of CPI data, but it's not the headline figure/main measure, so disagreement with its appropriateness as the main measure is fine, but a beating a strawman.
> For example, Owner’s Equivalent Rent is used, not actual rent that many families are struggling to pay.
This is simply false. Firstly CPI includes both rent and owners equivalent rent, weighted in proportion to the people that rent and own houses respectively. Secondly, OER is calculated based on estimates of current rental prices. Plus of course including OER rather than treating rent as something homeowners don't have to worry about tends to increase CPI when rents rise fast...
> In addition, the Fed’s core inflation number is ex food and energy prices, which is also misleading.
"Core inflation" is a separate time series to the CPI, clearly reported as an alternative measure excluding volatile energy and food prices to compare with CPI.
The only "misleading" is people ranting about how a separate dataset created specifically for comparison purposes proves dishonesty on the part of those calculating CPI...
This is not symptomatic of hyperinflation, it's symptomatic of supply being lower than demand, causing an increase in supply or a decrease in demand, which takes time
Gas isn't the only input into prices. Salaries are up 10% in a year for example.
Changes in costs also take time to filter through the economy, and indeed in the last 2 months prices have come down (CPI in June was 296.311, in August it was 296.171)
Yes, I have. I greedily want to keep as much of my money as I can so I buy the cheapest goods available, sending money to the greedy corporation who offers goods at the lowest price.
This stubborn hand-wavy argument that prices stay high due to greed smacks of economic illiteracy and White House propaganda.
Charging prices the market will bear is considered "hand-wavy" or propaganda now?
If I raise the price of a gizmo I'm selling by 20% because my costs went up, why would I reduce the price when my costs go down but demand is still high? I like my increased profits, and so does my competition. The myth of perfect competition is a exactly that: established companies do not engage in races to the bottom, "cartel" behavior is emergent.
You've cherry-picked 2 outlying low-margin, high-velocity products where there is a race to the bottom. I counter your gas with smartphones, where Apple and Samsung are ratcheting up the price year over year, while competitors like LG are bowed out. Why couldn't LG compete at lower prices, and chose to exit the smartphone market entirely?
How does your perfect competition theory explain why tuition prices have been going up over 5+ decades, vastly exceeding inflation?
> Why couldn't LG compete at lower prices, and chose to exit the smartphone market entirely?
Because Apple keeps making the phone better.
> How does your perfect competition theory explain why tuition prices have been going up over 5+ decades, vastly exceeding inflation?
I didn't espouse a "perfect competition" theory. That's your strawman. Anyhow, tuition prices have gone up because the government provides rivers of cash to prospective students. The pool of students thus has gone up drastically, and because of limited supply of colleges, and vast demand by students with fistfuls of cash (and little sense), the tuition went up. A lot.
Only because energy (which is more volatile) is way down the last two months. What happens when energy swings back the other way? Anyways 0.6% MoM for all items less food and energy is very far from success.
That's not for you to decide. Also, by that logic you should be fine with 100% inflation since it would stimulate the economy like crazy with full spending of everything earned?
During most of human history, before there were banks, "saving" usually meant saving some form of grain from one year to another. More likely, more than that would be lost to rot, virmin or brigands.
Gold did perhaps not decay the same way, but if the harvest was bad one year, the price of grain could go up radically, so saving grain directly was safer. Also, grain was harder to steal.
As society became more complicated, one could pay a goldsmith to store the gold in a vault, though there was still a risk that the gold would be lost to fraud or robbery, eventhough the vault was still probably safer than to store gold in private homes (if you did not live in a castle).
Up until this point, the time preference of money would tend to be negative whenever people were saving. Better to eat normal today and be sure to have enough next year, than to eat double today and maybe starve next year.
Some goldsmiths would lend this gold to lenders, at an interest, and the honest ones would pay the depositors an interest in turn, to compensate for the increased risk. Still, it did happen that banks went bankrupt, and deposits would be lost.
Only in the last handful of generations have governments guaranteed the bank deposits, and only for a limited amount.
Meanwhile we had the industrial revolution, and the population and economy was booming more or less for 200-250 years. This, combined with the growing banking system, caused a positive time preference for money, and people started to expect that saving was not only safe, but should also produce profit, not just safety.
Lately, however, both the economy and population have stopped growing, more or less, and the time preference of money is roughly back to neutral, if not slightly negative.
In such an economy, it simply doesn't make sense to have a currency that allows people, without risk, to "teleport" wealth from now into the future. We already tried that in 1929, with deflation causing mass economic destruction. A lot of savings were still lost when banks went bankrupt.
With a moderate interest rate (ideally around 2%), the economy can handle a somewhat negative time preference for money as much the population gets older and less in need of instant consumption. When the interest rate for deposits is lower than cash savings, the difference can be seen as the insurance premium for relatively risk free storage of value. Those who want a profit (or at least lose less), have to accept some more risk, and invest in other, riskier asset classes in such times.
As long as the interest rate is low, the currency still functions as intended as a medium of exchange and measure of value, while still being tolerable as a short term store of value.
Clearly, though, as the inflation goes to 10% and beyond, all features of the currency are hurt.
But next time you're annoyed that your deposit falls in value about 2% in a year, just imagine how it would be if you were saving grain in a silo, and found that the rats had been eating half of it.
I'm sorry, but this is just another gobbledygook non-explanation of why inflation is good for the economy, such as:
> it simply doesn't make sense to have a currency that allows people, without risk, to "teleport" wealth from now into the future.
Your explanation of banking is incorrect, too. Banks pay depositors to deposit money, because the bank makes money on those deposits by loaning the money out (banks often give away things like toasters and even guns to attract depositors). Some of that is in the form of a service ("free checking"). Larger amounts of money, the bank will pay you interest.
Depositing money in a bank is literally loaning it to the bank, and the depositor expects a return for that. Loaning money for interest goes back to the very beginning of money.
What inflation actually is is a tax on money, and that tax revenue is collected by the party that is inflating the money (i.e. the government). It is not good for the economy any more than any other tax is.
You could argue that taxing money is a reasonable way for the government to raise money, and that would make sense.
> Larger amounts of money, the bank will pay you interest.
Adjusted for inflation, I doubt there is a single depositor in the western world that receives a postive interest rate this year.
> Depositing money in a bank is literally loaning it to the bank, and the depositor expects a return for that. Loaning money for interest goes back to the very beginning of money.
Again, adjusted for inflation, even banks receive a negative (real) interest rate these days. The only way for them to create real profits this way, is to make sure the depositors loose more real purchaing power through their deposits and they do through their lending.
> What inflation actually is is a tax on money, and that tax revenue is collected by the party that is inflating the money (i.e. the government).
This is partially true, but oversimplified. Only if ALL the inflation is due to money printing can this be considered a tax, in that it is a transfer of purchasing power from the populace to the government. And even then, negative money (debt) get a negative "tax".
For the part of inflation that is caused by changes in supply or demand, but unrelated to money printing, the government is not benefitting from the inflation, and may even end up losing. And this is the kind of situation where inflation is needed to even out real changes in the economy.
Also, nobody is forced to store their wealth in a currency. And I actually think it is a good thing that people have an incentive to do long term storage of wealth in real assets, whether those are real estate, stocks or even commodities such as gold and silver, if you're longing for the gold standard.
The true fallacy is when people expect more from a currency than is possible. Currency is not real wealth, only some kind of representation of a debt that some anonymous other must pay in the future. A gold bar, house or a company, THAT is real wealth.
And corresponding deflation which netted out to zero.
Two interesting periods of inflation were during the California gold rush, and the Yukon gold rush. It turns out, when gold is the currency, flooding the market with newly mined gold causes inflation, just like fiat money printing.
"It was valued at 12,500 korona, and defined as 3,800 to one kilogram of fine gold – which meant that the pengő was pegged to the gold standard, but without exchange obligation."
Which means it can be inflated at will. The US did the same thing, pegging the dollar to gold, then inflating the paper money. The result was fiscal collapse leading to the Great Depression. The fix was to make it illegal to exchange dollars for gold, making the "gold standard" a complete fiction.
I think you are conflating a few things. What you have to remember with the gold standard is that the supply (or probably more correct, holdings) of gold determine the money supply when a gold standard is in place, as does the price of gold (the conversion rate). A reduction in the money supply (fear of deflation, leading to bank runs) and a massive withholding of production are generally the two key events cited as causes of the Great Depression. The later being the reason for the massive public works programs of the time were started.
The inflation of the US currency happened much later. Roosevelt banned private holdings of monetary gold and gold certificates, incentivized gold imports and gold production which lead to the inflation. That was nearly 5 years into the depression though.
> supply (or probably more correct, holdings) of gold determine the money supply when a gold standard is in place
It does not when the money is not convertible to gold. Such is a fictitious gold standard.
The bank runs in the Depression were caused by inflation devaluing the value of a dollar by about half since 1914, yet was still convertible to gold. People suddenly realized they could DOUBLE THEIR MONEY by converting their paper money to gold. So they ran to the banks to do this. Of course, there wasn't enough gold to support that, and the banks collapsed. The runs did not stop until FDR made it illegal to exchange dollars for gold.
> The inflation of the US currency happened much later
Check the historical inflation figures. The dollar lost half its value 1914-29.
You need to re-read your history. European nations suspended the Gold Standard in 1914 due to the buildup related to WWI...but the U.S. did not. And we still had 100% inflation. In fact, the U.S. remained on the Gold Standard until 1933, and being on the gold standard did not prevent the Great Depression or decades of inflation. In fact, it played a large part in making it a "great" depression instead of just a regular downturn, and getting off the gold standard was what ended the Great Depression.
Similarly, everything you've said about the Great Depression is completely wrong. It was caused by a stock market crash known as Black Tuesday, which was the result of rampant speculative trading on margin. After a series of relatively small dips, a number of investors faced margin calls and had to sell their shares. A few of them decided to liquidate all of their stock holdings, triggering a 12.8% drop in the Dow (Black Monday), which led to many more speculators panic-selling the next day (Black Tuesday).
I recommend you read "Monetary History of the United States" by Friedman. I have.
We've had stock market crashes before and after. None resulted in a Great Depression. Something else was going on to cause the Depression.
The 100% inflation from 1914-1929 indeed was not prevented by the gold standard, but in 1929 people realized they could double their money by converting their dollars to gold. This caused the bank runs which did not stop until all gold exchanges were stopped.
The gold standard ended in 1933, the Depression did not begin to end until 1939 when foreign countries flooded the US with armaments orders.
What the US did in 1914 was called "pegging". It wasn't really a gold standard, the fiat money was just pegged to gold. Pegging has been tried over and over throughout history, a sham that tries to inflate money while pretending not to. It works for a while, and then always results in a massive and destructive correction. The US's correction was the Great Depression.
I've read that book. My professor suggested using it as toilet paper after we were done, and I agreed with him.
The Great Depression bank runs were not caused by people trying to swap their cash for gold. Because you couldn't...after 1913 banks generally did not maintain their reserves in gold, and they certainly did not maintain local reserves in gold. At best you could get a promissory note for a representative amount of gold. The fiction that you could actually swap out cash for gold is one of the more bizarre historical conspiracies.
The bank runs stopped because the FDIC was created in 1934 to guarantee depositors' savings accounts. Until then, depositors risked losing their savings when a bank collapsed, which is why bank runs were a thing.
That first theory doesn’t hold because ancient empires such as the Romans did suffer a form of inflation. They just didn’t know what it was when they kept devaluing their currency.
They didn't have that word for it, but they would for instance talk about debasement for instance with putting base metals inside the coinage metals, the precious metals suitable for making coins. Although for sure some Romans used the word puffed up like a leather bag full of hot breath to hunt whales (one poet talking about whale hunting in the time of Marcus Aurelius). It's irrelevant. There's the same thing happening, the pauperization of the middle class, tipping the scales. They knew.
>they often think it is just a case of governments printing too much money.
The exorbitant banknotes we see in this collection are more like each government's response to inflation once it has gone completely out-of-control.
In some sense they are trying to arrest the free-fall at an artificially imposed numerical point, by basically normalizing the losses already incurred up until that time.
Just goes to show how much easier it can be to manipulate the value of fiat currency compared to coin of stored value.
Seems like when stocks & bonds are denominated in fiat currency, in order for the securities to maintain their relative value, whilst maintaining volatility within tolerable ranges, the only direction for the currency to ever trend is being downward in value by comparison.
When stock certificates represent overwhelmingly more stored value than their equivalent in legal tender, that's not when you're going to have the most prosperity overall. This is not the way free enterprise started out.
We recovered well from that most recent devaluation is something that no ordinary wage earner said ever.
Fiat money seems like the result rather than the cause. As nations start to draw down their gold/asset reserves, it makes sense to switch to a fiat currency.
Clearly the cause is too much money out and not enough money in to government coffers rather than fiat.
Governments prefer fiat money because they can print all they want without raising taxes. And that's what they've always done with fiat money, going back to the invention of money. It always results in inflation.
The reason nobody believes this is because of extremely effective propaganda emanating from every government that prints fiat money. The "Putin Price Hike" is the latest in a long string of lies about what causes inflation. (Inflation was at something like 7% before Putin's War started.) Of course, "the speculators, gougers, and profiteers" are always blamed, too.
I think we’re getting into conspiracy theory here. You’re arguing that $fact, and the only way $not-fact is argued is propaganda. This means any person who might have a reason to argue for $not-fact is by default a propagandist. There’s no productive conversation to be had from this.
The productive part is realizing you've been flim-flammed. There's no other explanation for the government narrative to completely avoid the truth. Every fiat money government does this - it's not a conspiracy, it's just that it's in their best interests to blame inflation on speculators rather than their own profligate printing of money.
I've presented many facts to support this. Economists know it, too. Study it and you'll see for yourself.
Another part of the flim-flam is the government is always trying to promote the idea that inflation is good for the economy. Read their explanations. It's all nonsense.
Right but it is government spending beyond that nation's means that is the root cause.
The Greek debt crisis was a great example of this, since they couldn't directly control the printing of the Euro, they were forced instead to siphon money directly out of citizen bank accounts to service the national debt.
You could imagine the same thing happening with a nation on a gold standard. In fact the US did something similar in requiring all citizens to deposit their gold holdings. Inflation of a fiat currency is just one of the many ways in which governments can 'tax' citizens to pay for government spending.
Fiat money is as old as currency itself. Greek and Rome coin values did not correspond to their intrinsic metal content (at least not within their boundaries) and they were regularly debased. The Chinese used bronze coins and paper as currency.
Clearly, it has something to do with fiat money.
(The Revolutionary Government also had massive inflation, and the Confederacy, too. What characteristic did they share? Fiat money.)
If shortages caused inflation, then one would expect to see corresponding deflation when those shortages eased. But that doesn't happen.