Inflation

[cthulu2016]

Of all the dangerous RW ideas current today, it seems that the one most often held by otherwise progressive persons is the belief that the US is currently facing inflation or has any significant danger of facing inflation any time soon.

This is a deep, deep RW idea... something etched deep into our national consciousness through generations of political propaganda. And it is a deadly idea.

First, gas and milk. The price of gas and milk (and some other foodstuffs) have gone up a lot over the last few years. This is, however, not inflation. It is the price of a few commodities going up in the face of global supply and demand factors, while other commodities go down due to global supply and demand factors.

These price increases are particularly hurtful because these are things people need (Along with price-rising higher education and healthcare)

The reason the price of gas hurts so much is precisely because it is NOT inflation, and there's an easy way to check—if it were inflation your paycheck would be bigger.

Inflation is a broad and usually self-fueling decrease in the value of money. EVERYTHING goes up in price, including labor. The classic wage-price spiral.

Here is why there's no inflation without rising wages. You work at a mattress store. You spend $300/week. $20 of that is gas. Now the gas component goes up to $40/week. You are spending $20 less on something else. At first people might take $20 from savings or borrow that $20 on a credit card but eventually it must come home to roost. That extra $20 for gas reduces your demand for everything else by $20/week.

There is something you are no longer buying, and that something is dropping in price as demand decreases. It just happens to be something you don't need as much or as often as gas. Because gas is so vital people around the world keep bidding it up while other sectors of the economy (like the value of your house) sink and sink.

You go to your boss and say, "I need an extra $20/week." He laughs. First, with high unemployment you can be replaced, and maybe for less. Second, your boss doesn't have any spare money unless he is selling gas. In fact, the mattress business is down and his profit margins on mattresses are being eroded by the price of gas which he has a hard time passing along because overall demand is way down.

In a real inflationary environment your boss would be selling mattresses for more money because everything is more expensive and he will give you that raise because he can afford to and you'd be hard to replace because the labor market is tight.

So now you can afford the increase in gas without cutting back (and forcing the price down) on something else.

Inflation is not prices going up, it is the value of money going down. Everything a dollar can buy is more expensive because the dollar is less valuable.

Since people of modest means run on tight budgets we have come to think of inflation as hurting the poor and lower income. But in the big it really does not. The great 20th century relative gains (adjusted for inflation) in worker standards of living occurred in inflationary environments. The erosion of those gains occurs in relatively deflationary environments.

Why do all RWers fret about inflation? Why do they preach it? It surely isn't because they have good economic ideas or care about the average worker.

And, as with so many things, they preach inflation despite the facts. A bank will lend you money for 30 years to buy a house at about 4% interest per year. The bank is making a strong bet that we are not now and are unlikely to see high inflation. The US can seel, all the bonds we want at about 3% interest. Again, are the people buying those bonds just too stupid to see all the inflation right around the corner? No. They see a world that is the opposite of too much money chasing too few goods, and no obvious way that consumers are going to get their hands on more money any time soon.

Again, inflation is a decrease in the value of money. Who does it hurt most? People with stockpiles of money. Inflation makes idle capital decrease in value every day. Inflation also makes all owned debt less valuable. Your bank lent you $100,000 at 4% to buy a house. If inflation goes up to 8% the bank is screwed. You won the bet and get to pay off your house with dollars worth a lot less than they were worth when you committed to repay the loan.

The very richest people lose out most from inflation and that is why they have do 24/7 propaganda to make people fear it... even though everyone with a large fixed interest rate debt, like a mortgage, should be praying for it.

Recap: The higher prices we see on necessities are due to some institutionalized gouging on some things we cannot do without (health and education) and normal global price competition on commodities that China and India are using much more of than they used to (energy, meat, metals) and it is very difficult on working people because it is not systemic inflation because wages are not going up and will not ever go up (across the board) as long as there is high unemployment.

[NMDemDist2]

1. kickety and +1 n/t

[xchrom]

2. i would inject 2 things into your thoughts -- 1st there has been a war -- a very real war

on 'wage inflation' since the carter years.

the 'elites' in both political parties have waged this war -- the differ as to how extreme.

the 2nd is that we have developed an economy where people will lend you money or credit to make up for the fact that your paycheck doesn't keep up w/ the basics of living -- i.e. bread & gas.

[cthulu2016]

3. Yes to both, but #2 is probably lesser

On the first point, the story of the economy begining in 1929 is clawing out of defaltion into a steady inflationary environment from WWII-circa 1978-1982 (with real advances for workers) and then a decline in inflation expectations from 1980 onward, which was ultimately the proximate cause of our current depression-minor. (Since the Fed had no power to stimulate the economy in the way it always had before because even our "high" rates were flying so low.)

There's a chart of T-bill rates from 1930 to today that is an amazingly clear pyramid... up, up, up to 1980, down, down, down every since.

And that period has been the period when financials became the biggest sector of our economy. No coincidence.

The second point is quite true and I alluded to it in the OP, though glancingly -- that people can take from savings or borrow to cover the missing demand caused by isolated commodity increases. And there are countless individual tragic stories to be told.

But there are practical limits, and those borrowing to buy gas will eventually go bankrupt (or face severe austerity), decreasing net demand even more than if they hadn't borrowed. And net consumer debt is down, so there does seem to be counter-austerity among those who can afford to cut-back. Across all consumers the role of debt in defraying lost demand from food, energy and healthcare is not major, but it does smooth the imediacy of the price effects. (And is unmitigated disaster for many individual households.)

[xchrom]

4. consumer credit was down -- unitl last month.

http://www.marketwatch.com/story/retail-sales-key-to-us-economic-recovery-2012-02-12

WASHINGTON (MarketWatch) — If the U.S. economy is to continue to chug along, consumers will have to take the lead.

The retail-sales report for January, which tops a busy week of data, will show whether consumers are still spending at elevated levels. Higher spending in the late stages of last year helped boost growth entering 2012 and gave fresh hope that the economy has turned a corner.

The closely followed retail report will be issued Tuesday morning. Also on the docket are reports on manufacturing, home construction and inflation. In addition, the Federal Reserve will release details of its last big meeting to discuss the economy.

Economists surveyed by MarketWatch predict retail sales jumped a sharp 1% last month, which would mark the biggest increase since September. Retail spending minus the auto sector, whose sales have been surging, is expected to rise 0.7% Read MarketWatch Economic Calendar.

Consumer spending accounts for more than two-thirds of U.S. economic growth, so such a large increase would bode well for the first quarter and perhaps beyond.



*** carter/reagan remains the line drawn in the sand on wages.
even volker -- if memory serves was against the 'wage iflation' we were experiencing.

squeeze on wages -- and ANY increase in bread and milk makes for difficult time for 'consumers.

http://econompicdata.blogspot.com/2012/02/consumer-credit-on-rebound.html

Consumer borrowing in the U.S. rose more than forecast in December, driven by demand for auto and student loans.

Credit increased by $19.3 billion to $2.5 trillion, Federal Reserve figures showed today in Washington. The gain topped the $7 billion median forecast of economists surveyed by Bloomberg News and followed a $20.4 billion advance the prior month.

Consumers “are willing to take on this debt because there is some increasing degree of confidence in the economy,” said Ken Mayland, president of ClearView Economics LLC in Pepper Pike, Ohio, who projected credit would climb by $15 billion, the highest in the Bloomberg survey. “Consumers over the past several years have done a pretty good job of repairing their balance sheets.”

I've been waiting for a private sector balance sheet to step in for the government's balance sheet for a while now and although I wish it were corporations rather than individuals, this isn't so bad. The reason being that about 40% of the two month jump in consumer credit ($16 billion of the $40 billion) has been consumer credit in the form of student loans, which to me is an investment rather than a loan simply buying more crap.

Over the past twelve months, consumer credit excluding student loans is still negative in nominal terms (down quite a bit relative to personal income), which means the consumer (excluding students) have still been in balance sheet repair mode. But, this is likely to flip positive in year-over-year terms next release, which would be good for the short-term recovery. Longer term we need corporations to step to the plate and hire, which would allow consumer credit to shrink as a percent of personal income, even if it grows in nominal terms.





*** i believe we essentially agree

[cthulu2016]

5. Fair enough

re: The Carter/Reagan racket -- I never understood the excitment over Volcker being an Obama advisor. He is a hero to financeers for "wringing inflation out of the system" once and for all but I never got the attraction.

He was a Carter appointee. I guess that's all it takes.

Meanhile, I think Bernanke has done about as good a job as any real-world Fed chair would have been likely to do but he was a Bush apointee so he's the devil.

Paul Volcker decided to make unemployment in the US 10%... a volitional act. One can wonder whether that was the right or wrong thing to do, but it makes we wonder why we focus on weighty decisions and raw uses of power like Truman dropping the A-bomb while just kind of accepting as unremarkable that an individual decided to plunge America into the deepest recsssion since the depression as an experiment in inflation dynamics.

[xchrom]

6. I wish I could say you were wrong.

Correct me if I'm wrong - but isn't it in the 80s that we see the emergence of the algorithms that we all seem to dance to today?

That seems to accompany the inflation bogeyman.

[cthulu2016]

7. In precipitating the 1981-1982 recession

the Fed really went for broke, jumping rates more than was strictly nessecary. They (or he, since it's a unilateral decision of the Fed Chair) were probably a little surprisied by the intensity of the results and slammed rates down in equally dramatic fashion, provoking "Morning in America"

Coming out of that jolt the markets didn't believe it at first and mortgage rates in 1983 were something like 12-15% despite the fact that we would never see real inflation again (as of this writing)

As to exactly how it was that inflation never returned from that mega-recession, I'm sure there are 1,000 valid factors and policies (support for most of them driven by the recent memory of the late 1970s, which was memorable. Everyone had their checking account money in a money market checking fund paying 8%+. Mortgages over 20%. Pretty wild.)

I do not think Volker is a bad guy. He was hired to end inflation and he did, and everyone thought it was a great thing. Not many can say that. Just that his method was chilling... kind of like Churchill allowing the bombing of Coventry. Understandable, but chilling.)

But the play-out of the whole thing since then has been terrible.

[xchrom]

9. Very good reminder. Nt

[trackfan]

8. Further, inflation destroys debt, which there is way too much of

currently.

[hfojvt]

10. you assume a limit that isn't necessarily there

"Here is why there's no inflation without rising wages. You work at a mattress store. You spend $300/week. $20 of that is gas. Now the gas component goes up to $40/week. You are spending $20 less on something else. At first people might take $20 from savings or borrow that $20 on a credit card but eventually it must come home to roost. That extra $20 for gas reduces your demand for everything else by $20/week."

What is $300 a week though. Is that 100% of my paycheck or just 70%?

Then too, why can't I just spend less on gas? Walk more. Bicycle more. Take fewer trips. Car-pool. Take a bus. Gas expenditures are not a fixed amount. Nor is anything else. Even if I generally spend 80% of my paycheck on average, I can adjust that up or down depending on my desires.

[abelenkpe]

11. Necessities are going up in price

Energy, food, education and healthcare. While unemployment is high, employment (what there is of it) is insecure, and everyone is reigning is spending. That ripples through every community leading to more job loss and insecurity. You can adjust a bit, but not that much on necessities. We live in a country where one person being unlucky enough to develop a serious illness means an entire family can be throw into poverty and bankrupt.

[cthulu2016]

13. The limit is one how much you can spend

In the hypothetical you cannot spend more than the $300 (without borrowing) so your ability to drive inflation is capped. You chose what to buy, but cannot increase the total aggregate demand for stuff.

If food goes crazy through the roof then maybe you will have to drop all purchases except food and wear rags in an unheated shack.

That's the point -- if prices go up but wages do not go up then people have to stop buying certain items. You don't have to spend the $300 but you cannot spend more, at least not for long.

So without a raise your ability to drive inflation is capped. In an extreme example where food goes up 10,000% then the price of everything other than food will plummet because 99% of everyone will stop buying everything -- except food.

And the few people so rich they have money leftover after feeding themselves can buy up anything for peanuts, which is what the great depression was like. If you had a job you were in great shape because prices kept sliding lower because of the people who didn't have a job not buying anything.

[hfojvt]

16. but that is absurd

it is very easy for me to spend more, perhaps much more in any given week. If I am making $300 a week and save $100 a week then after a mere ten weeks, I have a pool of $1,000 that I can dip in to whenever needed or wanted. Further, if I am only spending $200 a week out of the $300 a week that I make then if prices go up, I can spend more right along with them, at least for a while.

A saving rate of 33% is absurdly high, but the point is the same if 10% is saved.

Just decided to figure how much I have saved lately. Since November 4th, I have been paid, take home $7,535. I have saved at least $3,300 in that time. A saving rate of almost 44%. But that's me, and the fact that my salary recently about doubled.

One person cannot drive inflation anyway, and I do not believe that inflation is caused by increased or excess demand anyway.

[BzaDem]

12. Huge K&R. It is amazing to me that there are still people that believe there can be anything but low

inflation in a liquidity trap.

[banned from Kos]

14. Since the dreaded QE programs began in mid 2008 energy prices in the US have fallen

commodity---- mid 2008 ----- 2012

crude oil ---- $140/bl ---- $97/bl
coal -------- $130/ton ---- $70/ton
nat gas ---- $6/MBtu ---- $2.50/MBtu

the Fed "printing money" and subsequent inflation is mostly another right-wing myth.

(although a country that has lost control of its fiscal policy that prints will experience inflation)


Also, we had high inflation in the 70's with a low money supply.

[cthulu2016]

15. If we actually printed money it would be different

The fabled helicopter drop of newly printed currency would be inflationary, and will never happen.

But what we call "printing money" -- telling banks they are free to loan out more money when nobody wants to borrow (and the banks are scared to lend)-- is, as the saying goes "pushing on a rope."

Japan doubled her money supply over an eight year period with no inflation at all -- in fact, active deflation during that period.

[jeanpalmer]

17. There are various ways to measure inflation

Most posters in this thread are referring to consumer inflation -- the price the average conumer pays for various items like gas, food, housing etc. But there are other ways to measure inflation.

The issue of inflation arises now because of the huge injections of liquidity (money) into the system by the Federal Reserve. The balance sheet of the Fed has gone from $800 billion prior to the financial crisis to $2.4 trillion currently. This means that the Fed has bought an extra $1.6 trillion in assets during the crisis (mostly mortgaged backed securities) and has put them on its balance sheet. The Fed bought these securities on the open market, like from you and me, and paid for them with money they printed "out of thin air." So there is this extra $1.6 trillion sitting out there (mainly in banks) waiting to be used.

If all of this $1.6 trillion were used to buy gas, food, etc,. believe me, the price of those items would skyrocket. But since that money doesn't filter down to the average consumer and since the Fed and the banks have no need to buy gas and food, the prices of these consumer items have remained relatively stable. And therefore people (and the Fed) say we have no inflation.

But this extra money can, and does, filter into other areas and drive up the prices of other items -- like mortgage-backed securities, like stocks and bonds, like commodities, like real estate, like currencies. These items have much higher prices than they would have if the Fed had not injected the money into the system. Look at it this way. If you had a portfolio of mortgage-backed securities and the Fed stepped in and bought them at prices you couldn't refuse, where would you put the proceeds from the sale? Probably being a banker or financier, you'd look to buy other assets, like stocks for example. Because if you leave it in cash or Treasury securities, you earn nothing or next to nothing, because the Fed has said it will keep interest rates at 0% or near 0% for at least 3 more years. So it's in these other assets like stocks and oil that we're seeing the price inflation.

The stock market has risen 100% off the bottom, a move that has coincided with the Fed's injection of money into the system. Oil, which had declined from from $147 a barrel to ~$50 a barrel, has risen back to $100. Many industrial commodities have skyrocketed. Morthage-backed securities and other interest-based assets are trading at much higher prices than they would be trading at had the Fed not injected the money that it did. And of course, this is just another form of inflation.

The Fed is hoping that this extra money trickles down to the consumer in the form of jobs and higher wages. But we've seen that wages remain stagnant. While the profits of the corporations have skyrocketed. And to me that's the problem with this inflationist approach. It primaily rewards the rich traders and bankers who have access to the extra and very cheap money. And there's no requirement that the benefits get to anyone else.

There are several other problems with the Fed's policy. The markets for commodities, for example, is world-wide. While it's true that the lack of wage increases in the US can act as a damper on consumer price increases, increased demand elsewhere, e.g. China, can do the opposite -- increase prices not just for the Chinese consumer but the American one as well. And we're seeing that imo in a number of areas. Oil for example. The use of oil has fallen in the US, but the price of oil has gone up and is at a recovery high. How can that be if the price of a consumer item is determined only by US demand and wages? Obviously, there's a world market and US consumer prices can go up even with falling US wages.

The other major problem, from an inflation standpont, created by the Fed's liquidity is that ithe liquidity doesn't have to stay in the US to drive up US prices. It can travel anywhere, and does. When the Fed sends a message of future inflation to the markets, as it does with its 0% interest rate policy and asset purchases, people with this new money look for places to invest it. And the places they look to are the countries with the highest growth rate promising the highest rate of return. Since the economy in the US is saturated with capacity and is in the doldrums, they look to countries like China and other developing countries. And they buy the currencies and assets of these countries, pushing up their money supply and their asset prices, including real estate. And of course ultimately commodity prices like oil. Many developing countries have instituted or threatened capital inflow controls so US investors cannot come in with Fed money and wreck their economies with inflation.

One final point. Once an inflationary mindset sets in, it can spread like wildfire in a very short period of time and become impossible to control. The line of the Fed that it can foresse inflation and nip it in the bud is bullshit. The real estate boom is the perfect example of the quickness with which inflation can rise up, and the Fed's inability to see it or control it. The Fed is a political bureaucracy that has no ability to turn on a dime. And when the Fed is printing money like it is now, the risks of inflation are real. Just because you can't see something happening tomorrow doesn't mean the risk doesn't exist. Who foresaw the the financial collapse in 2008 even a week before it happened? You can count them on one hand.

[cthulu2016]

18. A few points

Everything you say about Fed policy and inflation would be very true if we had a healthy economy. With 4% unemployment and steady GDP growth of 3%+ then everything the Fed has done would be spectacularly, corrosively inflationary.

But we are not in that world.

Most of what you describe are efforts undertaken to prevent outright deflation. Such efforts are, by definition, intended to be inflationary in relative terms.

So those most concerned about the inflationary potential of Fed actions are, irronically, those making the strongest case for what the Fed has done. If the actions are inflationary, yet do not present typical inflation, then the Fed has been throwing the kitchen sink into the maw of vast potential deflation just to keep the world afloat. So yay Fed.

In an environment with the potential for deflation (which I assume all readers recognize as the worst possible thing) then all useful steps are "inflationary" in that they seek to move the needle upward out of the deflation zone.

Is the Fed announcement of 0% rates for years to come inflationary? They hope it is. They want it to be.

It is tempting to point to things like oil or gold or the stock market if one is determined to find inflation somewhere but the best place to look for a broad decrease in the value of money is in markets for money.

The inflation component in credit is trivial. The inflation component in long-term credit is trivial. The inflation component in bonds is trivial. In most cases the inflation component is lower than since the great depression.

If anyone wants to claim there is inflation in action they must explain US bond rates and US mortgage rates. It is possible that everyone in the world is wildly wrong. I do not discount that as a possibility. The point is that the inflation argument requires that all the central banks, commercial banks, bond traders and credit consumers are wrong.

And maybe everyone in the world with money in the game is wrong, but if that's the argument then make the argument. It cannot be finessed.

re: "Once an inflationary mindset sets in, it can spread like wildfire in a very short period of time and become impossible to control. The line of the Fed that it can foresse inflation and nip it in the bud is bullshit."

As it relates to the United States and comparable economies this is simply not true.

There is nothing in the world easier for a central bank to control than inflation. There is nothing harder to control than deflation.

The great depression limped on forever. Japan's lost decade limped along forever. Our current crisis limps along forever. Central banks try to battle deflation and find they are "pushing on a rope."

On the other hand, inflation was wrung out of the US economy with a series of Paul Volker's pronouncements in 1981.

Increasing credit is "pushing on a rope" because you can't force people to take advantage of it. Decreasing credit, on the other hand, flat out decreases credit.

Any central bank can create a relatively deflationary environment by reducing economic activity and demand. The reason inflation ever develops is because it has a large human cost to restraining it so there is political resistance. The Fed chairs before Volker were unwilling to create 10% unemployment in the US to break the back of inflation, but they always had the power.

And once the Fed showed that level or ruthlessness it changed expectations--there is no point in taking the inflation side of a bet when the Fed has demonstrated a willingness to simply not allow inflation.