What Actually Causes Inflation (and who gains from it)

Dovahkiin

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Jan 7, 2016
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Read it and offer a refutation if you disagree.
What Actually Causes Inflation (and who gains from it)
I made a post two weeks ago in which I explained that the popular view of inflation (wherein it is caused by money growth) depends critically on assumptions that do not hold in the real world.
Read this first before you continue: Money Growth Does Not Cause Inflation!

I'm pretty sure everybody knows what inflation is, but just incase:
Inflation is simply a rise in the average price of goods and services in the macroeconomy. Which particular goods and services depends on the measure we are examining. Consumer price inflation is the one usually in the news, and it takes a weighted average of various items purchased by the typical household (the list being determined by survey and then updated periodically). The average can rise while some prices have actually fallen, and how much it reflects your personal situation is a function of how closely the basket of goods and services in the index matches your buying patterns. But, the bottom line is that we say that inflation has occurred when the average price of those goods and services has increased.

Continued:
This does not happen by magic. It takes someone, somewhere making a conscious choice to charge more for the good or service they sell. The initial increase does not have to be in something that is being directly measured by the consumer price index. No household in my neighborhood, for example, buys barrels of oil; and yet when they become more expensive that sends a ripple throughout all related products. In the end, consumer prices jump as well.


Of course, that someone, somewhere who raises their price must also be in a position to make it stick. I could march into the Chancellor’s office here at TCU and demand that my salary be doubled, but that probably won’t accomplish a whole lot (other than to give me a chance to update my vita while I am cleaning out my office). Other factors must come into play. Many circumstances can cause inflation. I will focus on four.


Here are the four factors:
Market Power
Demand Pull
Asset Market Boom
Supply Shock
If you need to know what these are, you can refer to the OP article.


A strong conclusion:
Conclusions

This is not an all inclusive list, but I would think that it covers the vast majority of what we have experienced since the end of WWII (today, we are most threatened by the link between financial markets and commodities). The bottom line is that there are a number of processes that can create inflation, none of which starts with, “the money supply increases.” Someone make a conscious decision to raise a price or wage, and they must be able to make this stick. Because every higher price you pay means someone is getting more income, inflation causes a redistribution of income. Sometimes it does so in a manner that we would endorse and sometimes not. But in any event, it causes a rise in the demand for money that the Fed will almost certainly accommodate–and rightfully so, for refusing to do so almost always serves to punish those already in the weakest position.

I’m afraid this more realistic perspective does not offer a nice, simple rule as in the money growth ==> inflation camp. That said, neither do they since that’s not how the world really works! In reality, monetary policy does not cause inflation, and it is not well placed to stop it. What it does do is very strongly and directly affect interest rates. But prices are determined elsewhere in the system.
 
I think this is important to the discussion of inflation.
It's only ever brought up when we discuss federal spending these days.. been that way since the 70's.
From the end of WW2 until the 1970's, most governments maintained policies of full employment. No wonder people think so greatly of those times.. If you think back, you may remember something called Bretton-woods. (Although I doubt it, this stuff is never talked about.. we're all so obsessed with the debt now, for virtually no reason.)
Bretton Woods system - Wikipedia, the free encyclopedia - Essentially a fixed exchange.
After 1971, we abandoned it, and gold wasn't attached to our currency, so, as a result, the dollar began floating freely as a fiat currency on an exchange. Our monetary system changed, in a big way! How is this relevant to inflation? It should be obvious that ending the fixed exchange increased the fed govt's fiscal space.. Nothing was attached to the dollar at this point, and the federal govt could now use its currency issuing power. The govt could've maintained full employment with ease, simply spending. Not having to worry about gold reserves running out.
Sure, inflation is a concern, but that's easily controlled through taxation. What we have is a funny situation, although it's not funny when I think about it.. During the 70's, OPEC contracted the oil supply, and the world experienced what is known as "cost push" inflation on a massive scale. This is where it all goes downhill for america.. Milton Friedman/the chicago school.. wanted to convince people to be afraid of ALL FORMS OF INFLATION. He succeeded, obviously, it's now like the boogeyman, just like the deficit or raising taxes.. He actually tried to tie inflation to government spending. Politicians, feeling the effects of the "cost push" inflation, decided to buy into it. IDIOTS. This is where the fucking government decided to dismantle policies of full employment, with the intro of NAIRU. NAIRU - Wikipedia, the free encyclopedia
^ People actually buy this shit.
Milton friedman somehow made us shift to monetary policy from fiscal policy.. we're idiots for falling for it. (I'm not, but still.. our politicians still buy this crap, from both sides.)
NAIRU essentially is this: if we drop below a certain unemployment rate, "accelerating inflation" will occur. LOL. This is fucking absurd, and it should be obvious why it is.
NAIRU literally demands that we keep MILLIONS of potential workers/former workers/etc in a constant state of unemployment because if we don't, the claim is, we will experience "accelerating inflation." Like in the 70's. WAIT A MINUTE.. Do the morons not know what occurred in the 70's? "Cost push" inflation.. So essentially, the fucking government, inspired by friedman and other morons, has been keeping millions unemployed to fight a made up "war on inflation." This may be a surprise to some of you, but there are actually different causes of inflation, and different types of inflation... Keep that in mind.
(Now I wait for someone to try to claim we're going to get hyper inflation if we run a deficit..) Can't wait for that one! (Damn, this is a long post.. should've made a thread just with this.. oh well.)
 
Last edited:
Read it and offer a refutation if you disagree.
What Actually Causes Inflation (and who gains from it)
I made a post two weeks ago in which I explained that the popular view of inflation (wherein it is caused by money growth) depends critically on assumptions that do not hold in the real world.
Read this first before you continue: Money Growth Does Not Cause Inflation!

I'm pretty sure everybody knows what inflation is, but just incase:
Inflation is simply a rise in the average price of goods and services in the macroeconomy. Which particular goods and services depends on the measure we are examining. Consumer price inflation is the one usually in the news, and it takes a weighted average of various items purchased by the typical household (the list being determined by survey and then updated periodically). The average can rise while some prices have actually fallen, and how much it reflects your personal situation is a function of how closely the basket of goods and services in the index matches your buying patterns. But, the bottom line is that we say that inflation has occurred when the average price of those goods and services has increased.

Continued:
This does not happen by magic. It takes someone, somewhere making a conscious choice to charge more for the good or service they sell. The initial increase does not have to be in something that is being directly measured by the consumer price index. No household in my neighborhood, for example, buys barrels of oil; and yet when they become more expensive that sends a ripple throughout all related products. In the end, consumer prices jump as well.


Of course, that someone, somewhere who raises their price must also be in a position to make it stick. I could march into the Chancellor’s office here at TCU and demand that my salary be doubled, but that probably won’t accomplish a whole lot (other than to give me a chance to update my vita while I am cleaning out my office). Other factors must come into play. Many circumstances can cause inflation. I will focus on four.


Here are the four factors:
Market Power
Demand Pull
Asset Market Boom
Supply Shock
If you need to know what these are, you can refer to the OP article.


A strong conclusion:
Conclusions

This is not an all inclusive list, but I would think that it covers the vast majority of what we have experienced since the end of WWII (today, we are most threatened by the link between financial markets and commodities). The bottom line is that there are a number of processes that can create inflation, none of which starts with, “the money supply increases.” Someone make a conscious decision to raise a price or wage, and they must be able to make this stick. Because every higher price you pay means someone is getting more income, inflation causes a redistribution of income. Sometimes it does so in a manner that we would endorse and sometimes not. But in any event, it causes a rise in the demand for money that the Fed will almost certainly accommodate–and rightfully so, for refusing to do so almost always serves to punish those already in the weakest position.

I’m afraid this more realistic perspective does not offer a nice, simple rule as in the money growth ==> inflation camp. That said, neither do they since that’s not how the world really works! In reality, monetary policy does not cause inflation, and it is not well placed to stop it. What it does do is very strongly and directly affect interest rates. But prices are determined elsewhere in the system.

and your point is??
 
Read it and offer a refutation if you disagree.
What Actually Causes Inflation (and who gains from it)
I made a post two weeks ago in which I explained that the popular view of inflation (wherein it is caused by money growth) depends critically on assumptions that do not hold in the real world.
Read this first before you continue: Money Growth Does Not Cause Inflation!

I'm pretty sure everybody knows what inflation is, but just incase:
Inflation is simply a rise in the average price of goods and services in the macroeconomy. Which particular goods and services depends on the measure we are examining. Consumer price inflation is the one usually in the news, and it takes a weighted average of various items purchased by the typical household (the list being determined by survey and then updated periodically). The average can rise while some prices have actually fallen, and how much it reflects your personal situation is a function of how closely the basket of goods and services in the index matches your buying patterns. But, the bottom line is that we say that inflation has occurred when the average price of those goods and services has increased.

Continued:
This does not happen by magic. It takes someone, somewhere making a conscious choice to charge more for the good or service they sell. The initial increase does not have to be in something that is being directly measured by the consumer price index. No household in my neighborhood, for example, buys barrels of oil; and yet when they become more expensive that sends a ripple throughout all related products. In the end, consumer prices jump as well.


Of course, that someone, somewhere who raises their price must also be in a position to make it stick. I could march into the Chancellor’s office here at TCU and demand that my salary be doubled, but that probably won’t accomplish a whole lot (other than to give me a chance to update my vita while I am cleaning out my office). Other factors must come into play. Many circumstances can cause inflation. I will focus on four.


Here are the four factors:
Market Power
Demand Pull
Asset Market Boom
Supply Shock
If you need to know what these are, you can refer to the OP article.


A strong conclusion:
Conclusions

This is not an all inclusive list, but I would think that it covers the vast majority of what we have experienced since the end of WWII (today, we are most threatened by the link between financial markets and commodities). The bottom line is that there are a number of processes that can create inflation, none of which starts with, “the money supply increases.” Someone make a conscious decision to raise a price or wage, and they must be able to make this stick. Because every higher price you pay means someone is getting more income, inflation causes a redistribution of income. Sometimes it does so in a manner that we would endorse and sometimes not. But in any event, it causes a rise in the demand for money that the Fed will almost certainly accommodate–and rightfully so, for refusing to do so almost always serves to punish those already in the weakest position.

I’m afraid this more realistic perspective does not offer a nice, simple rule as in the money growth ==> inflation camp. That said, neither do they since that’s not how the world really works! In reality, monetary policy does not cause inflation, and it is not well placed to stop it. What it does do is very strongly and directly affect interest rates. But prices are determined elsewhere in the system.

and your point is??
Monetary policy doesn't cause inflation.
 
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What's your point? How does the inflation in your picture relate to the money supply increasing? Show me a connection? What's funny is, reagan actually ran a deficit that contributed to his boom, clinton ran a surplus. Obama has been cutting the deficit during the recovery, making it weak. What does that teach us?
 
What's your point? How does the inflation in your picture relate to the money supply increasing? Show me a connection? What's funny is, reagan actually ran a deficit that contributed to his boom, clinton ran a surplus. Obama has been cutting the deficit during the recovery, making it weak. What does that teach us?

Well, we heard much about how quantitative easing was going to lead to buying bread with wheelbarrows of cash. Didn't happen. I suppose that supports your point.
 
Read it and offer a refutation if you disagree.
What Actually Causes Inflation (and who gains from it)
I made a post two weeks ago in which I explained that the popular view of inflation (wherein it is caused by money growth) depends critically on assumptions that do not hold in the real world.
Read this first before you continue: Money Growth Does Not Cause Inflation!

I'm pretty sure everybody knows what inflation is, but just incase:
Inflation is simply a rise in the average price of goods and services in the macroeconomy. Which particular goods and services depends on the measure we are examining. Consumer price inflation is the one usually in the news, and it takes a weighted average of various items purchased by the typical household (the list being determined by survey and then updated periodically). The average can rise while some prices have actually fallen, and how much it reflects your personal situation is a function of how closely the basket of goods and services in the index matches your buying patterns. But, the bottom line is that we say that inflation has occurred when the average price of those goods and services has increased.

Continued:
This does not happen by magic. It takes someone, somewhere making a conscious choice to charge more for the good or service they sell. The initial increase does not have to be in something that is being directly measured by the consumer price index. No household in my neighborhood, for example, buys barrels of oil; and yet when they become more expensive that sends a ripple throughout all related products. In the end, consumer prices jump as well.


Of course, that someone, somewhere who raises their price must also be in a position to make it stick. I could march into the Chancellor’s office here at TCU and demand that my salary be doubled, but that probably won’t accomplish a whole lot (other than to give me a chance to update my vita while I am cleaning out my office). Other factors must come into play. Many circumstances can cause inflation. I will focus on four.


Here are the four factors:
Market Power
Demand Pull
Asset Market Boom
Supply Shock
If you need to know what these are, you can refer to the OP article.


A strong conclusion:
Conclusions

This is not an all inclusive list, but I would think that it covers the vast majority of what we have experienced since the end of WWII (today, we are most threatened by the link between financial markets and commodities). The bottom line is that there are a number of processes that can create inflation, none of which starts with, “the money supply increases.” Someone make a conscious decision to raise a price or wage, and they must be able to make this stick. Because every higher price you pay means someone is getting more income, inflation causes a redistribution of income. Sometimes it does so in a manner that we would endorse and sometimes not. But in any event, it causes a rise in the demand for money that the Fed will almost certainly accommodate–and rightfully so, for refusing to do so almost always serves to punish those already in the weakest position.

I’m afraid this more realistic perspective does not offer a nice, simple rule as in the money growth ==> inflation camp. That said, neither do they since that’s not how the world really works! In reality, monetary policy does not cause inflation, and it is not well placed to stop it. What it does do is very strongly and directly affect interest rates. But prices are determined elsewhere in the system.

and your point is??
Monetary policy doesn't cause inflation.
Zimbabwe and Weimar Republic would disagree
 
Read it and offer a refutation if you disagree.
What Actually Causes Inflation (and who gains from it)
I made a post two weeks ago in which I explained that the popular view of inflation (wherein it is caused by money growth) depends critically on assumptions that do not hold in the real world.
Read this first before you continue: Money Growth Does Not Cause Inflation!

I'm pretty sure everybody knows what inflation is, but just incase:
Inflation is simply a rise in the average price of goods and services in the macroeconomy. Which particular goods and services depends on the measure we are examining. Consumer price inflation is the one usually in the news, and it takes a weighted average of various items purchased by the typical household (the list being determined by survey and then updated periodically). The average can rise while some prices have actually fallen, and how much it reflects your personal situation is a function of how closely the basket of goods and services in the index matches your buying patterns. But, the bottom line is that we say that inflation has occurred when the average price of those goods and services has increased.

Continued:
This does not happen by magic. It takes someone, somewhere making a conscious choice to charge more for the good or service they sell. The initial increase does not have to be in something that is being directly measured by the consumer price index. No household in my neighborhood, for example, buys barrels of oil; and yet when they become more expensive that sends a ripple throughout all related products. In the end, consumer prices jump as well.


Of course, that someone, somewhere who raises their price must also be in a position to make it stick. I could march into the Chancellor’s office here at TCU and demand that my salary be doubled, but that probably won’t accomplish a whole lot (other than to give me a chance to update my vita while I am cleaning out my office). Other factors must come into play. Many circumstances can cause inflation. I will focus on four.


Here are the four factors:
Market Power
Demand Pull
Asset Market Boom
Supply Shock
If you need to know what these are, you can refer to the OP article.


A strong conclusion:
Conclusions

This is not an all inclusive list, but I would think that it covers the vast majority of what we have experienced since the end of WWII (today, we are most threatened by the link between financial markets and commodities). The bottom line is that there are a number of processes that can create inflation, none of which starts with, “the money supply increases.” Someone make a conscious decision to raise a price or wage, and they must be able to make this stick. Because every higher price you pay means someone is getting more income, inflation causes a redistribution of income. Sometimes it does so in a manner that we would endorse and sometimes not. But in any event, it causes a rise in the demand for money that the Fed will almost certainly accommodate–and rightfully so, for refusing to do so almost always serves to punish those already in the weakest position.

I’m afraid this more realistic perspective does not offer a nice, simple rule as in the money growth ==> inflation camp. That said, neither do they since that’s not how the world really works! In reality, monetary policy does not cause inflation, and it is not well placed to stop it. What it does do is very strongly and directly affect interest rates. But prices are determined elsewhere in the system.

and your point is??
Monetary policy doesn't cause inflation.
Zimbabwe and Weimar Republic would disagree
This only backs me up you know.
Mugabe rose up in Zimbabwe, and kicked farmers off of their land. He destroyed the food supply. the infrastructure, and railways, ruining the transport of goods. Unemployment increased. High tariffs ruined imports. Mugabe severely reduces the real capacity of the economy to produce. -- This is the key point. With unemployment at insane levels and no real way to provide jobs, Mugabe just kept spending. IN EXCESS OF THE ECONOMY'S REAL ABILITY. Oh, as long as the amount of money created and spent is not so much to cause excess demand, there won't be excess inflation.
 
Read it and offer a refutation if you disagree.
What Actually Causes Inflation (and who gains from it)
I made a post two weeks ago in which I explained that the popular view of inflation (wherein it is caused by money growth) depends critically on assumptions that do not hold in the real world.
Read this first before you continue: Money Growth Does Not Cause Inflation!

I'm pretty sure everybody knows what inflation is, but just incase:
Inflation is simply a rise in the average price of goods and services in the macroeconomy. Which particular goods and services depends on the measure we are examining. Consumer price inflation is the one usually in the news, and it takes a weighted average of various items purchased by the typical household (the list being determined by survey and then updated periodically). The average can rise while some prices have actually fallen, and how much it reflects your personal situation is a function of how closely the basket of goods and services in the index matches your buying patterns. But, the bottom line is that we say that inflation has occurred when the average price of those goods and services has increased.

Continued:
This does not happen by magic. It takes someone, somewhere making a conscious choice to charge more for the good or service they sell. The initial increase does not have to be in something that is being directly measured by the consumer price index. No household in my neighborhood, for example, buys barrels of oil; and yet when they become more expensive that sends a ripple throughout all related products. In the end, consumer prices jump as well.


Of course, that someone, somewhere who raises their price must also be in a position to make it stick. I could march into the Chancellor’s office here at TCU and demand that my salary be doubled, but that probably won’t accomplish a whole lot (other than to give me a chance to update my vita while I am cleaning out my office). Other factors must come into play. Many circumstances can cause inflation. I will focus on four.


Here are the four factors:
Market Power
Demand Pull
Asset Market Boom
Supply Shock
If you need to know what these are, you can refer to the OP article.


A strong conclusion:
Conclusions

This is not an all inclusive list, but I would think that it covers the vast majority of what we have experienced since the end of WWII (today, we are most threatened by the link between financial markets and commodities). The bottom line is that there are a number of processes that can create inflation, none of which starts with, “the money supply increases.” Someone make a conscious decision to raise a price or wage, and they must be able to make this stick. Because every higher price you pay means someone is getting more income, inflation causes a redistribution of income. Sometimes it does so in a manner that we would endorse and sometimes not. But in any event, it causes a rise in the demand for money that the Fed will almost certainly accommodate–and rightfully so, for refusing to do so almost always serves to punish those already in the weakest position.

I’m afraid this more realistic perspective does not offer a nice, simple rule as in the money growth ==> inflation camp. That said, neither do they since that’s not how the world really works! In reality, monetary policy does not cause inflation, and it is not well placed to stop it. What it does do is very strongly and directly affect interest rates. But prices are determined elsewhere in the system.

A child knows that inflation is caused by an increase in the quantity and velocity of money!!!
 

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