So it is not inflation, it is a congestion, a squeeze. When things settle, we'll see lots of supply w/o demand (due to economic players overreacting and new players trying to take advantage) and price drop
Either it's a useless distinction, or general inflation itself is a useless concept... or these are both exaggerations.
I do think inflation indexes, as we have been using them in recent decades isn't quite as "real" as we have been treating it. We over learned lessons from 20th century inflation events... and the importance of such indexes in monetarism... also "unemployment." When inflation is low, price fluctuations noise out trends. General inflation is somewhat theoretical.
We don't understand this stuff as well as we pretend to.
okay, sure, inflation is a very reductive term, the mechanism isn't hard to understand.
when water accumulates at the top of a mountain it gravitates downward to certain areas and pools or flows from those areas. money is created in a very similar mechanism, when the money pools instead of flows, the issuer creates more money to make it more likely to overflow from those areas. excessive pooling makes investments expensive, excessive flowing makes commodities and services scarce. the issuer tries to moderate the velocity of both by issuing just the right amount of money. of this set of actions that the issuer does (it can do more than just issue money), both cause price distortions upward, where you need more money to buy the same asset or good or service. but unlike rain water, this approach has very limited utility as you are trying to force humans to behave certain ways and many times they just don't want to for reasons they were never asked about.
most of the debate around the word inflation is simply whether the target inflation has been met, because nobody can agree on which assets should be counted and it is a political football that is easy to unilaterally manipulate.
>but unlike rain water, this approach has very limited utility as you are trying to force humans to behave certain ways and many times they just don't want to for reasons they were never asked about.
It is pretty obvious. An aging population spends less because old people have already reached their life goals. They had a job, got a house, got married, bought everything they wanted during their young years. Now they stop working, they have a small pension. They are less likely to be active as their body and mind can't keep up. They don't know if their pension will last. Oh and if they are in debt they will try to pay it off before they die. Some of them are also very rich (because of their long careers) and as you get richer you also run out of things to spend money on.
The global financial crisis during 2008 made people extremely risk averse. Even those who haven't retired yet are taking it safe and cut spending before retirement.
Interest rates drop on their own. It is only natural. Less borrowers, more lenders. Interest rates can't go up in such an environment.
You see. Young people have to work. They have to earn an income and income means spending. If "nobody" spends, nobody earns. You can't get full employment in such an economy. The decision to reduce spending is also the decision to reduce employment.
If people want to keep saving endlessly then you need to satisfy that demand by forcing money creation. Instead of waiting for borrowers to appear you just force the money upon (QE) them on behalf of the savers because the savers force money upon their banks. As saving money is not borrowed it does not create tangibles in the real world, the value of your savings have to decline, thus inflation becomes a noble goal instead of something to be avoided as it keeps the system alive for the benefit of the selfish savers.
Your money is getting worthless regardless of actual inflation because the real world is declining. If the real world is declining and money is not, we run into a problem. People will start ignoring the real world and save into money because they believe that the two are decoupled. The truth is that they are saving into nothing and inflation is just the logical consequence of a psychological desire to save into nothing.
>most of the debate around the word inflation is simply whether the target inflation has been met, because nobody can agree on which assets should be counted and it is a political football that is easy to unilaterally manipulate.
Or you just accept that the numbers are correct within reason. The Fed doesn't have the power to solve the problem or make it worse. It can only shield you from the worse horror by creating a less bad horror.
right, my point is that the Fed and central banks don't ask people why they do what they do. They just see "ah they are still hoarding dollars, make it worth less to force them to want to grow it on their own!" In negative interest rate environments, people are still willing to pay the government for the privilege of not investing in overvalued assets or random entrepreneurs.
> Interest rates drop on their own. It is only natural. Less borrowers, more lenders. Interest rates can't go up in such an environment.
I don't disagree with this without elaboration. The primary driving force of interest rates dropping are the central bank's actions, as they are the biggest whale in the market, they buy the benchmark bonds which forces those bond yields lower as these are inversely correlated. Everything priced based on those yields drops lower too. The "yields based on perceived risk" idea is completely broken right now, as nothing is properly risk adjusted, ie the chance of losing all your money is greater than the ROI for a lot of assets. Your supply and demand model works but only if you replace the market participants with the central banks being the universe sized lender.
The only thing that I would consider natural about interest rates is that risks are reduced as society progresses (in its current path). Like, the stability of human society, the lowered geopolitical risks, the larger economic unions and assets to monetize, the maturation of the market.
The distinction is important when you think about how and whether or not to combat the issue. If general prices are rising due to runaway inflation and rising wages (like in the US in the 70s), then the central bank knows it can raise interest rates to help slow things down. If prices of a few assets like used cars, cargo, or hand sanitizer are rising because of temporary shortages, raising interest rates is not going to do much.
You can't just magic more cargo shipping capacity out of thin air, the lead times from signing to paperwork to having a container ship sail out of the dock are measured in years.
It's also very much a boom and bust industry, and there has been a succession of past bubbles that has left shipping companies very wary of building extra capacity only for it to sit around unused.
The underlying cause seems to be a surge in demand though. Its sounds like inflation, but if this is caused by covid relief money then hopefully it will calm down once that money is spent.
With work from home, for some workers the time previously spent in a commute may have partly been converted into time spent consuming. I know this applies to me at least. WFH also allows online shopping during breaks, that was not something I would do at the office.
I personally have spent way more than normal on sports goods, clothes, furniture, and home improvement during the pandemic.
Life is lived differently nowadays and some changes will persist, it will be interesting to see how this impacts global trade.
Inflation is… complicated. One component of inflation is people’s expectations of future inflation. If prices keep going up, people will start to expect it and won’t hold on to cash for as long, which creates its own feedback loop, etc.
This is in some sense also the primary cause of inflation in many cases. When demand for money drops, its value relative to stuff decreases, and you need more of it for the same things. (This is often followed by an increase in money supply, not, primarily, caused by it. The increase in supply is usually people (government or their ilk) creating more money to afford things once it's value has dropped.)
So why does demand for money go down in the first place? Now that's complicated. The demand for money is determined by the market which is sometimes predictable and sometimes works in mysterious ways.
I was imagining how this works. It might make me bring forward some expenses, like if I am thinking of getting a new car, I'll get it sooner, or maybe I'd invest as much $ as possible as soon as I get it, if I didn't need to purchase anything.
"High" inflation happens during seller markets. (sellers have more power)
Low inflation or even deflation happens during buyer markets. (buyers have more power)
There, the monetary explanation of inflation no longer makes sense as you can create money in a way that does not turn the labor market into a seller market. The pandemic turns the economy into a sellers market temporarily so it is inflation but it is unlikely to last.
As a bonus: Keynesian economics is mostly about buyer markets, Austrian/neoclassical/neoliberal economics are mostly about seller markets. The theories aren't even competing against each other because they aren't even talking about the same thing.
If prices of things go up with a 100% correlation to an increase in the money supply, thats inflation
It can also simultaneously be other things and no price increase has to be permanent