[jnwatson]

Inflation isn’t caused by too much money. It is caused by too much money velocity. That’s why the last huge injection of money in 2008 didn’t cause inflation. Folks sat on their money and didn’t spend it.

Raising interest rates isn’t about causing unemployment (directly at least). It is about causing capital investment to be less lucrative than tying the money up in treasuries, reducing money velocity.

[rogersnm]

> It is about causing capital investment to be less lucrative than tying the money up in treasuries

Money isn't tied up in treasuries, money (loosely bank deposits and cash) and treasuries are two distinct concepts. You can trade money in exchange for treasuries, but then the previous holder of the treasuries has the money, and you have the treasuries, it doesn't tie the money up.

The amount of value captured in treasuries is a function of the total government debt outstanding, and a way to increase that value is to issue more Government debt (in which case, the money goes to the Government to then spend, it still isn't tied up), however the Government is actually disincentivised to do this as their cost of borrowing (interest rates) goes up.

> That’s why the last huge injection of money in 2008 didn’t cause inflation.

The "injection of money in 2008" (the creation of central bank reserves) didn't cause inflation because the overall quantity of broad money still fell over that time period (https://fred.stlouisfed.org/series/DDOI07USA648NWDB). This was because of the "credit crunch" occurring at the time, where commercial banks where massively reducing their lending activities. The same is not true now, the creation of additional central bank reserves in the past 2 years has directly translated into more broad money, and we have inflation as a result.

[bloodyplonker22]

In addition, here's one big difference: the Biden Administration printed 1.7T worth of handouts, which was mostly spraying helicopter money directly to the people. During the financial crisis of 2008-2009, TARP was not mostly helicopter money given directly to the people. It was given to institutions, so it was much more indirect. With the Biden Administration's money spraying, a good amount of that taxpayer money went to covid relief scammers.

[didibus]

I'll try to give you the most charitable read, but even if I do, the simple fact that inflation is happening world wide seems like there's no way the cause can simply be what you said.

It also ignores the flip side. COVID relief packages have also helped in many ways, it's unclear what outcome is worse, current inflation or what else would have happened without that assistance.

Finally, I tried to do some fact checking, and what I found is that Trump actually provided even more handouts, 2.2 trillion in COVID handouts through the Cares ACT under Trump, while Biden only provided 1.9 trillion as part of the American Rescue Plan.

And if you look at the direct payments of those plan, Trump totalled 459 billion in direct handouts, and Biden totaled 402 billion.

So Trump actually gave more Covid handouts than Biden did.

Now the argument that COVID handouts might play a role in the inflation is okay, maybe it does a little, but your singling out of Biden seems biased partisanry, and it makes it even harder for me to take you in good faith.

[makomk]

While you're right that this was bipartisan, worldwide inflation could well have been least partly the result of the US government handing out too much money. Here's how: the US actually had the highest inflation in the G7 until earlier this year. In order to get that under control, the Fed has been hiking interest rates more aggressively than the rest of the developed world. This has caused other currencies to lose value against the dollar, increasing the cost of imported goods priced in dollars like oil and gas and driving up inflation elsewhere: https://edition.cnn.com/2022/08/07/investing/strong-dollar/i...

The US dollar's status as the world's reserve currency has strange and counterintuitive effects like this which make their screw-ups everyone else's problem.

[rogersnm]

> This has caused other currencies to lose value against the dollar, increasing the cost of imported goods priced in dollars like oil and gas and driving up inflation elsewhere

If I have Pounds (GBP) and I need to buy Oil and settle in Dollars (USD), I exchange my Pounds for Dollars, and then I exchange my Dollars for Oil. The price of the Oil in Dollars doesn't matter to me, only the overall price of the Oil in Pounds. It has no effect on how many Pounds I spend if the GBP:USD is weaker now than it was 1, 2 or 5 years ago, it only matters what the net GBP:Oil exchange rate is.

The only time strengthening/weakening of the Dollar can have an effect is if the price moves between the two exchanges, but given how short settlement windows are, this is somewhat irrelevant.

In a system of free-floating exchange rates and absent of supply side shocks, inflation is entirely a domestic phenomenon. The reason why the entire G7 have the same problem is because they all experienced the same pandemic, and their respective Central Banks all took the same action (to increase the money supply).

Foot notes:

[1] We have since layered a supply-side shock on top of this, which has pushed up energy prices in many currencies, but this is not because of the strengthening of the Dollar, it is because many nations wish to minimise the amount of Oil & Gas they buy from one of the largest exporters of said Oil & Gas, effectively reducing supply.

[2] A strong Dollar can cause problems when foreign nations borrow in Dollars (i.e. they borrow Dollars rather than their domestic currency). As the Dollar strengthens, this means they have to sacrifice much more of their local currency to repay the debt, which can cause significant problems. (Editors note: try not to borrow in someone else's currency if you can avoid it.)

[nostrademons]

The reason inflation is happening world-wide is because all major governments are following roughly the same policies. They all gave various forms of financial assistance to their citizens to get through the lockdowns. They also all held interest rates down, below their natural levels, to stimulate economic growth during the recovery. Except for Turkey and Russia, most of them are starting to raise rates again now that the U.S. is.

There's a competitive aspect to central bank policy: if the U.S. drops rates but other countries don't, their exports become more expensive and hence relatively uncompetitive in the world market, their manufacturing sector loses jobs, and they get thrown out of office. If the U.S. raises rates but other countries don't, their currency drops in value relative to the USD, their imports become more expensive, this fuels inflation in their home country, and they get thrown out of office. Therefore there's a strong impulse to mimic U.S. monetary policy. This also makes the reaction of other countries a constraint on the actions of the Fed; they cannot make changes willy-nilly without causing severe dislocations to the global economy.

You're right that this is not a Biden vs. Trump issue, and that Trump also pursued policies that were highly inflationary. This is a "humans are predictably irrational" issue. They nearly always pursue policies that fix the problems they have now, even at the expense of causing problems that are highly likely to occur later.

[didibus]

I think I have a bit of an issue with your overconfidence on this.

There's no proof of this it seems, while I agree it's one of many hypothesis, I find it crazy that you can jump from the hypothesis to conclude it's true just like that.

How do you simply dismiss all the other possibilities and compounding factors? There was a never seen before global pandemic, there was major disruptions in production and sourcing of goods, there was a major attrition and rotation of the labor force, there's the conflict with Russia, there were dramatically overvalued stocks, there was a trade war, there was a ton of people that died, etc.

I'd be suspicious of anyone who claims they just know the truth here, follow your guts isn't a proven way to determine what's really happening. I need some more proof, a simulation model, some actual experiments, etc.

The intuition of experts is often more likely correct, but economists are very divided here, to me it still feels like we don't know the cause of the inflation, we don't properly understand why it's happening and how to fix it.

Another aspect that's also been bothering me is that it isn't clear if inflation is a problem or not. Say it was caused by too much money having been injected, ok prices go up, but everybody has extra money, so it evens out, and doesn't really mean anyone is worse off.

Inflation doesn't really seem like it necessarily implies people are worse off, especially from the point of view of: would that person had been worse off if they'd have been evicted from their home during the pandemic and lost their job and not been given out support? Or are they worse off having had that help to make it past that and now have to deal with some inflation?

Especially assuming the inflation is due to increase money supply.

Like I just feel the actual effects of inflation are also not clear.

If inflation is driven by a loss of jobs, lack of goods, and difficulty sourcing materials, that's bad, even ignoring the inflation that's bad. If inflation is caused from too much money but there's still enough jobs, goods, and sourcing is easy and cheap, is that bad?

[JackFr]

There is also the the contention that the huge injection of money went into assets rather than goods and services, leading to asset price inflation - that is, an asset bubble - rather than elevated consumer inflation.

[TheOtherHobbes]

Inflation is mostly caused by two things. The first and most obvious are external commodity supply price shocks which crash demand because essential inputs and their dependent outputs become unaffordable. (The demand is still there of course, but it becomes too expensive to satisfy it.)

The second is misdirected money supply which steers money towards sweatable assets like property and stock ownership, and away from productive investment, original invention and research, and small business creation.

Effectively this causes an internal supply shock which raises the prices of the sweatable assets for the ownership class and impoverishes everyone else, to the point where essentials like housing become unaffordable and demand starts to seize up. Small businesses are forced to close rather than being encouraged to open.

Inflation has very little to do with money velocity, interest rates, unemployment, wage rises, or any of that other supply side nonsense.

[rogersnm]

> The second is misdirected money supply which steers money towards sweatable assets like property and stock ownership, and away from productive investment, original invention and research, and small business creation.

You appear to be arguing that an increase in the money supply for "sweatable assets" comes at the cost of a reduction in the money supply for everything else. If this were true, you'd expect inflation in "sweatable assets", and deflation elsewhere, which is not what's observed (we currently have inflation in consumer goods, and if anything, housing & stocks are deflating).

> Inflation has very little to do with money velocity, interest rates, unemployment, wage rises, or any of that other supply side nonsense.

It seems to be a substantial leap to suggest that inflation has little to do with interest rates, given that Central Banks are tasked with managing inflation, and the main lever that they pull on are interest rates. A more typical view is that, in the long run, inflation depends on the quantity of money, and interest rates affect that quantity.

[galaxyLogic]

I can see the logic behind raising interest rates to fight inflation. I can choose to buy a new bicycle today, or put the money to bank. If interest rates are higher I am more likely to put the money to bank for later consumption. I will not buy the bicycle this year, which reduces the demand for bicycles this year and thus their price goes down or at least does not rise.

But, inflation is also caused by lack of supply. How do we get more supply? By people starting businesses. But in order for them to do that they must get a cheap loan. But Feds have raised the rates so they can not get a cheap loan and thus do not start a new business and thus supply does not go up.

So Fed increasing rates would seem to help with demand-side inflation, while increasing supply-side problems. But demand-side inflation will fix itself, when things cost more people will spend less. So why is fed raising interest rates?

It's starting to look to me like inflation is a political problem. When things cost more people get angry and are less likely to vote for those currently in power.

[tkk23]

I would rather say it's money throughput, not velocity.

Higher interest rates also lead to less borrowing which reduces the volume of available money. Together with the reduced velocity, this leads to an overall reduced throughput.

That said, why is money velocity, or throughput, reduced when inflation itself is a self-correcting problem?

[c7b]

Monetary velocity is defined as the price level times real output over the money supply. There is a mechanical relation with inflation (which is the delta of the price level), but saying that's a unidirectional casual link is a disingenuous interpretation.

[makomk]

This isn't just some weird game with definitions, though, I'm pretty sure it has actual consequences that are important for understanding inflation and the cost of living crisis.

Currently, energy prices have been going up due to an inadequeate supply of fossil fuels and an excessive supply of money (especially outside the USA, with natural gas prices particularly high). This is a direct consequence of too much money chasing too little supply; it's not possible to set a lower price because more would be purchased at that price than is actually available. However, all the money people are spending doesn't just disappear but ends up as profits for fossil fuel producers, and particularly in Europe there's been a push to fix this by placing windfall taxes on producers and using it to subsidise consumer prices. The problem is that although the money doesn't disappear, the fuels bought with it have gone up in smoke, so if you distribute that money back to consumers you're effectively increasing the amount of money they have to spend chasing the same limited supply of fossil fuels just like if you outright printed money. In a sense, monetary velocity is the supply of money.

[thrown_22]

So why not go for the even simpler solution of forcing everyone to use checks which only clear once a week?

If money velocity causes inflation forcing people to use less efficient methods of exchanging money should stop it.

[refurb]

Because people will compensate and take out more money.

[thrown_22]

It's almost like velocity of money doesn't exist or something.

[extrememacaroni]

So inflation is caused by having too much crap available to buy?

[littlestymaar]

“Money velocity” doesn't really exist though except as a catch-all variable in monetarists' equation MV=PQ.

[imtringued]

The actual circulating money supply is also unknowable because you don't know if people are holding onto cash or checking account deposits for buying things in the short term or as savings for the long term. Both look identical but one of them circulates more than once per year while the latter circulates less than once per year.

It is not like we are sending a dollar bill through the economy and counting how many times it changes hands to estimate the money velocity.

If you could neatly split up the money supply into "medium of exchange" and "store of value". You could actually estimate inflation based on that equation.

[littlestymaar]

Exactly.

[pcai]

spot on about money velocity.

in addition to capital investment there's also a lot of impact by manipulating current consumption that responds to interest rates - like the housing market, which is mostly consumption.