Sorry to side track the Global warming debate going on, but I was looking for help on understanding what inflation is. From what I can tell it’s really the most important thing in the US economy and I don’t really know what it actually means. So what is inflation, does the monetary system change what inflation is? Does a gold standard system differ from a fiat one with inflation? Why is inflation always positive when technology is deflationary? How do we calculate the CPI and why is energy and food always removed? Why is huge inflation bad? Guess I’m looking for a theoretical understanding as much as a technical one.
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Well, the global warming discussion just got sidetracked by fart comments which is unfortunate because I usually enjoy and endorse a good fart joke.
Anyhow, inflation is a rise in the general price level. The general price level refers to an aggregate price of goods. The CPI is an aggregate index of the price level of consumer goods. It is usually quoted in year over year changes.
Inflation can rise and fall for lots of reasons, but we should expect it to generally rise in a credit based monetary system because the quantity of credit is always rising relative to the quantity of goods. So, this generally means there is more demand for fewer outstanding goods. For instance, the price of food generally rise because we don’t produce enough food to keep up with the rise in credit that is bidding on that food. In the case of technology the demand is different because the quality of the goods change much more quickly. So, for instance, a hamburger is always a hamburger so its price isn’t impacted much by its change in quality. However, something like a TV is actually improving and becoming a better quality product over time. So, a SDTV might be made that costs $500 in 2010 and then in 2011 the same company improves the technology to make a HDTV. The price of the SDTV collapses and so the demand for the HDTV is pulled down thanks to the improvements in quality. As a result, the firms have less pricing power and the vast competition drives the overall prices down. Hence, technology tends to be deflationary because the improvements in quality are so significant.
But don’t mistake rising inflation for a decline in living standards. Prices can and will rise, but that does not mean we are worse off. For instance, a washing machine costs a lot more than a washing board so the cost of cleaning clothes has increased enormously over time, but what we lose in price increases we often gain in productivity because now I can spend less time cleaning my clothes which allows me to spend more time telling fart jokes.
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Best headline on cow farts ever
So inflation will always trend up in the US since we have a credit based monetary system where every dollar that’s created is a loan, so every dollar has an interest rate attached to it. So deflation would mean money is being destroyed, because loans are being repaid or defaulted on. So inflation should track growth in general?
So in a gold standard world or really any commodity, there wouldn’t be inflation since there’s no associated loan with dollar creation? What about countries that are pegged to other currencies?
Why do housing costs count in CPI but not stock or bond values?
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Yeah, I think we can expect a certain level of inflation. It’s a multitude of factors (sticky prices, credit creation, lack of resource supply, etc) but I think it’s safe to generally assume that some inflation is going to occur over time. Remember, this isn’t necessarily bad. The fact that things cost more does not mean we are worse off….
A gold standard will generally be deflationary because you’re suppressing the quantity of money that can be created which suppresses growth and has a recessionary bias. This is why the late 1800s were so volatile and had so many depressions.
Housing is counted in the CPI as the costs of rents. The BLS calculates it under Owners Equivalent Rent. Homes are technically investment and so they don’t count as a consumer good. Therefore, the value of their price increases don’t reflect “inflation” as much as they reflect the market value of past investment. A lot of people like to talk about “asset price inflation”, but asset values are not costs to consumers. They reflect the increases in the market value of assets.
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Ok Trump gave me a good example that maybe gets to my cognitive dissidence here. So if the 1 trillion in infrastructure spending went through that would boost growth from all the spending, but also increases inflation. Excluding policy based constraints, like the debt ceiling, the only US government spending constraint is to much inflation. So what’s used to judge what’s too much inflation/spending? Why cannot the government just spend until we get to full employment or everyone’s happy (insert Lego Movie’s Everything is Awesome)? And I’m not saying this in any hyperbolic way, according to the math then doesn’t communism work better? If Rand’s Galt’s Gulch is zero government spending and Marx pure communism is 100% government ownership isn’t how much control we want the government to have also a spending constraint?
Also I think I need help on where the money comes from, so government wants to pay 100 million to a construction company to rebuild bridges. Treasury auctions bonds and the proceeds go to construction company, where does the money come from to pay for that new bond? Who’s balance sheet increases?
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Mainstream textbooks say that on a rate hike the $ will soar and gold will plummet.
What we actually see is the opposite after a rate hike the $ falls and gold soars. The main reason for this is the price setter of course.
Rate hikes are price increases
Rate cuts are price cuts
Since the last rate hike in 2015 inflation has soared because the price setter increased prices. The last hike in December has of course hepled this.
Mike Norman has been saying this for months now. If you look at gold and USD/JPY since the hike they have acted opposite to the mainstream textbooks.
The gold standard, fixed exchange rate mob always push the $ up and gold down before a hike but they are doing the wrong thing and push noth markets in the wrong direction.
What is also interesting about this is that the FED thinks by raising interest rates it will fight inflation. The truth is all they will be doing is adding petrol to the flames.
A rate hike is like a helicopter drop because there are always more savers than borrowers and is a huge fiscal stimulas which can be seen in the daily treasury statement. Rate hikes add to bank deposits.
If the FED keeps on raising this year the $ will continue to plummet and gold will continue to soar. What you will see happening is they’ll push the $ up and gold down on the threat of the hike then once the FED pulls the trigger the opposite happens.
Gold at three-month highs. Yen at a two-month high. Dollar index at a three-month low.
Wait. That’s not supposed to happen, right?
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