Whence inflation?

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willthrill81
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Re: Whence inflation?

Post by willthrill81 »

alex_686 wrote: Sun Apr 18, 2021 2:51 pm
Mr.BB wrote: Sun Apr 18, 2021 2:08 pm
willthrill81 wrote: Sun Apr 18, 2021 2:07 pm
Mr.BB wrote: Sun Apr 18, 2021 1:46 pm I am starting to see what I like to call "hidden inflation" with our groceries. Instead of charging more money the manufactures are keeping the prices about the same but reducing the amount of food in the package you buy. Though it is not showing up in any type food price index the effect is the same as having higher food prices.
I have seen loaves of bread with smaller size slices, but the price is the same. I bought some Gefilte fish (same brand that I always buy when I want this), the price was the same but the pieces were 30% smaller. When I checked the nutritional info, each piece was 30% reduced in calories on the label from earlier purchases.
Yes, shrinkflation does occur and has for many years. In some contexts, it seems to be driven at least in part by Americans desiring smaller portions than before for health reasons, but that's clearly not always the case.
I never heard the term "shrinkflation" before. But that is the perfect term.
There is no such thing as shinkflation. Shrinkage, yes.

CPI tracks changes in size and adjust accordingly.

Yes, it affects your emotional response, but not the cold hard analytical value for of numbers.
Shrinkflation is real (i.e., "a rise in the general price level of goods per unit of weight or volume, brought about by a reduction in the weight or size of the item sold", as noted here), but you're correct that CPI should capture it.
Last edited by willthrill81 on Sun Apr 18, 2021 5:29 pm, edited 1 time in total.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
rockstar
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Re: Whence inflation?

Post by rockstar »

willthrill81 wrote: Sun Apr 18, 2021 2:54 pm
alex_686 wrote: Sun Apr 18, 2021 2:51 pm
Mr.BB wrote: Sun Apr 18, 2021 2:08 pm
willthrill81 wrote: Sun Apr 18, 2021 2:07 pm
Mr.BB wrote: Sun Apr 18, 2021 1:46 pm I am starting to see what I like to call "hidden inflation" with our groceries. Instead of charging more money the manufactures are keeping the prices about the same but reducing the amount of food in the package you buy. Though it is not showing up in any type food price index the effect is the same as having higher food prices.
I have seen loaves of bread with smaller size slices, but the price is the same. I bought some Gefilte fish (same brand that I always buy when I want this), the price was the same but the pieces were 30% smaller. When I checked the nutritional info, each piece was 30% reduced in calories on the label from earlier purchases.
Yes, shrinkflation does occur and has for many years. In some contexts, it seems to be driven at least in part by Americans desiring smaller portions than before for health reasons, but that's clearly not always the case.
I never heard the term "shrinkflation" before. But that is the perfect term.
There is no such thing as shinkflation. Shrinkage, yes.

CPI tracks changes in size and adjust accordingly.

Yes, it affects your emotional response, but not the cold hard analytical value for of numbers.
Shrinkflation is real (i.e., "a rise in the general price level of goods per unit of weight or volume, brought about by a reduction in the weight or size of the item sold", as noted here) an increase in the nominal price per unit , but you're correct that CPI should capture it.
You can find a lot of YouTube videos comparing product sizes and prices. It's pretty fascinating.
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Re: Whence inflation?

Post by LittleMaggieMae »

I don't think the smaller amounts in the packages that are the same size is about "portions".
I wish many packages of prepared foods that I buy came in even portions (no extra .5 or .25 of a portion). I wish the prepared foods came in even numbers of servings - so 2 or 4. That would help me with portion control and menu planning. I'm guessing the prevalence of Warehouse stores and what appears to be weekly shopping runs by most people means that the smaller "portion" sizes per package aren't really what Americans want.

But, I will agree with the concept of "shrinkage" in the volume/quantity in packaged foods - while the SIZE and shape of the container stays deceptively the same as when it had MORE volume/quantity in it. If "portion size" was important to Americans - why wouldn't the packaging reflect it? So it would be easy to grab/find the packaging with the "portions" you want and need? The cereal, alcohol, chips/snacks, and frozen food aisles would be good examples. It's hard to find a "small box of cereal" just looking at the shelf - you have to examine the box to see how much is IN the box to determine this. And yeah, those aren't exactly the "healthy food" aisles... but judging from the floor space allocated to those aisles - it's where most people are shopping.

(and yeah, I do cook and use a food scale and measuring cups/spoons and attempt to use appropriate portions of the parts of a meal at mealtime).

ADDED: and yes, the prices of many of the things i buy have "skyrocketed" either because there are no longer sales or the prices crept up a dime and quarter each and every couple of weeks for the last 3 months, or because the volume/quantity has gotten smaller.
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Re: Whence inflation?

Post by index2max »

willthrill81 wrote: Sun Apr 18, 2021 2:05 pm
index2max wrote: Sun Apr 18, 2021 1:39 pm Not sure whom OP is trying to convince there is not inflation. I can clearly see it right in front of me.

The money supply of dollars is increasing all the time. An increase in the money supply IS THE DEFINITION OF INFLATION.

https://wiki.mises.org/wiki/Inflation#Rising_prices
No, it isn't. Inflation refers to an increasing nominal price for goods and services, as noted here. An increased money supply does not necessarily lead to a lockstep increase in prices; economists have known this for a long time now.
Prices can’t just keep going up and up unless there was a corresponding increase on the money supply chasing after a more limited amounts of goods and services. Inflation is due to an increase in the money supply. The federal reserve is trapped, they aren’t going to raise interest raises or turn off the money printers anytime soon.

Why do you think the stock market just keeps going up and up after all these decades?
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Re: Whence inflation?

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index2max wrote: Sun Apr 18, 2021 5:44 pm
willthrill81 wrote: Sun Apr 18, 2021 2:05 pm
index2max wrote: Sun Apr 18, 2021 1:39 pm Not sure whom OP is trying to convince there is not inflation. I can clearly see it right in front of me.

The money supply of dollars is increasing all the time. An increase in the money supply IS THE DEFINITION OF INFLATION.

https://wiki.mises.org/wiki/Inflation#Rising_prices
No, it isn't. Inflation refers to an increasing nominal price for goods and services, as noted here. An increased money supply does not necessarily lead to a lockstep increase in prices; economists have known this for a long time now.
Prices can’t just keep going up and up unless there was a corresponding increase on the money supply chasing after a more limited amounts of goods and services. Inflation is due to an increase in the money supply. The federal reserve is trapped, they aren’t going to raise interest raises or turn off the money printers anytime soon.

Why do you think the stock market just keeps going up and up after all these decades?
An increased money supply is generally necessary for inflation to occur, but an increased money supply is insufficient to create inflation. This was carefully noted and demonstrated in the OP. The money supply has increased at a far faster rate than inflation for a long time now, over a decade.

The stock market goes up in nominal value for two primary reasons: inflation and earnings, mostly the latter.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: Whence inflation?

Post by 59Gibson »

bgf wrote: Sun Apr 18, 2021 1:12 pm
bottlecap wrote: Thu Oct 08, 2020 7:15 pm The government calculates inflation stupidly. Likely because it masks true inflation. Money doesn’t flow only into goods that are in the CPI. It flows into stocks, bonds, real estate and innumerable other things.

Velocity of money can be a symptom, but not a cause. Velocity of money doesn’t affect how I determine how much I’m willing to pay for goods (which, whether you agree or not, is how the CPI measures inflation, at least with respect to a limited number of goods). I doubt it factors into anyone else’s decisions, either.

JT
Inflation is bad insofar as it destroys purchasing power. Why count an increase in wealth (stocks, bonds, real estate) as 'inflation'?

If wages are increasing in such a way that standard of living is not decreasing over time, markets remain liquid and robust, and the economy continues to grow, then where is the problem?

People are constantly looking for a solution to a problem that does not exist. Inflation is not a problem in US, Europe, or Asia.
This is true if one's income as kept pace over the last 20+ years. Many jobs and not min wage/entry level positions have experienced a loss of purchasing power. When considering the true big 3 costs..Housing, Medical care/insurance, and education. These folks have gotten clobbered over the last 2 decades+
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Re: Whence inflation?

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59Gibson wrote: Sun Apr 18, 2021 6:15 pm
bgf wrote: Sun Apr 18, 2021 1:12 pm
bottlecap wrote: Thu Oct 08, 2020 7:15 pm The government calculates inflation stupidly. Likely because it masks true inflation. Money doesn’t flow only into goods that are in the CPI. It flows into stocks, bonds, real estate and innumerable other things.

Velocity of money can be a symptom, but not a cause. Velocity of money doesn’t affect how I determine how much I’m willing to pay for goods (which, whether you agree or not, is how the CPI measures inflation, at least with respect to a limited number of goods). I doubt it factors into anyone else’s decisions, either.

JT
Inflation is bad insofar as it destroys purchasing power. Why count an increase in wealth (stocks, bonds, real estate) as 'inflation'?

If wages are increasing in such a way that standard of living is not decreasing over time, markets remain liquid and robust, and the economy continues to grow, then where is the problem?

People are constantly looking for a solution to a problem that does not exist. Inflation is not a problem in US, Europe, or Asia.
This is true if one's income as kept pace over the last 20+ years. Many jobs and not min wage/entry level positions have experienced a loss of purchasing power. When considering the true big 3 costs..Housing, Medical care/insurance, and education. These folks have gotten clobbered over the last 2 decades+
As of September of 2020, the bottom income quintile had grown 42.4% in real dollars since 1967, as noted here. They definitely haven't gotten 'clobbered'.

Image
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Re: Whence inflation?

Post by ray.james »

willthrill81 wrote: Sat Apr 17, 2021 9:17 pm David Stein, host of the Money for the Rest of Us podcast, had a great episode this week on recent inflation. He provides evidence to suggest what many here have also put forward: the inflation we've seen over the last decade and especially the last year has not impacted the prices of the goods and services that CPI tracks nearly as much as it has impacted the prices of assets like stocks and real estate.
Thank you for sharing. Enjoyed listening to it. I am not aware of this blog before.
My goto's are calcualtedrisk and related.
When in doubt, http://www.bogleheads.org/forum/viewtopic.php?f=1&t=79939
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Re: Whence inflation?

Post by 59Gibson »

willthrill81 wrote: Sun Apr 18, 2021 6:26 pm
59Gibson wrote: Sun Apr 18, 2021 6:15 pm
bgf wrote: Sun Apr 18, 2021 1:12 pm
bottlecap wrote: Thu Oct 08, 2020 7:15 pm The government calculates inflation stupidly. Likely because it masks true inflation. Money doesn’t flow only into goods that are in the CPI. It flows into stocks, bonds, real estate and innumerable other things.

Velocity of money can be a symptom, but not a cause. Velocity of money doesn’t affect how I determine how much I’m willing to pay for goods (which, whether you agree or not, is how the CPI measures inflation, at least with respect to a limited number of goods). I doubt it factors into anyone else’s decisions, either.

JT
Inflation is bad insofar as it destroys purchasing power. Why count an increase in wealth (stocks, bonds, real estate) as 'inflation'?

If wages are increasing in such a way that standard of living is not decreasing over time, markets remain liquid and robust, and the economy continues to grow, then where is the problem?

People are constantly looking for a solution to a problem that does not exist. Inflation is not a problem in US, Europe, or Asia.
This is true if one's income as kept pace over the last 20+ years. Many jobs and not min wage/entry level positions have experienced a loss of purchasing power. When considering the true big 3 costs..Housing, Medical care/insurance, and education. These folks have gotten clobbered over the last 2 decades+
As of September of 2020, the bottom income quintile had grown 42.4% in real dollars since 1967, as noted here. They definitely haven't gotten 'clobbered'.

Image
I don't know about from 1967, but I was speaking of the last 2 decades. The chart you posted barely shows any growth outside the top 2 quintiles since late 90s/2000. Yet look at real estate values since the late 90s in much of the country, medical coverage and education costs.
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Re: Whence inflation?

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There has been inflation in the prices of housing, stocks and bonds. Logically before we have inflation in consumer goods, there will be deflation in asset prices. Inflationistas are too early.
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Re: Whence inflation?

Post by bgf »

59Gibson wrote: Sun Apr 18, 2021 6:15 pm
bgf wrote: Sun Apr 18, 2021 1:12 pm
bottlecap wrote: Thu Oct 08, 2020 7:15 pm The government calculates inflation stupidly. Likely because it masks true inflation. Money doesn’t flow only into goods that are in the CPI. It flows into stocks, bonds, real estate and innumerable other things.

Velocity of money can be a symptom, but not a cause. Velocity of money doesn’t affect how I determine how much I’m willing to pay for goods (which, whether you agree or not, is how the CPI measures inflation, at least with respect to a limited number of goods). I doubt it factors into anyone else’s decisions, either.

JT
Inflation is bad insofar as it destroys purchasing power. Why count an increase in wealth (stocks, bonds, real estate) as 'inflation'?

If wages are increasing in such a way that standard of living is not decreasing over time, markets remain liquid and robust, and the economy continues to grow, then where is the problem?

People are constantly looking for a solution to a problem that does not exist. Inflation is not a problem in US, Europe, or Asia.
This is true if one's income as kept pace over the last 20+ years. Many jobs and not min wage/entry level positions have experienced a loss of purchasing power. When considering the true big 3 costs..Housing, Medical care/insurance, and education. These folks have gotten clobbered over the last 2 decades+
If inflation is a monetary/political phenomenon, then it should affect all those who purchase goods/services in that currency, not just this or that job or those who work in this or that sector. if coal miners' purchasing power has been degraded, its not because of inflation. it is because their skill and product is no longer as highly valued in the marketplace. this is how capitalism works.

what you are describing, imo, is something that should be corrected by policy, but that doesn't make it inflation.
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Re: Whence inflation?

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59Gibson wrote: Sun Apr 18, 2021 6:34 pm
willthrill81 wrote: Sun Apr 18, 2021 6:26 pm
59Gibson wrote: Sun Apr 18, 2021 6:15 pm
bgf wrote: Sun Apr 18, 2021 1:12 pm
bottlecap wrote: Thu Oct 08, 2020 7:15 pm The government calculates inflation stupidly. Likely because it masks true inflation. Money doesn’t flow only into goods that are in the CPI. It flows into stocks, bonds, real estate and innumerable other things.

Velocity of money can be a symptom, but not a cause. Velocity of money doesn’t affect how I determine how much I’m willing to pay for goods (which, whether you agree or not, is how the CPI measures inflation, at least with respect to a limited number of goods). I doubt it factors into anyone else’s decisions, either.

JT
Inflation is bad insofar as it destroys purchasing power. Why count an increase in wealth (stocks, bonds, real estate) as 'inflation'?

If wages are increasing in such a way that standard of living is not decreasing over time, markets remain liquid and robust, and the economy continues to grow, then where is the problem?

People are constantly looking for a solution to a problem that does not exist. Inflation is not a problem in US, Europe, or Asia.
This is true if one's income as kept pace over the last 20+ years. Many jobs and not min wage/entry level positions have experienced a loss of purchasing power. When considering the true big 3 costs..Housing, Medical care/insurance, and education. These folks have gotten clobbered over the last 2 decades+
As of September of 2020, the bottom income quintile had grown 42.4% in real dollars since 1967, as noted here. They definitely haven't gotten 'clobbered'.

Image
I don't know about from 1967, but I was speaking of the last 2 decades. The chart you posted barely shows any growth outside the top 2 quintiles since late 90s/2000. Yet look at real estate values since the late 90s in much of the country, medical coverage and education costs.
It's true that the bottom three quintiles haven't seen much growth over the last 20 years, but keep in mind that real (i.e., inflation-adjusted) dollars are being measured here, and CPI does take rents, medical, and education costs into account.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: Whence inflation?

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index2max wrote: Sun Apr 18, 2021 1:39 pm Not sure whom OP is trying to convince there is not inflation. I can clearly see it right in front of me.

The money supply of dollars is increasing all the time. An increase in the money supply IS THE DEFINITION OF INFLATION.

https://wiki.mises.org/wiki/Inflation#Rising_prices
Note that "money supply" includes all of the dollars that exist in the system, not just M1 or M2 which are relatively easy to measure. Do you actually have data to show whether the total amount of money is greater than it was a year ago?
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Re: Whence inflation?

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Scott S wrote: Mon Apr 19, 2021 9:00 am
index2max wrote: Sun Apr 18, 2021 1:39 pm Not sure whom OP is trying to convince there is not inflation. I can clearly see it right in front of me.

The money supply of dollars is increasing all the time. An increase in the money supply IS THE DEFINITION OF INFLATION.

https://wiki.mises.org/wiki/Inflation#Rising_prices
Note that "money supply" includes all of the dollars that exist in the system, not just M1 or M2 which are relatively easy to measure. Do you actually have data to show whether the total amount of money is greater than it was a year ago?
Good point. So I'll repeat a question I asked OP in a different thread here. Why doesn't the federal reserve publish a single "money supply" quantity? Do they not know how many dollars are in circulation?

Even if they did, I doubt they'd want the public to have an easily digestible number vs all this M1, M2 etc. nonsense. Otherwise the public could easily calculate the percent loss in their existing dollars spending power.
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Re: Whence inflation?

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index2max wrote: Mon Apr 19, 2021 9:02 amGood point. So I'll repeat a question I asked OP in a different thread here. Why doesn't the federal reserve publish a single "money supply" quantity? Do they not know how many dollars are in circulation?

Even if they did, I doubt they'd want the public to have an easily digestible number vs all this M1, M2 etc. nonsense. Otherwise the public could easily calculate the percent loss in their existing dollars spending power.
It would help answer the question of *how strong* that effect is, I'll grant that.

It's amusing to me that people look at M1 or M2 and say "more inflation!" when money sitting in savings accounts doesn't do any chasing of goods or services. Whereas credit card balances and bank loans which actually do create money to finance consumption (chasing of goods and services) aren't covered. :D
Last edited by Scott S on Mon Apr 19, 2021 9:55 am, edited 1 time in total.
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Re: Whence inflation?

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Scott S wrote: Mon Apr 19, 2021 9:17 am It's amusing to me that people look at M1 or M2 and say "more inflation!" when money sitting in savings accounts doesn't do any chasing of goods or services. Whereas credit card balances and bank loans which actually do create money to finance consumption (chasing of goods and services) isn't covered. :D
Precisely. That's why the idea that an increasing money supply is de facto inflation is just plain wrong. If people stick the additional cash under their proverbial mattress and don't move it through the economy, it won't impact the prices of goods and services at all.
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Re: Whence inflation?

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willthrill81 wrote: Mon Apr 19, 2021 9:26 am
Scott S wrote: Mon Apr 19, 2021 9:17 am It's amusing to me that people look at M1 or M2 and say "more inflation!" when money sitting in savings accounts doesn't do any chasing of goods or services. Whereas credit card balances and bank loans which actually do create money to finance consumption (chasing of goods and services) isn't covered. :D
Precisely. That's why the idea that an increasing money supply is de facto inflation is just plain wrong. If people stick the additional cash under their proverbial mattress and don't move it through the economy, it won't impact the prices of goods and services at all.
So, if I took a million dollars and burned it, that would be no different than if I would've hid that million away forever and ever. The only time that hidden money is any different from burnt money is when it comes out of hiding.
"I think we may see a return to full employment next year." -- Janet Yellen, March 23rd 2021
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Re: Whence inflation?

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Robot Monster wrote: Mon Apr 19, 2021 9:58 am
willthrill81 wrote: Mon Apr 19, 2021 9:26 am
Scott S wrote: Mon Apr 19, 2021 9:17 am It's amusing to me that people look at M1 or M2 and say "more inflation!" when money sitting in savings accounts doesn't do any chasing of goods or services. Whereas credit card balances and bank loans which actually do create money to finance consumption (chasing of goods and services) isn't covered. :D
Precisely. That's why the idea that an increasing money supply is de facto inflation is just plain wrong. If people stick the additional cash under their proverbial mattress and don't move it through the economy, it won't impact the prices of goods and services at all.
So, if I took a million dollars and burned it, that would be no different than if I would've hid that million away forever and ever. The only time that hidden money is any different from burnt money is when it comes out of hiding.
Yes, and?
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Re: Whence inflation?

Post by Robot Monster »

willthrill81 wrote: Mon Apr 19, 2021 10:01 am
Robot Monster wrote: Mon Apr 19, 2021 9:58 am
willthrill81 wrote: Mon Apr 19, 2021 9:26 am
Scott S wrote: Mon Apr 19, 2021 9:17 am It's amusing to me that people look at M1 or M2 and say "more inflation!" when money sitting in savings accounts doesn't do any chasing of goods or services. Whereas credit card balances and bank loans which actually do create money to finance consumption (chasing of goods and services) isn't covered. :D
Precisely. That's why the idea that an increasing money supply is de facto inflation is just plain wrong. If people stick the additional cash under their proverbial mattress and don't move it through the economy, it won't impact the prices of goods and services at all.
So, if I took a million dollars and burned it, that would be no different than if I would've hid that million away forever and ever. The only time that hidden money is any different from burnt money is when it comes out of hiding.
Yes, and?
Just an observation.
"I think we may see a return to full employment next year." -- Janet Yellen, March 23rd 2021
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Re: Whence inflation?

Post by Be Calm »

Forester wrote: Sun Apr 18, 2021 6:37 pm There has been inflation in the prices of housing, stocks and bonds. Logically before we have inflation in consumer goods, there will be deflation in asset prices. Inflationistas are too early.
It's hard to say if there will be significant deflation in asset prices prior to inflation; it depends on demand. I think for equities, and to an extent real estate, will depend on prevailing interest rates. If demand for these assets remains high however, I would imagine that current prices could continue to be supported.

You're right about inflation existing in equities and housing. More significant I think is the enormous rise in the price of many commodities, among them lumber, steel and various industrial metals. It's possible that elevation in the prices of these materials truly can cause inflation, as the increased costs for these products is generally passed to the consumer. Therefore, some of the 'money in hiding' (e.g. savings) will increasingly need to enter the money supply in order to buy anything that uses these materials - which is inflationary.

I think that steel prices are especially interesting and important, as steel is used so widely (infrastructure, automotive, manufacturing of all types) and the global steel supply/demand situation is likely to support elevated prices throughout 2021 and possibly throughout 2022. Just take a look at current US hot-rolled coil steel futures, and compare with HRC prices in recent years. It's getting wild. Disclaimer: my 'play-money' allocation is completely invested in certain steel manufacturer stocks. As you probably guessed.

So do I think the stage is set for inflation in the US? Well sure, but... (1) I doubt that CPI numbers will matter much to equities, bonds and housing prices unless the federal reserve is forced to act more aggressively than expected with their monetary policy; and (2) I don't plan to do anything differently with my investments based on this suspicion. (To be fair, I don't hold any bonds, but I'm still somewhat early in my investing career.) Well, I guess I invested my play money in steel stocks for the time being, but that's probably an insignificant change. (3) I suppose I'll continue to fight against inflation by continuing to keep my savings rate as high as possible, and my spending as low as possible. :D
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Re: Whence inflation?

Post by alex_686 »

index2max wrote: Mon Apr 19, 2021 9:02 am
Scott S wrote: Mon Apr 19, 2021 9:00 am
index2max wrote: Sun Apr 18, 2021 1:39 pm Not sure whom OP is trying to convince there is not inflation. I can clearly see it right in front of me.

The money supply of dollars is increasing all the time. An increase in the money supply IS THE DEFINITION OF INFLATION.

https://wiki.mises.org/wiki/Inflation#Rising_prices
Note that "money supply" includes all of the dollars that exist in the system, not just M1 or M2 which are relatively easy to measure. Do you actually have data to show whether the total amount of money is greater than it was a year ago?
Good point. So I'll repeat a question I asked OP in a different thread here. Why doesn't the federal reserve publish a single "money supply" quantity? Do they not know how many dollars are in circulation?

Even if they did, I doubt they'd want the public to have an easily digestible number vs all this M1, M2 etc. nonsense. Otherwise the public could easily calculate the percent loss in their existing dollars spending power.
They know how many dollars are in circulation. However, they don't know how much money is in circulation.

As they say, if it walks like a duck, quakes like a duck, and waddles like a duck it must be a duck. Same with money. If it operates like money it is money - until it isn't. What is money? Really anything that is liquid and has principle protection (i.e., can fall in notional value). That is, anything that society accepts as money.

Here is a simple example from 2008.

Money Market Mutual Funds is considered cash. You can draw cash out at any time by pulling out your checkbook. Highly liquid with strong principle protection. And how is that money created? Corporations issue commercial paper (i.e. debt), the money market funds buy the debt, transforming that debt into money. This is all done outside of the Federal Reserve. Until 2008 when the financial crisis hit causing the commercial paper to freeze up. Without that liquid market then overnight that money no longer is money.

One might argue that the money market reforms have made this example irrelevant. While this particular example is no relevant it does illustrate a point. There is a long history of hard currency (either gold or fiat paper issued by the central bank), broad money (banks notes and other bank products), and near money (shadow banking, alternative assets) working fine until they don't.

Sorry. You are not the first person who has trod down this path.

Here is a nice easy read: Money: The Unauthorized Biography--From Coinage to Cryptocurrencies by Felix Martin
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
Random Poster
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Re: Whence inflation?

Post by Random Poster »

willthrill81 wrote: Sun Apr 18, 2021 2:54 pm
alex_686 wrote: Sun Apr 18, 2021 2:51 pm
Mr.BB wrote: Sun Apr 18, 2021 2:08 pm
willthrill81 wrote: Sun Apr 18, 2021 2:07 pm
Mr.BB wrote: Sun Apr 18, 2021 1:46 pm I am starting to see what I like to call "hidden inflation" with our groceries. Instead of charging more money the manufactures are keeping the prices about the same but reducing the amount of food in the package you buy. Though it is not showing up in any type food price index the effect is the same as having higher food prices.
I have seen loaves of bread with smaller size slices, but the price is the same. I bought some Gefilte fish (same brand that I always buy when I want this), the price was the same but the pieces were 30% smaller. When I checked the nutritional info, each piece was 30% reduced in calories on the label from earlier purchases.
Yes, shrinkflation does occur and has for many years. In some contexts, it seems to be driven at least in part by Americans desiring smaller portions than before for health reasons, but that's clearly not always the case.
I never heard the term "shrinkflation" before. But that is the perfect term.
There is no such thing as shinkflation. Shrinkage, yes.

CPI tracks changes in size and adjust accordingly.

Yes, it affects your emotional response, but not the cold hard analytical value for of numbers.
Shrinkflation is real (i.e., "a rise in the general price level of goods per unit of weight or volume, brought about by a reduction in the weight or size of the item sold", as noted here), but you're correct that CPI should capture it.
See, as a recent example, Tillamook ice cream.

A few months ago, they were sold in 1.75 qt packages.

Now, though, they are sold in 1.5 qt packages. Often at the same “old size” price.

Top tip though: complain on Tillamook’s website and they will send you a coupon for a free container of ice cream.
index2max
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Re: Whence inflation?

Post by index2max »

alex_686 wrote: Mon Apr 19, 2021 1:37 pm
index2max wrote: Mon Apr 19, 2021 9:02 am
Scott S wrote: Mon Apr 19, 2021 9:00 am
index2max wrote: Sun Apr 18, 2021 1:39 pm Not sure whom OP is trying to convince there is not inflation. I can clearly see it right in front of me.

The money supply of dollars is increasing all the time. An increase in the money supply IS THE DEFINITION OF INFLATION.

https://wiki.mises.org/wiki/Inflation#Rising_prices
Note that "money supply" includes all of the dollars that exist in the system, not just M1 or M2 which are relatively easy to measure. Do you actually have data to show whether the total amount of money is greater than it was a year ago?
Good point. So I'll repeat a question I asked OP in a different thread here. Why doesn't the federal reserve publish a single "money supply" quantity? Do they not know how many dollars are in circulation?

Even if they did, I doubt they'd want the public to have an easily digestible number vs all this M1, M2 etc. nonsense. Otherwise the public could easily calculate the percent loss in their existing dollars spending power.
They know how many dollars are in circulation. However, they don't know how much money is in circulation.

As they say, if it walks like a duck, quakes like a duck, and waddles like a duck it must be a duck. Same with money. If it operates like money it is money - until it isn't. What is money? Really anything that is liquid and has principle protection (i.e., can fall in notional value). That is, anything that society accepts as money.

Here is a simple example from 2008.

Money Market Mutual Funds is considered cash. You can draw cash out at any time by pulling out your checkbook. Highly liquid with strong principle protection. And how is that money created? Corporations issue commercial paper (i.e. debt), the money market funds buy the debt, transforming that debt into money. This is all done outside of the Federal Reserve. Until 2008 when the financial crisis hit causing the commercial paper to freeze up. Without that liquid market then overnight that money no longer is money.

One might argue that the money market reforms have made this example irrelevant. While this particular example is no relevant it does illustrate a point. There is a long history of hard currency (either gold or fiat paper issued by the central bank), broad money (banks notes and other bank products), and near money (shadow banking, alternative assets) working fine until they don't.

Sorry. You are not the first person who has trod down this path.

Here is a nice easy read: Money: The Unauthorized Biography--From Coinage to Cryptocurrencies by Felix Martin
Yes, I understand that money issued isn't necessarily in circulation. It would be like a company issuing shares, but not issuing them (e.g. holding onto them for a future stock-only acquisition).

Want to know how many dollars have been issued in total, regardless of whether some are not in circulation. Is such a number published or tracked by the federal reserve or US treasury?
alex_686
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Re: Whence inflation?

Post by alex_686 »

index2max wrote: Mon Apr 19, 2021 6:56 pm Yes, I understand that money issued isn't necessarily in circulation. It would be like a company issuing shares, but not issuing them (e.g. holding onto them for a future stock-only acquisition).

Want to know how many dollars have been issued in total, regardless of whether some are not in circulation. Is such a number published or tracked by the federal reserve or US treasury?
I am not sure what you are asking. What do you mean by "how many dollars have been issued"? I understand why people intuitively ask it - I just don't think it is a valid question.

Are you referring to M0? The actually bills that have been issued by the federal reserve? M1? M2? I mean, those numbers are all available. Try the St. Louis Fed. These refer to dollars that have been issued.

However, almost nobody cares about that. If they care about money supply, they care about Broad Money, or M3. Money that has not been issued by the Federal Reserve. This is 10x to 20x of what the central bank has issued. Consider this, if I write you a posted dated check of $100 we have in a very real sense of the word created $100 out of thin air. This fall under the "Real Bills" theory of money which easily dates back over 200 years.

The fed stopped counting M3 back in 2006. The data since the mid 90s was pretty worthless. The purpose of banks is to convert illiquid assets into liquid cash. They do a pretty good job of it. The money supply expands and contracts as needed. The fact that it instantly flits from one spot to another with little cause or reason makes it impossible to track.

Or, here is a alternative look at the money supply, and why it has no impact on inflation. It is a Planet Money podcast, it is the 4th story.

https://www.npr.org/2021/03/24/98084145 ... -and-money
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
index2max
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Re: Whence inflation?

Post by index2max »

alex_686 wrote: Mon Apr 19, 2021 7:28 pm
index2max wrote: Mon Apr 19, 2021 6:56 pm Yes, I understand that money issued isn't necessarily in circulation. It would be like a company issuing shares, but not issuing them (e.g. holding onto them for a future stock-only acquisition).

Want to know how many dollars have been issued in total, regardless of whether some are not in circulation. Is such a number published or tracked by the federal reserve or US treasury?
I am not sure what you are asking. What do you mean by "how many dollars have been issued"? I understand why people intuitively ask it - I just don't think it is a valid question.

Are you referring to M0? The actually bills that have been issued by the federal reserve? M1? M2? I mean, those numbers are all available. Try the St. Louis Fed. These refer to dollars that have been issued.

However, almost nobody cares about that. If they care about money supply, they care about Broad Money, or M3. Money that has not been issued by the Federal Reserve. This is 10x to 20x of what the central bank has issued. Consider this, if I write you a posted dated check of $100 we have in a very real sense of the word created $100 out of thin air. This fall under the "Real Bills" theory of money which easily dates back over 200 years.

The fed stopped counting M3 back in 2006. The data since the mid 90s was pretty worthless. The purpose of banks is to convert illiquid assets into liquid cash. They do a pretty good job of it. The money supply expands and contracts as needed. The fact that it instantly flits from one spot to another with little cause or reason makes it impossible to track.

Or, here is a alternative look at the money supply, and why it has no impact on inflation. It is a Planet Money podcast, it is the 4th story.

https://www.npr.org/2021/03/24/98084145 ... -and-money
Ugh. This is exactly what I am talking about. You can't give me a straight answer because they purposely don't provide one to us.

People think economics is complicated because the federal reserve tries to bore people with unnecessary details.

All that's going on is the man behind the curtain is printing lots of money and handing it out to everyone who's part of the power structure.

I won't continue arguing with you and OP. It's your guys' thread.

For anyone else who's still got an open mind, read "Economics in One Lesson" by Henry Hazlitt. You can even order a free copy issued by the Mises Institute if you want to learn about common sense economics.

https://mises.org/forms/get-your-free-e ... esson-book
interestediniras
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Re: Whence inflation?

Post by interestediniras »

When provided with substantive details, dismissing them as not being a "straight answer" because the "man behind the curtain" is "purposely" withholding the 'real facts' is not really a response to the merits of the case, so to speak. It's just a dismissal. An argument from the position of "it's complicated, so it's wrong," which is not an argument at all -- just a refusal to engage with the details.
rich126
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Re: Whence inflation?

Post by rich126 »

There now seems to be a lot of inflation like stuff but isn't true inflation. Some falls into lifestyle creep and some doesn't.
For example, hotel room rates. In the past you had a rate and taxes but now many charge a resort or destination fee. Something you pay but may not be a thing measured as inflation. Similar for airline tickets where you might have baggage fees, seating preference fees.

There are more and more tech stuff that comes with subscription fees and while the fee itself may not seem bad, when you have a bunch of them it adds up.

Food delivery. In the past you might get a pizza delivered and tip someone a few bucks. Now you have all these delivery services that have delivery fee, service fee and increase the price of the items from the menu plus a tip.

Just in my experience is that while there are now some real shortages due to COVID that is affecting purchasing cars, rental car issues, housing, housing materials, etc. it is easy to let some of the other fees/stuff creep into your budget w/o realizing it.
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Re: Whence inflation?

Post by not4me »

I haven't been reading this thread recently & still haven't read many posts. Thought I'd make a quick observation in case it soon gets locked.

Looking at opening post, about 7ish months back...touted:

"Perhaps this is why the market is only forecasting inflation over the next 10 years to be 1.73%."

So, while the thread has been hashed through, has market changed its view? Looking at same source today (Monday 5/3/21, so most recent data Friday 4/30/21) was showing 2.41%. Anyone thinking differently than before?
staustin
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Re: Whence inflation?

Post by staustin »

but isn't true inflation
procter & gamble, coca cola, clorox, and now Buffett report price increases due to 'significant inflation' in input prices. earlier in april, neilsoniq reported over general merchandise year over year increase of 7%. edited to add, pepisco, hershey, modelez, kraft, general mills, kimberly clark and j.m. smucker now also reporting price increases due to significant input component inflation. Corn, lumber, copper, futures increasing 20+% per Barron's.
Joe Public
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Re: Whence inflation?

Post by Joe Public »

Random Poster wrote: Mon Apr 19, 2021 3:27 pm
willthrill81 wrote: Sun Apr 18, 2021 2:54 pm
alex_686 wrote: Sun Apr 18, 2021 2:51 pm
Mr.BB wrote: Sun Apr 18, 2021 2:08 pm
willthrill81 wrote: Sun Apr 18, 2021 2:07 pm

Yes, shrinkflation does occur and has for many years. In some contexts, it seems to be driven at least in part by Americans desiring smaller portions than before for health reasons, but that's clearly not always the case.
I never heard the term "shrinkflation" before. But that is the perfect term.
There is no such thing as shinkflation. Shrinkage, yes.

CPI tracks changes in size and adjust accordingly.

Yes, it affects your emotional response, but not the cold hard analytical value for of numbers.
Shrinkflation is real (i.e., "a rise in the general price level of goods per unit of weight or volume, brought about by a reduction in the weight or size of the item sold", as noted here), but you're correct that CPI should capture it.
See, as a recent example, Tillamook ice cream.

A few months ago, they were sold in 1.75 qt packages.

Now, though, they are sold in 1.5 qt packages. Often at the same “old size” price.

Top tip though: complain on Tillamook’s website and they will send you a coupon for a free container of ice cream.
Ha. I am still complaining about the shift from half-gallon to 1.75-quart sizes two decades ago. Stop shrinking my ice cream! :annoyed
fatcharlie
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Re: Whence inflation?

Post by fatcharlie »

justsomeguy2018 wrote: Thu Oct 08, 2020 10:37 am Nice post, a point I might make is that inflation possibly found its way into assets that aren't tracked by CPI (to my knowledge), so instead of consumer inflation we have asset inflation (housing, stocks, etc.). Just thinking aloud....
There's already a very plausible explanation for the housing runup - lack of supply in the places where people want to buy.
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pokebowl
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Re: Whence inflation?

Post by pokebowl »

staustin wrote: Mon May 03, 2021 12:04 pm
but isn't true inflation
procter & gamble, coca cola, clorox, and now Buffett report price increases due to 'significant inflation' in input prices. earlier in april, neilsoniq reported over general merchandise year over year increase of 7%. edited to add, pepisco, hershey, modelez, kraft, general mills, kimberly clark and j.m. smucker now also reporting price increases due to significant input component inflation. Corn, lumber, copper, futures increasing 20+% per Barron's.
There is also a forecast of additional supply chain shortages this fall to coincide with said price hikes. For those attempting to get computer parts, its also projected the shortages will continue through the rest of this year into next. While it may be reported that CPI is low, its anything but and expected to only get worse by year end.
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willthrill81
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Re: Whence inflation?

Post by willthrill81 »

not4me wrote: Mon May 03, 2021 12:04 pm Looking at opening post, about 7ish months back...touted:

"Perhaps this is why the market is only forecasting inflation over the next 10 years to be 1.73%."

So, while the thread has been hashed through, has market changed its view? Looking at same source today (Monday 5/3/21, so most recent data Friday 4/30/21) was showing 2.41%. Anyone thinking differently than before?
The market is constantly forecasting future inflation, and it's clearly expecting more inflation than seven months ago. It's still far smaller than the rate of the increase in the money supply.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
AnonJohn
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Re: Whence inflation?

Post by AnonJohn »

Joe Public wrote: Mon May 03, 2021 12:27 pm
Random Poster wrote: Mon Apr 19, 2021 3:27 pm
willthrill81 wrote: Sun Apr 18, 2021 2:54 pm
alex_686 wrote: Sun Apr 18, 2021 2:51 pm
Mr.BB wrote: Sun Apr 18, 2021 2:08 pm
I never heard the term "shrinkflation" before. But that is the perfect term.
There is no such thing as shinkflation. Shrinkage, yes.

CPI tracks changes in size and adjust accordingly.

Yes, it affects your emotional response, but not the cold hard analytical value for of numbers.
Shrinkflation is real (i.e., "a rise in the general price level of goods per unit of weight or volume, brought about by a reduction in the weight or size of the item sold", as noted here), but you're correct that CPI should capture it.
See, as a recent example, Tillamook ice cream.

A few months ago, they were sold in 1.75 qt packages.

Now, though, they are sold in 1.5 qt packages. Often at the same “old size” price.

Top tip though: complain on Tillamook’s website and they will send you a coupon for a free container of ice cream.
Ha. I am still complaining about the shift from half-gallon to 1.75-quart sizes two decades ago. Stop shrinking my ice cream! :annoyed
Be patient. After this comes the 1.5 → 1.25 qt shrinkage comes the 1.25→1 qt. And THEN comes the introduction of the new super-sized half gallon size, responding to consumer demand for a larger size.

Actually there is one company that was selling a half gallon last time I looked. I was surprised. Can't recall the name (wasn't great ice cream). Cheers to ice cream! Now what was this thread about?
Tib
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Re: Whence inflation?

Post by Tib »

Inflation is not the Fed's only priority, and I suspect it's not the Fed's/the government's highest priority. Buffet sees a lot of inflation. Perhaps the Fed does also, but acknowledging it and saying explicitly that it has higher priorities might add to the public's expectation of inflation, which could cause inflation to get out of hand. The complexity of monetary/financial/economic matters affords ample scope for creative messaging. I've loaded up on commodity producers.
Random Poster
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Re: Whence inflation?

Post by Random Poster »

AnonJohn wrote: Mon May 03, 2021 3:24 pm Actually there is one company that was selling a half gallon last time I looked. I was surprised. Can't recall the name (wasn't great ice cream). Cheers to ice cream! Now what was this thread about?
Blue Bell.

They even highlight it on the package, saying “Still a 1/2 Gal”
make_a_better_world
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Re: Whence inflation?

Post by make_a_better_world »

I bought a piece of commercial property in 2018 in for $556k. In the last two months I got unsolicited offers to buy it at $1.5M and $1.8M by two separate parties.

My father recently commented to me about how a type of lumber he likes was $1-2/ft and now it’s $7/ft. Go to the hardware store in your city and look at how many people are there and how fast they are snatching up everything.

Virtually every asset class has appreciated significant amounts.

People create narratives to explain the phenomena such as the pandemic is driving up demand to leave the city which makes home prices go up but how would that explain the commercial real estate prices?

Inflation has already happened in a very real way. CPI is missing the mark.
fujiters
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Re: Whence inflation?

Post by fujiters »

make_a_better_world wrote: Mon May 03, 2021 5:39 pm I bought a piece of commercial property in 2018 in for $556k. In the last two months I got unsolicited offers to buy it at $1.5M and $1.8M by two separate parties.

My father recently commented to me about how a type of lumber he likes was $1-2/ft and now it’s $7/ft. Go to the hardware store in your city and look at how many people are there and how fast they are snatching up everything.

Virtually every asset class has appreciated significant amounts.

People create narratives to explain the phenomena such as the pandemic is driving up demand to leave the city which makes home prices go up but how would that explain the commercial real estate prices?

Inflation has already happened in a very real way. CPI is missing the mark.
CPI is an average of inflation across common expenditures. Yeah, if you're someone who buys a lot of lumber, you're experiencing high personal inflation. But CPI accounts for average personal lumber expenses (low). For what it's worth, I (someone who has never purchased lumber directly), seem to have lower-than-CPI personal inflation over the last year.
“The purpose of the margin of safety is to render the forecast unnecessary.” -Benjamin Graham
skierincolorado
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Re: Whence inflation?

Post by skierincolorado »

index2max wrote: Mon Apr 19, 2021 6:56 pm
alex_686 wrote: Mon Apr 19, 2021 1:37 pm
index2max wrote: Mon Apr 19, 2021 9:02 am
Scott S wrote: Mon Apr 19, 2021 9:00 am
index2max wrote: Sun Apr 18, 2021 1:39 pm Not sure whom OP is trying to convince there is not inflation. I can clearly see it right in front of me.

The money supply of dollars is increasing all the time. An increase in the money supply IS THE DEFINITION OF INFLATION.

https://wiki.mises.org/wiki/Inflation#Rising_prices
Note that "money supply" includes all of the dollars that exist in the system, not just M1 or M2 which are relatively easy to measure. Do you actually have data to show whether the total amount of money is greater than it was a year ago?
Good point. So I'll repeat a question I asked OP in a different thread here. Why doesn't the federal reserve publish a single "money supply" quantity? Do they not know how many dollars are in circulation?

Even if they did, I doubt they'd want the public to have an easily digestible number vs all this M1, M2 etc. nonsense. Otherwise the public could easily calculate the percent loss in their existing dollars spending power.
They know how many dollars are in circulation. However, they don't know how much money is in circulation.

As they say, if it walks like a duck, quakes like a duck, and waddles like a duck it must be a duck. Same with money. If it operates like money it is money - until it isn't. What is money? Really anything that is liquid and has principle protection (i.e., can fall in notional value). That is, anything that society accepts as money.

Here is a simple example from 2008.

Money Market Mutual Funds is considered cash. You can draw cash out at any time by pulling out your checkbook. Highly liquid with strong principle protection. And how is that money created? Corporations issue commercial paper (i.e. debt), the money market funds buy the debt, transforming that debt into money. This is all done outside of the Federal Reserve. Until 2008 when the financial crisis hit causing the commercial paper to freeze up. Without that liquid market then overnight that money no longer is money.

One might argue that the money market reforms have made this example irrelevant. While this particular example is no relevant it does illustrate a point. There is a long history of hard currency (either gold or fiat paper issued by the central bank), broad money (banks notes and other bank products), and near money (shadow banking, alternative assets) working fine until they don't.

Sorry. You are not the first person who has trod down this path.

Here is a nice easy read: Money: The Unauthorized Biography--From Coinage to Cryptocurrencies by Felix Martin
Yes, I understand that money issued isn't necessarily in circulation. It would be like a company issuing shares, but not issuing them (e.g. holding onto them for a future stock-only acquisition).

Want to know how many dollars have been issued in total, regardless of whether some are not in circulation. Is such a number published or tracked by the federal reserve or US treasury?
Dollars aren't issued. The vast majority of dollars are not created by the Fed. They are created by banks and financial institutions by fractional reserve lending. Banks and financial institutions have dramatically increased their reserves over the last decade+ thereby creating many fewer dollars than they had been previously.
dknightd
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Re: Whence inflation?

Post by dknightd »

As I see it the number of people in the world keeps increasing. So to keep the costs of goods the same, the governments needs to create more money. Just to keep up with the number of people spending money. I think governments are making more money than we need. But that is probably OK since there are many people who do not spend the money.
Costs for some things are definitely going up. That is to be expected. As long as income keeps up with increasing prices, no problem.
I budget for 3% inflation. As long it as it is lower than that I'll be OK. I hope and think
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Re: Whence inflation?

Post by willthrill81 »

skierincolorado wrote: Tue May 04, 2021 1:09 amThe vast majority of dollars are not created by the Fed. They are created by banks and financial institutions by fractional reserve lending. Banks and financial institutions have dramatically increased their reserves over the last decade+ thereby creating many fewer dollars than they had been previously.
This is a key concept that many aren't aware of. Dollars are created through lending. Only paper dollars are created through printing. Therefore, if there isn't any lending, there are no new dollars. And getting back to the point of the OP, if the Fed loans dollars to commercial banks, but those commercial banks don't then lend out those dollars, the velocity of money will not increase, and there won't be any inflation.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: Whence inflation?

Post by willthrill81 »

dknightd wrote: Tue May 04, 2021 9:50 am As I see it the number of people in the world keeps increasing. So to keep the costs of goods the same, the governments needs to create more money. Just to keep up with the number of people spending money. I think governments are making more money than we need. But that is probably OK since there are many people who do not spend the money.
Costs for some things are definitely going up. That is to be expected. As long as income keeps up with increasing prices, no problem.
I budget for 3% inflation. As long it as it is lower than that I'll be OK. I hope and think
Theoretically, if the supply of dollars is increased at the same rate as the demand for new dollars, there will be no inflation. This would be desirable for many reasons. However, the problem is that if the supply of dollars falls behind the demand for new dollars, deflation occurs. Frankly, deflation scares the pants off of the Fed and most economists because it can lead to a death spiral in the economy. It puts enormous pressure on debtors, effectively increasing the amount that they have to repay because they are getting few dollars in income than before. That causes the economy to tighten further, putting more downward pressure on economic activity, and so on. The Fed wants to avoid this at virtually all costs and has determined that 2% inflation is a reasonable target to avoid deflation while not being too much inflation.
“Good and ill have not changed since yesteryear; nor are they one thing among Elves and Dwarves and another among Men.” J.R.R. Tolkien, The Lord of the Rings
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Re: Whence inflation?

Post by alex_686 »

skierincolorado wrote: Tue May 04, 2021 1:09 am Dollars aren't issued. The vast majority of dollars are not created by the Fed. They are created by banks and financial institutions by fractional reserve lending. Banks and financial institutions have dramatically increased their reserves over the last decade+ thereby creating many fewer dollars than they had been previously.
This is kind of my day job and kind of off. Or rather, simplistic. This was true in the 80s but has becoming every less true.

Fractional Reserve assumes that you have deposit high-powered hard currency (historically gold) into the bank to generate currency (bank notes).

However, this assumes that money must be tied to a high-powered hard currency - and its not. It is a intuitive alluring assumption that fails in the real world. Anything that acts like money is money. Under the Credit Theory of Money, money is just a special type of bond. Highly liquid, fungible, (perceived) notional principal protection.

Thanks to securitization of financial assets starting in the 80s, banks could convert almost any asset into functional currency. Converting one type of bond (mortgages) into another (money) This is not that radical - the Real Bill theory of money has been around for 200 years. But it does mean that most money creation is now outside the government and Federal Reserve control.

This is why the M3 money supply is no longer published by the Federal Reserve. There is just no good way to measure it.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Whence inflation?

Post by make_a_better_world »

Buffet thinks "very substantial inflation" is occurring.

https://www.youtube.com/watch?v=7t7qfOy ... ceVerified
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Re: Whence inflation?

Post by skierincolorado »

alex_686 wrote: Tue May 04, 2021 11:00 am
skierincolorado wrote: Tue May 04, 2021 1:09 am Dollars aren't issued. The vast majority of dollars are not created by the Fed. They are created by banks and financial institutions by fractional reserve lending. Banks and financial institutions have dramatically increased their reserves over the last decade+ thereby creating many fewer dollars than they had been previously.
This is kind of my day job and kind of off. Or rather, simplistic. This was true in the 80s but has becoming every less true.

Fractional Reserve assumes that you have deposit high-powered hard currency (historically gold) into the bank to generate currency (bank notes).

However, this assumes that money must be tied to a high-powered hard currency - and its not. It is a intuitive alluring assumption that fails in the real world. Anything that acts like money is money. Under the Credit Theory of Money, money is just a special type of bond. Highly liquid, fungible, (perceived) notional principal protection.

Thanks to securitization of financial assets starting in the 80s, banks could convert almost any asset into functional currency. Converting one type of bond (mortgages) into another (money) This is not that radical - the Real Bill theory of money has been around for 200 years. But it does mean that most money creation is now outside the government and Federal Reserve control.

This is why the M3 money supply is no longer published by the Federal Reserve. There is just no good way to measure it.
My understanding is that the 'reserve' doesn't have to be gold .. it can be anything of value... MBS as you say. But regardless, it is the process of lending that creates more dollars. If I deposit $100, and the bank lends out my $100 to a business, and the business pays an employee $100, I have $100 and so does the employee. And the business has -$100. It's my understanding that this process forever, it would explain how it is today there are so many assets and liabilities in existence.
alex_686
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Re: Whence inflation?

Post by alex_686 »

make_a_better_world wrote: Mon May 03, 2021 5:39 pm People create narratives to explain the phenomena such as the pandemic is driving up demand to leave the city which makes home prices go up but how would that explain the commercial real estate prices?

Inflation has already happened in a very real way. CPI is missing the mark.
The CPI index measures consumer prices, not asset prices.

So, lets say we go into the a store and buy a candy bar. A portion of that price has to cover the rent (or imputed rent) of the building.

You can view rent as the yield on the building, much the same way as the coupon is the yield on the bond. The return demanded on assets have dropped like a stone in the past year. 10 year Treasury Bonds and 10 year corporate bonds. For risky assets like stocks, earnings yield, dividend yield, and the equity risk premium has dropped.

So it is very easy to imagine a case where asset prices increases but rents do not. If rents do not increase than the candy bar does not change in price, thus no inflation.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
AlwaysLearningMore
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Re: Whence inflation?

Post by AlwaysLearningMore »

rich126 wrote: Mon May 03, 2021 11:55 am There now seems to be a lot of inflation like stuff but isn't true inflation. Some falls into lifestyle creep and some doesn't.
For example, hotel room rates. In the past you had a rate and taxes but now many charge a resort or destination fee.
Here's the BLS CPI-U breakdown. Note large share devoted to shelter.

https://tinyurl.com/awfk3vwj
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Last edited by AlwaysLearningMore on Tue May 04, 2021 4:42 pm, edited 1 time in total.
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alex_686
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Re: Whence inflation?

Post by alex_686 »

skierincolorado wrote: Tue May 04, 2021 11:42 am My understanding is that the 'reserve' doesn't have to be gold .. it can be anything of value... MBS as you say. But regardless, it is the process of lending that creates more dollars. If I deposit $100, and the bank lends out my $100 to a business, and the business pays an employee $100, I have $100 and so does the employee. And the business has -$100. It's my understanding that this process forever, it would explain how it is today there are so many assets and liabilities in existence.
Assuming a fractional reserve system of 1:5, the bank can only lend out $100 if it has $20 of of high-powered hard currency.

Explaining Fractional Reserve Banking is easiest with gold. It is easy to understand why that is high-powered hard currency. The fact it is easy to understands leads many down the wrong intuitive path - but that might be a discussion for another day.

Under fiat money, you replace gold with a rather shot list of assets, like Treasury Bills. Prior to the 90s most financial transactions ran though the bank. The metaphor often used for banks was a automobile transmission. It was the lynch pin. While gold was no longer being used, the Fed could still use the same tools to manipulate reserve requirements - and thus money supply - as gold.

However, starting in the 70s, more and more transactions were circumventing the standard bank process. Securitization, shadow banking, etc. As such more and more money was created outside of the fractional reserve system.

As a example, take a look at a money market fund with check writing privileges. Here, you can deposit $100 and the fund can lend out $100 by buying commercial paper. This creates money but also completely circumvents the Federal Reserve and fractional reserve requirements.
Former brokerage operations & mutual fund accountant. I hate risk, which is why I study and embrace it.
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Re: Whence inflation?

Post by dknightd »

willthrill81 wrote: Tue May 04, 2021 10:55 am
dknightd wrote: Tue May 04, 2021 9:50 am As I see it the number of people in the world keeps increasing. So to keep the costs of goods the same, the governments needs to create more money. Just to keep up with the number of people spending money. I think governments are making more money than we need. But that is probably OK since there are many people who do not spend the money.
Costs for some things are definitely going up. That is to be expected. As long as income keeps up with increasing prices, no problem.
I budget for 3% inflation. As long it as it is lower than that I'll be OK. I hope and think
Theoretically, if the supply of dollars is increased at the same rate as the demand for new dollars, there will be no inflation. This would be desirable for many reasons. However, the problem is that if the supply of dollars falls behind the demand for new dollars, deflation occurs. Frankly, deflation scares the pants off of the Fed and most economists because it can lead to a death spiral in the economy. It puts enormous pressure on debtors, effectively increasing the amount that they have to repay because they are getting few dollars in income than before. That causes the economy to tighten further, putting more downward pressure on economic activity, and so on. The Fed wants to avoid this at virtually all costs and has determined that 2% inflation is a reasonable target to avoid deflation while not being too much inflation.
To me this an interesting dichotomy. We are encouraged to save more. But we are also encouraged to spend more. A 2% target seems reasonable to me. I hope they can keep it close to that. Honestly I do not know how much control they have. Probably more than I have . . . I suspect in the long term they need deceased value of the dollar, just make it cheaper to pay back money being borrowed.
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Re: Whence inflation?

Post by willthrill81 »

dknightd wrote: Tue May 04, 2021 12:53 pm
willthrill81 wrote: Tue May 04, 2021 10:55 am
dknightd wrote: Tue May 04, 2021 9:50 am As I see it the number of people in the world keeps increasing. So to keep the costs of goods the same, the governments needs to create more money. Just to keep up with the number of people spending money. I think governments are making more money than we need. But that is probably OK since there are many people who do not spend the money.
Costs for some things are definitely going up. That is to be expected. As long as income keeps up with increasing prices, no problem.
I budget for 3% inflation. As long it as it is lower than that I'll be OK. I hope and think
Theoretically, if the supply of dollars is increased at the same rate as the demand for new dollars, there will be no inflation. This would be desirable for many reasons. However, the problem is that if the supply of dollars falls behind the demand for new dollars, deflation occurs. Frankly, deflation scares the pants off of the Fed and most economists because it can lead to a death spiral in the economy. It puts enormous pressure on debtors, effectively increasing the amount that they have to repay because they are getting few dollars in income than before. That causes the economy to tighten further, putting more downward pressure on economic activity, and so on. The Fed wants to avoid this at virtually all costs and has determined that 2% inflation is a reasonable target to avoid deflation while not being too much inflation.
To me this an interesting dichotomy. We are encouraged to save more. But we are also encouraged to spend more. A 2% target seems reasonable to me. I hope they can keep it close to that. Honestly I do not know how much control they have. Probably more than I have . . . I suspect in the long term they need deceased value of the dollar, just make it cheaper to pay back money being borrowed.
I believe that one of the reasons that the Fed is targeting 2% inflation is because they know that the tools they have at their disposal are not precise. No one can predict with any accuracy what the exact impact of a given Fed action will be. They really want to avoid deflation, but they don't want inflation to get out of control either, so it's a bit like walking a tightrope blindfolded, since you don't know exactly what the impact of your next step will be; you have to 'feel' for it as you go.

Also, the Fed has changed its stance so as to make 2% inflation an average goal, meaning that they are willing to allow inflation to rise above 2% for some period of time in order to reach 2% as an average. But they haven't specified what the time frame involved for determining that average should be (e.g., 5 years, 10 years, etc.).
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