What creates inflation?

[Obvious Leo]

Make up your minds. Is the government responsible for inflation or is the Federal Reserve responsible for inflation?

The Federal Reserve is subject to oversight by Congress, which periodically reviews its activities and can alter its responsibilities by statute. Also, the Federal Reserve must work within the framework of the overall objectives of economic and financial policy established by the government. Therefore, the Federal Reserve can be more accurately described as independent within the government. In other words, the government can't plea bargain its way out of jail.

Thank you, Bob. Doesn't it feel better to make a balanced and reasoned statement about these respective roles rather than simply firing off a hysterical outburst? Not everybody thinks in monochrome like you do.

[FlashDangerpants]

My answer is the government creating money to drive up the money supply and nothing else, by definition.

An increase in the minimum wage won't increase the money supply, just redistribute the money from employers to employees. But this can happen. Some employees would lose their jobs. But since the spending power of the employees goes up, then they buy more goods and services which leads to more jobs which tends to even things out in that department. Now some businesses could fail, not simply due to a greater expense, but also due to people going for more expensive items (a better car e.g.) and the rich, being less rich will go for cheaper items (maybe a cheaper airplane e.g.).

Once the increase in the minimum wage takes effect and after the beneficiaries spend the money on what they want, then things will settle down and the extra money will go into savings which the banks will use for lending which helps out the economy further.

PhilX

It is a little more complicated than that.
Inflation is when there is too much money chasing too little product.
This can be the result of printing money, but as we have seen in the UK since the crash, printing £385 billion has not led to any inflation.
The money supply can change by other means, such as when people decide to dump their savings on the market. SInce the crash the interest rate has been low, and this has caused people to spend their saved money. This TOO has not created inflation, and no one knows why this is happening.

QE money was issued to prevent deflation, which by all accounts seems to be what it did (thus the Eurozone eventually had to join in when they hit deflationary territory without it, and they too avoided the plunge once they did).
Money supply doesn't immediately or directly change prices. It does so in combination with other factors.
The theory that inspired QE uses variations on a formula MV = PQ where M is Money, V is the rate at which it circulates, P is prices and Q is demand.
It's a bit untestable in my view to have a formula with 4 variables that are all impossible to count properly, but that's economics for you.
To make matters less predictable still, what sets P today is mostly expectations of future values of V and Q, so the links are weak at best.

The point is (in part) that when V and Q are low (recession times), M can be used to increase P. But if V and Q return to boom time values, you must remove all the QE added to M or else P will explode and that is when you get the big inflation. If inflation becomes apparent quickly, then the QE was massively overdone.

Wages for your work are the price that a company pays for your labour by the way. So in that formula, I believe they add directly to P.

[bobevenson]

Not everybody thinks in monochrome like you do.

That's absolutely true, which succinctly addresses their problem.

[BigWhit]

So you can't say that the Federal Reserve is totally independent of the government. There is influence.

The Federal Reserve is NOT part of the government, any more than the Supreme Court is. I'm not suggesting that there is no influence from government but in fact this influence would be vastly less than the influence from the financial sector.

The Supreme Court is the Judicial Branch of the government and is as much a part of the government as the president...

The Federal Reserve is a privately owned and operated business that has congressional oversight. Thing is, the Fed usually serves the interests of it's largest shareholders, which are big businesses and banks, which themselves have bought a lot of Congress.

And to answer what you said earlier, the government is responsible for putting the money supply in the hands of the Fed in the first place, which is unconstitutional.

[Philosophy Explorer]

So you can't say that the Federal Reserve is totally independent of the government. There is influence.

The Federal Reserve is NOT part of the government, any more than the Supreme Court is. I'm not suggesting that there is no influence from government but in fact this influence would be vastly less than the influence from the financial sector.

The Supreme Court is the Judicial Branch of the government and is as much a part of the government as the president...

The Federal Reserve is a privately owned and operated business that has congressional oversight. Thing is, the Fed usually serves the interests of it's largest shareholders, which are big businesses and banks, which themselves have bought a lot of Congress.

And to answer what you said earlier, the government is responsible for putting the money supply in the hands of the Fed in the first place, which is unconstitutional.

Let me add to this BigWhit as Leo didn't read Article III of the Constitution. The Supreme Court is one of the three big branches of the US government, the President and Congress are the other two. I forgive Leo as he's not from the US.

PhilX

[bobevenson]

I forgive Leo as he's not from the US.

That's right, he's from down under, about six feet down under, I'd say.

[Obvious Leo]

Let me add to this BigWhit as Leo didn't read Article III of the Constitution. The Supreme Court is one of the three big branches of the US government, the President and Congress are the other two. I forgive Leo as he's not from the US.

I don't need to be from the US to understand the concept of the separation of powers. The fact that your constitution doesn't allow for this to be done effectively is a big part of the problem. Ours is a little more up-to-date but not much.

[Philosophy Explorer]

Let me add to this BigWhit as Leo didn't read Article III of the Constitution. The Supreme Court is one of the three big branches of the US government, the President and Congress are the other two. I forgive Leo as he's not from the US.

I don't need to be from the US to understand the concept of the separation of powers. The fact that your constitution doesn't allow for this to be done effectively is a big part of the problem. Ours is a little more up-to-date but not much.

This is what I responded to:

"The Federal Reserve is NOT part of the government, any more than the Supreme Court is"

Now you're going into a different subject which would make for a different thread and I didn't see anything about separation of powers in what you've said before.

PhilX

[bobevenson]

Always remember that Oblivious Leo is from down under, and once you get off the subject of boomerangs, he's lost.

[Hobbes' Choice]

It is a little more complicated than that.
Inflation is when there is too much money chasing too little product.
This can be the result of printing money, but as we have seen in the UK since the crash, printing £385 billion has not led to any inflation.
The money supply can change by other means, such as when people decide to dump their savings on the market. SInce the crash the interest rate has been low, and this has caused people to spend their saved money. This TOO has not created inflation, and no one knows why this is happening.

QE money was issued to prevent deflation, which by all accounts seems to be what it did (thus the Eurozone eventually had to join in when they hit deflationary territory without it, and they too avoided the plunge once they did).
Money supply doesn't immediately or directly change prices. It does so in combination with other factors.
The theory that inspired QE uses variations on a formula MV = PQ where M is Money, V is the rate at which it circulates, P is prices and Q is demand.
It's a bit untestable in my view to have a formula with 4 variables that are all impossible to count properly, but that's economics for you.
To make matters less predictable still, what sets P today is mostly expectations of future values of V and Q, so the links are weak at best.

The point is (in part) that when V and Q are low (recession times), M can be used to increase P. But if V and Q return to boom time values, you must remove all the QE added to M or else P will explode and that is when you get the big inflation. If inflation becomes apparent quickly, then the QE was massively overdone.

Wages for your work are the price that a company pays for your labour by the way. So in that formula, I believe they add directly to P.

Sadly the QE was handed over to the banks which had caused the problems in the first place; thus rewarding failure.
The QE would have been far more effective had they just dropped the fucking cash out of a plane; or passed it on in Universal Benefits payments.

Any school boy mathematician will tell you what a crock of shit that (ahem!) equation is. Not that the relationships do not hold some validity, but it is the utter arrogance of so-called "economists" who pretend that it is actually a mathematical statement- it is not.
As we all should know, variables in an equation have to have comparable UNITS, and the products so named need to have reciprocal UNIT. e.g. speed= distance x time, works with km/hour, or miles/sec etc. But what the fuck would "rate of of circulation" look like.
The piece of fiction you have presented is more like this one: S= Ef x Tn + L + G
Which is success= effort multiplied by tenacity plus luck and genetics.

I've got another equation that derives "bullshit", from the ability to self deceive.


I know there is a more technical name for these sort of equations, but CrocMaths will do for now.

[bobevenson]

Under Evensonomics, inflation is defined as follows:
It = M1/M2, where I = inflation, t = any time period, M1 = money exchanged for but not representing property, and M2 = all money exchanged for property. Inflation has nothing to do with high prices, increasing prices or prices at all. It can range between 0 to 100% for any time period.

[Philosophy Explorer]

Under Evensonomics, inflation is defined as follows:
It = M1/M2, where I = inflation, t = any time period, M1 = money exchanged for but not representing property, and M2 = all money exchanged for property. Inflation has nothing to do with high prices, increasing prices or prices at all. It can range between 0 to 100% for any time period.

Yes Bob, but many of us are concerned with high prices.

PhilX

[Hobbes' Choice]

Let me add to this BigWhit as Leo didn't read Article III of the Constitution. The Supreme Court is one of the three big branches of the US government, the President and Congress are the other two. I forgive Leo as he's not from the US.

I don't need to be from the US to understand the concept of the separation of powers. The fact that your constitution doesn't allow for this to be done effectively is a big part of the problem. Ours is a little more up-to-date but not much.

This is what I responded to:

"The Federal Reserve is NOT part of the government, any more than the Supreme Court is"

Now you're going into a different subject which would make for a different thread and I didn't see anything about separation of powers in what you've said before.

PhilX

This is pretty much straightforward.
There are 12 Federal Reserve Banks, and they are NOT part of the government. They are independent institutions with the testicles of the government in their sweaty hands, as they have had for around 100 years.

The Supreme Court IS part of the government, though unelected, is appointed by the standing government as post become available.

Both institutions enforce inertia on progress and have the keys to a set of ball and chains that tie the hands and feet of the government. Sadly they are virtual chains, and as such are far harder to break than real ones.

[bobevenson]

Under Evensonomics, inflation is defined as follows:
It = M1/M2, where I = inflation, t = any time period, M1 = money exchanged for but not representing property, and M2 = all money exchanged for property. Inflation has nothing to do with high prices, increasing prices or prices at all. It can range between 0 to 100% for any time period.

Yes Bob, but many of us are concerned with high prices.

PhilX

Influenza provides an analogy for inflation. Influenza is often accompanied by a fever, but just like you can't cure influenza by eliminating the fever, you can't cure inflation by eliminating high prices. For instance, in economics, if productivity magically doubled, but prices only went down a little bit, you would still have massive inflation since prices should also have gone down just as dramatically as productivity increased.

[FlashDangerpants]

Sadly the QE was handed over to the banks which had caused the problems in the first place; thus rewarding failure.
The QE would have been far more effective had they just dropped the fucking cash out of a plane; or passed it on in Universal Benefits payments.

Any school boy mathematician will tell you what a crock of shit that (ahem!) equation is. Not that the relationships do not hold some validity, but it is the utter arrogance of so-called "economists" who pretend that it is actually a mathematical statement- it is not.
As we all should know, variables in an equation have to have comparable UNITS, and the products so named need to have reciprocal UNIT. e.g. speed= distance x time, works with km/hour, or miles/sec etc. But what the fuck would "rate of of circulation" look like.
The piece of fiction you have presented is more like this one: S= Ef x Tn + L + G
Which is success= effort multiplied by tenacity plus luck and genetics.

I've got another equation that derives "bullshit", from the ability to self deceive.


I know there is a more technical name for these sort of equations, but CrocMaths will do for now.

QE wasn't handed over to banks. It was fresh cash created to purchase financial products from investors in order to force those investors to re-invest further along the yield curve. Government bonds are the only realistic product to be purchased with it because they are always the low end of that curve, plus there is plenty of state debt to purchase. Banks and insurance companies who preferred not to sell saw the value of their holdings reduced as yields were pushed down. None of those institutions can sell all of their holdings, so their losses were greater than their gains (by necessity, for that yield curve thing to work). The primary beneficiaries seem to have been companies large enough to issue debt on the bond markets - the yield on which dropped as institutional investors were pushed to take a little more risk. Given that companies mired in recession lack desire to invest in plant, they obviously used much of that debt for share buybacks pushing up equities. But this is monetary policy not social policy, so as long as the money gets moved around, the objective is being achieved.

All economists know that the data they are able to work with provides at best a rough estimate of something more or less related to the phenomena under investigation. And they don't expect simple formulas such as MV=PQ to fully explain anything. There's no point singling out that particular equation for greater ridicule than all the others in use given that GDP, Non Farm Payroll numbers, unemployment, the CPI, and every other number available to the field is just as faulty and speculative as M0 and M4 money supply.

Thus far that formula has proved reasonably useful for predicting to some extent the impact of interest rate and money supply changes on prices and demand in so far as those things are capable of measurement. The new finance minster of Venezuela is a prominent critic of it though. He thinks printing money doesn't cause inflation at all. Let's see how he gets on over the next few months and revisit the subject.

Your other suggestion is called helicopter money. It has some very prominent backers including a former deputy governor of the Bank of England. The main difference between that and QE is that once the deflationary risk has gone, in theory inflation is stoked by all the extra money lying around. Helicopter money can't easily be destroyed at that point (likewise Corbyn's PQE). QE money should be easily written down by the central banks. If that turns out not to be the case, then it is genuinely likely that helicopter money will be the response to the next big financial meltdown.