If inflation is defined as an increase in prices (which is erroneous), and inflation increases moderate; i.e., prices are not increasing as fast as they had been, it won't help too much if the new inflated prices don't come down. We're stuck with the same income paying for higher prices. Am I missing something?
Part of the challenge in apprehending inflation as a macroeconomic phenomenon is recognizing what is driving various price increases. Thus within the economics literature you get into nuances such as "cost-push" inflation and "demand-pull" inflation.
There is a broad view that inflation is always a fundamental question of money supply, which I conssider is is a dangerous oversimplification: Even a cursory examination of the basic monetarist equation (MV==PQ, where M equals the money supply, V equals the velocity of money, P equals price of a good or service, and Q equals the quantity of a good or service) shows that if M is doubled or even quadrupled, but V is reduced by half or even 3/4, the net effect on prices is zero. Thus right off the bat the notion that inflation is strictly a matter of money supply is shown to be false.
A better (in my view) understanding of what inflation is would be a fundamental disequilibrium between supply and demand pressures within a market place pushing up prices (and deflation would therefore be the same disequilibrium, but with downward pressure on prices instead).
For example, when you consider the price of natural gas, it is currently at a 10-year high and likely to go higher.
However, when you look at the timing of the price rise, it does not correlate in any discernible way to the explosion of the money supply in 2020 as part of the COVID pandemic lockdown. In fact, the rise in the price of natural gas is NOT correlated to the growth of the money supply at all.
So what drives the increase in the price of natural gas? Part of that price increase is the Russo-Ukrainian War and the automatic disruptions to European natural gas supply, leading the EU to bid up the price of natural gas until a new equilibrium is reached. But much of the increase dates back to the beginning of 2021, long before the Russo-Ukrainian War was even a possibility..
Notionally, when economists (and the Fed) speak of "price stability", they are speaking of supply and demand being in a dynamic equilibrium, so that prices generally oscillate around the equilibrium point without moving too far from it.
Thus, while resolving inflation will not necessarily bring prices down to prior levels (unless the reversion to equilibrium entails a measure of disinflation), restoring dynamic equilibrium to the economy is what the Fed ostensibly has as its strategic goal on inflation.
I'd have much more confidence in the Fed if members laid out the issues as you have.
And why don't they admit their dual mandates are contradictory?
And the IRA (Inflation Reduction Act) was a joke. Couldn't Fed members call out politicians on their deceptions? It wouldn't be "political;" just factual.
Having contradictory mandates is nothing new, nor is it intrinsically a problem. What it means objectively is that the Federal Reserve, like so many other entities, is obligated to balance a myriad of concerns in formulating policy.
Unfortunately, the Fed rarely addresses the balancing required, and almost reflexively conflates asset prices and consumer prices--even though the two are vastly different and warrant different economic consideration: asset price inflation is good where consumer price inflation is bad, and asset price deflation is bad where consumer price deflation is good.
Much of the interest rate manipulations that Ben Bernanke and his successors have done were directly (and explicitly) targeted as sustaining ASSET prices. In fact, if you index the S&P 500, the DJIA, and the NASDAQ alongside the M1 money supply, beginning in 2008 the stock market indices strongly correlate to M1 money supply growth, up to 2020 when everything came unglued.
As for the Fed calling out the Congress on matters such as the IRA. Notionally, fiscal policy is not the Fed's brief, and there would be a lot of hue and cry over the Fed trying to color outside the lines, so to speak. Given that the Fed has demonstrated little understanding of actual inflation drivers, I'm not entirely comfortable with them weighing in on the topic--I've had my fill of overeducated but fundamentally ignorant "experts" trying to micromanage everything.
The better approach would be to return Congressional action (and, by extension, the Federal Government), to the narrow confines of the enumerated powers, and let the States handle the rest of the governance job as the Constitution actually mandates.
But there I go, using common sense again! (I really need to do something about that, it gets me into all kinds of trouble!)
Also, FWIW, the better approach would be to let the Treasury control the money supply, and divorce the Federal government from having to borrow, at interest, every dollar it spends.
As Dr. Ron Paul has maintained for decades - End the Fed.
Giving Treasury control of the money supply would lead directly to a CBDC model for the US.
No, thank you.
At that point we'd be better off with a form of cryptocurrency as the basis for currency, but one that was not subject to interventions and debasement by the Treasury.
Ideally, a cryptocurrency backstopped by gold and silver would obviate the entire convoluted process of "managing" the money supply.
Failing that, if Treasury is going to be issuing currency they need to have a vetted supply of gold and silver on hand to support the currency.
Ending the Fed is a good idea.
Giving Treasury the currency creation role of the Fed, not so much.
Well, FWIW, Lincoln did exactly that when funding the Civil War, issuing "green backs" via the Treasury, backed only by the good faith of the Federal government. He was forced into this position because the northern bankers would only lend money at exorbitant interest rates.
I'm no fan of CBDCs, either. And, FWIW, backing currency with gold and/or silver only works if there is a fairly free market in precious metals, something we have not had for a very long time.
Thank you for taking time to put this together. One of the absolute best aspects of Substack is the interactions with authors and other readers.
As to the money supply issue (and I'm no expert, believe me), I have ascribed increases in the money supply, especially drastic increases, with increases in inflation, as to many economists (as you know). As I understand it, then, increases in money supplies can lead to increases in the rate of inflation, but not necessarily for all products, especially those that are somewhat immune from money supply increases (for various reasons). If I understand that correctly, I will have to reexamine my impulse to equate money supply increases with higher prices.
Again, thanks for the feedback. I enjoy your articles and I learn a lot from them.
Edit: I intended to add a link to a video I saw recently, even though it is somewhat dated. The authors in this video (apologize for the length) do equate money supply increases with changes in economies, particularly depressions. That is not the same as equating money supply changes with increases or decreases in prices, I imagine.
For the longest time, I subscribed to the same view that money supply increases == rampant inflation. You see that so often in the media that it is for many a canon of economics.
The problem is, the data doesn't match. No matter which inflation metric you use, and that includes ShadowStats, the one thing you do NOT see is inflation going hyperbolic in 2020 at the same time the M1 money supply did.
What you DO see is the M1 velocity dropping to damn near zero at the same time as the M1 increase--thus negating the M1 supply increase as an inflationary pressure.
IF the velocity of money is a constant (which it never is) then yes, an increase in money supply will produce inflationary pressure on prices. The caveat here is the "all else being equal"--which is helpful for theoretical analyses of various phenomena but rarely applies in the real world.
For example, when you look at the CPI Year-on-Year inflation rate on the same timeline as M1 money supply growth, the fluctuations don't match.
What you DO see, and this does appear to broadly support the money supply growth==inflation argument, is that, when the M1, M1 Velocity, and CPI are indexed to a common date, up until 2008, they all move more or less in tandem.
2008 and the Great Financial Crisis was a point of departure where that correlation abruptly ended, and has not been restored. M1 and M1 Velocity started moving in different directions and independent of CPI.
I would love to say I fully comprehend the significance of all of this but I'm still working on that part!
Suffice it to say that looking at inflation as strictly a monetary phenomenon is simply an oversimplification of the issue. Money supply plays a part, but it's not the only or even the primary driver in all circumstances.
If inflation is defined as an increase in prices (which is erroneous), and inflation increases moderate; i.e., prices are not increasing as fast as they had been, it won't help too much if the new inflated prices don't come down. We're stuck with the same income paying for higher prices. Am I missing something?
Not really.
Part of the challenge in apprehending inflation as a macroeconomic phenomenon is recognizing what is driving various price increases. Thus within the economics literature you get into nuances such as "cost-push" inflation and "demand-pull" inflation.
https://www.investopedia.com/articles/05/012005.asp
There is a broad view that inflation is always a fundamental question of money supply, which I conssider is is a dangerous oversimplification: Even a cursory examination of the basic monetarist equation (MV==PQ, where M equals the money supply, V equals the velocity of money, P equals price of a good or service, and Q equals the quantity of a good or service) shows that if M is doubled or even quadrupled, but V is reduced by half or even 3/4, the net effect on prices is zero. Thus right off the bat the notion that inflation is strictly a matter of money supply is shown to be false.
A better (in my view) understanding of what inflation is would be a fundamental disequilibrium between supply and demand pressures within a market place pushing up prices (and deflation would therefore be the same disequilibrium, but with downward pressure on prices instead).
For example, when you consider the price of natural gas, it is currently at a 10-year high and likely to go higher.
https://tradingeconomics.com/commodity/natural-gas
However, when you look at the timing of the price rise, it does not correlate in any discernible way to the explosion of the money supply in 2020 as part of the COVID pandemic lockdown. In fact, the rise in the price of natural gas is NOT correlated to the growth of the money supply at all.
So what drives the increase in the price of natural gas? Part of that price increase is the Russo-Ukrainian War and the automatic disruptions to European natural gas supply, leading the EU to bid up the price of natural gas until a new equilibrium is reached. But much of the increase dates back to the beginning of 2021, long before the Russo-Ukrainian War was even a possibility..
Notionally, when economists (and the Fed) speak of "price stability", they are speaking of supply and demand being in a dynamic equilibrium, so that prices generally oscillate around the equilibrium point without moving too far from it.
Thus, while resolving inflation will not necessarily bring prices down to prior levels (unless the reversion to equilibrium entails a measure of disinflation), restoring dynamic equilibrium to the economy is what the Fed ostensibly has as its strategic goal on inflation.
I'd have much more confidence in the Fed if members laid out the issues as you have.
And why don't they admit their dual mandates are contradictory?
And the IRA (Inflation Reduction Act) was a joke. Couldn't Fed members call out politicians on their deceptions? It wouldn't be "political;" just factual.
Having contradictory mandates is nothing new, nor is it intrinsically a problem. What it means objectively is that the Federal Reserve, like so many other entities, is obligated to balance a myriad of concerns in formulating policy.
Unfortunately, the Fed rarely addresses the balancing required, and almost reflexively conflates asset prices and consumer prices--even though the two are vastly different and warrant different economic consideration: asset price inflation is good where consumer price inflation is bad, and asset price deflation is bad where consumer price deflation is good.
Much of the interest rate manipulations that Ben Bernanke and his successors have done were directly (and explicitly) targeted as sustaining ASSET prices. In fact, if you index the S&P 500, the DJIA, and the NASDAQ alongside the M1 money supply, beginning in 2008 the stock market indices strongly correlate to M1 money supply growth, up to 2020 when everything came unglued.
https://bucketeer-e05bbc84-baa3-437e-9518-adb32be77984.s3.amazonaws.com/public/images/8f1b6e9e-8177-480c-9476-7b995cdfa695_640x255.png
As for the Fed calling out the Congress on matters such as the IRA. Notionally, fiscal policy is not the Fed's brief, and there would be a lot of hue and cry over the Fed trying to color outside the lines, so to speak. Given that the Fed has demonstrated little understanding of actual inflation drivers, I'm not entirely comfortable with them weighing in on the topic--I've had my fill of overeducated but fundamentally ignorant "experts" trying to micromanage everything.
The better approach would be to return Congressional action (and, by extension, the Federal Government), to the narrow confines of the enumerated powers, and let the States handle the rest of the governance job as the Constitution actually mandates.
But there I go, using common sense again! (I really need to do something about that, it gets me into all kinds of trouble!)
Also, FWIW, the better approach would be to let the Treasury control the money supply, and divorce the Federal government from having to borrow, at interest, every dollar it spends.
As Dr. Ron Paul has maintained for decades - End the Fed.
Giving Treasury control of the money supply would lead directly to a CBDC model for the US.
No, thank you.
At that point we'd be better off with a form of cryptocurrency as the basis for currency, but one that was not subject to interventions and debasement by the Treasury.
Ideally, a cryptocurrency backstopped by gold and silver would obviate the entire convoluted process of "managing" the money supply.
Failing that, if Treasury is going to be issuing currency they need to have a vetted supply of gold and silver on hand to support the currency.
Ending the Fed is a good idea.
Giving Treasury the currency creation role of the Fed, not so much.
Well, FWIW, Lincoln did exactly that when funding the Civil War, issuing "green backs" via the Treasury, backed only by the good faith of the Federal government. He was forced into this position because the northern bankers would only lend money at exorbitant interest rates.
I'm no fan of CBDCs, either. And, FWIW, backing currency with gold and/or silver only works if there is a fairly free market in precious metals, something we have not had for a very long time.
Thank you for taking time to put this together. One of the absolute best aspects of Substack is the interactions with authors and other readers.
As to the money supply issue (and I'm no expert, believe me), I have ascribed increases in the money supply, especially drastic increases, with increases in inflation, as to many economists (as you know). As I understand it, then, increases in money supplies can lead to increases in the rate of inflation, but not necessarily for all products, especially those that are somewhat immune from money supply increases (for various reasons). If I understand that correctly, I will have to reexamine my impulse to equate money supply increases with higher prices.
Again, thanks for the feedback. I enjoy your articles and I learn a lot from them.
Edit: I intended to add a link to a video I saw recently, even though it is somewhat dated. The authors in this video (apologize for the length) do equate money supply increases with changes in economies, particularly depressions. That is not the same as equating money supply changes with increases or decreases in prices, I imagine.
https://www.youtube.com/watch?v=utTMZBgYKuE
Thank you for the kind words.
For the longest time, I subscribed to the same view that money supply increases == rampant inflation. You see that so often in the media that it is for many a canon of economics.
The problem is, the data doesn't match. No matter which inflation metric you use, and that includes ShadowStats, the one thing you do NOT see is inflation going hyperbolic in 2020 at the same time the M1 money supply did.
What you DO see is the M1 velocity dropping to damn near zero at the same time as the M1 increase--thus negating the M1 supply increase as an inflationary pressure.
IF the velocity of money is a constant (which it never is) then yes, an increase in money supply will produce inflationary pressure on prices. The caveat here is the "all else being equal"--which is helpful for theoretical analyses of various phenomena but rarely applies in the real world.
For example, when you look at the CPI Year-on-Year inflation rate on the same timeline as M1 money supply growth, the fluctuations don't match.
https://fred.stlouisfed.org/graph/?g=T8vC
If you look at the M1 as a percentage change from a year ago, treating it like the inflation rate, there is no similarity in behavior.
https://fred.stlouisfed.org/graph/?g=T8vN
What you DO see, and this does appear to broadly support the money supply growth==inflation argument, is that, when the M1, M1 Velocity, and CPI are indexed to a common date, up until 2008, they all move more or less in tandem.
https://fred.stlouisfed.org/graph/?g=T8w7
2008 and the Great Financial Crisis was a point of departure where that correlation abruptly ended, and has not been restored. M1 and M1 Velocity started moving in different directions and independent of CPI.
I would love to say I fully comprehend the significance of all of this but I'm still working on that part!
Suffice it to say that looking at inflation as strictly a monetary phenomenon is simply an oversimplification of the issue. Money supply plays a part, but it's not the only or even the primary driver in all circumstances.