Wednesday, March 18, 2020

Problematic Price Inflation?

Mark Hovila emails:
I told a friend that so much money is going into the system right now that it seemed to me that we will see an increase in inflation in the near future. He responded:

"I believe we’ve never actually experienced problematic inflation from putting new money into the economy. I believe that’s a common misconception. It’s always been a resource crunch that has caused real inflation. The problem is they put the money in at the top instead of at the bottom where it would circulate more widely."

I told him that hyperinflation has happened in history many times, and that a rapid increase in the money supply is generally recognized to be the cause. Any thoughts on this?

Thanks.

RW response:

You were correct in pointing out that there have been many periods in history that hyper-inflation occurred after massive money printing.

See:





In  addition, he is not being very consistent. When he says:
 The problem is they put the money in at the top instead of at the bottom where it would circulate more widely.
He is admitting that money entering the system can push prices up. And just for fun ask him why he thinks money "would circulate more widely at the bottom"?

But at the core, when he says that "I believe we’ve never actually experienced problematic inflation from putting new money into the economy. I believe that’s a common misconception," ask him if he believes in supply and demand curves.

If he says yes, ask him:  How if supply stays the same but the amount of demand increases because everyone has twice as much money in their pockets that wouldn't cause an increase in prices---even if there is no change in resources?

-RW





4 comments:

  1. But Bob, who exactly is going to have "twice as much money in their pocket"? I've raised this point before and there has never been a response to it. Prices of assets and incomes are deflating everywhere. Deflating....lower values, less money, reverse wealth effect, etc. (I got an email from the Sarasota Ballet yesterday. They have closed up their season and stand to lose $800,000. No government program will restore even a fraction of that income loss. They and their dancers and janitors and staff will never have "more money in their pocket" when this nonsense ends). So, my judgment is that this is all massively deflationary as far as "demand" is concerned. The central bank will be "lucky" to "replace" even a fraction of that deflation throughout the economy. It will take years to fully restore supply chains and employment in hundreds and hundreds of job markets and when this happens the Fed can always readjust their balance sheet by selling assets acquired over the next year. Now hear me clearly. I am not recommending anything. I am just unclear about why and how there will be more money in people's pockets on balance.

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  2. Yeah to the person with just $1000 in the bank to their name. If they get $1000 from the gov it really helps, but to those with $20,000+ it is much more insignificant.

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  3. To add on to what I have said above, almost no one is yet talking about the most important household asset: real estate. This is certainly the next shoe to fall and that falling shoe is all deflationary. Housing prices will sink. New home sales and new home construction will be in the tank (despite the lower interest rates) for some time. Again, no government program can or will restore even a fraction of the "income" lost in these markets. Households will feel dramatically less wealthy (lower stock portfolios including IRAs, lower housing values, loss of jobs, etc.) and a one-time check from the State for 1K is almost meaningless. (I know someone whose stock portfolio is down $450K). Perhaps San Francisco is the exception to all of this but I'm not convinced.

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    1. I’ll take a stab at this.

      Zimbabwe is an example of the government causing the economy to drastically slow and then try to print their way out of it causing hyperinflation.

      The Zimbabwe government created an economic crises mainly due to war and by taking farm/ranch land from farmers/ranchers and giving it to those with little to no farming/ranching experience causing a huge reduction in production. This reduction in production can be compared to the current reduction due to government hyperinflation of COVID-19. Both Zimbabwe and central banks around the world “print” “money” trying to cover for their other terrible policies.

      Exactly who is going to have more money is up to the powers that should not be. The sectors that the money is injected into will realize price inflation. Some price inflation may be offset by gains in production efficiencies but the costs are still artificially higher.

      Some say that price inflation due to QE after the roaring 2000’s bust was less than expected due in part to banksters not loaning all of allowable reserve.

      How much different will the current situation be? IMO quite a bit. Price inflation offset by gains in production efficiencies and banksters not loaning all of allowable reserve is less likely for this hyper inflated crisis.

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