I am a fan of analogies so while describing the impact (on the world!) of an ever fluctuating value of a dollar, I love this one.
“Imagine what using a map would be like if the definition of a mile were changing as you are on the go. That is what living under a regime of high and variable inflation is like.”
Yes, I read this. I mostly buy it. I mostly buy SS’ take on monetary policy, certainly over Tyler’s (and I usually agree with Tyler on most topics ex-climate change policy…).
My understanding of economics overall, especially micro, is pretty good. My understanding of macro has never been great. But I find myself agreeing with *both* SS and AK here.
We choose what to believe based on who we believe…
Wealthy households spend a lower percentage of their income as consumption than poor households do. Paper wealth doesn't have as great an impact on CPI as state fiscal spending on stuff like welfare or infrastructure, because when labour receives money they spend a higher percentage of it on consumption than the wealthy do. So paper wealth actually acts as a sponge, soaking up the monetary base and causing the cpi to increase less than monetarists would predict.
“Consensual hallucination”? We accept a form of payment because we believe it is generally acceptable, and *our belief is almost never wrong*—we are *not hallucinating*.
That's a good point. We similarly make choices on fashion based on what other humans will find acceptable and appealing in the future, but I don't think anyone would call aspects of clothing markets as consensual hallucination. People might be wrong about the value of their closet to other people, but the fact that it has value based partially on the tastes and whims of others doesn't imply that its value is more hallucinatory than an extra snow shovel in the garage you never end up needing to use.
The biggest problem is in the definition of inflation -- with govt deficits there HAS BEEN huge asset inflation: stock & financial assets (including Bitcoin), and houses.
And of course food & fuel/energy prices, which vary, are part of actual consumer prices, what real people really spend money on, tho not included in the official but less relevant Consumer Price Index.
The Big Mac index remains as good as any other indicator, and better than most; often better than CPI.
Economists who talk about inflation without talking about supply and production are missing half the story -- what people pay for the things they buy depend on a supply of those things. With a big supply, perhaps by already capitalized machines, the marginal cost to produce is quite low so the firms produce a bit more, and sell more at lower prices, depending on what customers are buying.
Tyler's post was a bit annoying at not specifying even an outline of what Fischer Black's view are, or are well known to be.
"They act as if inflation will be low and stable, unless it becomes impossible to do so."
I wasn't sure [that] I agreed with you until this sentence and what followed. And I still wonder where all that liquidity has gone. It seems some has been soaked up by reduced velocity by banks holding more reserves, more being held internationally, or something else. With that as a big unknown and maybe mitigating the quoted statement, I don't see that statement as contrary to monetarism, though maybe it's a bigger caveat than Friedman ever acknowledged.
So that I may consider your ideas carefully, please give me a concrete definition of the term "paper wealth," which figures prominently in your model. I think I may know what you mean, but I want to be sure.
What does "monetized" mean, if not converted to "money"? Just about everything we ever learned about "money" in graduate school continues to be called into question by a host of economists. I used to ask questions of my professors in graduate school about the orthodoxy they were teaching. They danced, they waved hands, they gave answers that were unconvincing; lots of economists seem to be doing the same now. No, I don't think I have great answers, so don't ask me for them.
All I'm sure of is that I have no idea what to teach my students in money and banking these day. What a shame.
Mostly those activities do make wealth more liquid, and they do make it easier for spending to increase. But there is no mechanical relationship, no equation to predict the outcome
Ah, more liquid but with unknown effect on propensity. And it might just mean that people with money they want liquid can now park it in these securities.
Either a central bank can influence nominal variables or it can't. It's an Aggregate Demand thing. Instead of currency, imagine the Fed as a giant entity buying assets in the real American economy. Forget bonds. Imagine it prints money to buy foreign currencies. Or prints money to buy stocks. Or prints money to buy real estate. That creates scarcity. Specifically expectations that the purchases are permanent.
Imagine the Fed announces "we're buying $1 trillion of assets with printed money this month. If futures markets don't indicate higher expected inflation, then we'll buy $2 trillion the next month. If futures markets don't indicate higher expected inflation, then we'll buy $4 trillion the next month." And so on and so on. How much would the Fed have to buy with such commitments before inflation expectations rise? Sumner and I say "not much." It's not so much the quantity that matters but the commitment.
I've never been able to grasp whether counterarguments to the scenario I described above playing out the way I think it would exist, and, if so, what they'd look like.
You are not directly saying so, but are you sympathetic towards Cochrane's FTPL view re inflation?
Wealth and inflation: doesn't there need to be a a way to liquify the wealth to affect inflation? Borrow against assets or sell some of one's wealth holdings?
Say one has an enormous common stock portfolio that generates income far in excess of non discretionary and discretionary cash needs. That wealth is never touched. How then might it contribute to inflation?
There is no monetary aggregate knowledge of which can reliably be used to predict inflation, because that is knowledge of monetary *supply, with no information about monetary *demand*.
I am a fan of analogies so while describing the impact (on the world!) of an ever fluctuating value of a dollar, I love this one.
“Imagine what using a map would be like if the definition of a mile were changing as you are on the go. That is what living under a regime of high and variable inflation is like.”
Nice food for thought.
It would be interesting to hear Scott Sumner’s response.
Maybe he’ll do a post in reply?
I think this is kind of a pre-ply: https://scottsumner.substack.com/p/why-money-is-important?utm_campaign=posts-open-in-app&triedRedirect=true
Yes, I read this. I mostly buy it. I mostly buy SS’ take on monetary policy, certainly over Tyler’s (and I usually agree with Tyler on most topics ex-climate change policy…).
My understanding of economics overall, especially micro, is pretty good. My understanding of macro has never been great. But I find myself agreeing with *both* SS and AK here.
We choose what to believe based on who we believe…
Wealthy households spend a lower percentage of their income as consumption than poor households do. Paper wealth doesn't have as great an impact on CPI as state fiscal spending on stuff like welfare or infrastructure, because when labour receives money they spend a higher percentage of it on consumption than the wealthy do. So paper wealth actually acts as a sponge, soaking up the monetary base and causing the cpi to increase less than monetarists would predict.
I was thinking something like that but hadn't worked it out fully. Your explanation sounds perfect.
“Consensual hallucination”? We accept a form of payment because we believe it is generally acceptable, and *our belief is almost never wrong*—we are *not hallucinating*.
That's a good point. We similarly make choices on fashion based on what other humans will find acceptable and appealing in the future, but I don't think anyone would call aspects of clothing markets as consensual hallucination. People might be wrong about the value of their closet to other people, but the fact that it has value based partially on the tastes and whims of others doesn't imply that its value is more hallucinatory than an extra snow shovel in the garage you never end up needing to use.
The biggest problem is in the definition of inflation -- with govt deficits there HAS BEEN huge asset inflation: stock & financial assets (including Bitcoin), and houses.
And of course food & fuel/energy prices, which vary, are part of actual consumer prices, what real people really spend money on, tho not included in the official but less relevant Consumer Price Index.
The Big Mac index remains as good as any other indicator, and better than most; often better than CPI.
https://ethoscapitaladvisors.com/big-mac-prices-a-tale-of-local-and-global-inflation/
Economists who talk about inflation without talking about supply and production are missing half the story -- what people pay for the things they buy depend on a supply of those things. With a big supply, perhaps by already capitalized machines, the marginal cost to produce is quite low so the firms produce a bit more, and sell more at lower prices, depending on what customers are buying.
Tyler's post was a bit annoying at not specifying even an outline of what Fischer Black's view are, or are well known to be.
The analogies you provide are very helpful to plebe economists like myself. Appreciated.
"They act as if inflation will be low and stable, unless it becomes impossible to do so."
I wasn't sure [that] I agreed with you until this sentence and what followed. And I still wonder where all that liquidity has gone. It seems some has been soaked up by reduced velocity by banks holding more reserves, more being held internationally, or something else. With that as a big unknown and maybe mitigating the quoted statement, I don't see that statement as contrary to monetarism, though maybe it's a bigger caveat than Friedman ever acknowledged.
So that I may consider your ideas carefully, please give me a concrete definition of the term "paper wealth," which figures prominently in your model. I think I may know what you mean, but I want to be sure.
Hmm. Think of all of the assets on your household balance sheet that can be quickly monetized.
What does "monetized" mean, if not converted to "money"? Just about everything we ever learned about "money" in graduate school continues to be called into question by a host of economists. I used to ask questions of my professors in graduate school about the orthodoxy they were teaching. They danced, they waved hands, they gave answers that were unconvincing; lots of economists seem to be doing the same now. No, I don't think I have great answers, so don't ask me for them.
All I'm sure of is that I have no idea what to teach my students in money and banking these day. What a shame.
So if I take my company public, have I turned some other kind of wealth (real wealth?) into paper wealth?
If I'm a local banker and I sell my mortgages to an investment bank that packages it with other mortgages, does that turn it into paper wealth?
If a company issues debt on the market instead of going to a bank, does that create more paper wealth?
If so, what is the impact of this?
Mostly those activities do make wealth more liquid, and they do make it easier for spending to increase. But there is no mechanical relationship, no equation to predict the outcome
Ah, more liquid but with unknown effect on propensity. And it might just mean that people with money they want liquid can now park it in these securities.
Either a central bank can influence nominal variables or it can't. It's an Aggregate Demand thing. Instead of currency, imagine the Fed as a giant entity buying assets in the real American economy. Forget bonds. Imagine it prints money to buy foreign currencies. Or prints money to buy stocks. Or prints money to buy real estate. That creates scarcity. Specifically expectations that the purchases are permanent.
Imagine the Fed announces "we're buying $1 trillion of assets with printed money this month. If futures markets don't indicate higher expected inflation, then we'll buy $2 trillion the next month. If futures markets don't indicate higher expected inflation, then we'll buy $4 trillion the next month." And so on and so on. How much would the Fed have to buy with such commitments before inflation expectations rise? Sumner and I say "not much." It's not so much the quantity that matters but the commitment.
I've never been able to grasp whether counterarguments to the scenario I described above playing out the way I think it would exist, and, if so, what they'd look like.
You are not directly saying so, but are you sympathetic towards Cochrane's FTPL view re inflation?
Wealth and inflation: doesn't there need to be a a way to liquify the wealth to affect inflation? Borrow against assets or sell some of one's wealth holdings?
Say one has an enormous common stock portfolio that generates income far in excess of non discretionary and discretionary cash needs. That wealth is never touched. How then might it contribute to inflation?
Cochrane has bond-holders looking forward into the future. I have them very naively treating their bonds as wealth.
There is no monetary aggregate knowledge of which can reliably be used to predict inflation, because that is knowledge of monetary *supply, with no information about monetary *demand*.
Where’s Irving Fisher when you need him ?
Alternatively, there is the Fiscal Theory of the Price Level.