Does this explanation of inflation make sense?

[Shartnado]

This thread has me curious about how well wages track with inflation. Anybody got quick access to something informative in this regard?

There's always CPI rates , those usually average around 3.5% a year.

 

[IDL]

I don't see how increasing taxation has ever solved anything. Especially when it hurts the little guy more than anyone. I'd like to see more basic bartering, goods for goods , value for value.

It's not supposed to help the little guy, although it can be made to sound appealing. Policies are drawn up and implemented under the supervision of the ruling class so that right there tells you who it will benefit.

The 'tax the rich' will just tax the bottom of the 1% and further separate the gap between the common class and the ruling class. Basically it will help to eliminate their competition.

The solutions are presented to the common class so they get to pick from a number of things that distract them from the root cause (The oligarch gravy train).

That's why the banking system won't be addressed. People will be too busy focusing on the solutions that trickle down to them and assume that they are the only viable choices. Pick your poison.

 

[Cubo de Sangre]

There's always CPI rates , those usually average around 3.5% a year.

Thanks. How about wage statistics (hopefully something stratified so the top dogs aren't skewing the results)?

 

[Jack V Savage]

This thread has me curious about how well wages track with inflation. Anybody got quick access to something informative in this regard?

 

[Cubo de Sangre]

Sweet. I can't pull up your source. Do they have anything that separates top earners from bottom earners?

1995-2002 was the dotcom "bubble"?

 

[Jack V Savage]

Sweet. I can't pull up your source. Do they have anything that separates top earners from bottom earners?

1995-2002 was the dotcom "bubble"?

Honestly, I just Googled it. Shape looks right based on other things I've seen, but I don't recall the specific source. I could Google it again, but, meh. Don't feel like it right now.

During the 1990s boom period, we were at full employment, and there was actually a bit of a labor shortage, which led to wages rising. Often in that situation, you'd expect the Fed to hit the brakes because they'd fear rising inflation, but they didn't.

 

[JuliaB4GSP]

Honestly, I just Googled it. Shape looks right based on other things I've seen, but I don't recall the specific source. I could Google it again, but, meh. Don't feel like it right now.

During the 1990s boom period, we were at full employment, and there was actually a bit of a labor shortage, which led to wages rising. Often in that situation, you'd expect the Fed to hit the brakes because they'd fear rising inflation, but they didn't.

During and after the '97, '98 Asian and Russian financial crises we kept rates low to accommodate our global partners.

 

[Jack V Savage]

During and after the '97, '98 Asian and Russian financial crises we kept rates low to accommodate our global partners.

Um, I don't think so.

Stiglitz has a non-crazy explanation that makes sense:

The Fed, like many other forecasters at the time, thought that inflation would pick up as soon as unemployment fell below about six percent. This critical rate, below which unemployment cannot go without stimulating inflation, is called the NAIRU—the "non-accelerating inflation rate of unemployment." If the Fed had been able to anticipate the extent to which lending, and hence economic activity, was subsequently to pick up, it would have tightened monetary policy (by raising interest rates) early on, in an effort to thwart inflation before it started. But the Fed didn't foresee the increased economic activity, and so it didn't raise interest rates—to the economy's good fortune. By September of 1994 unemployment had crashed through the NAIRU barrier, falling by December to 5.5 percent—but, contrary to the Fed's model, inflation didn't pick up. Eventually unemployment fell another two percentage points, still without stimulating inflation. This course of events powerfully benefited the poor: the reduction in unemployment reduced welfare rolls as much as any other measure we might have undertaken. It played a major role in other social changes, too, including a drop in the crime rate.

The Fed had not fully appreciated the consequences of rapid changes in the labor market: higher levels of education, weaker unions, a more competitive marketplace, increased productivity, and a slower influx of new workers meant that the economy was able to operate at much lower rates of unemployment without triggering inflation. As evidence mounted that lower unemployment need not mean inflation, Alan Greenspan, to his credit, grasped the new reality. While the inflation hawks at the Fed continued to fret (they said inflation had to be shot before one saw the whites of its eyes), Greenspan raised interest rates more slowly than they wanted. If the hawks had had their way, the period of growth would very probably have been cut short.

 

[JuliaB4GSP]

Um, I don't think so.

Stiglitz has a non-crazy explanation that makes sense:

We must have lived in a closed economy in the late 90s then? I was a teenager, I can't recall.

Claudio M. Loser

"THE COUNTRIES of the Western Hemisphere confronted the Asian crisis under conditions of generally strong economic performance; during 1997, real GDP was growing at a healthy pace and inflation was low or declining in the United States and most of the countries in Latin America and the Caribbean. The region is weathering the effects of the crisis relatively well, although policymakers have had to adapt policies to rapidly changing circumstances. In the United States and Canada, domestic demand is strong, and the crisis has served essentially to reduce the need for monetary actions to slow the economy. The United States has benefited from a flight to quality of capital flows, and long-term interest rates have declined while the U.S. dollar has appreciated. The Canadian dollar has come under intermittent downward pressure, but underlying confidence in the government's policies remains strong. Relative strength in North America with growth projected at about 3 percent in both the United States and Canada in 1998 augurs well for the developing countries of the Western Hemisphere because close to 50 percent of their trade

 

[Jack V Savage]

We must have lived in a closed economy in the late 90s then?

That follows how?

Claudio M. Loser

"THE COUNTRIES of the Western Hemisphere confronted the Asian crisis under conditions of generally strong economic performance; during 1997, real GDP was growing at a healthy pace and inflation was low or declining in the United States and most of the countries in Latin America and the Caribbean. The region is weathering the effects of the crisis relatively well, although policymakers have had to adapt policies to rapidly changing circumstances. In the United States and Canada, domestic demand is strong, and the crisis has served essentially to reduce the need for monetary actions to slow the economy. The United States has benefited from a flight to quality of capital flows, and long-term interest rates have declined while the U.S. dollar has appreciated. The Canadian dollar has come under intermittent downward pressure, but underlying confidence in the government's policies remains strong. Relative strength in North America with growth projected at about 3 percent in both the United States and Canada in 1998 augurs well for the developing countries of the Western Hemisphere because close to 50 percent of their trade

 

[shootermcgavin7]

During and after the '97, '98 Asian and Russian financial crises we kept rates low to accommodate our global partners.

This is on the right track with regards to explaining the divergence in the late 1990s. This also caused oil prices to plummet (it was possible to find gasoline for $0.79/gallon in the late 1990s).

Because so much of consumer good prices are explained by price changes in energy/petrochemicals/etc (even more so 15 years ago) this helped depress consumer prices on average.


On a somewhat related note, there appears to be some confusion in this thread relating to how inflation affects consumer prices verses stock prices.

 

[Jack V Savage]

This is on the right track with regards to explaining the divergence in the late 1990s. This also caused oil prices to plummet (it was possible to find gasoline for $0.79/gallon in the late 1990s).

Because so much of consumer good prices are explained by price changes in energy/petrochemicals/etc (even more so 15 years ago) this helped depress consumer prices on average.

This is more similar to his revised position than the one you quoted. Basically, we had less reason to put the brakes on the economy because foreign crises reduced inflationary pressure, even with the economy running very hot. I'm not convinced that that's correct, but it's a reasonable position. The idea that monetary policy was being set to accommodate our foreign partners is very different, and not a reasonable position. I'm confused about your failure to see the distinction. "We didn't try to slow things down because there was no inflationary pressure" vs. "we didn't try to slow things down because we were more concerned with helping our foreign partners than what was happening in the U.S. economy."

On a somewhat related note, there appears to be some confusion in this thread relating to how inflation affects consumer prices verses stock prices.

This also appears to be based on a bad reading.

 

[shootermcgavin7]

Basically, we had less reason to put the brakes on the economy because foreign crises reduced inflationary pressure, even with the economy running very hot. I'm not convinced that that's correct, but it's a reasonable position. The idea that monetary policy was being set to accommodate our foreign partners is very different, and not a reasonable position. I'm confused about your failure to see the distinction. "We didn't try to slow things down because there was no inflationary pressure" vs. "we didn't try to slow things down because we were more concerned with helping our foreign partners than what was happening in the U.S. economy."

My statement has nothing to do with monetary policy. In the time period under discussion, the Fed Funds rate bounced happily along between 5% and 6% for the most part.

Nominal prices are simply the interaction between the supply/demand of money and a particular consumer good. Normally we think of inflation/deflation in terms of monetary policy, which is true over broad ranges of the earlier time series graph and generally true in "normal" times. The "disconnect" in the late 1990s between wages and inflation rates had major causes in the Asian financial crisis which caused negative shocks to oil prices due to what was essentially an economic collapse in SE Asia. In a relatively competitive economic market then reductions in input prices will be passed along to the consumer in the form of lower consumer prices.

To say things another way, we had a negative price shock to oil in the 1990s that affected the US in opposite ways than the OPEC embargo in the 1970s. Neither were very related to ex-ante monetary policy in the US and thus not in the classical sense that we think about inflation.

This also appears to be based on a bad reading.

I have seen several issues here, although clearly it is easier for any author (including myself) to blame a misunderstanding on "bad reading" rather than a lack of clarity.

Financial markets price assets using real rates of return (returns net of inflation). Any "price" is the expected future cash flows discounted by the real rate of return. As long as the company is going to produce cash flows in the future that are inflation-adjusted (as they have done historically), then stock prices are in some sense "immune" from the effects of inflation. As long as markets are relatively rational, in fact, stock prices are perfectly hedged against inflation. I believe that this what IDL was trying to say on the front page of this thread but I do not want to put words in his or her mouth.

The upshot is that the price mechanism for stocks is different from consumer goods, so it is confusing to muddle the two in one discussion.

 

[Shartnado]

Understanding money is like apocalypse survival theories, every guy thinks his intuition is divine

 

[FlowWithTheGo23]

Nobody worth anything gives a shit about these Austrian talking points.

 

[Jack V Savage]

Nobody worth anything gives a shit about these Austrian talking points.

I wonder how anyone can even think they sound plausible. I kind of get why people think that inflation cuts their buying power, even though it's pretty easy to explain why that's wrong. But I don't get the "money memory" one. It seems like obvious, hokey mysticism to me.