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Any (post 2008) Economists in the house? - Inflation.

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Jacob

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I wonder if the poorest in society are more feckless than those who are richer. I’m not sure they are.
...
No the rich are much more sensible. Jeff Bezos just spent $5.8 billion on a 4 minute space trip in a rocket shaped like a huge pe*nis. Beat that, suckers!
 
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D_W

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the car you drive, the phone you use, the food you eat (cheaply), the TV you watch, the electric motors you use...

...all created for the most part by "foolish" rich savants.
 

Sean33

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I would have thought the driver is a sudden drop in supply of goods, that has got things out of kilter. Gas prices are rising because gas is in short supply with maintenance of equipment due in 2019/20 has had to be postponed and added to the 2021 workloads so capacity is down. Its also down because it suits some producers to keep the market tight. Normally demand falls because of economic factors - rescission and so supply falls. with the pandemic demand fell for unique reasons, there was still latent pent up demand and cheap money continued to be supplied by governments. So in your function demand has exceeded supply, but the real cause was a sudden drop in supply followed by a slow resumption whereas demand bounced back much faster.

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I have a question for a proper economist. In normal circumstances governments and central bankers will raise interest rates to quell inflation. However if we have a sudden rise and tough economic times ie stagflation, do you think the authorities would take the political risk to clamp down hard on inflation, or do you think they will live with it for a few years and hope that surging production in China over time will provide a natural deflationary effect on global prices as happened in the 2000s. Thanks
By no means a qualified Economist, but without doubt the biggest fear of any central bank or government is stagflation. All the major central banks are hinting at raising rates so there will be no surprises. The consensus is the fed will start to taper there bond buying program in November and .25 basis point rise in 2022. Similar is expected in the UK and Euro area. The biggest point to note is that the Fed and all have said they will suffer inflation until growth gets back to normalised levels, and they are looking out to 2022-2023, so in answer to your question yes inflation can and may stay higher for longer.
Oil, been a while since i last checked but from memory $52 and above the fracking and independents break even so production now will be ramping up, but as with most things at the moment backlogs for parts and machinery is horrendous. Recent comments from the oil services sector has been very positive with upgrades to estimates. When you think back to April last year and the April contract went negative nothing would surprise me with the oil price.
 

Sean33

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No the rich are much more sensible. Jeff Bezos just spent $5.8 billion on a 4 minute space trip in a rocket shaped like a huge pe*nis. Beat that, suckers!
Jacob, yes its a ridiculous sum of money, but, Bezos having spent that much i just wonder how many jobs have been created from it, then from the money they have earned how many things have they purchased, then how many more jobs have been created and so on...
 

TominDales

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Thankyou for your thoughtful, nuanced reply to my sweeping statements. I would note that your list of people suffering through deflation doesn't include savers or people living on fixed incomes - most notably pensioners. Both these groups are royally shafted by the endless, constant inflation which actually constitutes theft of their assets. Inflation doesn't need to happen, but is endemic and endless and entirely done on purpose. What is the long term purchasing power of a pound over time? A pound today is worth 4% of a pound in 1960. The only reason there aren't riots about this is because it happens gradually.

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This constant devaluing of the currency is not because of shortages or increased demand - it is a carefully crafted, fully intentional destruction of wealth over generations for the benefit of...?
Hi I totally agree with that. High inflation destroyed my grandparents retirement wealth in the 1970s as Terry said at the start of this section the best policy is stability and the targeting of inflation at 2% by most independent central banks has done a lot to achieve this.. In short stable money is essential to protect citizens.

I lived near and so helped my grandfather and was shocked to discover his retirement pension in 1989 was £200 per year- he retired in 1966 when £200 was just about ok. If we agree high inflation is horrendous, I've heard and read that deflation is even more horrific as it creates an ever increasing spiral of misery. Its not happened in my lifetime. I've read accounts in history books and I've seen the effects when researching the local history of the towns I've lived in - Leicester, Liverpool, Yorkshire and the period of deflation and recession in the later 19th century saw desperate hardship and high mortality despite rapid improvement up to that point through the 19th century. My wife has pieced together her family tree and the mortality during that period stands out. The cases of people driven into abject poverty. The 1920s Uk was similar, my granny witnessed the 1920s deflation in the UK (the US was more the 1930s but UK 1920s) and she used to describe to me how it was in county Durham when children had no shoes and starvation killed as work dried up. The way she talked its was far worse than what she endured in the 1980s even though pensioners were poor then. So poor that they barely heated their houses. She considered herself to have had a lucky lifetime. My grandfather was aware of how inflation had eaten his income, he was an erudite and well read person. Its true that their wealth eroded over a 25 year time and their outgoings declined as they aged, but they still referred to the deflation of the 1920s with horror.

Are you really sure inflation was a deliberate act to steel the savings of the old? The US did apply a slack monetary policy in the 1960s which drove up global inflation in the 1960s allegedly to pay for the Vietnam war. But the rest of the time governments seemed happy to inflict hardship to manage debt and supress inflation. the Attley government did all it could to pay down debt without driving up inflation after WW2 and the 1970s and 1980s hikes were largely due to the oil price shocks. Callaghan and Wilson were a bit ineffectual, but the Thatcher governments in the 1980s and 1990s put some strong measures to tame inflation, so much so that 250 economists wrote to the Times condemning Howes budget and interest rate hike in the teeth of a recession. I recall Uk interest rates hitting 17 or 18% shortly after I bought my house..
Having said all that, I detect a complacency about inflation at the moment, its been low for so long policy makers seem to have assumed its gone away. I suspect we will see high interest rates quite soon. That would have a major cooling effect on UK house prices. We live in interesting times.
 

Jacob

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Jacob, yes its a ridiculous sum of money, but, Bezos having spent that much i just wonder how many jobs have been created from it, then from the money they have earned how many things have they purchased, then how many more jobs have been created and so on...
Well yes but you could say the same of all and every blast of extravagance, self indulgence and luxury. In fact it's an ancient argument wheeled out to justify inequality, throughout history.
Think of how much more could have been done with that money, from paying Amazon workers more and giving them better conditions, to alleviating poverty.
 
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Trainee neophyte

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I recall Uk interest rates hitting 17 or 18% shortly after I bought my house..
Me too - and property prices fell by about 40% if I remember rightly. Certainly the house I bought halved in value from the frothy top. If the property market in the UK drops (deflation) what happens to the banks? This is where deflation causes the problem - lenders lose their capital. It will be great for new buyers, who may be able to afford a house for the first time in a generation, but no bank will be solvent to lend to them. Unless the government decide to ignore the rules, or decides to just bail out all the banks yet again. Saving the banks will be more important than saving the economy, or the people.

If interest rates rise the USA and the UK will be unable to finance their debt through taxation - there won't be enough money in the world if interest rates go to 17% again. Can interest rates rise all all? Is it possible? If interest rates denote the value of money, the current value is zero. In europe, interest rates are less than zero. At some point the people may catch on and start using something else for their interactions, which will be interesting.

My thinking is that the world economy still wants its deflationary recession which wasn't allowed in 2008/9. Because deflation is effectively illegal, world government's will do everything in their powers to stop deflation, and the only real power they have is printing. The Swiss central bank buys stocks directly - creating a false market and making true price discovery impossible. The Plunge Protection Team (a conspiracy theory now proven as fact) does similar albeit secret work in the USA, and I'm sure most other western central banks fiddle the markets in their own special ways. Until all this stops no one actually knows what the value of anything really is. It's all a bit of a mess. The upshot is we are living in a not very well run, but planned world economy. Nothing works the way it ought to, so trying to read the future is tricky.

Maximum borrowing would be the smart move right now, but I've been debt free for many years, so it's hard to break the habit.
 

Terry - Somerset

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We can understand the reasons why both inflation and deflation are damaging. But why is the target ~2% for which there seems some international consensus, rather than 0%.

Is it because consequential behaviours are not balanced - behaviours will tend to change progressively under increasing levels of inflation, but deflation at any level initiates an immediate behavioural change. Deflation:
  • reduces spending in the expectation that prices will fall - very directly reduces employment and economic growth
  • saving, not enterprise, is the basis upon which wealth is accumulated
  • asset values (eg: property) tend to fall - their value rests upon their demand
  • makes it difficult to repay existing loans or act as security for new borrowing.
  • theoretically leads to negative interest rates which encourages money under the mattress rather than in the bank
There is a very different emotional response to interest rates which are used as the principal economic control lever and impacts the balance between spending, investment and saving. So it is probably better to target inflation at between (say) 1% and 3%, rather than -1 to +1%.
 
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We can understand the reasons why both inflation and deflation are damaging. But why is the target ~2% for which there seems some international consensus, rather than 0%.

Is it because consequential behaviours are not balanced - behaviours will tend to change progressively under increasing levels of inflation, but deflation at any level initiates an immediate behavioural change. Deflation:
  • reduces spending in the expectation that prices will fall - very directly reduces employment and economic growth
  • saving, not enterprise, is the basis upon which wealth is accumulated
  • asset values (eg: property) tend to fall - their value rests upon their demand
  • makes it difficult to repay existing loans or act as security for new borrowing.
  • theoretically leads to negative interest rates which encourages money under the mattress rather than in the bank
There is a very different emotional response to interest rates which are used as the principal economic control lever and impacts the balance between spending, investment and saving. So it is probably better to target inflation at between (say) 1% and 3%, rather than -1 to +1%.

Excellent post, thanks.

The Central Banks (The Fed, UK BoE, ECB anyway) are fairly transparant and publish a lot of information. The ECB's rationale is here.

Risk of deflation is indeed the principle reason why it's not zero.
 

Spectric

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You just need more hot air and hype, I think that is how the financial sector and housing markets seem to work. If enough people get excited and produce lots of hot air and get talking then they can keep things up on a cushion of air, but if they feel pee'd of or down then less hot air is produced and the markets fall.

It is a world of virtual reality, how can a two bed terrace in London be worth £750,000, in the real world it cannot. But in the world of make believe and hype it can be worth what ever you can convince some poor sod to cough up and then people all jump on the bandwagon until the hot air can no longer support them and down they all come. The problem will never be solved until we remove the stupidity of London housing, someone has been real clever in making a fortune out of it because look at it without rose tinted specs and you just see it for what it is, a spawling cesspit of overcrowding, polluted, overpriced and filth yet people believe surviving here is better than living elsewhere, a good scam!
 

Blackswanwood

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You just need more hot air and hype, I think that is how the financial sector and housing markets seem to work. If enough people get excited and produce lots of hot air and get talking then they can keep things up on a cushion of air, but if they feel pee'd of or down then less hot air is produced and the markets fall.

It is a world of virtual reality, how can a two bed terrace in London be worth £750,000, in the real world it cannot. But in the world of make believe and hype it can be worth what ever you can convince some poor sod to cough up and then people all jump on the bandwagon until the hot air can no longer support them and down they all come. The problem will never be solved until we remove the stupidity of London housing, someone has been real clever in making a fortune out of it because look at it without rose tinted specs and you just see it for what it is, a spawling cesspit of overcrowding, polluted, overpriced and filth yet people believe surviving here is better than living elsewhere, a good scam!

We all choose to live where we do with different motivations and requirements but is there really any need to describe where others choose to live in such derogatory terms?
 

Terry - Somerset

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Beauty is in the eye of the beholder, and thus what we are prepared to pay for same will differ.

It make no sense to me to spend £'000s on jewellery - small bits of yellow metal or tiny stones indistiguishable from glass from more than a few feet. No sense to spend £m's on a few square ft of paint and canvas.

So to judge the value of property in London by reference to its acreage is superficial.

Over the last 40 years I moved from north London to the west country, via Hertfordshire and Berkshire. I would not contemplate moving back to London. I find it difficult to think of the circumstances in which I would want to move back to the South east (but it is possible)

But for many London may seem wonderful, or at least the best compromise:
  • family, friends, education are local (we are all creatures of habit to some extent)
  • job and career propects
  • interest or involvement in music, arts and theatre
  • cultural diversity in food, vibrant social life etc
For me it seems noisy, polluted, congested and expensive. These outweigh the positives for which a very high income would be required. But as Blackswanwood says it is a matter of personal choice and priorities.

Life would be irredeemably boring if we all thought the same things. We just need to be tolerant of that which we consider bizarre.
 

Trainee neophyte

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We can understand the reasons why both inflation and deflation are damaging. But why is the target ~2% for which there seems some international consensus, rather than 0%.
In 25 years the purchasing power of each pound/dollar etc will almost halve. Governments think long term, and it's a handy way of defaulting on your debt without actually defaulting. My mother, who learned her household economics in the 60s and 70s reckoned on the value of money halving every 7 years. I see the last decade as being an oddity rather than the new normal.
reduces spending in the expectation that prices will fall - very directly reduces employment and economic growth
This is a well known economic truism, except it ignores all Apple products, computers, technology in general. People queue up for days to buy the latest iphone despite the fact that it will be hundreds of €£¥$ cheaper in a few weeks or months at worst - economics says that this is impossible because people always wait for the cheaper price. Personally I think that if people want something, they buy it as long as they can afford it. Who here has a flat screen TV? Why did you buy it? It will be cheaper and bigger in 6 months, so why didn't you wait? Time preference and associated economic theories tend to struggle in the real world.
 

Sean33

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Well yes but you could say the same of all and every blast of extravagance, self indulgence and luxury. In fact it's an ancient argument wheeled out to justify inequality, throughout history.
Think of how much more could have been done with that money, from paying Amazon workers more and giving them better conditions, to alleviating poverty.
Yes you could but i could turn your statement on its head and argue the same has been said throughout history to moan of inequality.
Yes it would be extravagant to 99% plus of the worlds population, but i say again without Mr Bezos and everyone else for that matter spending money it keeps people in employment and creates Jobs.
Before you mention the highly publicised throwing away of returned, broken, end of line stock etc that Amazon has been criticised for if you happen to be able to get into most distribution hubs you will find that household names are doing the exact same thing. Do i agree with it No, can i see why they do, Yes, it is pure economics.
Wages- The fulfilment and logistics space is very highly competitive, the good news for many employees is that most of the distribution hubs are closely situated with many different companies operating in close proximity. I do not have the numbers but i can tell you staff turnover is ridiculously high, and this is because staff will move to the highest payer and good on them for that.
Are wages poor ? it depends on the comparison you make, pay is similar to that of nurses, I have my own view on which is the more demanding and stressful, but they are mine and i dont try and put my opinions on others or berate others for there's..
 

Jacob

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..... I have my own view on which is the more demanding and stressful, but they are mine and i dont try and put my opinions on others or berate others for there's..
Er - Isn't that exactly what you were doing? Make your mind up!
Not that I mind - I think people should exchange their points of view and talk about things, especially important things which affect all our lives.
 

Sean33

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Er - Isn't that exactly what you were doing? Make your mind up!
Not that I mind - I think people should exchange their points of view and talk about things, especially important things which affect all our lives.
Was I ?
 

TominDales

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You both write as if inflation is a new thing invented by modern capitalists. The same arguments against inflation are in the Bible - something about unequal weights and measures beings an abomination to the Lord, and probably lots of other stuff. 'Your gold has turned to dross and your wine to water' or something.

Be it right or not, it's been around for a long time and probably will be until we transistion to some sort of sufficient-for-all model like Gene Rodenberry wrote about (Star Trek).
sorry meant to press like and hit reply... There some quiet amusing examples in history, amusing for us but not for those living through it. The black death was deflationary. The spanish silver haul from south america caused European inflation and I think funniest of all was Mansa Musa trip to Meccas from Timbuctoo. He passed through Egypt and gave away so much gold that it devalued the local metal currency causing rampant inflation for roughly 10 years. Debasing the currency was either outlawed by monarchs since the days of Archimedes or occasionally used as a trick to raise funds by medieval monarchs, until inflation caught up with them.
 

Spectric

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A lot of people cannot understand finance, they just see the face value of their money which I think is wrong, much better to think in terms of buying potential.

When you tell someone that there money sitting in the bank is actually depreciating they laugh and just say " I put £25,000 in there in 2008 and when I look now I have £25,154" so no it is growing!! Trying to explain that what they could have purchased in 2008 with that money would have been more than it will buy now but deaf ears.

I think £20 in 1990 you now need closer to £100 to buy the same, ok not looking at some technology which is cheaper now, I certainly think that £30 K wages in 1990 was better than £50 K now, you could certainly live better on it.
 
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