Inflation, what is it and what causes it and why does it matter?

[Revoltingest]

Setting aside that claim for just a sec, you're using the words "buying power", buying what? The point here is that intuitively money's value is always tied to something in the real world.

Even when that something is
government printing too much.

Hyperinflation - Wikipedia

en.wikipedia.org

 

[EconGuy]

Note the usefulness of comparing economic
value to dollar value, & how the latter decreases
over time.

Tell me, why does it matter if the value of a dollar declines if on average pay increases, in real terms exceed those losses?

If the value of a dollar declines by 50% over 50 years, but salaries increases by 55% aren't people better off?

I gave you none.

Posting a link to something on the internet without any context, summation or explaining how it offers evidence to your point is homework. This is a conversation and I don't read info to make another persons point for them.

I mean, unless you somehow believe I will find it interesting and enlighten, in which case, say that.

I've nothing to add.

If what you mean by this is you don't want to continue our conversation, then why respond? I mean, unless I've misunderstood you?

Respectfully,

EG

 

[EconGuy]

Even when that something is
government printing too much.

What government? When? Hyperinflation? What are you talking about?

 

[Revoltingest]

Tell me, why does it matter if the value of a dollar declines if on average pay increases, in real terms exceed those losses?

As I've explained, selling a capital asset years after acquisition
results in more dollars at sale than at purchase because of the
dollar's decline in value. Government treats the increase in
dollars (unadjusted for loss in value) as taxable profit.

As wages rise with inflation, income moves into a higher
marginal tax bracket, thereby increasing the average
rate paid.

If the value of a dollar declines by 50% over 50 years, but salaries increases by 55% aren't people better off?

That doesn't take into account taxation.

Posting a link to something on the internet without any context, summation or explaining how it offers evidence to your point is homework. This is a conversation and I don't read info to make another persons point for them.

It's for convenient reference so you can learn
more if you're so inclined. I don't expect it.
Most posters don't care to understand more.
Read it or don't.
It's entirely up to you.

 

[Revoltingest]

What government? When? Hyperinflation? What are you talking about?

If you're unfamiliar with hyperinflation,
it's beyond the scope of RF for me to
elaborate on this phenomenon.
You might find the link I posted earlier
useful. Or you might not.

 

[EconGuy]

Money is first created by a government that issues a currency and proclaims that the currency can be redeemed for a commodity at a set exchange or a basket of goods for that exchange.

Not quite, but close.
Yes the government creates the nations currency, but it does not force private businesses to accept dollar (though there may be some examples where that's not the case. For instance, if you open a business and want only to accept crypto, you can do that, no one can force you to accept dollars. However, what the government will force you do do is pay your taxes, income, property, sales capital gains ect in the US dollar.
So businesses accept dollars because not accepting dollars means losing money in the exchange from something like crypto to the dollar in order to pay taxes or use dollars in places that only accept the dollar as payment.

U.S. gov't used the Fed to control the value of the dollar so it can buy a market basket of commonly purchased goods --as rated by the Consumer Price Index.

No, the Fed was created to stabilize the dollar as before the dollar, money in the economy fluctuated between periods of inflation and deflation.

Whenever the gov't changes that amount of exchange rate of money to goods it's called inflation/deflation.

Disagree,. Can you explain to me the mechanisms you believe the government uses to do this?

Respectfully,

EG

 

[EconGuy]

If you're unfamiliar with hyperinflation

Hard to tell if that was an attempt at levity or if you are serious, but let's review your statement in context:

Setting aside that claim for just a sec, you're using the words "buying power", buying what? The point here is that intuitively money's value is always tied to something in the real world.

Even when that something is
government printing too much.

Hyperinflation - Wikipedia

en.wikipedia.org

That's called question begging.

Start with something you believe proves that the government is "printing too much". Perhaps you could start by telling us how you'd determine how much currency the government should create?

That said, there are plenty of real world examples of where something currency like is created in increasing amounts and it has little to no affect on value. Why? Because value isn't a simple equation that looks at the amount of something to be purchased and divides it by all the currency available to purchase it. How do we know this. Simple, business owners don't set prices by on the quantity of money in circulation, rather it's based on demand/ supply. If demand increases and supply along with it, then inflation is kept in check.

It is, as I said in my OP.....

the cause of inflation is the result a divergence between supply capacity and current level demand.

Divergence is the key.

it's beyond the scope of RF for me to
elaborate on this phenomenon.

No please, let's discuss.

 

[EconGuy]

As I've explained, selling a capital asset years after acquisition
results in more dollars at sale than at purchase because of the
dollar's decline in value

I want to be clear before I reply, are you asserting that's the only reason that an asset increases in value over time?

As wages rise with inflation, income moves into a higher
marginal tax bracket, thereby increasing the average
rate paid.

Correct, but what is your point? So what?

Here let me take a shot...

Are you saying that when people earn more money they in fact do not?

 

[EconGuy]

The Fed is a conglomerate of privately owned banks with a board of directors appointed by the Prez.

You you that 94% of all the profits made by the Fed are handed back to the US government. The other 6% is used to run the fed and pay FIXED dividends, right?

You are also aware that the Fed was created by an act of Congress and could be abolished by the same?

The fact that the Fed is independent within the government does not mean it's independent of the government.

I wrote a long piece that addresses the points you make, but it's too long as a reply in this forum, but if you or anyone else is interested, I'd be happy to PM it to you, but only if you're interested.

 

[Revoltingest]

Hard to tell if that was an attempt at levity...

You asked basic questions about hyperinflation.
My link would've helped.

 

[Revoltingest]

I want to be clear before I reply, are you asserting that's the only reason that an asset increases in value over time?

I never claimed that.
Some assets increase in value because of increasing scarcity &/or demand.
Sometimes the increase in dollar price is a combination of the above, &
currency devaluation.

Correct, but what is your point? So what?

I already made 2 points about taxation.

 

[EconGuy]

That doesn't take into account taxation.

That was a hypothetical example.

Let's look at some real numbers.

The median wage in 1950 was $3,033 or just over $25,000 in inflation adjusted dollars.


The median wage today is about $69,000

In 1950 a wage of $3000 puts you in a 22% federal tax bracket.
In 2020 a $69,000 income puts you in a slightly higher 24% bracket.

However, as I'm sure you know, tax brackets in the 1950's went all the way to 91% where as today they stop at 37% Of course there are nominal numbers that don't account for exemptions ( I don't have access to a table with real figures), but what I see is incomes that are 176% higher from 1950 to 2020, but the value of the dollar has declined by 25% over the same period and taxes are similar.

So why wouldn't a person making the median wage be better off today than in 1950?

 

[EconGuy]

You asked basic questions about hyperinflation.

Please go re-read, I never asked a question about hyperinflation.

You made an unsupported assertion:

Even when that something is
government printing too much.

[Hyperinflation]

That assertion being that the government is printing too much ostensibly supporting your link to hyperinflation.

I replied asking for clarity.

What government? When? Hyperinflation? What are you talking about?

Now does that really look like I'm asking you what hyperinflation is, or I'm asking you to explain your baseless assertion? If you think it's the former, than let me clear things up for you, it's the latter.

Now that you know that, how would you respond? I mean, all I can figure out is in your hubris, ironically, you don't realize what hyperinflation is.

 

[EconGuy]

I never claimed that.

Good thing I put a question mark at the end.

Some assets increase in value because of increasing scarcity &/or demand.
Sometimes the increase in dollar price is a combination of the above, &
currency devaluation.

Excellent, so there are a lot of factors at play. Curious you omitted these other factors initially.

Now, in order to evaluate your claim, we really need to know how much prices have risen due to each factor to make a judgement, wouldn't you say?

 

[EconGuy]

It's true that most dollars are created by foreign banks outside of the Fed's jurisdiction.

This is 100% false.

It would be true to say that some number of dollars are in bank accounts that are currently owned by non-US interests (approx $6 trillion), but none of those dollars are outside the Federal Reserve system and none are created outside the same.

 

[EconGuy]

I think the variation of currency is the problem as there is no world standard for one single currency.

Why would we need a standard? We have a market that determines the exchange rate between currencies.

 

[EconGuy]

The Fed has only as much power as the world economy allows it to have. If they go crazy, the rest of the world may decide to drop the $ as a reserve currency and OPEC would drop the petro $. It would be disastrous for the $ and the US economy - but then and only then would the Fed control the $.

You really need to understand why the foreign sector has so many US dollars in the first place. Once you realize why, you'll understand that the largest holders of US bonds couldn't stop buying US bonds even if they wanted to (assuming they want to sell goods to the US).

Think about it, tensions between the US and China are higher than they've been in my lifetime, if it was really that easy to "drop the US dollar", wouldn't China already have done it? Or at least threaten it?

They haven't because that's not how it works. The RMB accounts for about 2.76% of global reserves. The reason that Saudi Arabi or OPEC as a whole cannot adopt the RMB or any other currency is there simply isn't enough circulating in the global economy to do all the business that wants to be done. Sure Russia and and a few other BRICS nations have flirted with using the RMB, but that market is miniscule compared to the US dollar and it cannot grow to compete with the Pound or the Euro never mind the dollar.

Now why are there so many US dollars flowing around the world? Because the US runs a MASSIVE trade defect. We are a large net importer of goods and a large net exporter of our dollar. not just for oil, for everything. If China wants to replace the dollar as the worlds premier reserve currency it needs to run a huge trade deficit, not to mention un-peg it's currency and become more transparent and earn the trust of the nations it wants to use it's currency globally.

Now honestly, perhaps one day that will happen, but not, as things are going, in my lifetime. Things are going ok for China now, but they are on the verge of a demographic crash and that's going to make things harder for China for the foreseeable future.

 

[EconGuy]

Worse is cryptic currency now is about as shady as it gets.

Agreed

 

[Revoltingest]

That was a hypothetical example.

Let's look at some real numbers.

The median wage in 1950 was $3,033 or just over $25,000 in inflation adjusted dollars.


The median wage today is about $69,000

In 1950 a wage of $3000 puts you in a 22% federal tax bracket.
In 2020 a $69,000 income puts you in a slightly higher 24% bracket.

However, as I'm sure you know, tax brackets in the 1950's went all the way to 91% where as today they stop at 37% Of course there are nominal numbers that don't account for exemptions ( I don't have access to a table with real figures), but what I see is incomes that are 176% higher from 1950 to 2020, but the value of the dollar has declined by 25% over the same period and taxes are similar.

So why wouldn't a person making the median wage be better off today than in 1950?

Please go re-read, I never asked a question about hyperinflation.

You made an unsupported assertion:


That assertion being that the government is printing too much ostensibly supporting your link to hyperinflation.

I replied asking for clarity.

What government? When? Hyperinflation? What are you talking about?

Now does that really look like I'm asking you what hyperinflation is, or I'm asking you to explain your baseless assertion? If you think it's the former, than let me clear things up for you, it's the latter.

Now that you know that, how would you respond? I mean, all I can figure out is in your hubris, ironically, you don't realize what hyperinflation is.

Good thing I put a question mark at the end.


Excellent, so there are a lot of factors at play. Curious you omitted these other factors initially.

Now, in order to evaluate your claim, we really need to know how much prices have risen due to each factor to make a judgement, wouldn't you say?

I've nothing to add.

 

[Heyo]

Setting aside that claim for just a sec, you're using the words "buying power", buying what?

Whatever you want to import.

The point here is that intuitively money's value is always tied to something in the real world.

You have explained inflation with rising prices. "Buying power" is just the other side of prices. When prices go up, the buying power of your money goes down.
What makes @Pete in Panama's definition inferior to yours is that he only sees prices go up for imported goods while you view prices all over the board - but his isn't wrong or doesn't make sense.