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

[Heyo]

I'd be happy to PM it to you, but only if you're interested.

Nah, I already have an opinion, don't confuse me with facts.

 

[Heyo]

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?

As long as the $ still works in their favor, there is no reason to drop it. Replacing the $ with, say the € will damage all economies - but it can be done. And note that I said that that might happen "if they go crazy", i.e. the moment the Fed introduces policies that no longer serve the global market, the $ will be dropped like a hot potato. That's what I meant by "the Fed doesn't control the $".
That's also the reason why the RMB is not going to become a reserve currency, because the CCP does control the RMB. Ain't nobody gone trust them.

 

[Pete in Panama]

"The Federal Reserve Act created a system of private and public entities. There were to be at least eight and no more than twelve private regional Federal Reserve banks. Twelve were established, and each had various branches, a board of directors, and district boundaries. The Federal Reserve Board, consisting of seven members, was created as the governing body of the Fed. Each member is appointed by the U.S. president and confirmed by the U.S. Senate." - Federal Reserve Act - Wikipedia
The Fed is a conglomerate of privately owned banks with a board of directors appointed by the Prez.

Yea, I already said so.

I'm not sure that's true but as some countries use the dollar as a shadow currency, there sure is some book money in circulation that isn't created by US banks.

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 and I have different views on what's government controlled and what's privately independent. This is probably just a nonsense fuss over terminology.

 

[Pete in Panama]

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.

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

View attachment 79294



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

Respectfully,

EG

What's happening here is I'll say that the government controls the value of the dollar and you disagree saying I'm wrong and that the government "stabilizes" the dollar. Off hand, what I'm seeing is that you enjoy disagreement for its own sake, though you'll probably point out how I'm wrong...

 

[Heyo]

you and I have different views on what's government controlled and what's privately independent. This is probably just a nonsense fuss over terminology.

I think we can agree that the US system is pretty unique and that the way it was created (Jekyll Island conspiracy) even more so.

 

[Pete in Panama]

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.

Please understand that it is possible to open a foreign currency account in the U.S. and the U.S. bank you deal w/ will be only in compliance w/ U.S. banking laws. This is also true in foreign countries.

 

[Pete in Panama]

I think we can agree that the US system is pretty unique and that the way it was created (Jekyll Island conspiracy) even more so.

Sounds good.

 

[EconGuy]

Whatever you want to import.

Right so it's difficult keeping up with the conversation as there are several going at once. Let's review.

Pete said:

That's my take too. Supply/demand don't matter. If the currency is devalued we got inflation. Simple.

[emphasis mine]

He claimed supply and demand don't matter, then said if the currency is devalued we have inflation. I asked him to explain the mechanism and that request went ignored. Not only does it matter, it's the only thing that matters as without goods and services there can be no currency (what is a currency without something to purchase?), but there can and historically has been goods and services in places in the world without a currency regime.

Then you said:

It does make sense on a macroeconomic scale. Devaluation of currency is lost buying power on the global market. I.e. prices go up for imports. Depending on the connectedness of the local economy consumers feel that kind of inflation more or less.

The point is a simple one. There is no such thing as inflation/ deflation unless it is measured against the thing that a currency is used to buy and the supply and demand of those things) or can be exchanged for at the very least. That is, unless someone @Pete in Panama or @Revoltingest can give me an example. Even when considering global markets.

Look at crypto as an example. If we didn't know the exchange rate for US dollars, that is, it's value stood on it's own, how could we measure inflation or deflation? If inflation is simply a measure of how many units of currency there are, as some would claim, then by that logic the value of bitcoin should have fallen from day one and should be worth almost nothing.

So in the case of crypto and foreign currencies there value is measured against the dollar (here in the US) and the value of the dollar is measured against things that it an be used to purchase in the real world. But even in the case of the exchange rate into a foreign currency, the trade value into another currency is still grounded in the fact that those currencies can be used to purchase goods and services and their supply and demand in their respective markets.

The poster child for hyperinflation was Weimar Germany or Zimbabwe. Why did those currencies inflate? Was it over creation of the currency? Well, the order of event matters. In both cases it was other forces that began with other factors that eventually resulted in the creation of currency as a response not as a precipitating cause. Anyone that wants to challenge me on this, please let's discuss.

 

[EconGuy]

I've nothing to add.

You mean, you can't or won't explain your position, which is fine, have a good day, but should you decide to weigh in, as you said earlier you had nothing to add but came back for a wave of responses.

Should you come back, hopefully you can answer a few questions?

I asked, if the relative value of currency declines over time, but people on average people have more money, not to mention that when we look at goods in the past vs goods today, generally todays goods have greater utility, cars are more efficient, safer, pollute less, more comfortable. Houses are similar, the average home in 1950 didn't have air-conditioning, not to mention greater comfort, better appliances, more efficient etc.. So the fact there are still about the same price when accounting for inflation sounds like a win to me.

Same with taxes. Today there are more services, better roads, more bridges and better services.

Let's see what else.....

You posted something about hyperinflation, but never explained why that reference was relevant to this conversation on inflation.

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.

The free market sets the price on housing, not the government. When I've purchases houses in the past, I consider the tax implications in my buying decision. I still don't understand why this is relevant or how it relates to this conversation about inflation. You are giving an anecdote about your experience of prices, not inflation.

Prices on houses have gone up, I'd argue in large measure because there are more wealth in the highest quintile of wealth owners. In turn those people increasingly look for investments that earn them a return over time. Given the extremely finite supply of land (and therefore houses to build on them) it's not a surprise that housing prices have increased (supply/ demand hard at work). But all that said, housing prices is not, in itself, inflation, it's just one, albeit foundational piece of an inflation calculation - well, in reality rents are used in the inflation calculation for reasons I assume, as a real Estate (former?) agent you already understand.

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

So what? Tell me why you think that matters.

If you are arguing that the tax system could be better, I agree. I think that taxes are much to high on people in the middle three economic quintiles (Those in the 21st to 80th% in income). If you want to argue that the tax system needs an overhaul, I agree, but I doubt we'll agree as I'm more in support of something like LVT

I already made 2 points about taxation.

Sure, but never made an argument as to why any of us should care. It sounds like your mad you have to pay taxes.

So if you decide you've changed your mind and you have something to add, here are some things you can address. Maybe you can correct my grammar again?

Respectfully,

EG

 

[EconGuy]

you and I have different views on what's government controlled and what's privately independent.

With respect, can we agree that that some opinions are better than others? That some are supported by the evidence and other are not?

What's happening here is I'll say that the government controls the value of the dollar and you disagree saying I'm wrong and that the government "stabilizes" the dollar.

And again, the evidence doesn't support your conclusion. I would say that the government via deficit spending, taxation (fiscal policy) and via the Fed interest rate and other machinations of the Fed (monetary policy) attempt to manipulate the value of the dollar, but control is a strong word because clearly the evidence points away from something as strong as control. For years after the '08 crash and recovery that the Fed wanted to increase interest rates but could not. To say nothing of Milton Friedman's beliefs in neoliberal policy adopted under Regan could control the things you're refiring to and yet have been an abject failure. Seems manipulation of the system is not the same as control.

Please understand that it is possible to open a foreign currency account in the U.S. and the U.S. bank you deal w/ will be only in compliance w/ U.S. banking laws. This is also true in foreign countries.

But that's just it, opening a currency account is not the same as creating dollars that are outside the purview of the US government. If you don't respond to anything to this point, at least help me understand what you're referring to here.

Respectfully,
EG

 

[Revoltingest]

That's my take too. Supply/demand don't matter. If the currency is devalued we got inflation.

Nay, supply vs demand matter too.
But that applies more to specific assets & classes thereof.
Currency devaluation applies to all commerce.

 

[Revoltingest]

You mean, you can't or won't explain your position....

Get'n a little snarky, eh.
It's that I've said all I wanted, &
found our recent discussion unproductive.

 

[EconGuy]

Get'n a little snarky, eh.

Nope.

 

[Pete in Panama]

He claimed supply and demand don't matter, then said if the currency is devalued we have inflation. ...

--and you're not familiar w/ governments that have unilateraly changed the value of the currency? Maybe Heyo can explain it better than I have.

 

[Pete in Panama]

Nay, supply vs demand matter too...

Of course they do, and then they don't matter when the government acts by fiat. There are plenty of examples in history when various government have raised the value of their currency by fiat --all w/ varying degrees of success.

 

[Revoltingest]

Of course they do, and then they don't matter when the government acts by fiat. There are plenty of examples in history when various government have raised the value of their currency by fiat --all w/ varying degrees of success.

The examples of lowering currency value
are more known...cuz it's disastrous, eg,
Weimar Republic, Zimbabwe.

 

[Heyo]

Of course they do, and then they don't matter when the government acts by fiat. There are plenty of examples in history when various government have raised the value of their currency by fiat

[citation needed]

--all w/ varying degrees of success.

More like various degrees of failure.

You can try to raise the value of your currency artificially by lying and hope you don't get called out but it's nearly impossible. As @Revoltingest pointed out, the other way around is more likely. And both cases were deliberately, at least at first before it got out of hand.
That's why today central banks are usually independent institutions, you can't trust politicians with money.
Unfortunately bankers aren't much more trustworthy.

 

[Revoltingest]

That's why today central banks are usually independent institutions, you can't trust politicians with money.
Unfortunately bankers aren't much more trustworthy.

I've dealt with many banks & bankers.
I find them generally trustworthy...honest & dependable, unlike
politicians...that is, for privately owned banks
Regarding banks owned by government, eg, RBS (owned by
British gov't), Citizens NA (owned by RBS), their dependable
to be imperious, difficult, & dysfunctional.

The best lenders are privately owned local banks
that hold their loan portfolio, instead of selling it.

 

[EconGuy]

--and you're not familiar w/ governments that have unilateraly changed the value of the currency? Maybe Heyo can explain it better than I have.

I am very familiar with one such case in Brazil. Brazil changed its currency in 1994, replacing the Cruzeiro Real with the Real. The Real was introduced as part of a broader plan to stabilize the Brazilian economy, known as the Plano Real.

Here's an excerpt from an article that explains what they did:

"We called it a Unit of Real Value -- URV," Bacha says. "It was virtual; it didn't exist in fact."

People would still have and use the existing currency, the cruzeiro. But everything would be listed in URVs, the fake currency. Their wages would be listed in URVs. Taxes were in URVs. All prices were listed in URVs. And URVs were kept stable -- what changed was how many cruzeiros each URV was worth.

Say, for example, that milk costs 1 URV. On a given day, 1 URV might be worth 10 cruzeiros. A month later, milk would still cost 1 URV. But that 1 URV might be worth 20 cruzeiros.

The idea was that people would start thinking in URVs -- and stop expecting prices to always go up."


Now perhaps you're talking about something different? I'm not sure. But I'm not sure what this has to do with the US and more specifically your claim that devaluation is all that matters or that the fact that governments can manipulate their curacies relates the things I've said to you.

 

[EconGuy]

The examples of lowering currency value
are more known...cuz it's disastrous, eg,
Weimar Republic, Zimbabwe.

Do you think that "lowering value", or hyperinflation, was the result of fiscal policy or do you think hyperinflation was the result of something that preceded each nations currency decline?