The whole point of inflation is to encourage investment as money is only worth something as it flows through the economy.
You’re not supposed to save money under the mattress you’re supposed to save value by purchasing assets. A hundred years ago buying roughly speaking any asset would have preserved your entire wealth or created tons of new wealth.
Wages have on average kept pace with inflation.
You keep a small slush fund for a rainy day in a savings account that at least partially offsets inflation and you invest the rest. You don’t save money, you save value. You transact money. If you’re saving money you’re doing it wrong.
- CPI(-U) is not a suitable measurement of inflation anymore since it discarded fixed basket goods somewhere in the 90s and that
- inflation measures with "old-school" fixed baskets report inflation rate in the range of 6-10%/year
- production of goods became much more efficient but instead of being reflected in cheaper prices it increased shareholder profits and wealth inequalities?
My take on it re CPI is that I don’t know enough to know whether CPI is a suitable metric or not. I defer to economists here which is something you’re free to hold against me.
Re (2) I’d be very interested in learning more about the delta between CPI and these baskets. Do you happen to have a reference? I’m always down to learn more.
Re (3) I agree that inequality has gotten worse but I see that as a social and fiscal policy matter and not a monetary policy matter. If we’d been using gold, the same trend would have manifest. Poor people don’t hold onto money anyways they’re hand to mouth. And any extra they happen to hold onto could have been invested anyways. Frankly minimum wage over the period hasn’t been indexed to inflation either!
I’m a huge advocate of decreasing the gap between the rich and poor, I have more than I need to be sure, and the best way to do that is taxation.
This gap between rich and poor really started widening after the Reagan era tax cuts and trickle down economics. If you look back the top marginal tax rate in the US in much of the 1900s was 80-90%. Estate tax the same. If you reduce that to 37%, rich people get richer because they keep more and more of their wealth. A practically 0% estate tax ensures the next generation starts on a monopoly board where there’s a hotel on every square. To me that’s a much clearer correlation than the spooky action at a distance of this 2% (a figure you admittedly contested) inflation rate. Do the ultra wealthy really hold cash? Do the poor? Does anyone?
CPI matches other measures of inflation like http://bpp.mit.edu pretty well. People who think inflation is high are cranks - the history of cranks goes from Austrians, to Shadowstats, and currently is on Chapwood Index.
If we had inflation at 10% the economy would be smaller now than it was in 2010. It's under 2% and we can't get it up no matter how hard we try (not that hard so far.)
> If you look back the top marginal tax rate in the US in much of the 1900s was 80-90%.
Note that the effective rate was nothing like this because there were also lots of deductions.
To be fair I actually thought that inflation was measured using a fixed basket of goods.
Apparently that was changed in the 90s. An example I read (of which I am not sure if it is entirely accurate) was: "if steaks become too expensive, its weight in the basket will be reduced because people are expected to buy more chicken instead. this results in lower inflation estimates".
If true, why do you feel a fixed basket should not be used to determine inflation even though it is probably what most people would expect in such a measure?
In your example of steak, there are macroeconomic changes which may well cause the specific commodity to change in price substantially over time. Inflation isn't determined as a function of "steak" but rather as a function of "protein."
For instance, industrial agriculture, the farm bill subsidizing corn to below the cost of production starting in 1933, and many other things may change the relative cost of beef over time as compared to, for instance, pork and chicken. That's not inflation, and as such it doesn't really make sense to define inflation in terms of these factors which affect only a specific industry.
> In your example of steak, there are macroeconomic changes which may well cause the specific commodity to change in price substantially over time. Inflation isn't determined as a function of "steak" but rather as a function of "protein."
I don't think this applies to the general population's understanding of inflation. The layman's interpretation would be "how much more expensive would it be today if I bought the exact same things 1/2/5/10 years ago". This is actually how inflation was measured up until the 90s.
"Removing" (i.e. reducing the weight) of a good when it becomes more expensive is contradictory to measuring the price increase of an average basket of goods. Especially if you do it on short timeframes. CPI-U is reweighed every 2 years and C-CPI-U is reweighed every month. How are you expected to measure inflation* beyond those timeframes? Housing too expensive? Rent. Cars too expensive? Public transport. Steaks too expensive? Eat chicken. Chicken too expensive? Ramen. Ramen too expensive? Food stamps.
The result? Population on food stamp in the US rose from ~6% in 2001 to ~15% in 2017, while unemployment rate and wages stayed the same. They can't protect themselves via buying stocks or other assets because they need their money to survive months by month. All the while, the riches are getting richer by pocketing efficiency gains and bailouts.
People have learned that the 2% inflation (of a fixed basket) is nothing to worry about in the past. The same measurement would now yield a 10% inflation rate which is unprecedented and worrisome. So the inflation measure was changed to a dynamic basket in which expensive items are reduced, cheaper items are increased and magically inflation* is around or even below 2%. Nothing to see here, nothing to worry about - we always had 2% and 2% is fine. Except the poor are getting poorer and more desperate and susceptible to fascism.
So the idea people have about "inflation" as the increase of costs of a fixed average basket of goods is as obsolete as the idea of "money" being backed by gold.
> I don't think this applies to the general population's understanding of inflation. The layman's interpretation would be "how much more expensive would it be today if I bought the exact same things 1/2/5/10 years ago". This is actually how inflation was measured up until the 90s.
The layman's interpretation of a lot of things isn't right or useful - just ask antivaxxers. As our standards for what luxury is change, what we're willing to pay for them (in the supply and demand sense) changes.
Things that used to be "poor-mans food" like lobster and caviar are now high-end food. Monkfish, oysters, foie gras. Even sushi was street food. Skirt steak was crap meat! Now they're incredibly expensive. Is that inflation? Of course not, that's a change in tastes.
Similarly, spices like clove, nutmeg, cinnamon and pepper used to be hugely expensive but are now dirt cheap. Is that deflation? Of course not, that's a change in productivity and availability.
The fact that the basket wasn't adjusted seems like a huge oversight to me.
> The result? Population on food stamp in the US rose from ~6% in 2001 to ~15% in 2017, while unemployment rate and wages stayed the same.
This is a completely unfounded leap. You have not presented any evidence for a cause-effect relationship, just simply asserted it. Correlation is not causation.
This is a social policy issue and not a monetary policy issue. Even if we pretend for a second that the situation was exacerbated by monetary policy, it doesn't matter - it's still a social policy issue to resolve.
> People have learned that the 2% inflation (of a fixed basket) is nothing to worry about in the past. The same measurement would now yield a 10% inflation rate which is unprecedented and worrisome.
Sure only if you ignore that that's not how inflation is calculated and for a good reason.
Haha, that's not what I'm saying, however. Although bugs are a delicacy in a number of cultures! [0]
Just that factors outside inflation influence the pricing of certain commodities. Nobody's guaranteed a specific commodity forever, and the definition of luxury, and commodity expectations, changes over time.
For instance, pig feet are having a moment (or at least were pre-pandemic). They used to be discarded as waste, but now you'll find them in haute cuisine. [1] Sweetbreads too!
Tastes change, expectations change, cost structures change. The world isn't static, and nor should our metric be.
The whole point of inflation is to monetize the crazy debt spirals by empires. Its why the romans did it, why the Germans did it, why the british did it , and its why we do it. It doesn't take an econ degree to know that. That was the reason the gold window was closed in the first place.
If the whole point of inflation, mind you, is to encourage investment, then why does the fed react by spiking interest rates in the , 60s' 70's, 82 to address inflation...yet introducing a bona fide investment meltdown ?
Thats what reveals the facade. If the purpose of inflation was to encourage investment, it is certainly an odd to react to inflation by increasing interest rates, and destroying business investment in the process.
>>>>>>You’re not supposed to save money under the mattress, s you’re supposed to save value by purchasing assets.
This sure sounds like you know better than everyone else. Its probably an attitude that would be frowned upon by someone that believes in freedom of choice, like we do in USA.
>>>>Wages have on average kept pace with inflation.
I don't know if that is true since you have no sources, but the total count of people living in the US under the poverty line is exactly where it was in 1959, and now, post pandemic, it is certainly far higher. So even if wages kept pace, which is uncertain, with technology advances and the dollar as the reserve currency, you would expect the total number of people to be lower.
>>>>>>>You keep a small slush fund for a rainy day in a savings account that at least partially offsets inflation and you invest the rest. You don’t save money, you save value. You transact money. If you’re saving money you’re doing it wrong.
This is valid because there is inflation. But it saddens me to think that you think it is perfectly rational and acceptable to steal money from the savings of hardworking people, who often have to fend off scams left and right...and thus keep the money for themselves, for no real reason other than that it is what... you think.
The gold window was closed because gold was garbage money. A money supply you can’t adjust cannot respond to shocks and it can’t respond to changes in the economy or society. The crash in 2008 and again now would have been much much much worse without an ability to control supply. Inflation is defined in terms of supply and velocity. Velocity plummeted so supply was raised to offset and lo and behold the fed nailed its 2% inflation target in 2020 in spite of epic global chaos. Gold would have ruined us.
Yes wealth inequality is a problem, that’s a fiscal and social issue not a monetary policy issue. Tax the rich.
>>>> slush fund
Nobody’s stealing anything. The inflation target is public and goaled on. Inflation has a purpose. You don’t like that purpose maybe because you don’t understand it maybe because you do, but it’s not theft. There is every chance we’d all be worse off under a 0% inflation environment because it would drastically reduce the liquidity that underlies the entire global economy.
Think about it: if poor people have no money and real salary has kept pace with inflation what wealth is inflation reducing? And if we use a 0-inflation or negative inflation currency, what’s to say wages wouldn’t stay flat or go down.
Again if you want to help the poor and narrow the gap, tax the rich, this inflation thing is just the game, and railing against it is tilting at the wrong windmills.
> The gold window was closed because gold was garbage money.
The gold windows was closed because the French decided to redeem their dollars for gold, and due to the rampant debasement of dollars, there wasn't enough gold available to do so.
Mises had a few things to say on the subject of what makes money “good” or “bad”. You might learn something if you read The Theory of Money and Credit.
>Wages are up 10% since 1963 on an inflation adjusted basis
And they're down 5% since 1970. Claiming that chart shows growth is a gross misreading of that source. The slope of the trendline since 1963 is practically zero.
>The whole point of inflation is to monetize the crazy debt spirals by empires. Its why the romans did it, why the Germans did it, why the british did it , and its why we do it. It doesn't take an econ degree to know that. That was the reason the gold window was closed in the first place.
Hyperinflation is what happens when the economy collapses and you are deep in debt both at the same time. When people talk about inflation as a policy goal they usually talk about a moderate amount like 2% or maybe 4% if you have an appetite for risk but also greater potential gains.
Hyperinflation is never a policy goal, it's what happens when things have gone wrong entirely.
>If the whole point of inflation, mind you, is to encourage investment, then why does the fed react by spiking interest rates in the , 60s' 70's, 82 to address inflation...yet introducing a bona fide investment meltdown ? Thats what reveals the facade. If the purpose of inflation was to encourage investment, it is certainly an odd to react to inflation by increasing interest rates, and destroying business investment in the process.
Too much inflation is a bad thing. It means there are not enough workers/there is not enough production capacity to meet all needs. Interest rates reduce inflation and thus demand for workers by making sure only the most productive investments stay on the market. A dead company can just borrow money to hire people and waste their time if interest rates are negative. If interest rates are low like 3% then your company has to make a moderate profit. They have to put people to good use. If interest rates are too high it means only the most productive companies can even make it in the market. Some industries like agriculture have low yields (as in dividends) that cannot afford high interest rates but they are extremely important for our society. We must hit a balance between a non productive and too productive economy and interest rates can contribute to this.
>This sure sounds like you know better than everyone else. Its probably an attitude that would be frowned upon by someone that believes in freedom of choice, like we do in USA.
The reality is that if someone has 20 years of salary in their bank account and another person is unemployed for 20 years the value of your money is gone because that person that owed work for your money didn't work during that time. Food rots, people age. Your money exists purely as a representation of labor and its products and thus even money has to rot.
If your money doesn't rot but there are less apples in the future then you can still buy the same number of apples (or more) and thus your share of apples grows even though you have done nothing to deserve them. People save with precious metals, real estate and stocks (technically just the land) because they do not deteriorate. Well, that's not entirely true. If you save in gold you are betting that an economy will exist in the future that can give you apples in exchange for gold. If you save in land you are betting that people will gather around you and live and work around your plot of land. If you save in stocks you are betting that the company will not go bankrupt in the future.
How do you make sure that people will work both work today and tomorrow? You just pay them more tomorrow. That's why inflation is a policy goal.
>I don't know if that is true since you have no sources, but the total count of people living in the US under the poverty line is exactly where it was in 1959, and now, post pandemic, it is certainly far higher. So even if wages kept pace, which is uncertain, with technology advances and the dollar as the reserve currency, you would expect the total number of people to be lower.
Inflation is generally driven by a shortage of labor and a shortage of labor drives salaries. There are some exceptions. You can build an economy that is unable to employ everyone but that's not an argument against inflation. It's an argument against specific policies. The government can just ban work and everyone will agree that this is stupid. There are less nefarious policies that can have the same harmful but lesser effect.
Inflation is down because there is a complete lack of domestic demand for a certain segment of the population. College educated people tend to do far better than those with just a high school diploma. There are two reasons for this. Globalization makes unskilled labor unnecessary domestically. That means less work where you can sell your body but the work where you use your brain hasn't moved. That portion is actually growing. The second problem is that employers have absolved themselves of the responsibility to train their workers. That means you are now responsible for your own education. This means people must go to college but it also means there are some unfortunate souls that did not acquire the right skills for the current labor market.
>This is valid because there is inflation. But it saddens me to think that you think it is perfectly rational and acceptable to steal money from the savings of hardworking people, who often have to fend off scams left and right...and thus keep the money for themselves, for no real reason other than that it is what... you think.
That's not savings. That's rotting paper. It's not even stealing because you can get interest on your savings if inflation is high.
Debasement of the currency, however, has been…high.
So you didn't "lose" that dollar from a hundred years ago, it's just worth about a penny now. Where'd the other $0.99 go?