Will stimulus lead to inflation? Shiller responds.

[jurgs01]

Quote:

Originally Posted by cyber888 There's probably 3 Trillion dollars in US denominated currency outside the US. We don't have much tourists right now to spend 'US dollars' in US tourism industries. The stimulus won't cause inflation, because our economy contracted by nearly 1.9 Trillion dollars in 2020 - big drop in consumer spending. And there are millions of people unemployed - both officially reported and unofficially reported. To get back to growth, the stimulus is needed to pump prime the economy. Can I still buy a $1.19 Cheeeseburger - Yes. Food and essentials -there's no inflation here. Housing prices are a bit higher, since there's a higher demand due to covid19 and there's less construction going on.

The only thing that will save us from inflation is allowing a bust in the FED driven bubble-bust cycle. Federal Reserve and government are scared politically to let that happen, and has already created inflation. We are already seeing some of the resulting price inflation in many sectors, and it will likely get worse unless the FED allows interest rates to rise and pulls in liquidity.

[GenXguy]

Quote:

Originally Posted by jurgs01 The only thing that will save us from inflation is allowing a bust in the FED driven bubble-bust cycle. Federal Reserve and government are scared politically to let that happen, and has already created inflation. We are already seeing some of the resulting price inflation in many sectors, and it will likely get worse unless the FED allows interest rates to rise and pulls in liquidity.

Yeah, my personal inflation on the same things I've been spending money on is getting out of control. Greenspan said inflation is his biggest concern.

[twaddle]

I guess there are several things happening. The monetary policy is potentially leading to asset bubbles, but some economists seem to believe that you can only recognize a bubble once it pops, so no alarms are going off.

There is a fiscal "stimulus," but it's not so much a stimulus as a get-out-of-poverty-free card for those impacted by the pandemic.

So I'm not seeing the inflation argument. I am buying the slow, painful recovery argument, though. And maybe asset *deflation* after we get back to some sense of normal.

Genuine fiscal stimulus is also on the table (e.g., infrastructure spending). That seems like a good idea to me.

[Dtail]

Quote:

Originally Posted by GenXguy Yeah, my personal inflation on the same things I've been spending money on is getting out of control. Greenspan said inflation is his biggest concern.

Personal inflation rate is the game that matters.
For me, it is the ever increasing costs on car/umbrella/home insurance.

[Running_Man]

Quote:

Originally Posted by MichaelB Inflation typically refers to CPI over sustained periods of time, not snapshot views of specific commodity prices. So, for those who feel the rate of inflation is going to increase or already increasing: What rate do you project for inflation and when does it reach that level? Edit to add - the most recent BLS showed 0.3% in January and 1.4% for the previous 12 months. https://www.bls.gov/news.release/pdf/cpi.pdf

I think intermediate (within 2 years) we will be back at 4-5 %. If interest rates are not allowed to rise and there is an issue with that, then I think inflation accelerates from there.

From CNBC today:
"Though consumer prices were up just 1.4% from a year ago in January, recent indicators of retail sales, durable goods purchases and service sector prices have shown inflation in the pipeline. The 5-year breakeven rate, an indicator of the bond market’s expectations for inflation, rose to 2.38% Wednesday, its highest level since before the financial crisis of 2008."
https://www.cnbc.com/2021/02/25/us-b...dp-update.html

The Fed has some bond buying to do today.......

[PussInBoots]

Wow 10 year treasuries yield was today momentarily up 10%. Something is starting to happen.

[twaddle]

Quote:

Originally Posted by PussInBoots Wow 10 year treasuries yield was today momentarily up 10%. Something is starting to happen.

From 1.46% to 1.53%? That is exciting.

[GravitySucks]

I believe the powers that be are much more worried about deflation, so while the stimulus may bump up the inflation rate, it's doing its job to keep deflation in check.

[aleabo]

Quote:

Originally Posted by twaddle I guess there are several things happening. The monetary policy is potentially leading to asset bubbles, but some economists seem to believe that you can only recognize a bubble once it pops, so no alarms are going off. There is a fiscal "stimulus," but it's not so much a stimulus as a get-out-of-poverty-free card for those impacted by the pandemic. So I'm not seeing the inflation argument. I am buying the slow, painful recovery argument, though. And maybe asset *deflation* after we get back to some sense of normal. Genuine fiscal stimulus is also on the table (e.g., infrastructure spending). That seems like a good idea to me.

Since when family making $150K considered poverty? I could have understood to give help to unemployment people but printing money and giving them away to majority of US population? Classical inflation - more money than products.

[twaddle]

Quote:

Originally Posted by aleabo Since when family making $150K considered poverty? I could have understood to give help to unemployment people but printing money and giving them away to majority of US population? Classical inflation - more money than products.

Yeah, especially retired people who make less than $150K. The idea as I understand it is that they sacrificed precision targeting for speed. But those who needed it, still got something.

The checks were kind of dumb IMO, but the Paycheck Protection Program was appreciated by a lot of local orgs and their staff. I have no doubt it was also abused.

[Leo1277]

Here is the problem. Let's look at two quotes:

Quote:

Originally Posted by USGrant1962 My short version, from Econ 101, is that inflation requires "too much money chasing too few goods". While there is a lot of money sloshing around, there is no shortage of goods. Or of labor thanks to Covid (we were approaching labor shortages a year ago and real wages were rising). And we haven't had real shortages of anything important for a long time. Hence little to no inflation.

Quote:

Originally Posted by cyber888 <snip> The stimulus won't cause inflation, because our economy contracted by nearly 1.9 Trillion dollars in 2020 - big drop in consumer spending. And there are millions of people unemployed - both officially reported and unofficially reported. To get back to growth, the stimulus is needed to pump prime the economy.

The main reason of the drop of economy is that goods and services that would normally have been produced and rendered were not produced last year due to Covid. I don't know the exact number off the top of my head, but it is in the neighborhood of the 1.9 Trillion quoted by cyber888. That number appears as missing income, but much of that missing income is due to the fact that the goods and services that should have been produced and that would have led to this missing income are not there.

Now we are spending a similar amount of money as the missing income (and missing goods and services), but much of it does not go into the missing production of goods and services - people cannot make up for the vacations missed last year, or the homes not build, etc - rather they are largely used to fill income gaps.

Now, in my opinion that filling of income gaps is necessary one way or another, since these income gaps would otherwise lead to lots of personal hardship (at the humanitarian level), and lack of buying power, leading to more production decline in goods and services due to the things the unemployed can not buy which they normally would (at the economic level).

But the crux is, in this process we fix the income gap problem and the associated avalanche of further not-bought goods and services, but we cannot fix the situation of the goods and services not produced last year, they are gone forever. Now going back to USGrant1962, with this stimulus spending, we have the same income as we would have otherwise had, but we have a huge lack of goods and services that weren't produced. So, according to "Econ 101" that he refers to, we now are exactly in the situation where the same amount of money is chasing less goods and services. Hence according to Econ 101, this would be an inflation generator.

[Leo1277]

A brief follow-up: So the deep, un-fixable problem is that due to the pandemic, the US produced less goods and services than they normally would have. This cannot be changed, regardless whether stimulus is provided or not, and this is the key driver of the economic deficit. Now the political question arises: do we put this deficit on the government (by providing stimulus), or do we leave it to those individuals that are primarily affected, and let them incur debt or in the worst case go bankrupt. It is probably more prudent to spread the pain around by letting the government take care of it instead of the individuals, and minimize the follow-up damage from the otherwise reduced purchase power of the affected individuals. But the answer is apparently not clear cut.

Yet however you do it, the real problem is the economic output missed by Covid. The only way this unexpected black swan event could perhaps been avoided or minimized is by targeted productive employment of affected individuals, which however is very hard to do in practice, especially on short notice and at the necessary scale. Perhaps one could have employed some of those that lost their jobs as contact tracers, or in some helper capacity in the health care system, or perhaps one could have accelerated some infrastructure programs that don't need a specific trained work force and can maintain the needed social distancing. Long overdue projects in the US National Park system that need manpower come to mind.

On a small scale, such things did happen: many hotels used the empty halls and rooms to accelerate renovations that were in the pipeline, restaurants that were shut down did renovations, companies with workforce at home accelerated investments in the needed infrastructure which will save office space and is hoped to increase efficiency in the future, etc. But however we move forward, we have to cope with a significant chunk of lost economic output that cannot be restored, its impact can only be moved around one way or the other.

[Montecfo]

Respectfully, these experts may have fine credentials and be mildly interesting to listen to, but they do not know the answer to the question.

The factors which drove inflation in the 70s will likely never recur so trying to compare that period with now I think is useless.

I think our recent experience shows that inflation is far less of a concern than it was in the past.

Perhaps that will change but there is no such indication at this writing.

[jurgs01]

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Originally Posted by Montecfo Respectfully, these experts may have fine credentials and be mildly interesting to listen to, but they do not know the answer to the question. The factors which drove inflation in the 70s will likely never recur so trying to compare that period with now I think is useless. I think our recent experience shows that inflation is far less of a concern than it was in the past. Perhaps that will change but there is no such indication at this writing.

Fundamental economics and human action doesn't change just because technology and innovation does.

The problem is that you view history through decades or centuries, but your current perspective is limited to your lifetime (at most), and more likely a couple of decades.

The US is at a unique point that despite our welfare and warfare state, we are still the center of gravity for innovation and freedom in the world. That balance is constantly at risk...

[Leo1277]

Quote:

Originally Posted by Montecfo Respectfully, these experts may have fine credentials and be mildly interesting to listen to, but they do not know the answer to the question. The factors which drove inflation in the 70s will likely never recur so trying to compare that period with now I think is useless. I think our recent experience shows that inflation is far less of a concern than it was in the past. Perhaps that will change but there is no such indication at this writing.

That is a useful way of thinking. Can you expand a bit what you think the drivers for the 1970 problems were? What immediately comes to mind is of course the oil price shock, which took out an unexpected chunk from the US economy. Other than that, there were management mistakes that are more clearly visible in hindsight. What else contributed? Also now we have a big unexpected chunk taken out of the US economy.

[USGrant1962]

Well, my comment was primarily aimed at the notion, popular for the last 30 years or so, that government deficits (money supply) always lead to massive consumer inflation. I suggest that is not true unless there is also a shortage of goods - which has not seemed to be the case in a macro sense since the oil crisis.

As far as the short term effects of Covid, consumable goods that were not produced and not consumed last year cannot lead to inflation next year. I think the "huge lack of goods and services" were mostly consumables, not durable goods. There was some of the latter, but Covid mostly crushed services like hospitality and restaurants. I hope people eat out and travel twice as much after Covid to make up for a lost year (and a half?), but it seems highly unlikely.

But in the overall scheme of things, Covid is just a short term disruption and might even be deflationary if some of the behavior patterns stick around causing a fall in aggregate demand for restaurants, travel, office space, gasoline, etc.

[RetireeRobert]

Will stimulus lead to inflation?

Yes. It, and artificially low interest rates from Fed easy money, already are raising inflation rates as we speak.

[Leo1277]

Quote:

Originally Posted by USGrant1962 Well, my comment was primarily aimed at the notion, popular for the last 30 years or so, that government deficits (money supply) always lead to massive consumer inflation. I suggest that is not true unless there is also a shortage of goods - which has not seemed to be the case in a macro sense since the oil crisis. As far as the short term effects of Covid, consumable goods that were not produced and not consumed last year cannot lead to inflation next year. I think the "huge lack of goods and services" were mostly consumables, not durable goods. There was some of the latter, but Covid mostly crushed services like hospitality and restaurants. I hope people eat out and travel twice as much after Covid to make up for a lost year (and a half?), but it seems highly unlikely. But in the overall scheme of things, Covid is just a short term disruption and might even be deflationary if some of the behavior patterns stick around causing a fall in aggregate demand for restaurants, travel, office space, gasoline, etc.

This raises many good questions. First, about oil shock versus Covid: in the 70s, we suddenly found that one consumable is much more expensive than it was earlier, namely oil. This leads to a decrease in travel and shipment of goods. Now, other consumables are much more "expensive", mostly restaurants, hotels, and short- and long distance public transportation. This time, the increase in "expense" is first not in dollars, but in health risk; but the consequence, namely decreased business travel and private travel etc is similar, and the economy takes an actual dollar hit when the "health risk expense" translates into subsequently needed medical care. I recall that at the time Carter talked on TV sitting in a cold room in his sweater, there were folks who said this whole episode may be deflationary because people change their habits and won't drive as much and will use smaller cars.

[Surewhitey]

My gut says yes. I wasn't around for the 70s inflation. Really don't recall any hyper inflation in my "awareness" times. Only looking back at big ticket items from the past 25 years shows some minor blips.

I'm afraid this is the beginning of something big. Just look at building supplies and companies not offering discounts (paint & tools in my world). Foods are starting imo too. I wonder if the $15/hr minimum wage proposal is their way of softening the coming blow.

[Leo1277]

Quote:

Originally Posted by Surewhitey My gut says yes. I wasn't around for the 70s inflation. Really don't recall any hyper inflation in my "awareness" times. Only looking back at big ticket items from the past 25 years shows some minor blips. I'm afraid this is the beginning of something big. Just look at building supplies and companies not offering discounts (paint & tools in my world). Foods are starting imo too. I wonder if the $15/hr minimum wage proposal is their way of softening the coming blow.

Actually it was also before my "awareness" time, and I wasn't even in this country yet. But I have seen documentaries about it afterwards, and remember my parents getting grey hairs when their adjustable mortgage payments went up monthly and yet dad's salary didn't. And I have that nagging worry too that this may be the beginning of something big. Time will tell.