Will stimulus lead to inflation? Shiller responds.

[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]

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]

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.

 

[Montecfo]

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.

There were several unique factors in my opinion (and probably a few others I have missed).

-Easy monetary policy
-Wage price freeze in early 70s (created shortages and made pricing a coiled spring)
-Currencies delinked from gold>>dollar devalued
-Oil price surge due to changes in supply>> repriced many goods due to importance of energy to US.

Obviously only the expansive monetary policy exists now.

What else is different?

-Today we have a global economy and relatively free trade so availability of lower cost goods abroad keeps a lid on pricing.
-We have greater price transparency due to the internet which tends to publish most prices and online retailers which Make pricing comparisons easy.
-jobs are easily shipped abroad to lower cost countries, suppressing wage growth.

These factors are completely different from the 1970s.

For these reasons, predicting inflation solely based on an expansive monetary policy is a mistake in my opinion. We have had plenty of expansive monetary policy since the '70s, but 1970 style inflation has never recurred.

Of course, I am not saying it can never happen. It can and likely will at some point, particularly if some of these drivers recur. The most potentially concerning in my opinion would be if profligate fiscal policy damages the dollar sufficiently to devalue it suddenly.

I welcome other views.

 

[ychuck46]

Nothing new to see here

Question: is the stimulus package inflationary? Summers - yup. Krugman - nope.

Both are nothing but shills for one party. The only thing shocking here is that Summers is being honest for once.

 

[jurgs01]

The big difference now is our lack of price increases in the US is directly related to their acceptance of our inflation abroad (shown by our increasing current account deficit).

This will end someday, and it will not be good for us.

 

[aleabo]

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.

Unfortunately $15 will have opposite effects.
Unemployment will increase, inflation accelerates, after some time $15 will be today $7.5. And new thread starts...

 

[24601NoMore]

Unfortunately $15 will have opposite effects.
Unemployment will increase, inflation accelerates, after some time $15 will be today $7.5. And new thread starts...

Exactly. What's a bit concerning is the number of people (not necessarily here on ER where folks are more economically and financially astute but across the general population) that don't understand a simple, basic premise related to wages..

Raise the minimum wage, and EVERYTHING becomes more expensive. That fast food meal you used to get for $5? It's now $10. Electronics at Best Buy? Yeah..that $15/hr minimum is now in the increased price of your TV, computer, etc.

It's ECON 101. Unfortunately, many just focus on the "fairness" aspect that the economic aspect gets totally lost in the discussion in many cases.

In a free market system, compensation "should" be tied to skills and the willingness of potential employees to perform a job at a given hourly rate. If an employer is only paying $X/hr (where X < $15), people either will, or won't take the job. If they take the job, there's a market for performing that job at that rate and that's a decision the person taking the job makes. If no-one takes the job, the employer has to raise the rate ON HIS OR HER OWN to the point someone wants it. Basic capitalism and free markets. We really can't regulate that, or we're ALL going to be paying a lot more for..pretty much everything we buy.

 

[Montecfo]

Exactly. What's a bit concerning is the number of people (not necessarily here on ER where folks are more economically and financially astute but across the general population) that don't understand a simple, basic premise related to wages..

Raise the minimum wage, and EVERYTHING becomes more expensive. That fast food meal you used to get for $5? It's now $10. Electronics at Best Buy? Yeah..that $15/hr minimum is now in the increased price of your TV, computer, etc.

It's ECON 101. Unfortunately, many just focus on the "fairness" aspect that the economic aspect gets totally lost in the discussion in many cases.

In a free market system, compensation "should" be tied to skills and the willingness of potential employees to perform a job at a given hourly rate. If an employer is only paying $X/hr (where X < $15), people either will, or won't take the job. If they take the job, there's a market for performing that job at that rate and that's a decision the person taking the job makes. If no-one takes the job, the employer has to raise the rate ON HIS OR HER OWN to the point someone wants it. Basic capitalism and free markets. We really can't regulate that, or we're ALL going to be paying a lot more for..pretty much everything we buy.

I recall a few years ago seeing workers picketing McDonald's pushing for a doubling of the minimum wage to $15.

What I think none of the folks that were demonstrating realized is that if the minimum wage was $15 it would get paid to people other than the folks demonstrating.

Stated differently, there's really no reason for a business to pay someone $15 that isn't worth more than $7.50 in the competitive marketplace.They will hire people who are already better trained and skilled, or replace hourly workers through automation. Both of those destroy the entry level market and the labor market for young unskilled folks.

Bad plan. but because so few people actually earn this wage, I doubt that it would trigger any sort of massive inflation.

 

[jurgs01]

The minimum wage is $0 for all of the jobs that will be eliminated if the government sets a price on wages.

 

[bolt]

I cannot see how adding similar mass to a similar whole does not cause inflationary measures, must be me.

 

[harley]

Well, the only signal of inflation that matters to me is that the beef tenderloin at Costco is now $18.99/lb. Two years ago it was $10.99. I may have to go back to work.

 

[Out-to-Lunch]

Exactly. What's a bit concerning is the number of people (not necessarily here on ER where folks are more economically and financially astute but across the general population) that don't understand a simple, basic premise related to wages..

Raise the minimum wage, and EVERYTHING becomes more expensive. That fast food meal you used to get for $5? It's now $10. Electronics at Best Buy? Yeah..that $15/hr minimum is now in the increased price of your TV, computer, etc.

It's ECON 101. Unfortunately, many just focus on the "fairness" aspect that the economic aspect gets totally lost in the discussion in many cases.

In a free market system, compensation "should" be tied to skills and the willingness of potential employees to perform a job at a given hourly rate. If an employer is only paying $X/hr (where X < $15), people either will, or won't take the job. If they take the job, there's a market for performing that job at that rate and that's a decision the person taking the job makes. If no-one takes the job, the employer has to raise the rate ON HIS OR HER OWN to the point someone wants it. Basic capitalism and free markets. We really can't regulate that, or we're ALL going to be paying a lot more for..pretty much everything we buy.

Three questions for you:
-Do you think we have a free market system now?
-Do you think we should abolish the federal $7.25 minimum wage?
-Do you think we should abolish laws against child labor, to allow children who are willing to work to take paying jobs?

 

[Montecfo]

Three questions for you:
-Do you think we have a free market system now?
-Do you think we should abolish the federal $7.25 minimum wage?
-Do you think we should abolish laws against child labor, to allow children who are willing to work to take paying jobs?

Was not directed to me but I will take a crack at it.

We do not have a free market system since we currently have a federal minimum wage and lots of other wage regulation.

I think wage regulation should be left to the states. A federal minimum wage makes little sense in a large and cost-diverse country like the US. The current minimum wage is pricing unskilled labor out of the market in some cases.

Not sure where you are going on child labor.

 

[njhowie]

Raise the minimum wage, and EVERYTHING becomes more expensive. That fast food meal you used to get for $5? It's now $10. Electronics at Best Buy? Yeah..that $15/hr minimum is now in the increased price of your TV, computer, etc.

Absolutely.

Further, now you have everyone who was previously earning $15 to maybe $20 an hour as skilled labor looking at $15 minimum wage for doing a menial job no experience required which does not require any effort thinking "Why work hard for $15 to $20 when I could get $15 for doing the bare minimum"?

 

[Running_Man]

So for the past days I have been analyzing the "stimulus" and the economic theory behind it and past inflations in the last 120 years. What I learn startled me, I knew M1 was exploding but M3 in the past 12 months as of December 2020 was up 25.1% over the prior 12 months and was nearly double the growth in M3 over a 12 month period inany other time period from 1960. 13.5% was the previous peak.

In the inflationary 1970's M3 money growth expanded by 13% for a period of time and this reoccured in the late 70's but nothing has ever occurred like the money growth we have seen over the last year and an additional $1400 is going out to most Americans.

The claims that any prior stimulus has not seen inflation is made null merely by the great increase in money. I do believe the net price of all goods tends towards the Money Supplly times the velocity to equal the value of all goods.

The greatest problem of this money creation is the debt creation produced by the requirement during the pandemic. In 2021 assumming passage of the 1.9 stimulus the deficit will be 4.2 Trillion dollars, remarkably 20% of US GDP which is the highest since WWII. When the government is this big of a debtor one does not want in the long run to be a creditor, as your chosen position as a creditor is in conflict with the most powerful of market participant.

There will in the future be all sorts of excuses for why there is inflation, but these numbers are so large excuse exercises to justify a prosperity that has no basis in production can I believe be ignored and should be for your own financial safety.

The value of the GDP of the country at 20.8 Trillion is set to explode upwards. Of this I am positive, the following is M3 as a % of GDP for a series of years

1964 162%
1974 141%
1984 181%
1994 207%
2004 191%
2014 153%
2020 113%

It is inevitable that this money production in the past year will find it's value into the GDP of the country, for now the money is being created and producing "free goods", the total value of goods & services has not kept up with the supply of money, it is presently being stored by the FED as an asset to be collected during the ravages of inflation from the great swath of society. When the market as a whole recognizes the oversupply of money and it's mispricing in relation to real value, at that point GDP will begin to flow under guidance from the FED like the floodwaters of New Orleans under the guidance of the US Corp of Army engineers in 2005. This can be inflationary or a general boom or both. Either that or the FED will have to collapse the money supply and based on Janet Yellen's testimony that is highly unlikely. there is not enough time to engineer a solution to satisfy the imminent problem

It is imperative to keep an eye on the money supply for a sudden drop in money supply would mean an unexpected contraction could be occurring. This would cause a depression an order of magnitude greater than the great depression but I would not expect that because that is not in the best interest of the government at this time, this bubble must be expanded in order to keep it functional.

A GDP advance of 25-50% over the next three years is minimum for what I am expecting and in such a scenario long term calls would be the best way to garner value. A dislocation of values in such a scenario is unavoidable. And the $1200 could be the match to the kindling.

Powell's statement "Right now ... M2 ... does not really have important implications. It is something we have to unlearn I guess.” will be a major embarrassment in the coming years. Conditions are coiled, we shall see in the next two years whether an old accountant looking at history and mathematics was right or whether the FED with a century of responsibility for controlling inflation and the economy is correct.

 

[dixonge]

Inflation is a pretty slippery term, eh? Asset inflation, wage inflation, economic growth, CPI, and interest rates. Different things, some related, some not so much.

I know next to nothing about economics, but I can read.

These articles helped me sort some things out.

First:

Is Inflation About to Rise? That is the Wrong Question

a quote:

"Over the last three decades or so, the world economy began to work differently. Inflation, interest rates and growth have fallen persistently in nearly all advanced nations.Not many people predicted this, and economists have spent years wrapping their heads around the reasons."

Another article:

Why Didn't Quantitative Easing Lead to Hyperinflation?

a quote:

"Many feared that QE would spell hyperinflation for the U.S. economy following the economic crisis of 2008. The crisis, however, was largely a deflationary phenomenon and the money being injected into the system by QE, as seen by the spike in the M0 monetary base, was by and large retained by the financial sector, with the more important M2 money supply remained fairly stable."

One more article:

Terminal Deflation is Coming

a quote:

"Sailing in uncharted waters invites speculation about what sort of dangers might sink the ship. One common failure scenario for the Fed’s new monetary policies is the fear that $1 million per second for the indefinite future will cause an inflationary disaster. That fear is intuitive, widely held, and influential. It is also completely misplaced. Economic history suggests that deflation, not inflation, is by far the more likely—and in some ways the more dangerous—destination of the Fed’s current trajectory without yet more unprecedented action."

 

[dixonge]

Follow up - I am currently reading this book:


The Price of Tomorrow: Why Deflation is the Key to an Abundant Future

https://www.amazon.com/Price-Tomorrow-Deflation-Abundant-Future/dp/1999257405

 

[Markola]

Follow up - I am currently reading this book:


The Price of Tomorrow: Why Deflation is the Key to an Abundant Future

https://www.amazon.com/Price-Tomorrow-Deflation-Abundant-Future/dp/1999257405

It looks like an intriguing counter argument to the common inflation-is-certain assumptions, and makes me glad our portfolio is half bonds as a deflation hedge.

We all try to make sense of the present and future through our various fragmented lenses doing our best to grapple with a world of extreme and accelerating economic inequality and wealth concentration at the top; declining-to-negative interest rates globally; Internet-facilitated information bubbles that don’t respect geography and allow people to choose their own facts; climate change-induced extreme weather events and sea level rise and their unpredictable food production, fresh water sourcing and population dislocations; and, probably most of all, technology invading and disrupting every millimeter of our lives, shattering prices in the process.

Phew! Good luck to us and our descendants. It’s a new paradigm but today is a beautiful day and I’m going for a walk.

 

[twaddle]

OK, so commodity prices up this month, yields are up. And now ISM reports that services are raising their prices. CPI could follow.

"... service sector firms sought to pass on higher cost burdens to clients. The rate of charge inflation was the second fastest on record."

 

[Running_Man]

Market proxy for inflation expectations hits a 10 year high and has risen from zero to 2.5% expected inflation in 7 months.

https://finance.yahoo.com/news/u-yields-resurgent-inflation-expectations-171038508.html

 

[Running_Man]

It looks like an intriguing counter argument to the common inflation-is-certain assumptions, and makes me glad our portfolio is half bonds as a deflation hedge.

We all try to make sense of the present and future through our various fragmented lenses doing our best to grapple with a world of extreme and accelerating economic inequality and wealth concentration at the top; declining-to-negative interest rates globally; Internet-facilitated information bubbles that don’t respect geography and allow people to choose their own facts; climate change-induced extreme weather events and sea level rise and their unpredictable food production, fresh water sourcing and population dislocations; and, probably most of all, technology invading and disrupting every millimeter of our lives, shattering prices in the process.

Phew! Good luck to us and our descendants. It’s a new paradigm but today is a beautiful day and I’m going for a walk.

I do not believe in new paradigm, it is as old as money itself. Governments run on money and their ability to control it, ignore naratives and follow logical mathmatics. For deflation to occur the money supply and value of goods must fall through a tightening process. Who in the world is trying to constrain the money supply. That would result in an immediate implosion of all the debt which is not in the best interest of the government and the risks are known, so that likelihood is very low.

 

[Markola]

People have been predicting major inflation seemingly since Paul Volker yet here we are with the markets absolutely freaking out today because we MIGHT hit 2% inflation, according to Chair Powell’s remarks today. One can say that “narratives” don’t matter but we need an explanation for years and years of massive stimulus not leading to inflation. My money is on the narrative of technology and globalization demolition prices over the last several decades. YMMV.