The Fed's Great Inflation Mystery
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- čas přidán 4. 06. 2024
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SOURCES:
I've linked my sources in the blog that goes along with this video. Most links are in the text. But, I added some extra literature and data sources to the end of the blog: www.moneymacro.rocks/blog
Timestamps:
0:00 - introduction
1:31 - Keynesians love Phillips
3:29 - Friedman prints a theory
7:55 - sponsor
9:11 - expecting interest rates
12:38 - next Keynesianism?
16:02 - a modest inflation theory
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isnt this just another pump n dump scheme, but with art instead of crypto?
i know...this guys with masterwors are in everyones youtube... i really dont understand how serious youtubers can endorse such schemes
I'm shocked this channel would endorse scams like this.
@@ATMOSK1234 do you have concrete proof it's a scam? If not and you are not interested, you should just ignore it
@@ATMOSK1234 I looked into these claims but I have not found a convincing explanation of why this would be a scam. In my opinion a scam is dishonest. What they do is basically issue shares, buy paintings, sell them and share the profit or losses with the investors (after taking a commission). What is the dishonest or scammy bit?
Here is my current sponsor guideline for investment products (which is more stringent than for other products). Let me know if you think I violated it in this case or if it should be changed in any way.
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My purely scientific theory ;) is that when economists find a parameter(s) that correlates well with the inflation, central bankers start artificially propping up the parameter(s), which leads to parameter's decorrelation in some new way. The similar situation happens in corporate environment when managers are given a good KPI, they start boost it instead of boosting overall efficiency, and KPI becomes worse indicator than it used to be before it was adopted.
This comment deserves X100 more likes
Yup. Two can play the manipulation game. The proverbial enemy has his say. And trust drops when people figure out they're being played.
That 's commonly known as the Goodhart's Law or Campbell's Law, expressed more elegantly as "When a measure becomes a target, it ceased to be a good measure" or "the more any quantitative social indicator is used for social decision-making, the more subject it will be to corruption pressures and the more apt it will be to distort and corrupt the social processes it is intended to monitor".
Well described...
Still wonder why not people discuss the variables in equations.. like private bank's credit creation, asset inflation etc.
Conspiracy or conveniently ignoring
@@PeperazziTube "What gets measured, gets manipulated"
Had never heard of Goodhart or Campbell, though - thank you!
That nervous laughter was dangerously honest
"the future is always up for grabs"
End the fed
Hey, this was a tough video to make. I hope I represented all the different arguments well. You can verify this yourself by checking out some the sources I used. I linked them in the text here so that it is more clear which source I used for what:
www.moneymacro.rocks/2022-08-16-inflation-mystery/
I would be pleased if you could do a full length (20 min) video on the neo-Keynsians. I don't like their ideas as you briefly presented them, but if Janice Yellen is a follower, I need to know more.
You did a great job, thank you
The simple is your government made floating currency to make profit from citizens
Great video and very interesting subject! I really wish you'd gone with a different sponsor though... I can't imagine Masterworks ending well for the actual users, as that industry is rife with scams and price manipulation. Their sponsorship is almost as concerning as seeing an ad for crypto products would be...
Note. The graph on UK money supply does not technically show M1 and M3. It shows narrow and broad money
I used this database: www.macrohistory.net/database/
Upon further inspection for the UK notes & coins is narrow money and M4 is broad money. Central bank reserves don't seem to be included because they are not part of money that can be used by the public. I don't think this matters too much for the 80s. But, it does these days. It also doesn't impact my main conclusion that money issued by private institutions is far more important than it used to be. But, I wanted to mention it here nonetheless.
It's disappointing that the leading theories by the most famous economists on inflation are both essentially reducing an economy to two variables, they are only arguing over WHICH two variables. I think it's clear that there are far more than two important variables.
Yeah, the fact that they don't even consider globalization and technology induced deflationary pressure is truly baffling.
@@SkyWKing It's considered in the sense that the effects are watched and the central banks react to what they see. It's rather impossible to predict the effect of future innovations on prices. For instance, computers are 1000X better than they were 20 years ago but if I went out to buy a computer in 1999 I would be paying around $3000; if I go out and buy a new Macbook Pro from Apple with most of the upgrades it's still $3000, so the price came down but the quality went up and the expectation for quality went up.
😔 QE doesnt cause inflation, they are printing reserves (not money) but what does cause inflation is the US treasury giving $1.4 trillion in stimulus to people while simultaneously shutting down the supply chain. Debt is deflationary as its an unproductive waste of capital and we have LOTS of debt therefore LOTS of deflation coming
@@DegenerateSpeculator All debt causes deflation or just unproductive debt?
@@DegenerateSpeculator It had to be done, Better to save people’s lives for now and deal with inflation later than just let who lives live and who dies die.
I agree with your conclusion. Inflation is like a fever in a sick patient: it's a symptom, but it could indicate many different things. The short term solution might work to bring the fever down, but the underlying cause also needs to be addressed.
In the recent case, we had mass shutdowns paired with stimulus money, leading to a surge in demand, shortage of workers, and massive supply chain issues restraining supply. As these resolve, and the interest rate hikes take effect, inflation will continue to decline. Side note: NPR's Planet Money podcast has some great explorations of different aspects of these, with historical examples like how Brazil's currency change cut off persistent inflation expectations that had crippled their economy for a long time. Also exploring how women shopping for groceries has a surprising effect on inflationary fears :)
I mean it would be more like the constant warmth a body needs to function, only if it goes above certain thresholds it becomes a real problem. And not as problem in itself but as the emergent result of systemic disfunction.
Why would they resolve? In particular the labour shortage should get worse & worse as ever more boomers retire.
In the recent case and every other one in history we had a bullshit economy. If it was a coherent system with a consistent structure then you'd be right on the money. Prices aren't some reflexive outcome or the result of a formula. Corporate gouging is involved.
@@craigthebrute7929 There is no 'labor shortage', it's one of the big lies. What did happen is that the highly qualifed people who have decades of experience left the labor force. Companies can't replace these people with equivalent qualifications. For decades companies had the dominance in the employer/employee relationship and simply refused to bother keeping anyone who wasn't exceptional. This created an ever growing number of people with the degrees but not the job they went to school for but instead working menial jobs, pushing out low skilled workers from low skilled jobs.
The labor shortage only seems that way because for decades companies failed to invest new employees. You see this manifest in the 'entry level' being defined as someone who has 2-5 years experience where 40 years ago entry level meant you had 0 experience in the job.
Inflation is caused by printing money, and the world has printed alot of money and the inflation has finally come to pass after years of expecting it. The reality is that there was inflation all along, in housing, healthcare, education, and in financial markets. There has been plenty of inflation right in front of everyone's face.
@@allanwilmath8226 in the UK the shortages have been most apparent in social care & hospitality sectors, neither of which require any degrees or experience. The baby boomers are the largest demographic cohort by number, as they retire of course we will see general labour shortages.
Difficult to find a balanced discourse on the internet on complicated and sensitive topics. Well done!
In the 1930s, economist John Maynard Keynes said: “Markets can stay irrational longer than you can stay solvent." Well that is true a billion times over for predictions about the economy. Various simple theories are useful tools for analysis, but economies are so complex and filled with so many feedback loops that it is beyond our ability to make accurate predictions.
Often attributed to Keynes, but he probably never said it. At least it's not in his written work. It's a good short seller adage though.
impossible to time the markets... Unless your Nancy Pelosi
Markets are very rational - for insiders. If they were rational for everyone, then insiders will have less profit, ergo...
Irrational, corrupt, confused, you name it. There are no clean answers for a dirty system.
Official inflation is an arbitrary measure. It conveniently excludes some significant items, biggest one being real estate. Add that into the calculation and then let us know if the real inflation since 2001 has been low or actually insane (especially in the 2010's). And then also tell us who mostly benefited from it.
I think your comment is the most insightful one out of any I have read on the matter.
Isn't land price inflation basically covered in PCE though?
Actually, I think Schasfoort himself (or Plain Bagel maybe?) talked about real estate in some other video, giving an argument that real estate is also an investment category and can't therefore be included in the inflation index in the same way as food etc.
@@markociprijanovic7520 looks like food might become a scarce commodity which will make it an investment for grifters and shysters. Does that mean it should be taken out of inflation index? Just because cronies design definitions doesn't make those definitions correct.
Inflation is based on goods & services, which is "consumption". Real Estate is an investment, which is not "consumption".
'Rent' is the consumption of Real Estate, so the rise in rent is included in inflation.
The lack of inflation in recent decades is better explained by two words: China and Technology. With 1/5 of the world's population into manufacturing, massive capital inflow, and constantly improving productivity, prices of goods across the world are suppressed. In other words, China acted as a sponge for global inflation and deposited that inflation into its real estate market. Also, technology is inherently deflationary, since more and better stuff can be produced with the same amount of labor and materials.
But the pandemic changed that. With manufacturing and capital pulling out of China and its real estate bubble on the verge of collapse, the deflationary pressure is no longer there. At the same time, productivity boosters like computers, internet, robots, and global financing are already so widespread, the low-hanging fruits for improving productivity are already exhausted. That's why we are seeing inflation picking up.
I just don't understand how "economists" see economy purely through the lens of economic theory and completely ignoring the two things that fueled global prosperity in the past two decades. I guess that's why they are discredited as scientists.
OK but even right now with the “pandemic” going on Chinese export is still growing at record breaking speed.
@@stc2828 Chinese gdp growth is near 0% right now. And that’s the *official* statistic.
nobel prize in economics loading... .. ....
@@stc2828 Chinese export denominated in USD is growing because of the inflation. They didn't increase the amount of stuff exported, but the unit price of exports. And that's where the solution is. If China gets out of Covid-Zero next year and its manufacturing back at full speed, this global inflation naturally subsides. Before then, the rest of the world don't have a lot of tools for controlling inflation. The West in particular is suffering from withdrawal symptoms of this whole "decoupling from China" agenda. If they really wanted to decouple, they should expect sustained economic pains before maybe SEA and India can pick up the slack.
@@SkyWKing Idk what you are dreaming. The fact is no business man follow government’s agenda. The recent crisis only prove how irreplaceable Chinese manufacturing is. No matter what politician says, corporates are not stupid and are only investing more into China.
Worldwide inflation. Looming food crisis in Africa and middle east. Gas prices all time high. Global currencies are in decline while all institutions are predicting recession within one year. Let's not forget the war. Supply chain are disrupted across the globe. There is fertilizer shortage. Well the only thing i can think to make situation worse is severe climate condition leading to draught and floods and we are set for once in a lifetime ride to depression. With inflation currently at about 9%, my primary concern is how to maximize my savings/retirement fund of about $300k which has been sitting duck since forever with zero to no gains.
Building a good financial-portfolio has been more complex since covid then we now face the worse inflation in decades, so I would recommend you seek professional support. This way you can get strategies designed to address your unique long-term goals and financial dreams.
@@Robertgriffinne With the inflation what it is, the stock isn't going to be raking in huge gains It wouldn't be a bad time to BUY it. Just don't expect big gains from it for a while. I'll buy once things start looking up in all those trouble areas..until then, too much turbulence for me.
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I'm no economist and this is just my humble non-expert opinion, but it feels to me that, with regards to inflation in the 70s, any attempt to look st it from a monetary perspective fails to address, or even simply acknowledging, the elephant in the room. Two petrol crisis shook the decade, and petrol is a very special commodity indeed in our post industrial revolution economies. We're not talking about a random good, like fridges, a specific type of mobile phone or a specific type of food. Petrol is an input into the production of pretty much everything. You can't run cars or public transportation without it, and even more importantly, you can't ship/fly/transport goods around without it, so to some extent all goods are dependent on petrol as an input. The moment petrol prices go up, so does the price of everything else, and that's gonna happen even if the government isn't printing money. And even diminishing the amount of money in the economy, I believe, isn't as simple a solution as that. Sure, less money means that the remaining money is more valuable, but one needs to remember that money is a means of transaction within the economy. If you just start burning money, whatever remains at the end will very likely not be enough to ensure all economic transactions within the economy, that will destroy economic activity and push more and more people into unemployment and poverty
Right so it was predominantly a supply-led inflation. Limited supply of petrol. So even though money supply didn't change in absolute terms, the supply of money relative to the supply of goods/services rose
A counter-argument would be that businesses already price goods (and thus their profits) at the highest level they can get away with i.e. whatever's the highest price their consumers can pay that makes the business the maximum amount of absolute profit -- if they can make 50 units of profit, they won't voluntarily reduce it to 40 units of profit out of the goodness of their hearts.
So theoretically higher petrol prices shouldn't make a difference because businesses would always have been charging the maximum people can pay. Businesses can run experiments though, say a 30% rise in prices for a short time to see if their overall profits remain the same (which can happen when the increase in prices compensates for a fall in purchases from lower income purchasers), so maybe that's a possible explanation for the sustained 70s inflation.
Another factor in the sustained high inflation could be the abandonment of gold backing for paper currency in the early 70s. This could have caused people and businesses to (rightly) expect high inflation in the following years, as money supply was no longer constrained by any real goods.
@@aliasgharkhoyee9501 I think there was definitely an effect of the end of the gold standard.
I also think that one should never narrow it down to "the" cause of inflation. Inflation in the 70's was partly due to oil shocks, partly due to the reverberations from the end of the gold standard, and substantially due to Nixon's monetary manipulation, and worsening government debt, as well as the end of the Vietnam War. Add in the substantial improvement of the productive capability of the remainder of the world (think Japan and Germany). Any explanation of 70's inflation must include all of these at least.
@@aliasgharkhoyee9501 Well business puts it on highest price consumers will pay.. but the price which consumers would pay depends on the price of my (as a business) competitors and what their price is. And for me and all of my competitors have higher costs, we can push it to the consumers, especially for essential goods, like food hosing and transportation.
Also, when the input costs change, the optimal amount the business can price things at, changes as well. Since you might have had a $100 dollar product that took you $90 to produce and suddenly you get a 10% increase in input cost. Now your Proffit is 10x smaller. And it might be the case that it is more profitable to increase the price to $105 dollars, making your profits per sale at $6 instead of $1 and losing 60% of the sales by doing that.
That was head and shoulders above any other media on inflation I’ve seen. Thank you… my fav vid from you so far.
Just wrote a term paper regarding inflation expectations and the Phillips curve... the one thing I would like to add, that anchoring, according to me, does not really work as intended... there is a huge gap between financial workers and general populace... and misscommunication, lack of trust in banks and central banks, etc.
I agree. I think adaptive expectations are more convincing. If you look at the post-pandemic data it looks like expectations follow actual inflation, not the other way around.
@@MoneyMacroTalks I've come to call it "capped capitalism". The creation of money is out of control and until there are controls in place that prevent the top most capital users of money from moving money easily, markets cannot keep prices stable.
It is perfectly logical to increase the money supply in relation to a growing economy. The point I see a lot of economics talks miss is what makes up an economy. It is the end users of capital and most of annual GDP is generated by the millions of citizenry, not the bankers. Bankers need to be prevented from creating new monetary vehicles or schemes. If a system becomes more complex, it more than likely is doing more harm than good.
You even said it yourself in the video that we see inflation crop up when demand outstrips growth. So governments and banks then see "print more money" as the answer to people being priced out of goods markets. No one is stepping to say "No, there are not enough goods to go around, so just be patient". It's an opportunity to do harm to the balance of the economy by bankers in the same vein that politicians use crisis' to pass agendas.
No one wants to have patience and no one at the top of earners is willing to make less.
If people and corporations growth could be capped as a percentage of per capita earnings, I think we could much healthier economies. Inefficiency in monetary systems can be viewed as a force of good in keeping an economy healthy.
Oh, I trust the central bank. I know exactly what they want to do, and I trust they will.
@@aEtherEater Or you could restore ownership of the economy to the people who do all the work.
I agree... theories like inflation expectations kinda have the assumption that most people understand how inflation works when they just don't.
Can you do a case study of Argentina? We´ve been dealing with high inflation since ever except between 1994 and 2001 when a law came out that enacted that for every peso there was in the economy there must be a dollar in the Central Bank to back it. As this was the only period with inflation under control in Argentina´s modern history it seems like the monetarist theory is actually valid in my country
Congrats for the great content, you are a good professor
I would say that there was big increase in price levels since 2009,when so called "money suppy" exploded,it was just increase in the price of financial assets since most of the money created by QE stayed inside the financial sector and did not leak so much into real mainstreet economy,therefore CPI wasn't on the rise until government started doing fiscal stimulus more aggressively during corona lockdown. So, money supply still matters it is just a question of where does that newly created money goes. When Fed does QE (which is basically an asset swap between the banks inside the financial sector,and it is not "money printing" as Peter Schiff likes to yell about,since Fed can't print money or create legal tender by itself ,it needs government to do so,(how many people do you know that get their cash directly from the Fed ,yes, the answer is none,government running deficits is how government create new money),QE affects usually bond prices and interest rates but not CPI.When government send stimmy check direcly to the people it effects CPI the most,since most of the people spend that money into consuming the products,and when private banks create money out of nothing, as they do ,and as they are the biggest source of money creation in our economy(Private banks create more then 95% of new money supply,while central banks less then 5%) it affecs whatever the credit goes into, usualy it is loans for buying real estate and asset speculation,so that explains high real estate and stock prices..So yes, inflation is caused by rise in money supply and lack of real output in production,but that rise have multiple soruces,not only Fed or government
The Fed isn’t ever going to reduce its balance sheet. They have no credible plan. For all intents & purposes Schiff is correct, they are printing money.
@@craigthebrute7929 only US treasury can create legal tender,Fed can fund government deficits through US treasury,but they can't create money or cash that we use in our day to day life.So when Peter Schiff talks about Feds balance sheet growing as it is same as money printing,he is wrong,because they can grow their balance sheet by many more trillions but those are just reserve notes siting on the books or in the computer,so it is not money untill they buy bonds from US treasury and they spend it into real economy,
@@lukaradojevic7195 they do buy treasuries though. And the people who sell those treasuries spend that newly printed money mostly on other financial assets. So I don’t see how Schiff was wrong in the least.
@@craigthebrute7929 because they don't always buy the treasuries from US treasury every time they increase their balance sheet.they can increase it without buying them ,and that new "money" stays trapped inside the banking system without affecting real economy and prices of consumer goods and services,which is why US and Japan, despite their central banks "printing" trillions of dollars in the last ten years,had very little inflation of consumer prices,until US government started sending checks directly to the people, which is money printing, and did caused inflation in the last two years..
I think that misses the mark a bit. The central banks did not so much inject money, but instead re-injected money that the lockdowns sucked out. Money disappears from the economy when there are defaults. What I think really pushed it was the sudden shift from services, which are easy to scale up, to goods consumption, which is absolutely a nightmare to scale up.
My personal take as a non-economist is that especially in the 1990s-2018 era, wealth growth became concentrated in a small group of individuals and companies, and mostly in the form of stock wealth, stock wealth-backed loans and increasing company balance sheets - forms of wealth that is not easily spent and therefore takes away inflationary pressure from the main street economy. Basically, govmnt/central bank-printed money and QE that normally would have spiked inflation disappeared into a black hole, and started to come out in 2021 when supply chain disruptions made it necessary to spend more.
There is also something to be said about companies running out of stuff to spend their money on. You can only build so many headquarters, invest so much in R&D, until you run out of meaningful investments. Our economy as it currently works will see these giants keep stockpiling money with nowhere for it to go. Meaning our economic model was never stable in the first place. Money aggregates in a few places and just keeps doing it.
A great summary of how we got to present day macro, thank you. I studied econ in the mid-2000s so I have learned from you how shaky the Keynesian models are.
Or every other model for that matter.
Great video. Thanks.
Interesting that you say there was no inflation in the 2010s - and you are right looking at cpi . However if you look at the bigger picture there was massive asset price inflation over this period. To my mind this adds weight to the monetarist theory.
Absolutely there was massive asset price inflation. But, assets do operate quite differently from goods & services. The monetarist stuff that I read doesn't clearly distinguish between the two. Perhaps I missed something. Or perhaps there is still an opportunity there to come up with a theory that incorporates both (not just lumping it together) and call that next-monetarism or something like that :)
@@MoneyMacro renting makes housing a service, not an asset.
"money supply × velocity of money = price level × real GDP" explains it all. Friedman was right because of the "money supply" variable. The trouble is that "velocity of money" and "real GDP" depend on the Keynesian factors. I believe that inflation was surprising low last decade because the dollar is a world currency and China's growing production added to the "real GDP" variable.
I generally disagree with Friedman on so many points that its hard to sum up. That said, we did have inflation over the last 10 years, just not in areas we consider "inflation". We had huge increases in house prices as well as in stock prices. This is a "kind" of inflation
@Charles now it turns out that a significant portion of that Chinese GDP is hot air in unbuilt real estate units and another significant portion is being decimated by zero covid policy.
I like the high minded theoretical explanation for what actually happens in boardrooms: "there's an oil supply crisis. We could increase production...or do nothing and jack the prices up."
@@GreenLarsen it wasn't a "kind" of inflation considering housing prices are the working classes single biggest expense. "Classical" econ is a 3 card monte game.
@@aluisious You and I might consider changes in house prices to be a part of inflation calculations. But it traditionally is not. So when we see xx inflation mentioned in the news or even when many economists talk about inflation, changes in house prices are not included. They are instead considered "investments" and increases are therefore seen as a pure "good thing".
Personally I see many flaws with this kind of view, but I do not have the power to change it. I can only mention it when possible and hope it slowly change
I've heard some pretty good arguments that stagflation can be explained well enough as supply constraints... But the constraints are within key sectors and not the overall economy.
Seems to make sense... If growth is been driven primarily by technological advances and cheap energy, then a lack of relevant workers and increase in energy costs will drive up prices pretty much across the board while simultaneously making a lot of enterprises (and jobs) fail.
Stagflation might be a mystery in a spherical cow economy, but not so much for a real one.
Very interesting. I’ve learned..and know I still have a LOT more to learn. Thanks 👍
Thank you for this explanation. The best I've seen on the topic for someone like me who is not an economist and have a hard time understanding economics. Much appreciated 👍🏻
I think a unified inflation theory in economy is even more elusive than a unified field theory is in physics. why? because by the very nature of the game any such theory is self defeating: actors which know its predictions can (and will) take advantage of them thus falsifying them immediately. In my opinion the approach of central banks should continue to be "better be approximately right rather than exactly wrong"...
Excellent video! Be right back, going to look up that Monetary Control Act...
This is by far the best video I have seen on the topic. Thank you - and keep up the great work.
This video is a treasure of knowledge and a feast of food for thought.
You're awesome man.
Also, congrats on the animations, getting better with each video :)
Friedman didn't say it was how much money is printed, he said it was the debt the government takes and this is what is happening now. The US government should have kept the fragile economy in the number one position the last years. But I think they wanted this to happen, so they could pick in chose some new green economy, which really won't change a thing, just make themselves richer. Nice channel, subscribed for now.
There are two things that all these theories forget or don't include:
1. Banking regulations - there must be a frame through an Act to introduce appropriate, non-knee jerk legislation when necessary
2. Taxation - in 1962, here in the UK, the new government, Tory lead, increased the top rate of tax from 40% to 90%. Debt to GDP ratio was 259%, even after the Empire was dismantled. Result? Paid off within three years and to quote Harold Wilson later, "You never had it so good" The debt dropped below 100% .
Inflation affects regular people rather than institutions and the wealthy.
Rich people and corporations hoard money 💰 because they don't suffer. The more they have, the less they spend.
These two factors are needed into the mix, because when things go South, the rich and the banks believe that the government's of the world will bail them out without consequences. Which is true.
Rich people and corporations are essentially holes we throw money into.... except those holes come to life and start corrupting everything they touch, especially government. The real economy exists to serve the racket, not the people. The fact that people manage to survive this shit is just an unintended side effect. I'm extremely salty about this, but that's life! The strong have always abused the weak. That's the hell we live in.
Super informative video! Thank you.
Thank goodness you're making these videos Joeri. For years the only content available on CZcams about monetary theories and central banking was mostly conspiratorial / unacademic.
This times 10.
Your intro was just absolutely brilliant :)
Good summary and fantastic conclusion.
Thanks for the video again.
A bit unrelated, but does anyone know if posting comments actually help a video‘s algorithm? Like does it actually help the video get seen by more people?
Though "the machine" is a black box, the common assumption is that a video should be enhanced by more engagement. And engagement includes likes (and dislikes), and it includes comments. In summary, probably yes.
People say that engagement is one of the factors that goes into the algorithm. Commenting might be part of that. I am personally not a hundred percent sure how much commenting helps. But, I do appreciate it.
@@MoneyMacro Ah thanks for the reply. Also, another great Video as always Dr!
@@Krasbin Ok thanks. Good to know.
Some say that likes and dislikes are both functioning the same way for the algorithm, so if you dislike something is like you have liked it
Though I don't know how much truth there is in this claim
Yes. I agress, a lot of different reasons why inflation or many economic fluctuations happen.
Economics is behavioral and there are multiple rationalities behind behaviour.
I'm an economics student whose special interest is theories of money and inflation and this is absolutely the most concise and approachable explanation to inflation theories I've ever seen online
The theory of money and credit by Ludwig Von Mises.
Inflation can be caused by any factor that leads to a surplus of demand over supply, central banks have controlled money supply components and uncontrolled components.
Disaggregating money supply for the 1921-1929 period shows that a credit expansion boom and eventual bust depsite the Fed increasing controlled factors paved the path of huge liquidations of the Great Depression (see America’s Great Depression by Murray Rothbard)
Austrian economics explains every phenomenon but is difficult to follow coming from a mainstream background, most if not all of what I have been and am being taught in mainstream economics can be proven wrong within a couple of minutes of thinking
Very informative as always, thank you!
Your final conclusion seems to be the most logical option to me. I find it weird why anyone would think that such a complex system like economy could be explained by just a handful of rules. No theory will cover all possible scenarios. I'm sure there will be times again where a simple set of rules might suffice to explain inflation. And then there will be times again where they don't.
The ultimate goal of federal bank is to monetized the debt and keep inflation roiling. Reaching a 15% inflation target was their mark back then they said they will let inflation run hot during the plan..demic. The U.S government can't serviced its debt obligations and with higher inflation comes higher tax revenues.
Its part of the master plan.
👍 Thank you. This was very informative.
This video is the reason of why I'm subscribed to this channel.
I appreciate the way you describe the different economic theories, and more importantly, how you give context, propose dilemmas and help reflexive thinking.
Very happy to hear that!
Thank you for your effort to make very informative economy education videos.
new subscriber - as an economist myself your ability to explain some of the more assoteric aspects of economics is very good. It is always important to not be ivory tower and make the theory applicable to the average person and in making thier money and investment decisions, Theory on its own is useless it must be applicable.
A great video, and thank you for sharing it with the world.
Brilliant as always. Massive thanks!
recently found the channel & a new student of macroeconomics. awesome content, answering one question at a time :)
This was pretty epic. I think a few videos going into the different models of theory would be very insightful
Yoeri, thank you so much for your work, so much knowledge gained in only 19 minutes. Groetjes!
I come from an environmental science background where forecasting models are often based on chaos theory. My thoughts on this are that we humans tend to try to simplify the reality to understand it and control it. But reality is complex and multidimensional. And variations in the initial conditions are hugely impactful to the outcome. Moreover, the number of combinations of any given initial settings is infinite. So I really like your thoughts at the end of the video and would agree with them: at different times, different factors would cause inflation, and we might never be able to forecast them (with accuracy).
Thanks for the channel.
i loved your analogy at the end. complex enough systems aren't completly predictible, we can only use educated guesses.
Great video! Keep up the good work.
The product placement for a new investment vehicle within this very video demonstrates what a tenuous grasp central banks have on the money supply .
My bet is on the behavioral economist. They seem to be the new hot upstarts in Economics. I can see alot of banks jumping onto their theory
Thank you!
You are welcome 🙂
Hi Money and Macro i like your videos. Can you please do more video's like this whr you explain econ concepts. and if have an book recommendations can u please do share
Milton Friedman is absolutely right -- there's only one source of inflation, it's where money is printed.
Jep, and again we are seeing the living proof of it in these hyperinflation Time. Jesus, we have 10 procent inflation and in Europe the central banks are still on 0 procent policy rates... Theoretically, I u can keep borrowing money, with inflation t 10 procent at hardly any interest rates, you would earn fortunes just because your debt devaluates. What a crazy situation purely because of the extreme monetary impulses (money printing...).
This was a great video!
Bill Philips wasn't an economist, he was an engineer that made a water powered machine that worked like a computer model of the economy. The LSE needed him to publish a paper to join the faculty there, so they asked "What have you got?" The Philips curve was derived from one of the conceptual rules used in the machine. Make of that what you will. I think it's a great illustration of how economics isn't really a real science.
Great stuff
Conclusion: Inflation is always and everywhere a relative phenomenon. In other words, what we can say for certain is that inflation is always and everywhere driven by a unique confluence of factors that affect supply and demand. There is no single, neat model that can perfectly explain and predict inflation, which is why any single model that attempts to do so is successful in some regimes, but unsuccessful in others. However, some models might have more predictive power across more regimes, which means such models are better accounting for the complex interaction between many variables that produce inflation. But it remains to be seen which existing or future models have the greatest explanatory power across the widest range of regimes. This is the main principle (but it's just my interpretation, and I am inevitably injecting some of my own bias into it) I have taken from watching this wonderful video.
Great video, and great analysis of the history of the attemps to define inflation.
Thank you kindly!
This is the highest quality economics content on youtube. Thanks for what you do
I am a physicist and it’s true economics is a science. As a fellow scientist, I will add that the mockery of Milton Friedman should be frown upon. He was trying to address a fundamental problem in the field and he got a prestigious award for it. He dedicated his entire life to solving a complex problem. Even if he was incorrect, making fun of him is disrespectful and a bit pathetic. It would be the equivalent of me laughing at Newton’s theory in the corpuscles of light or the aether theories for the propagation of force. The theories were not complete and sometimes incorrect, but the people working on them were doing their best and we should applaud them for trying. We are not more brilliant than them, we know more because we see more from standing on their shoulders. It is easy not take a wrong path after everyone else has done it.
This is why Economics Explained is interior to this channel
Great work keep it up 👍
I think the key point is what you said at 16:48
Maybe the fact that we are looking for a simple explanation is the problem. Maybe inflation is too complex to be explained with elegant models.
Maybe systems thinking to the rescue?
Bit of a side-gripe, but the "corporate greed theory of post-covid inflation" seems pretty vapid to me. We didn't experience a sudden increase in corporate consolidation, so the argument is that consolidation over the past decades amplified other inflation shocks. But that conflicts with low inflation over the last decades. Worse, standard IO pass-on theory notes that monopolies should absorb part of supply shocks - exactly contradicting this hypothesis. High profits during the pandemic are explained much more readily by companies halting spending - just as households did.
I read an explanation of this In a banned book(in most western countries), written by the Ex-Chairman of South Sudan Central Bank called the History of Central Banking and the Enslavement of Mankind. The argument was against central Banking where an interesting system was allegedly exposed, which existed since the Romans(led to murder of Julius), debasement and fall of Roman currency after Nepo in 7A.d., The French Revolution, The Napoleonic Wars(How Britain financed to fund Austria and the Allies against France) and led to the Emergence of the Bank of England as the World's first Central Bank; how its history was de-stained by politicians in two 252 worded sentences in bills proposed.
The Argument was that the value of Money goes down only when the Central bank and it's financers procure purchasing power or fixed tangible assets against bad debt or by means of ursury.
How it works is like this:
-)The Central Bank prints money out of nothing which holds the same purchasing power as Pre-inflation for the short term market period.
-) It provides loan to Governments and Commercial banks at a Rate
-) The Government and Banks induce the money into the economy in form of expenditure,loan or advances.
-)the Value of money goes down by inflation
-) The Central Bank still receives Interest, at an effective lower purchasing power than it provided the loan with, yet the entire amount is recovered with interest.
-) The Bank owns everything it finances. The Money returned which yielded profit was produced out of nothing. The Bad debts were recovered in form of fixed assets. The Depreciation of Currency did not effect the Central bank as it made it transactions before excess Money was injected into the economy. The High power money(total liability of the Central Bank) which is effectively the entire monetary supply of the Economy, is produced out of nothing and an interest is charged against its purchasing power; either by interest paid by borrowers or inflation by receipt of money supply as depreciation of currency is ultimately Depreciation of total liability of the Central Bank.
Thus the liability of the Central Bank remains effectively constant which it's purchasing power is potentially infinite. With this system, inflation goes on, people provide more and more for less and less; prices outgrow Factor incomes by an margin payable to Central Bank, which provided no obligation for payment because the loan provided by it was depreciated due to depriciation of currency 💵 ultimately. It is similar to How US paid Spiders in WW2. They paid them in cash, then caused inflation at pre-inflationary rates and then diminished the purchasing value of payments made to spikders who now had no option but to fight another war.
Similarly, the same process repeats till Wealth is concerntrated in hands of few, all because they own the monetary supply and by its manipulation, they produce purchasing power out of nothing by stealing it from others.
What is the second channel referred to?
@Money & Macro, Your red frame around a video always make it seem like I have already watched that, and I tend not to click on it. Just an observation. I love your work and research. Always very informative.
I think supply side disruptions is the key it is the only constant feature in all historical periods of unexpected high inflation. If I were an academic I would focus on that
The problem is cause and effect: you can think of supply chain problems as a cause of inflation, but they can as well be an effect. How will you distinguish between both possibilities, without considering other variables?
I love your conclusion at the end. A world with 7 billion+ complex beings making complex decisions everyday can't be neatly described by a single theory. With each successive downturn/crash previous theories will crumble and new ones will emerge.
Great video! However, the sound levels in some of the clips was way too low. :(
Excellent vídeo
Solid video, as always. It would’ve been nice to hear more about the Post Keynesian account, though, with conflict over the distribution of income as the main driver of inflation. It’s more challenging to adequately formalise a concept like that, given the historical and institutional complexity that underlies class relations, but it’s still a powerful perspective to consider.
Yeah. It was with pain in my heart. But, they are not so popular with central bankers. I will try to get some post Keynesian guests for the live stream in the future
What about financial asset inflation, does it have any feed back mechanism?
Private banks, under a state monopolization of money, have an incentive to expand the money supply. They're more competitive as they can offer lower rates. There's many regulatory barriers though. For example many financial institutions are forced to hold bonds. It's practically a borrow-tax.
Under a sound currency, in a country where contractual obligations are carried out, on-demand deposits would be 100% reserve. Only time deposits would be lent out.
Another great video! I suppose a pragmatic approach is the only sensible one.
Great stuff, Joeri! Very helpful explanations and timeline.
Would love to see a discussion some day of some of the ideas presented in the anthropologist David Graeber's 'Debt: The first 5000 years' and his final book with David Wengrow 'The dawn of everything'.
Would be interesting. I read part of his first book. Wasn't aware of the second one
Think where seeing both cost push inflation (energy prices, supply chain) and demand pull inflation (everyone wanting to move house)
I’d be interested to see a video from you on how the calculation of inflation has changed. What is and is not included in the CPI etc. energy and food are left out now because they are volatile but still impact people. However including energy would in someways double count since goods and services prices would changed based on the energy to produce and get them to the consumer.
13:21 Inflation did indeed go up in the post-2008 quantitative easing phase, and rapidly. But it wasn't CPI inflation; it was asset price inflation.
Economist Michael Hudson has constantly emphasized that there was an explosion of inflation in the FIRE sector (finance, insurance, and real estate), making the rich even richer.
Most of these assets are owned by the rich. Because poor and working people rarely own significant assets, their wealth did not increase, and their incomes stagnated. So consumer demand did not increase, meaning there was little CPI inflation.
Great video, as always. Have you ever talked about ERIC LONERGAN AND MARK BLYTH's “Angrynomics“? If not, might be an interesting video.
We need a new theory. It could be something like China-Russia-Supply-Inflation theory...
If you get it published in a good journal, I will cover it in the next video :)
@@MoneyMacro Or back to Wicksell whose theory is that prices follows interest rates. Antal Fekete and Keith Weiner were extending his theory.
Inflation is still a monetary problem: There is no inflation in a barter system.
Monetarist felt short in explaining money behaviour and who controls supply and demand of money, but the fact that it is a monetary issue is evident and almost axiomatic.
Thank you so much for your work. Love in your life and G(o)od bless!
great video
Uncle Milton was right, inflation is a monetary phenomenon. We didn't see inflation during QE bc the Fed swapped short term bank reserves for long bonds held by member banks, the increase in the money supply was contained within the banking system. Look at the growth of base money (exponential) compared to the rate of growth in M2 (flat), where money created leaks out into the economy. The inflation we're seeing today is bc of huge Fed printing to cover the massive government spending in the economy, not contained in the banking system as under QE.
One pedantic point. Phillips himself studied unemployment vs wage inflation, not unemployment vs broad consumer price inflation. i.e. he never made the chart put on the screen when mentioning him. Unemployment vs broad price inflation was an extension of the Phillips Curve by Samuelson and Solow to the US. They made the sleight of hand from wage to broad inflation.
I tried to subtly hint to this when saying that Keynesians incorporated the curve into their theories. But, I admit. By showing his face all the time, it does create the wrong impression.
This was a great video, by the way. Didn't mean to undercut the effort you put in. Thanks!
Love you, but I personally see 3 shortcomings in the video:
1. No political economy explanation of inflation. Recommended readings: The Deflationary Bloc by Yakov Feygin and “Who Killed the Phillips Curve? A Murder Mystery“ by David Ratner and Jae Sim, principal economists at the Fed. If the conclusion is that "Inflation can be caused by lots of things", then it is sad that political action and different interests of societal groups are pretty much ignored. This leaves inflation at some technocratic dimension. It is about time that we stop treating inflation as such, as central bank independence is pretty much dead at this point.
2. Huge difference in New-Keynesian theory vs. MMT and post-Keynesian theories is the view on whether the MS is endogenous or exogenous.
3. Was worthwhile to mention that the inflation expectations theory is also pretty much dead, or at least it is useless to explain 2022 inflation. Inflation expectations only went up as inflation did.
All fair points. But, I had to make some difficult choices to avoid making another hour long video. Maybe I can explore these points further with guests on money & macro talks
My opinion is that you definitely should use that footage of an anvil falling into a pipeline with sound whenever you mention supply side disruptions
Amazing video, thank you. Do you have or please could you make a video explaining the regulations around how private banks are able to create credit and the relationship between it and how the central bank increases money supply. I wonder what the incentive is for banks to not extend credit, since they create the money anyway, what is the incentive to prevent excessive lending? Clearly not an economist but your videos are brilliant, thank you
Would you please engage with Steven Keen's mmt? Im new so I might have missed it.
3:05 for a split second I've read it like you wrote it))
18:30 The comparison with cancer induced by smoking is really good: liking or not, science doesn't actually know when or even if a smoker will get cancer, but they know It's a lot more likely for that happen when they're smokers; by analogy economists don't exactly when or even if a policy will cause inflation but they know a few factors that increases the probability for the development of inflation. Really good video by the way.
Oh yes, please make a video brazilian inflation in the 80's and 90's, It really puts all these theories on a hardcore test.
@13:09 How do falling prices lead to falling wages?
Price of labor (wages) fall, but not as fast as other prices. Known as “sticky” wages
I found the article, "Who Killed the Phillips Curve" from the Federal Reserve to be extremely interesting. The authors look into adding labor market power as another component to the Phillips curve.
13:18 I've heard that all the inflation was at the markets during 2010s. Is that true?
👏🙂
very informative
I wonder if a useful analogy might be found in population modelling within ecosystems. Just because a change in one ecosystem had an observable and measurable impact on populations or a population within that ecosystem, you can’t turn it into a model that would be applicable to different ecosystems. The analogy would apply to both different contemporaneous economies as well as economies across time, as they are subject to different pressures or different patterns of exposure to similar pressures.
Omg, you are one of the best teachers I’ve heard on economics. Can we get your classes online?