CPI jumps 5% in May of 2021, fastest since 2008

[Brian4Liberty]

...
Blackrock has as many FRNs as they want. FRNs are not money. They are debt coupons created out of thin air. Blackrock has no worry of devaluing those FRNs or any sort of need for "value" in terms of FRN value. It's like a cheet code in a video game. It doesn't matter if they buy a house at $500,000 that should be worth $400,000. All the money printing will inflate the price past that anyway. Yet somehow this is all free markets. ...

And that’s the key. Forward looking at prices.

Monetary inflation leads to price inflation. Being the first person to get that new money means you spend stronger dollars, in anticipation that those dollars will decrease in value after it flows into the system. You anticipate higher prices in the future, as you are part of the inflationary system that drives those prices higher.

[Krugminator2]

And how does that apply to the Federal Reserve purchasing government bonds at above market prices?

Blackrock is a publicly traded company that has a fiduciary duty to shareholders. They are in business to make money. Systematically overpaying for houses for whatever conspiratorial reason would interfere with making money. The Federal Reserve conducts monetary and doesn't exist to make money.

And that’s the key. Forward looking at prices.

Monetary inflation leads to price inflation. Being the first person to get that new money means you spend stronger dollars, in anticipation that those dollars will decrease in value after it flows into the system. You anticipate higher prices in the future, as you are part of the inflationary system that drives those prices higher.

If you think prices are going up, you by definition aren't overpaying. That is called speculation. Credit worthy borrowers have no trouble getting access to loans right now if they want to make that bet. Nobody is stopping you from making the same bet on housing as Blackrock.

[ClaytonB]

The dropoff from the mid 1960's to now is incredible. People really dont understand it as far as I can tell .Of course a big part of the working population would have become accustomed to this in the late 80's to now.

Jorg Guido Hulsmann: The Cultural and Spiritual Legacy of Fiat Inflation

In the old days, saving was typically done in the form of hoarding gold and silver coins. It is true that such hoards did not provide any revenue—the metal was "barren"—and that they therefore did not lend themselves to the lifestyle of rentiers. But in all other respects money hoards were a reliable and effective form of saving. Their purchasing power did not just evaporate in a few decades, and in times of economic growth they even gained some purchasing power.

Most importantly, they were extremely suitable for ordinary people. Carpenters, masons, tailors, and farmers are usually not very astute observers of the international capital markets. Putting some gold coins under their pillow or into a safe deposit box saved them lots of sleepless nights, and it made them independent of financial intermediaries...

... Things are not much better for those who have already accumulated some wealth. It is true that inflation does not force them into debt, but in any case it deprives them of the possibility of holding their savings in cash. Old people with a pension fund, widows, and the wardens of orphans must invest their money into the financial markets, lest its purchasing power evaporate under their noses. Thus they become dependent on intermediaries and on the vagaries of stock and bond pricing.

It is clear that this state of affairs is very beneficial for those who derive their living from the financial markets. Stockbrokers, bond dealers, banks, mortgage corporations, and other "players" have reason to be thankful for the constant decline of money’s purchasing power under fiat inflation. But is this state of affairs also beneficial for the average citizen? In a certain sense, his debts and increased investment in the financial markets are beneficial for him, given our present inflationary regime.

When the increase of the price level is perennial, private debt is for him the best available strategy. But this means of course that without government interventionism into the monetary system other strategies would be superior. The presence of central banks and paper money make debt-based financial strategies more attractive than strategies based on prior savings...

...money hoarding does not have any negative macroeconomic implications. It does definitely not stifle industrial investments. Hoarding increases the purchasing power of money and thus gives greater "weight" to the money units that remain in circulation. All goods and services can be bought, and all feasible investments can be made with these remaining units. The fundamental fact is that inflation does not bring into existence any additional resource. It merely changes the allocation of the existing resources. They no longer go to companies that are run by entrepreneurs who operate with their own money, but to business executives who run companies financed with bank credits.

The net effect of the recent surge in household debt is therefore to throw entire populations into financial dependency. The moral implications are clear. Towering debts are incompatible with financial self-reliance and thus they tend to weaken self-reliance also in all other spheres. The debt-ridden individual eventually adopts the habit of turning to others for help, rather than maturing into an economic and moral anchor of his family, and of his wider community. Wishful thinking and submissiveness replace soberness and independent judgement. And what about the many cases in which families can no longer shoulder the debt load? Then the result is either despair or, on the contrary, scorn for all standards of financial sanity.

[Madison320]

High prices mean more profits, which means more supply brought to market, which means lower prices and normalized profits. The cure for high prices is high prices.

Lumber is down 50% since the peak when he highlights that article.

That works for some things but not for necessities like food. I read a book by a guy who lived thru 3 hyperinflations, 2 in Argentina and 1 in Chile. He said assets like home prices collapsed while food skyrocketed. People had to sell assets to buy food.

If high prices cured high prices there would never be high inflation.

[ClaytonB]

That works for some things but not for necessities like food. I read a book by a guy who lived thru 3 hyperinflations, 2 in Argentina and 1 in Chile. He said assets like home prices collapsed while food skyrocketed. People had to sell assets to buy food.

If high prices cured high prices there would never be high inflation.

It works for everything -- high prices are the cure for high prices. The trouble is that it works for everything, even money itself. So when a market is flooded with cash, the price of cash itself (its purchasing power) must fall. Therefore, there will always be a secular rise in all prices in the presence of monetary expansion. This was even true during the gold/silver era, it's just that monetary expansion could never occur very quickly because mining is so costly. Gold/silver inflows-outflows also occurred as a result of the insane bimetallist policies that governments would institute. But even these were nothing compared to modern inflation which has devalued the dollar to a tiny fraction of its value in the course of just a century (there are people born before the Federal Reserve was established who are still alive today...)

[Brian4Liberty]

Blackrock is a publicly traded company that has a fiduciary duty to shareholders. They are in business to make money. Systematically overpaying for houses for whatever conspiratorial reason would interfere with making money. The Federal Reserve conducts monetary and doesn't exist to make money.

If you think prices are going up, you by definition aren't overpaying. That is called speculation. Credit worthy borrowers have no trouble getting access to loans right now if they want to make that bet. Nobody is stopping you from making the same bet on housing as Blackrock.

I’m not addressing whatever conspiracy hypothesis you are talking about.

But any given fund has a purpose and objectives. If it invests in the S&P 500, it invests in the S&P 500 whether it is going up or down. It has to buy it. Likewise, a fund that invests in residential real estate has to invest in residential real estate. And with the amount of money they have to invest, they are not going out bargain hunting and lowballing. They pay top prices to ensure that they can acquire property and fulfill that investment purpose.

Supply and demand. Demand increases, prices go higher. Pretty basic.

[Brian4Liberty]

That works for some things but not for necessities like food. I read a book by a guy who lived thru 3 hyperinflations, 2 in Argentina and 1 in Chile. He said assets like home prices collapsed while food skyrocketed. People had to sell assets to buy food.

If high prices cured high prices there would never be high inflation.

The fundamental error in the application of big picture theories to real time, real life is that they don't apply in real time. There are far too many variables. You are hungry and don't have any food? Don’t worry, prices will rise, and farmers will meet your demand. You just have to wait a year. You can go without food for a year, can’t you?

Likewise, when housing is the issue, the real world is not a thought experiment. The solution is build more houses? How long does that take? How much open land is there? There may well be no space to build. It can take a long time to convert suburban areas into Hong Kong style urban sky scrapers. People don’t want to sell their property for redevelopment. Creating more housing may take a long time, more time than you have.

The Chinese came up with a solution to the commoditization of residential housing. Build huge cities of high rise condos in the middle of nowhere and sell them. Ghost towns of unoccupied homes. Is it smart? Is it efficient? Is it a good use of land? Is it a good investment? No, but’s a pure “market solution”. It should make Gordon Gekko happy.

[CaptUSA]

The fundamental error in the application of big picture theories to real time, real life is that they don't apply in real time. There are far too many variables. You are hungry and don't have any food? Don’t worry, prices will rise, and farmers will meet your demand. You just have to wait a year. You can go without food for a year, can’t you?

Likewise, when housing is the issue, the real world is not a thought experiment. The solution is build more houses? How long does that take? How much open land is there? There may well be no space to build. It can take a long time to convert suburban areas into Hong Kong style urban sky scrapers. People don’t want to sell their property for redevelopment. Creating more housing may take a long time, more time than you have.

The Chinese came up with a solution to the commoditization of residential housing. Build huge cities of high rise condos in the middle of nowhere and sell them. Ghost towns of unoccupied homes. Is it smart? Is it efficient? Is it a good use of land? Is it a good investment? No, but’s a pure “market solution”. It should make Gordon Gekko happy.

Nominal rigidity. Or, price "stickiness". Wage prices are historically far more sticky than products and services. Another reason why price inflation kills the lower classes. But those who can take advantage of nominal rigidity will benefit.

[ClaytonB]

The fundamental error in the application of big picture theories to real time, real life is that they don't apply in real time. There are far too many variables.

This is simply not true. Sound economic theory -- that is, the Austrian school of economics -- has no problems with the complexity of the real world because it's not pretending to "model" the real-world, as the modern "quantitative economics" theories do. Rather, sound economic theory is a theory of human behavior, in particular, human action. Human action is human action, whether there is an abundance or famine.

Likewise, when housing is the issue, the real world is not a thought experiment. The solution is build more houses?

No, the solution is to allow the market to do what it does best -- economize. Two families can live in one home if they have to. Rooms can be sub-let. Garages/basements can be converted. Camping trailers can be used as a living space, at least for a while. People who were debating the idea of off-grid living can be pushed off the fence by a rise in housing prices. And so on, and so forth. When the crunch really is that bad, high prices compel those with low demand for housing to economize their use of it, freeing up housing for those with high demand for it; at the same time, high prices incentivize developers (who may have significant idle capacity) to build more housing. Project timelines can be moved up, project-management is not Moses with the ten commandments... everything is flexible/negotiable. Money moves, so when prices rise, things move faster.

People don’t want to sell their property for redevelopment.

And high prices help change their minds...

The Chinese came up with a solution to the commoditization of residential housing. Build huge cities of high rise condos in the middle of nowhere and sell them. Ghost towns of unoccupied homes. Is it smart? Is it efficient? Is it a good use of land? Is it a good investment? No, but’s a pure “market solution”. It should make Gordon Gekko happy.

China is the exact opposite of free markets. And Gordon Gekko is no spokesman for the free market, he's a spokesman for greed, and says as much in the movie. The Marxist smear of capitalism is that "capitalism is greed", but genuine free markets have nothing to do with greed. The best entrepreneur is the one who learns to serve and to love serving. Putting the customer first has become a meaningless buzz-phrase nowadays but it used to mean something.... just goes to show how deeply printing-press money corrupts a society and its markets...

[Brian4Liberty]

This is simply not true. Sound economic theory -- that is, the Austrian school of economics -- has no problems with the complexity of the real world because it's not pretending to "model" the real-world, as the modern "quantitative economics" theories do. Rather, sound economic theory is a theory of human behavior, in particular, human action. Human action is human action, whether there is an abundance or famine.

And no matter what actions that human's take, there are still many variables out of the control of humans. People might starve to death, it happens. And trite quips about the free market don't change basic facts today. I am advocate and supporter of true free markets, but I don't wear it like a religion, along with all of the usual mantras. It does work best in the long run.

No, the solution is to allow the market to do what it does best -- economize. Two families can live in one home if they have to. Rooms can be sub-let. Garages/basements can be converted. Camping trailers can be used as a living space, at least for a while. People who were debating the idea of off-grid living can be pushed off the fence by a rise in housing prices. And so on, and so forth. When the crunch really is that bad, high prices compel those with low demand for housing to economize their use of it, freeing up housing for those with high demand for it; at the same time, high prices incentivize developers (who may have significant idle capacity) to build more housing.

Agree.

Project timelines can be moved up, project-management is not Moses with the ten commandments... everything is flexible/negotiable. Money moves, so when prices rise, things move faster.

I have to laugh, due to real world experience. Depends upon where you are. Is ten years a long time? I've seen many projects for building housing last longer than that.

And high prices help change their minds...

But not always.

China is the exact opposite of free markets.

But in what way was the building of massive amounts of housing (supply) to meet investor demand the opposite of free markets?

And Gordon Gekko is no spokesman for the free market, he's a spokesman for greed, and says as much in the movie. The Marxist smear of capitalism is that "capitalism is greed", but genuine free markets have nothing to do with greed. The best entrepreneur is the one who learns to serve and to love serving. Putting the customer first has become a meaningless buzz-phrase nowadays but it used to mean something.... just goes to show how deeply printing-press money corrupts a society and its markets...

The printing press is not the root of all evil, just the majority of it.

[Brian4Liberty]

Nominal rigidity. Or, price "stickiness". Wage prices are historically far more sticky than products and services. Another reason why price inflation kills the lower classes. But those who can take advantage of nominal rigidity will benefit.

I was thinking of using the term "supply stickiness". The supply of some things can not be increased very fast. Gold, bitcoin, housing...

[oyarde]

I’m not addressing whatever conspiracy hypothesis you are talking about.

But any given fund has a purpose and objectives. If it invests in the S&P 500, it invests in the S&P 500 whether it is going up or down. It has to buy it. Likewise, a fund that invests in residential real estate has to invest in residential real estate. And with the amount of money they have to invest, they are not going out bargain hunting and lowballing. They pay top prices to ensure that they can acquire property and fulfill that investment purpose.

Supply and demand. Demand increases, prices go higher. Pretty basic.

that is an interesting point , if your dumping big sums your just taking what is available , not looking for bargains

[Krugminator2]

That works for some things but not for necessities like food.

If high prices cured high prices there would never be high inflation.

Food is the textbook example of where price signals work. If the price of soybeans rises relative to wheat, farmers will plant soybeans to earn a higher profit. The extra supply will prevent soybean prices from running away to the upside and ultimately bring them back down.

inflation is a monetary phenomenon not something caused by speculators buying houses or businessman. Rising home prices are a market signal that encourages buyers to economize and builders to bring more supply to market. Those actions check unduly high prices. Speculators don't cause high home prices. They only speed up adjustment to whatever prices should be. And if a speculator does push up home prices and their economic forecast is in error, they will lose money as prices fall.

[Brian4Liberty]

And how does that apply to the Federal Reserve purchasing government bonds at above market prices?

... The Federal Reserve conducts monetary and doesn't exist to make money.
...

Isn't the Federal Reserve made up of banks that exist to make money?

This is the Ron Paul Forums, so just blowing off the Federal Reserve as if they are a benevolent organization doesn't hold water. What they do (monetary inflation) is very destructive to the economy as a whole, and to many segments of the economy. Purchasing debt instruments and manipulating the entire interest rate market is central planning at it's worst. There is no free market interest rate discovery.

Go to the 12:44 mark. It's very basic to what Ron Paul is about.

Prices Rise & Standards of Living Fall -- Yet The Fed Keeps Printing Like Crazy

[ClaytonB]

Quote Originally Posted by Krugminator2 View Post
... The Federal Reserve conducts monetary and doesn't exist to make money.
...

Isn't the Federal Reserve made up of banks that exist to make money?

The Federal Reserve is a private entity created by an act of Congress, a bit like the USPS. As such, it is regulated separately from other kinds of private entities -- importantly, it is not subject to FISA, Congressional oversight or other public accountability mechanisms. This makes the Federal Reserve a legal black-hole in respect to public policy. Even the CIA has to report to Congress through the intelligence oversight committee. Nor does the Federal Reserve directly answer to executive authority under the US President, although the relationship is obviously inherently cooperative. The stated reason for this arrangement is "independence" from the government, I guess to prevent corruption or something, who knows. The real reason is to shield the Federal Reserve from the apparatus of national power which is why the Federal Reserve has never been a friend of US nationalism and has consistently supported economic policy that is consistent with the aims of the globalists.

This is the Ron Paul Forums, so just blowing off the Federal Reserve as if they are a benevolent organization doesn't hold water. What they do (monetary inflation) is very destructive to the economy as a whole, and to many segments of the economy. Purchasing debt instruments and manipulating the entire interest rate market is central planning at it's worst. There is no free market interest rate discovery.

Indeed. And the insidiousness of the effects of inflation is not limited to ever-rising prices and economic collapses:

The Non-Price Effects of Monetary Inflation

In this article, we have challenged the common view that monetary inflation automatically leads to increases in prices of consumer products. Changes in prices are always a result of conscious actions of entrepreneurs who, in response to the rising prices of means of production—and according to the Cantillon effect, an increase in money supply does not affect all prices uniformly and simultaneously—may apply other strategies, consisting in decreasing the quantity of product or reducing its quality, keeping the nominal prices unchanged.

Thus, monetary inflation is a factor passed over in the literature that may be partially responsible for downsizing and decreasing quality of some products. From this perspective, the above-mentioned actions taken by entrepreneurs do not have to result from their ill will or inherent greed, but from their effort to remain in business in inflationary and competitive environment. Therefore, it seems that the Austrian theory of inflation should be extended to incorporate non-price effects of monetary inflation.

The non-price effects of increases in the money supply clearly show that the impact of monetary inflation on innovation is negative. Instead of promoting products of higher quality, entrepreneurs spend scarce resources to hide the increase in an effective price through changing packaging or reducing quality, which is detrimental to innovation. That impact does not have to be direct, but can result from cutting costs through limiting expenditures on investments.

The Cultural and Spiritual Legacy of Fiat Inflation

The notion that inflation is harmful is a staple of economic science. But most textbooks underrate the extent of the harm, because they define inflation much too narrowly as a lasting decrease of the purchasing power of money (PPM), and also because they pay scant attention to the concrete forms of inflation. To appreciate the disruptive nature of inflation in its full extent we must keep in mind that it springs from a violation of the fundamental rules of society.

Inflation is what happens when people increase the money supply by fraud, imposition, and breach of contract. Invariably it produces three characteristic consequences: (1) it benefits the perpetrators at the expense of all other money users; (2) it allows the accumulation of debt beyond the level debts could reach on the free market; and (3) it reduces the PPM below the level it would have reached on the free market.

While these three consequences are bad enough, things get much worse once inflation is encouraged and promoted by the state (fiat inflation). The government’s fiat makes inflation perennial, and as a result we observe the formation of inflation-specific institutions and habits. Thus fiat inflation leaves a characteristic cultural and spiritual stain on human society...

Reference for those who would like to learn the factual history of the Federal Reserve:

[Madison320]

Food is the textbook example of where price signals work. If the price of soybeans rises relative to wheat, farmers will plant soybeans to earn a higher profit. The extra supply will prevent soybean prices from running away to the upside and ultimately bring them back down.

inflation is a monetary phenomenon not something caused by speculators buying houses or businessman. Rising home prices are a market signal that encourages buyers to economize and builders to bring more supply to market. Those actions check unduly high prices. Speculators don't cause high home prices. They only speed up adjustment to whatever prices should be. And if a speculator does push up home prices and their economic forecast is in error, they will lose money as prices fall.

Higher prices will reallocate production to different areas, but it can't increase overall production. So in you example the price of soybeans will come down but at the expense of wheat prices.

Do you really think the US has increased it's overall productive capacity over the last 12 years considering how far left we've moved?

[ClaytonB]

Higher prices will reallocate production to different areas, but it can't increase overall production. So in you example the price of soybeans will come down but at the expense of wheat prices.

Do you really think the US has increased it's overall productive capacity over the last 12 years considering how far left we've moved?

This is not completely correct. All or nearly all of the monetary expansion by the Fed is concomitant with lower interest rates (because the injection-point of new money into the economy is the commercial banks, which are credit institutions... free cash for them translates to lower interest rates on loans), so the economy is, in fact, stimulated in terms of increased production (new investments -> increased production). But the problem is that this increased investment is not based on a prior reduction in popular consumer spending or other expenditures for the purposes of building capital. Therefore, the "price signal" of interest rates becomes distorted. In a sound money economy, savers increase savings in response to higher interest rates, and vice-versa. The artificial lowering of interest rates punishes would-be savers so they are forced to either invest or consume. So the entire economy is driven into a situation of simultaneous over-investment and over-consumption and this is the cause of the business cycle, as so well explained by Austrian economists...

[oyarde]

Fed Philly pres says employment significantly down , probably near 11 million jobs off. Atlanta Fed Pres says employers reluctant to hire because of future uncertainty and he expects Fed will raise rates in 2022 and not wait to 2023. Basically all signs are negative. Even if GDP evens up back where it was , there wont be much growth , congress still off the rails with spending , the Fed still buying 120 billion per month while pushing infrastructure drugs , inflation is high and rising , workforce participation is too low , there are more takers than givers. I see complete , total failure.

[Madison320]

This is not completely correct. All or nearly all of the monetary expansion by the Fed is concomitant with lower interest rates (because the injection-point of new money into the economy is the commercial banks, which are credit institutions... free cash for them translates to lower interest rates on loans), so the economy is, in fact, stimulated in terms of increased production (new investments -> increased production). But the problem is that this increased investment is not based on a prior reduction in popular consumer spending or other expenditures for the purposes of building capital. Therefore, the "price signal" of interest rates becomes distorted. In a sound money economy, savers increase savings in response to higher interest rates, and vice-versa. The artificial lowering of interest rates punishes would-be savers so they are forced to either invest or consume. So the entire economy is driven into a situation of simultaneous over-investment and over-consumption and this is the cause of the business cycle, as so well explained by Austrian economists...

That's a good point, although I'm not sure how much you can print and get the overall economy to overproduce, since there's a limited amount of resources.

If you had 2 guys on an island, one is a coconut farmer and the other is a fisherman, would a pile of money make them able to increase their production? Maybe to a certain extent.

[ClaytonB]

That's a good point, although I'm not sure how much you can print and get the overall economy to overproduce, since there's a limited amount of resources.

If you had 2 guys on an island, one is a coconut farmer and the other is a fisherman, would a pile of money make them able to increase their production? Maybe to a certain extent.

With such a small economy, of course, changes in the monetary commodity cannot alter production in any meaningful sense. One way to see how inflation in a modern economy increases production is to consider idle production resources (mothballed factories, dormant manufacturing lines, dormant mines, resting agricultural land, etc.) These resources can be brought online virtually overnight. They were deactivated in response to market conditions, meaning, prices fell too low to continue at the former level of production. But if prices rise, these resources can be reactivated and brought online. In fact, this is one of the major arguments that Keynes and other economists made for inflation during periods of unemployment -- we have all these "idle production resources" and we also have unemployed people, might as well put them to work on these mothballed production lines!!

You can see how this concept naturally extends into new investments, that is, the building of new factories, addition of new production lines, opening of new mines, development of new agricultural land, and so on. Investment tends to fluctuate inversely with interest rates since cheap money is easier to pay back much later, whereas business loans with high interest rates are at greater risk of creating losses on the balance sheet if the expansions don't turn out to be as profitable as expected.

It's crucial to keep in mind that these artificially cheap loans are driving increased investment in the absence of genuine price signals from consumers. The reason these investments were too risky/unprofitable prior to money-printing is that consumers were not demanding additional goods/services of that variety. We can say there is no real demand for this increased production. And yet, we are pouring real resources into these projects. So this is why the Austrians call this the misallocation or discoordination of economic resources caused by inflation. The price signals are being jammed or disrupted by the central bank which is creating an illusion of increased demand in the absence of an increase in real demand (by consumers). So we get container ships full of cheap Chinese garbage that nobody really wanted to begin with at absurdly low prices overflowing from the shelves of our stores. Material production has absolutely been increased, but at what cost??

All the resources that were poured into these massive investments to produce plastic knockoffs of quality products could have gone to other, more valuable uses (as judged by consumers) instead. Maybe we would have a larger artisan / handmade / homegrown / farmers market / bespoke economy today if it weren't for inflation. I'm not saying it's necessarily the case since these are very costly ways to produce goods. But the point is that higher price is how consumers signal demand for higher quality goods, not just higher quantity. And inflation is certainly driving increased quality in very select consumer goods --- those demanded by people working in the heavily inflation-subsidized financial/banking sector! So we see that the redistribution effect of inflation -- explained ad nauseum by the Austrian economists going back to Mises and even earlier -- is not "theory" at all, it's a brute fact that anyone can observe with their own two eyes.

As a starting-point, check out the two articles I linked above regarding the destructive effects of inflation. I like to point people to these articles to open their eyes to the broader destructive effects of inflation. The Keynesians/Krugmanites always want to reduce the discussion to some kind of abstract mathematical argument over arcane "models" of economics. But the majority of the real damage of inflation is not even measurable via monetary calculation. Inflation is an insidious corruption not only of the economy, but of culture, faith, family and the very structure of our communities...

[oyarde]

Along with Mays inflation you have personal income down 2 percent compounding the inflation problem while consumer spending is flat .Personal savings rate down over two percent . Just no positive news to be found.

[Matt Collins]

[Madison320]

With such a small economy, of course, changes in the monetary commodity cannot alter production in any meaningful sense. One way to see how inflation in a modern economy increases production is to consider idle production resources (mothballed factories, dormant manufacturing lines, dormant mines, resting agricultural land, etc.) These resources can be brought online virtually overnight. They were deactivated in response to market conditions, meaning, prices fell too low to continue at the former level of production. But if prices rise, these resources can be reactivated and brought online. In fact, this is one of the major arguments that Keynes and other economists made for inflation during periods of unemployment -- we have all these "idle production resources" and we also have unemployed people, might as well put them to work on these mothballed production lines!!

You can see how this concept naturally extends into new investments, that is, the building of new factories, addition of new production lines, opening of new mines, development of new agricultural land, and so on. Investment tends to fluctuate inversely with interest rates since cheap money is easier to pay back much later, whereas business loans with high interest rates are at greater risk of creating losses on the balance sheet if the expansions don't turn out to be as profitable as expected.

I think we agree on the main point, that screwing with the market price of money leads to all kinds of disasters.

I think the business cycle is more a case of misallocated production, not a case of more overall production. If someone tries to open a new mine they have to take resources from somewhere else, right.? I'm guessing if you looked at countries that tried to stimulate their economy, their net production actually decreased. I know that's the case for the US. Easy money has caused our production to collapse. Everyone is staying home and ordering stuff from China.

[ClaytonB]

I think we agree on the main point, that screwing with the market price of money leads to all kinds of disasters.

I think the business cycle is more a case of misallocated production, not a case of more overall production.

It's both...

If someone tries to open a new mine they have to take resources from somewhere else, right.?

In the short-run, yes, but in the medium-run (when the mine begins operation), the total amount of production in the economy will be increased. Aggregate production measures like "GDP" tend to conceal misallocation, however -- "Oh wow, national production has increased!" But there wasn't market demand for increased mining (for example), so the new mines that are opening are feeding into a market that was already at equilibrium, and they will have the effect of artificially lowering prices in that market. This will, in turn, "stimulate" all other secondary products that consume the output of this mine as a factor of production. For example, if the price of steel goes down, this will stimulate the building of more cars. But the pre-inflation condition was already one of market equilibrium, so the artificial lowering of steel prices has come at the cost of disrupting the market's price signals which were already allocating the resources in the economy to where they were most demanded. Thus, inflation is a "jamming" signal. It shuts down the coordinating effect of prices in the economy, necessarily leading to misallocation/discoordination.

I'm guessing if you looked at countries that tried to stimulate their economy, their net production actually decreased. I know that's the case for the US. Easy money has caused our production to collapse. Everyone is staying home and ordering stuff from China.

In the long-run, absolutely. The most apt metaphor would be performance-enhancing drugs. They really do enhance performance. But they do so at the cost of long-run health. The body is not designed to sustain such artificially stimulated levels of activity, diet, exercise, etc. so the body's systems wear down at an accelerated rate -- accelerated aging (and ultimately, death). Of course, the economy is not exactly like a body, but the metaphor is serviceable.

[oyarde]

Fed still buying 120 billion per month . New jobs report out . Unemployment went from 5.8 to 5.9 . Markets up as that is perceived as good news .

[oyarde]

US jobless claims tick up to 373K . At some point here the Fed is going to throw in the towel on employment dreams , go back on everything they have said all along , dozens of times and raise rates over 1/4 percent. Clearly they have no idea what they are doing ,The question is how will that effect the markets ? Because right now the Dow is poised for 35K by Tue.

[oyarde]

CPI up another percent in June , most in 13 years . West Texas Crude and Brent Crude both up again over 1 1/2 percent ea . Gold ( and silver ) , the only bargains out there never reached higher than 1818.40 . On another continent , South African mining industry grows 21.9 percent in May .

[Warrior_of_Freedom]

It's like a bad episode of Shark Tank. "I'll give you $5,000, but you pay 20% more for food in perpetuity."

[oyarde]

US Wholesale prices post largest 12 month jump on record . Producer Price Index inflated 7.3 percent . . All but .8 percent of that has been racked up since December.

[oyarde]

US retail sales down 1.7 percent in May , up .6 percent in June for a combined total of negative 1.1.