If you become more valuable to your employer each year as you get more experience, then it would make sense that your pay increase will be higher than inflation. It will keep exceeding inflation until your value stabilizes (or only modestly increases). Eventually you will retire, a less senior person will take your position (internally or externally) and then another take their position etc., ultimately leading to an entry level vacancy which offers a lot less money than what you were being paid. So, overall the average salary increase may be the same as inflation.
Increase government debt and the Fed buying assets (treasuries and other securities) on the open market.
I want to be clear that inflation has been going on for over a decade IMO. Real estate, businesses, and other capital have become more and more valuable over the last decade as the Fed worked to stimulate the economy. In my opinion the Fed really stimulates wealth creation and not economic activity. The crypto bubble is a sign of there activity. Tremendous price increases for stuff that is basically nothing.
Put money into the little peopleās hands and you stimulate what we are calling inflation right now. This shouldore accurately be called consumer inflation because it is quite different than wealth inflation described above. Consumer inflation can only occur by putting money into consumers hands. Weāve already stopped doing that and itās going to take another year or so for prices to reach equilibrium (outside of energy which is always volatile anyway).
The only thing the Fed can do is top wealth inflation. Unfortunately that will stop investment into the economy and trigger a big recession. The legislature could quickly stop consumer inflation by adding 5ish% to income taxes at all levels of pay. That would slow consumer activity without stopping corporate investment. The economy IMO will be better off in the long and short run with an increase in the tax rate. The Feds way just causes waves so we will oscillate back and forth between recession and boom for maybe a couple of decades much like we did throughout the 80ās and 90ās.
All this means monetary policy has a lot to do with where the pipe is shooting the money out of. The Fed is going to largely take and give money to investors and wealth holders. Taxation and federal giveaways are the way to take money and give money to consumers.
In past spirals the problem is neither side knowing what inflation next year will be. Employees will push for more to avoid the risk of losing purchasing power. Employers will give it, then pass it on through even higher prices. This continues until thereās a recession.
My understanding of German hyperinflation was that it was a deliberate ploy to pay off war reparations. There were a lot of factors leading to the rise of Hitler. Hyperinflation has happened in many countries throughout history and does not always end up with a dictator in power.
Itās always destabilizing.
1 Like
Youāre worrying about hyperinflation though. Thatās not what we have going on. I would even posit that absent all monetary policy we would be seeing around 4%-5% inflation right now just because of lifestyle changes and oil price shock from the Russian Ukraine conflict. Monetary policy just made it worse. We basically undershot fiscal policy in 2008 and overshot it in 2020. What we risk doing with bad interest rate policy is causing long term problems in investment and employment.
Everyone would rather have a job and pay higher prices than lose their job and see prices return to normal. I think we are risking throwing the baby out with the bathwater here.
Considering some of the wingnuts running for officeā¦do we really want to risk it?
I agree with you that increasing taxes looks like a better way to slow the increase in consumer prices than raising interest rates.
If we say that the Fed creates money by buying bonds with newly created money, then I agree with you that hyperinflation isnāt a concern as long as the Fed decides to not buy ātoo manyā bonds.
I think it is confusing to say ārealā inflation is the increase in the cost of assets, not the increase in consumer prices. The ārealā definition of words in general usage is the most common use. You could be specific and say āasset price inflationā and āconsumer price inflationā if you want to tie the word āinflationā to asset prices.
I agree that if the Fed buys bonds it raises the price simply because there is another buyer in the market. Higher prices on existing bonds are automatically lower effective yields due to the price/yield connection. Lower yields on bonds push investors to look for return elsewhere, increasing the demand for stocks on increasing price/earnings ratios there. This encourages new bonds and new stock offerings and that increases economic activity which results in more dollars in consumers hands. So Iād say that although the immediate effect of the Fed buying bonds is to increase the price of bonds, the result after a couple steps is more economic activity.
Iām not saying real. Iām saying we only call things inflation when they impact consumer prices. We donāt call home prices tripling in a decade inflation. I posit that is in fact inflation.
A lot of my progressive friends are turning moderate now that the homelessness is showing up in their front yard.
I can see Hitler being elected by both parties in America when hyperinflation hits.
Iām saying that the increase in consumer prices is different from the increase in bond prices. We should have different words for them to recognize that. If you want to use inflation for both of them, put adjectives in front.
Gotta disagree. The Congress authorizes spending. The Federal Reserve sends the funds (bank transfers, if you will). The Treasury directs the flow.
Increasing debt has no impact on money supply. The transaction is simple. The buyer sends in dollars (greenbacks or bank transfer) and gets a bond of virtually the same amount. The only difference being: those bonds pay interest, greenbacks do not. But no net increase in money. Itās like changing a twenty for four fives.
Apart from Congress, the money supply can also be changed via Reg T or banking regs wrt the total loans allowed as a factor of Tier one bank capital. Reg T has to do with margin requirements on equities. In either case, the effect is to have banks and brokerage firms create money by making bigger loans.
A lot of progressives live in the āgood part of townā. That saying in and of itself is not progressive and has always struck me as ironic.
Disagree. Interest rates create money in debt scenarios. A $10000 bond is worth more money than $10000. Itās $10,000 plus interest.
Also when The Fed buys that bond from the Treasury the government just created money out of thin air.
Iām just going to leave this link here as an example of the beginnings of an inflation spiral.
As I asked when people were proposing a minimum wage of $15, why stop at $15?, why not go for $75? Unless the Fed has some success, it looks like weāre on our way.
Why do you hate working people?
2 Likes
I guess we will have to give up the best job market in history so we donāt have to pay $5 for gas. Oh wait monetary policy and gas are not connected.
The federal minimum wage of 1968 of $1.60 an hour if adjusted for a wage index used by Social Security (with guesses of 5% for 2021 and 2022 would be about $18/hour). Austin has a cost of living index, 20% higher than the US base, and 30% higher than Texas. Adjusting for overall wage growth and cost of living differential takes you to about $22/hour If one took economic productivity growth into account and cost of living differential one would be at about $28/hour.
Iām sure Ranger would argue that the $1.60 in 1968 was way too high.
3 Likes
Actually there is a component for rent and increases in home values and increases in interest rates on mortgages will increase the rent component, not just increases in rent charged my landlords.
When the Fed buys mortgages as they did for most of the past decade or so, do they pay the banks cash money (wire transfers) for those assets? The Fed then also collects the interest and principle which is paid on those mortgages (or bundled collateralize assets). But the bank got cash that they can now lend again.
Isnāt that different than when the bank sells the mortgage to an investor who has cash? The Fed simply created that cash, it did not exist prior to the Fed sending it to the bank, did it?
3 Likes
I think you took cost of living into account twice.
But yes, the federal minimum wage is relatively low right now.