@shoshin We just going to ignore Trumps historically massive QE he engaged in from the start of the coronavirus onward? Not only was it the most massive attempt at QE in history but QE is known to cause inflation in the years that follow it (which is why its rarely used).

That isnt to say Biden is innocent, he should be reducing spending (he is not) and using that money to pay off the QE induced debt Trump created. This could ultimately reverse the ongoing effects... But to blame biden along is just naive.

@freemo @shoshin The QE is a lot older than Trump...
It's an accident waiting to happen for ten years.
And it's happening in Europe too.

@frank87

QE has taken place prior to Trump, yes. But not anywhere at the scale that Trump did it. Though past QE was still significant and also a mistake.

@shoshin

@freemo @shoshin It's huge indeed (Google says https://www.atlanticcouncil.org/global-qe-tracker/ )
Still, I don't think without Trump's QE the problem would be smaller.
For years, the QE-money stayed in banks and tax paradises. It had to land in the real economy some day. And now it does: first in real estate(everybody with too much money invests in real estate, ask Trump), now it's going everywhere.

@frank87

QE causes inflation, QE delays and under the right circumstances might prevent depression.

So while the inflation is absolutely much worse due to Trump's QE, and therefore he deserves a lot of blame for it, the truth is if we didnt have QE we wouldnt have inflation sure, but we would be in a very serious financial depression right now. That might solve the inflation issue but that isnt much better a situation to be in.

@shoshin

@freemo @shoshin It was the argument: QE to fight the sudden depression caused by the lock-downs. So now is the time to pay the bills.
But still, there already was a considerable pile of bills from pushing the economy since 2008.

@frank87

the nature and volumn of Trumps QE well exceeded that of 2008. That said the inflation that resulted from 2008 already come and went, it doesnt last forever, so a moot point either way.

@shoshin

@freemo @shoshin For years we've had press releases about a lack of inflation (2% a year is the ECB goal).
The Dutch prime minister told everybody to stop saving and buy a car, to get the economy running.
Now people will have to spend their savings to fight inflation...
https://data.oecd.org/chart/6uyT

@frank87

Yup, exactly my point. For years now the 2008 QE was no longer driving inflation like it was int he years immediately following it. We were doing good and inflation was no longer a concern. Then when CV hit and Trump relied on massive CE of a nature and magnitude never before seen now we are are seeing, as expected, unprecedented inflation rates again as a direct result in the wake of that QE. This will likely continue for another year or two before the QE will be far enough behind us to no longer be driving the inflation.

@shoshin

@freemo @shoshin I'm afraid people spending their saving, will increase inflation (by "fighting inflation", I meant fighting inflation pushing them into bankruptcy, not stopping Inflation. "Surving inflation" would be better phrased).
We could be in real trouble.
It's not the creation of money causing inflation, it's people spending it.

@frank87

Thats not really how inflation works. Spendingyour savings on someone else just makes it their savings. The total amount of money people have in savings or in general is unchanged.

In fact for most transactions you generate wealth while keeping the total amount of money the same therefore on its own this causes deflation not inflation, even if its bad for an economy overall.

You seem to be falling into the general fallacy that anything bad for an economy creates inflation, this is simply not the case.

@shoshin

@freemo @shoshin I'm afraid you're not using the usual definition of inflation. The thread was started with a list of rising prices. The common definition depends on the price level. Not some highly volatile money-amount divided by some abstract definition of wealth(most companies try to keep just enough money to pay next months bills).
Prices are made when stuff is sold. Keeping your money in the bank, won't have any influence on prices and inflation.
When you spend extra saving, the more expensive options are bought too, so general price level will rise.
That's why the earlier QE didn't cause inflation. The money went to fixing bank balances, and investors not buying stuff.
Now people start spending money because stuff is getting expensive and you don't get interest on your savings.

@frank87

Those two are the same thing, or to put it another way have a cause effect relationship. Wealth is the value of your assets, for example the number of cows a farm has is part of its wealth. How much physical money you need to equate to a certain amount of wealth is effectively the price level of objects.

If I spend my money and buy things the reason prices dont rise is because by buying things you allow more things to be manufactured as well, so while the act of buying things increases the supply it also increases the demand, and therefore do not necessarily have inflation.

You are also incorrect about stating that the earlier QE didnt cause inflation. It not just caused inflation but caused one of the highest rates of inflation we had seen at around 5.5%. Thankfully we stopped the QE and after a bit of time the inflation rate dropped back to normal until Trump's QE caused it to surge again.

@shoshin

@frank87

The best way to demonstrate in a simple example why spending money does not cause inflation but rather deflation is to look at the common example using a farmer.

A farmer has 3 cows. To hold onto those cows costs the farmer feed and no feed for the cows. He is the only cow farmer in town. If he does nothing and no one buys his cows then they will slowly die off and the number of cows in town will decrease and thus the cost for cows will go up. So everyone sitting on their savings and buying few cows over time causes the price of cows to rise, if we see this with all the goods in the market this is inflation.

Now in the scenario where everyone is emptying their bank accounts to buy cows now the farmer sells one cow and has enough money to buy plenty of feed for the two remaining cows. In fact he has extra feed now so he can even start breeding them. Over time he now has 10 cows. The overall wealth has increased 3.33 fold starting with 3 cows and going to 10. There is more wealth. The amount of money remains fixed. Since there are more cows than before cows are now cheaper as a result of the increase in wealth. Therefore deflation has occurred.

Spending over time increases wealth in a population. If the money supply remains fixed while a populations total wealth supply increases that results in deflation.

@shoshin

@freemo @shoshin Why would the price rise in the first example? No cow is sold, they are priceless.
In the second scenario the cows are sold, prices are set, and they can go up, or down (because the town has a limited taste for beef).

A counter example: a farmer wants to start a farm, gets $1000 from the bank, and buys 10 calves, they become cows and he sells one of them for $1000. Gives the money to the bank.

The wealth of the farmer is 9 cows = $9000,-- (somebody else has another one, total wealth: $10000).
Total amount of money $0 : the bank created the first $1000, and its destroyed when it's payed. More wealth created, the amount of money didn't change, no deflation or inflation. 1 cow won't impact price levels.

There is no direct relation between the amount of money and the total wealth. Money is used in transferring wealth, most wealth is stationary.

@frank87

Because our farmer isnt the only farmer in town. Cows are still being sold just at such a slow rate he as an individual isnt getting any sales.

Your example fails because it forgets the fact that as the farmer sells cows he will breed more. So the more people buy cows the more cows are produced over time, deflation occurs.

I am not saying this to be condescending but as someone who has worked professionally modeling economic systems you have a **lot** of reading to do on the subject. We are discussing pretty fundamental concepts in the field here long since proven/established. Economies over time generate wealth.

If you wish to learn about the subject the technical term is "The velocity of money" and is a fancy way of saying "how much money are people spending relative to how much they have". There are equations dictating the immediate and long term effects. Short term (before new wealth has a chance to generate) you will see price levels increase, but long term those prices levels decrease as the wealth generation increases from the money flow. In other words as the assets/wealth increase the velocity of money will increase to follow it and the price levels will decrease in response according to the V_t=PT/M equation.

Also the fact that you think wealth is stationary suggests to me you may not understand what wealth really is. It is neither stationary nor fixed. Wealth grows at tremendous rates year after year and is quite mobile.

@shoshin

@freemo @shoshin My example was one instance, with two financial transactions for different valuables: it's totally independent from price levels.

The velocity of money is part of my point: the velocity of money is what makes the difference in number of transactions. The total amount of money is of little consequence because it can be spent lot of times (If you buy something from me for $1 and you sell it to me for $2, GDP grows $3 )

But indeed it's pretty basic. It's almost like the trick question from the solid state physics professor: "What's the color of silicium?"

@frank87

Literally the definition of the velocity of money is related to the price level (a change in which is inflation) and the money supply. Those are the three major values in that equation. To claim the money supply has little to do with it is at odds with literally the most basic and accepted notions of how money works.

Yes your example only had two financial transactions and left out what happens over time. Thus why it doesnt reflect real life. In real life a farmer with more money and plenty of sales breeds more cows (increases their wealth) and that is essential to understanding why as the velocity of money increases **over time** it results in deflation not inflation.

@shoshin

@freemo @shoshin
Money supply, is it the amount of money? Or is it something going around in your models.
It does reflect real life: It's a slice of life. Little animals get big eating the grass in the meadow. No money, creation of wealth. Trying to complicate stuff is just a smokescreen. There's a life outside of the banks 😉

@frank87

For starters its not "my model", it is literally just the definition for how to measure money velocity.

We are talking about all money when we talk about inflation, specifically called MZM. When not talking about inflaction other types of money supply like M1 or M2 might be used but those give different meanings and wouldnt apply here.

@shoshin