Economics Nerd Central

[PROCNA2018]

View attachment 11461

Definite growth in graphs on that graph and looks like it could continue quarter on quarter in an adverse trend.

 

[How bad boy]

What about supply shortages in commodities? There was a school of thought that post Covid these shortages would lead to a temporary blip in inflation. What’s your thinking on this now?

And what is “stagflation.”

Supply shortage in commodities explains only some of it IMO.
As an example, while oil is relatively high, it's still in and around the price it was between about 2011 - 2014, which adjusted for inflation was significantly higher.
Of course they could create blips, but I think there are too many other indicators of a different overall root cause.
House price inflation is a good one:




You can see that ahead of the crisis, house price inflation had basically halted, but as things opened back up, it skyrocketed.


As for Stagflation, I believe it's something to do with this:

 

[How bad boy]

Agreed but for us economic simpletons can we not just have a "......Liam has a euro. If the price of a chomp is 20c and inflation goes up to 5% - will he really have to pay 21c for a chomp like?..."

Then we can build up to the graphs and spreadsheets and Keynes v Classical stuff at Higher Level

Meh, I'll do it if I feel like it. Probably as part of a stupid long rant on something else. Like what exactly is inflation measuring anyway? And what sort of measures are right? Cause inflation for you is not the same as inflation for me.

Actually, one of my issues with inflation explanations you give above is the inflation rate for Liam probably isn't 5% unless Liam is some sort of weirdo who only survives on Chomps. Or whoever the fuck owns cadburys decides their only response to inflation is to increase the price by exactly the inflation rate is. Which is a bit of a problem if it's 20c and the inflation rate is 0.7%. Fuck off Cadburys, you're not allowed to charge people 20.14c a Chomp.
Liam's inflation rate very much depends on age, personal circumstances, etc...
If Liam is a retired gent living in a house he bought in the 70s, with an electric car and solar panels who loves to have a single chomp every christmas to remind of his youth, his inflation rate is very different to that of young Liam who is living away from home for the first time in a rented hovel, and has just discovered nobody can stop him attempting to survive on Chomps and Lilt while hammering around town in his 2003 Subaru Impreza.

And that's why we have different baskets of goods for different inflation measures...

 

[PROCNA2018]

Meh, I'll do it if I feel like it. Probably as part of a stupid long rant on something else. Like what exactly is inflation measuring anyway? And what sort of measures are right? Cause inflation for you is not the same as inflation for me.

Actually, one of my issues with inflation explanations you give above is the inflation rate for Liam probably isn't 5% unless Liam is some sort of weirdo who only survives on Chomps. Or whoever the fuck owns cadburys decides their only response to inflation is to increase the price by exactly the inflation rate is. Which is a bit of a problem if it's 20c and the inflation rate is 0.7%. Fuck off Cadburys, you're not allowed to charge people 20.14c a Chomp.
Liam's inflation rate very much depends on age, personal circumstances, etc...
If Liam is a retired gent living in a house he bought in the 70s, with an electric car and solar panels who loves to have a single chomp every christmas to remind of his youth, his inflation rate is very different to that of young Liam who is living away from home for the first time in a rented hovel, and has just discovered nobody can stop him attempting to survive on Chomps and Lilt while hammering around town in his 2003 Subaru Impreza.

And that's why we have different baskets of goods for different inflation measures...

Being serious, how can inflation be different? I understand the impact of inflation is different if you have won the euromillions as opposed to living on chomps and lilt - but surely the result of a 5% inflation rate is the same irrespective of your ability to withstand it?

Or am I just not getting it?

 

[How bad boy]

Being serious, how can inflation be different? I understand the impact of inflation is different if you have won the euromillions as opposed to living on chomps and lilt - but surely the result of a 5% inflation rate is the same irrespective of your ability to withstand it?

Or am I just not getting it?

No, and perhaps this comes back to your original point about the link between inflation and interest rates.

There is no one inflation rate. The most obvious example of this is that there's CPI and RPI.
i'm gonna copy+paste an explanation here that will hopefully illustrate it better (https://www.thetimes.co.uk/money-mentor/article/rpi-versus-cpi/):
"The consumer prices index (CPI) measure of inflation surged to 6.2% in the year to February, its highest level in 30 years, due to higher food and energy bills.

The retail prices index (RPI) is an older measure which tends to be higher than CPI, measuring 8.2% up from 7.8% the month before.
...

• RPI includes mortgage interest payments: this means it is “heavily influenced” by house prices and interest rates
• CPI measures take no account of housing costs: but factors in all the other goods and services

You'll find if people are selling you something (e.g. phone contract), they'll typically say the contract will rise with RPI, but if someone is paying you something, e.g. pensions, they'll say they're raising in line with CPI.


The results very much depend on what's the mix of stuff you care about. Personally, I'd say an inflation measure that doesn't take major account of housing costs is nonsense (there is a variant of CPI - CPIH), but again, the variability can be enormous.

It's an estimate, there isn't really one price level per-se in the country, it may seem simple, but it's really, really not at all simple. The more you think about it, the less obvious this shit becomes.

Here's an example that pulls out how this stuff becomes very complex, and also how it links back to interest rates.

Say my house is worth £500k. Someone buys the identical house next door for £1M.
How much has my house risen in value? is this inflation? How would we reflect that it definitely has gone up, but it's not completely clear why? Is that £1M a once-off? Or is it now the new value of my house. In fact, my house is in better nick with a nicer garden than next door, so is it worth £1.1M? Your inflation measure needs to take account of all of that.

Now where it comes back to interest rates is my house is actually worth exactly how much someone is willing and able to pay for it. No more, no less.

If the sale of that house next door was reflecting a mental housing market, but that's because interest rates were basically zero, but now interest rates have been raised to 20% annually, then how much is my house worth now? Almost certainly a lot less than £1M, as the ability for people to borrow the money has reduced.



Price levels are an indication of supply and demand for money. If I have a lot of money because there's a big supply, then I can spend more, price levels rise. If I have less money because the supply has reduced, then I can spend less and price levels drop.

Currencies have the same supply and demand. If the Bank Of England is offering a 5% interest rate, and the ECB is only offering a 1% interest rate, and I think the chances of the UK defaulting are low, what I'm going to do as an investor is to buy loans from the BOE and sell my ECB loans, increasing demand for sterling and decreasing demand for euros. That will strengthen sterling, making british people relatively richer compared to their neighbours. Domestically, with higher interest rates, there's probably less demand for those loans from the BoE.

But here's another spot where it gets messy. here's the equation for GDP
GDP (Y) = G (government spending) + C (Consumption spending) + I (Investments) - S (Savings) + NX (Net Exports, Exports - Imports)

Taking the above impact on the UK (cause it's kind of the situation today as the UK is raising interest rates faster), with the currency going up, your exports are more expensive reducing demand, imports are cheaper increasing demand, domestic investment is lower because money is more expensive and savings increase because there's more of a return to savings, all of which drops GDP.


And we come back to that equation I cited at the start:
V*M = P * Y

By raising interest rates, you're trying to drop the money supply (M) and that may well result in lower P (Inflation, what you wanted to lower) and Y (GDP, which you didn't want).

Now if you're a bit crap at this and don't compensate for this, e.g. by raised government spending or driving investments over savings, you might also find that because of other factors such as external commodity price issues or price rise expectations have become built into a number of self reinforcing systems in the economy, you can end up both screwing GDP and inflation carries on rising. Then you've potentially got stagflation.

 

[PROCNA2018]

Believe it or not I understood a good portion of that - thanks for having the patience to post it.

 

[Meridian]

Bank of America have suggested there may be a recession on the way based on traders purchasing short term bonds of late.

 

[How bad boy]

Bank of America have suggested there may be a recession on the way based on traders purchasing short term bonds of late.

That wouldn't be surprising if the fed is looking to tighten up monetary policy.

The current Fed funds rate is a smidge over 0.3%

Current US inflation is 8.5%.

If you follow the Taylor Rule (created by John Taylor as a way of setting guidelines for interest rate setting for central banks), US interest rates should be above 10%*

Interest rates are definitely too low in the US. Way, way too low. Raising them may well trigger a recession.

Interest rates are definitely too low in the Eurozone too. If you're going to remortgage, do it quick. If you're going to buy a house, well, think about the impact of higher interest rates on the cost of it...



*by my calculations on current static data, approx 14% but I'm not as confident plugging in the right variables. John Taylor himself said a little above 10% in an interview in mid feb but inflation and growth are higher since then, so I think it's probably about right.

 

[How bad boy]

Looking like the Bank of England is going to hike rates again, but really up to only 1%:

Fourth rate rise in a row looms at Bank of England as job market remains red hot

City economists think the Monetary Policy Committee will hike the UK’s interest rate to 1% at its next meeting on May 5

www.standard.co.uk

I really think the ECB are going to have to hike rates ahead of when they thought.

Here's the minutes from their policy discussions for last month:

Monetary policy decisions

The European Central Bank (ECB) is the central bank of the 19 European Union countries which have adopted the euro. Our main task is to maintain price stability in the euro area and so preserve the purchasing power of the single currency.

www.ecb.europa.eu

Their reasoning for keeping rates low was:
"Any adjustments to the key ECB interest rates will take place some time after the end of the Governing Council’s net purchases under the APP and will be gradual. The path for the key ECB interest rates will continue to be determined by the Governing Council’s forward guidance and by its strategic commitment to stabilise inflation at 2% over the medium term. Accordingly, the Governing Council expects the key ECB interest rates to remain at their present levels until it sees inflation reaching 2% well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at 2% over the medium term."

Think with inflation in the Eurozone at 7.5%, it's hard not to reason that there's a significant risk of overshooting that target of 2%...
They're meeting tomorrow, I'd be surprised if they don't announce a rate increase.

Looking at the Irish bank rates, they've already priced in the increase.


There were banks in the UK offering below 1% fixed rate mortgages. Some of the rates on offer last summer were nuts, Natest were offering a 5 year fixed rate mortgage for 1.17%. The BoE rate will almost certainly be 1% next month.

I really don't see how this can't result in a reduction in house prices in the UK.
As for Ireland, let's see what comes out of the ECB tomorrow, but again, if you can't borrow shittons of money for cheap, then you can't pay extortionate prices for houses...

 

[PussyinBoots]

There is a current bout of inflation happening globally.

I have a theory on why it is happening. Not really seen much commentary on it that covers this aspect.

I think it's because of the changing velocity of money, coming out of Covid.
This is the velocity of money equation:

I realise more explanation is needed as it's probably not obvious what the hell I'm wittering on about.
It's more obvious if you rearrange the equation to P * Y = V * M.

That hasn't helped much has it?

Right, P is essentially inflation*. Y is GDP. M is how much money goivernments have printed.

Normally, if you print a shitton of money (M) without changing the velocity of money, you end up with GDP growth (Y) or Inflation (P). Usually inflation.


During Covid (and the financial crisis, I'll come back to that), there was an enormous amount of money printed and basically given to governments who then gave it to people to spend on things like furlough payments.

But also during Covid, the velocity of money fell off a cliff. One way of explaining this is that if I spend say €20 in a restaurant, €5 might go on staffing costs, €10 to suppliers, etc...
Then the staff go for a night out, and spend half that €5 in the pub next door. And of that, €0.5 goes to the pub staff. Of the €10 to suppliers, €2 goes to local farmers, €5 to staff, and so on down the line. So that €20 spend turns into many, many multiples of spend with different people, companies, etc...

That chain of transmission of money through the economy was broken in Covid, the speed of moving money through the economy was greatly reduced.
Now if the money supply had been held constant while that velocity dropped, then you'd see GDP or Price Levels drop. We saw GDP drop, don't think there was any deflation noted.

This is now unwinding. The M2 money supply according to the ECB rose from €5.7tn to €12.1tn between Feb 2020 and Feb 2021. Totally the right move.
But it's still at 6.7 according to the ECB (https://sdw.ecb.europa.eu/browse.do?node=9691573).
That's a good bit higher than Feb 2020 (17%), but I'm also convinced that those metrics are lagging rather than leading indicators, it takes a significant amount of time for the system to react when you turn on and off the taps. M

So basically, there might be a burst of inflation, but it's unlikely to be long lasting in the EU.

The US is possibly** in a different place, M2 has risen threre from $15.5tn (feb 2020 https://ycharts.com/indicators/us_m2_money_supply) to €21tn and hasn't really been unwound.
The UK is probably in a smilar position too, from £2.4tn to £3tn, which again hasn't been unwound.


Its not quite as simple a story as all that, of course Brexit is a factor in the UK and EU, with war doing shiz and China's incessant locking down also not helping matters.

But on this occasion, I think Milton Friedman's maxim that “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” is broadly correct. I don't think it's always correct though, because the velocity of money is a thing.


*Well it's not, but it is. I've already typed too much here.
** Oh man, money supply measurements. So the US Fed stopped releasing M3 quite some time ago, it was too hard to get right, M2 is a pretty narrow definition of the money supply. So it can be misleading as to what's eactually going on in the real economy. It's ok as a proxy, but really only that. And it's a simple sum, not a model that captures the reflexiveness of the money supply. And I'm using the Fed M2 rather than something like the Divisia M2 rate, which I'm sure anyone who is a proper monetarist would absolutely cringe at. And of course, GDP measures are pretty difficult too. As are inflation metrics, which inflation measure to you use? Ah Macroeconomics, you're a tricky mistress....

Can you tell me is it a good time to but crypto, and if so, what crypto should I buy?