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Inflation

ConservativeLibertarian
Posts: 54
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3/31/2014 10:24:13 PM
Posted: 2 years ago
I need to write a paper on the current factors influencing the rate of inflation in the US and the results of that rate as it pertains to markets, investment, economic growth, etc. I have a few, but would really appreciate if someone could brainstorm some ideas with me.
wrichcirw
Posts: 11,196
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4/1/2014 4:21:14 AM
Posted: 2 years ago
At 3/31/2014 10:24:13 PM, ConservativeLibertarian wrote:
I need to write a paper on the

current factors influencing the rate of inflation in the US and

1) Debt. As long as debt is difficult to manage, the US will pursue inflationary policy in order to "inflate that debt away".
2) Deflation. Currently the US is in the midst of a deleveraging cycle, where we get debt down to manageable levels. This is deflationary, so US policy will compensate (QE). These two opposing forces largely cancel each other out, so we get the benign inflation rate.
3) Housing. Housing debt is what is difficult to manage. One way to get housing debt easier to manage is to stabilize debt-equity ratios, and one way to do that besides deleveraging is to inflate housing prices. Bernanke's policies have largely been aimed at MBSs and such, which keeps mortgage rates low, which keeps housing demand higher than it otherwise would be, which causes home prices to rise (or not be lower than they would be). As the housing sector recovers, inflation will become more pronounced.

the results of that rate as it pertains to markets, investment, economic growth, etc. I have a few, but would really appreciate if someone could brainstorm some ideas with me.

This is probably much easier for you to figure out, this is standard econ 101. Low inflation rates will typically be concomitant with low interest rates, and the latter induce "animal spirits", which are all positive for "markets, investment, economic growth, etc..."
At 8/9/2013 9:41:24 AM, wrichcirw wrote:
If you are civil with me, I will be civil to you. If you decide to bring unreasonable animosity to bear in a reasonable discussion, then what would you expect other than to get flustered?
DanT
Posts: 5,693
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4/1/2014 7:46:41 AM
Posted: 2 years ago
At 3/31/2014 10:24:13 PM, ConservativeLibertarian wrote:
I need to write a paper on the current factors influencing the rate of inflation in the US and the results of that rate as it pertains to markets, investment, economic growth, etc. I have a few, but would really appreciate if someone could brainstorm some ideas with me.

First it is important to know what inflation is. Allot of people mistakenly think inflation is any growth to the monetary supply, when inflation is really just a rise in prices.

Inflation = the % change in price = the % change in the monetary supply + the % change in the velocity of money - the % change in the volume of transactions.

In other words, inflation occurs when the monetary supply grows faster than the volume of transactions.

When prices are flexible the velocity of money is constant, but when prices are sticky the velocity of money must fluctuate in order to ensure that Money x Velocity = Price x Transactions.

In the long run prices are flexible, but in the short run they are sticky; this is why the velocity of money is constant in the long run but not the short run.
"Chemical weapons are no different than any other types of weapons."~Lordknukle
slo1
Posts: 4,320
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4/2/2014 12:01:16 PM
Posted: 2 years ago
Already been said well by wrichcirw and Dan T. Here is how I think of it.

- Monitary inflation via continued increase of money supply.
- To DanT's point if results in investment, velocity, and increase transactions, prices will go up. One of the reasons this recovery has been so slow despite the Federal Reserve having over $4 Trillion on their balance sheet is that the increased money supply did not result in an increased velocity of transactions.

- The Fed's actions of increasing money supply also:
- Tends to coincide with deficit spending by the treasury.
- The Fed buys existing Treasury debt off the market, which should drive up interest rates, but the Treasury issues new debt to satisfy the overall demand keeping interest rates low. The risk is that the Treasury issues enough debt to lower the markets perception on the quality of debt thus demanding a higher interest rate for the increased risk of default.
- Lastly the increase money supply results from Banks selling treasury debt they hold to the Fed. Their cash account goes up in their Fed account. This increases the working capital they have to lend out in the world.

As you can see the entire scheme needs some balance, increased money supply, lower interest rates, easier access to capital for businesses to do something with it.

Toss in the new thing the Fed started doing, which is not only buying Treasury debt from banks, but the also buy mortgages held by banks. This also helps free up money that can be lent out to the world and directly supports the mortgage industry.

Rarely spoken about, the entire monetary process is one of trickle down. More money in the market is great, but somebody has to do something with it to have actual value in the economy. Everyone talks about investment, supply side, business, but what happens when the money is not being used with velocity? The answer..... we get stagnant low growth and a boat load of debt with it.