What is Actually Causing Inflation? A Deep Dive (ft.  

Thanks Alexander! I appreciate it.

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Yeah that is a big part of this debate for sure.

Love it! Thanks!

The problem with that quote is that it is misleading as if Keynes doesn't really care, but the full quote of John Maynard Keynes is: But this long run is a misleading guide to current affairs. In the long run we are all dead. Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is long past the ocean is flat again. it really takes on a different meanings and more of a purpose for economists to understand the scheme of things.

@@peterkratoska4524 but it's still fundamentally wrong

@@Bolognabeef which part is wrong? That we're all dead in the long run or that economists should do more than tell us the storm has passed.

As user @DavieB noted, there is considerable controversy over what transitory actually means. In this video we have been (perhaps too) generous to team transitory in defining it as till after the pandemic ends.... Whenever that may be.

Noted by @AlbertS, the positions of people in team permanent are in general very different. Schiff, Weidmann, and Summers have very different world views and on what is driving inflation & might make it "permanent."

New data on labour markets in the US (EU much less) does seem to point to a labour market that is increasingly hot... the risk of this is that it could start feeding into expectations at some point. I'll keep an eye on it.

While the latest U.S. inflation numbers are consistent with what we said here (pandemic went on longer than we though in November), there are now signs that inflation is being driven by more mainstream categories. In other words, there are now more signs of demand-pull and expectation driven inflation.

Noted by viewer @Simon Bond: "As late as the 1970's the Merriam-Webster defined inflation as the increase in the money supply. "

Thanks. Love to hear that! I feel that I had to include him because this is a RU-vid video and he is massively popular in the YT space, not so much outside of it (partly for the reasons that you mention).

Absolutely agree, this is actually the one of the only RU-vid channels about economics I actually watch even though my formation goes straight to economics, It's simply an extreme level of bias on social media, even those that I kinda like have too much bias (I more left wing shall we say, but I really don't like other left wings on economics, but I find right wing usually worst on bias [cof cof PragerU cof cof]).

There's an old saying - put two economists in a room, and you'll have three opinions.

@@davidchou1675 🤨

"Bro"?

The 30 sec think is too true. Sadly

@@Antowan So NOT true. I watched a full minute. (at 2x speed of course)

If I am 100% honest, I did think twice if I should watch a 1hour video and I almost skipped. But I am very happy that I didn't. Great video also for someone who is not an economist.

Bruh, you can't be saying that after 'The Line Goes Up' by Folding Human went viral. And this is almost on the same level of quality, it could happen.

Larsen Wrong, this is a simplistic, superficial, and inaccurate treatise of the subject. Find a dictionary from the 60's or the 70's and look up 'Inflation'. The term has evolved in error, to be synonymous with 'rising prices', and that is woefully simplistic, and erroneous.

Definitely agree with what you're saying. I love that he can just deliver the information straight and not get bogged down in issues of "will this affect my views" and such.

You are experiencing the Dunning-Kruger effect :). Don't get discouraged by it. It is a good thing.

​​@@MoneyMacro i hope that's why, but it seems like every economist has a different opinion than the next. The only consensus is among the MMT folks, and while they have an interesting argument, i can't buy their framework. Am i wrong on this outlook?

there is no class warfare. people don't go around thinking "X people of my income range is my team" except if you're indoctrinated by Marxist ideology to do so (so if it does exist, it's being waged by the poor, not by the rich) Back to the sane world, the way things actually works is everyone just seeks profits, and different people have differing levels of ability to get it. The people that have great ability to get it are then post ex facto called a class. and that's the key part - post ex facto. That makes this warfare paradigm is a tautology. And that assumption underpins the rest of the theory. So that's the intellectual equivalent of an elephant doing a balancing act on a tricycle being balanced on an apricot seed.

@@gwho do you like chelsea's, oxford's or mukluks? ru-vid.com/video/%D0%B2%D0%B8%D0%B4%D0%B5%D0%BE-Ezthd6A3tiw.html

@@gwho Rich people doing what they can to stay rich by screwing over poor people IS class warfare. It's also the way capitalism works. If you don't have class warfare you don't have capitalism either.

It's good to hear different perspective but this is not the place to hear different perspective. Even in the middle of trying to supposedly explain the other side, at 18:40, he's inserting "rebuttals" from Joseph Stiglitz.

The effect on wages is the only time I have ever agreed with Stiglitz. The obverse of higher labor costs is higher wages. IMHO, that is a good thing. I also have an opinion about the difference in wage change in the US vs. EU. The US wage rate is closer to the supply/demand price point. This is due to the various labor laws throughout Europe, which cause a lower demand for labor relative to supply (this is manifested by the much higher unemployment rates in Europe vs. the US at the best of times). So raising the true demand for labor in the US increases wages. Raising true demand in Europe for labor has not brought price (wages) to the true price point. It should lower unemployment, though that is likely delayed.

Glad you enjoyed it!

Thanks. You raise an important point. However, purely from a visual perspective it can be really hard to show pretty big changes now if your chart starts at 0 always.... Tricky.

@@MoneyMacro Charts can start at whatever value you need. No one shows temperature graphs with 0 Kelvin at the bottom because it would be pretty stupid in almost all cases. 0 is just a value that is sometimes useful and sometimes not. There is no silver bullet.

@@thedj67 I don't disagree, but what kind of temperature graphs use Kelvin as their unit of measurement instead of Celsius?

@@pascalausensi9592 old school solar physics papers

Well, Joeri & Co. notwithstanding, the world seems to agree with your econ teachers. Inflation has continued, and gotten worse, exactly as Milton Friedman would predict. The quantity of money theory has proven itself, again.

Inflation is resuming due to the war now, not of supply chain problems. No heterodox or orthodox economist predicted such escalation. Also Friedman quietly assumes Full Employment, which is far from reality. Only in FE does QTM work. There have been papers which found a correlation between money supply and inflation, but no Granger causation. In the very long term , just as prof. Joeri said, QTM works. But no one can say that if you increase Ms by 5% then automatically π rises by 5% as well.

@@alex_2293 Well, at 3.9% unemployment in the US, full employment is as close as we will ever see. But you are clearly correct that the precision of money supply:inflation is pretty low.

Thanks, will do! :)

Homeless encampments everywhere. More “informal” jobs. That’s where the missing millions of working age men are.

@@alfinal5787 Homeless rates are down in the US since 2008.

The retirement theory matches what I have seen anecdotally. Not alot of people living on unemployment, but alot of grandparents no longer working. When it comes to younger nonparticipation, it seems alot of that seems to be lower wage workers now providing familial childcare so higher wage warners can keep working without the interiptions of the chaotic daycare closures.

@@mikebaker2436 nonsense

The swap to 1099 status and not reporting it. Hence part of the reason probably for the new rules set forth by the IRS this year.

Very happy to hear that.

Exchange rate be damned exports are costs in REAL terms.

Phewww this was sooo much work... hehe the conversations are from November... but I think they held up well enough.

Hahahaha this comment made my morning

I didn't come across the decreased salience issue by Blanchard. What is the title of the paper in which he talks about this? Or speech or blog?

@@MoneyMacro Blanchard talks about it in: Blanchard, O. (2018): "Should We Reject the Natural Rate Hypothesis?" Journal of Economic Perspectives, 32(1), pp.97-120. At page 114 he describes two possible explanations for the anchoring of inflation expectations. One of them is that stable and low inflation leads to a less frequent update of inflation expectation because prices and wages are changes less often. So it is basicly the idea of "sticky information".

Expectations are measured through surveys. So, they ask people as well as professional forecasters.

Thanks! At the moment not yet. But, I will take the plunge anyway and make more of them and see where it takes me. Too much fun.

Those things also lower peoples reliance on debt, having a cooling effect on inflation. Normally this is done by forcing interest rates in order to force a brake on new credit creation. But these things also slow down credit creation so also slow down the growth of the money supply without needing to raise interest rates. And if the working population ends of shrinking it will also shrink the production and availability of goods and services keeping things in balance.

Personally I disagree with your point on flexible jobs. At least here in the UK, freelance work and flexible work is growing. I certainly can see this greater labour market flexibility becoming an integral part of many developed economies.

@@josephbrennan370 the entire economy is gearing up for a shift to a lot more decentralisation. Making people less reliant on masive corperations and enabling increasing numbers of people to walk away from the abuse. Turning labour flexibility into a good thing for working people. At least eventually, i am sure it will be fought and tried to reverse at every oppertunity i'm sure.

There is always uncertainty of the future, where we try to figure out if extra debt taken now will produce even more value before the debt needs to be paid. + the uncertainities, if others will be willing to give our country new debt cheaply enough in the future; if they trust us enough that we will (be able to) pay the debt + pay the determined interest payments back. Taking extra debt is “risky business” for sure, but it’s a gamble that might pay off enourmously as well. In that respect, it’s similar to the stock market (my day job). So you might be right, but you also might be wrong… and it always depends what the nation’s goals are & how you predict the future will turn out, how much risk a country deems it can take + loads of other factors. In essence, you described the risks, without describing the benefits. Both need to be looked at. Good economists are paid well for a reason; this is all complex as hell ^^ :D Cheers ❤️

Imagine it as if there are two countries haggling for a fair price at the veggie local market, instead of 2 people doing the same. Or how you would haggle for conditions to loan money to your friends, depending on how shady they act & how they live their lives & what they say will they do with their money (as in, throw it all away or build a great business) Countries are very similar, only on a country-level-of-scale (and therefore extra complexity, since consequences of error are that much more impacfull for many people)

It all started with "a welfare state is an ethical imperative"

@@rutessian Yes and no. Before the welfare state, countries and kingdoms went bankrupt due to expensive foreign wars, among other things. Pulling future consumption forward has always been too attractive. Also, if you want to be practical, abolishing welfare is impossible. And the richest countries are wealthy in part because the wealth is not just for the 1%.

@@rolandxb3581 Rich countries are rich because they produce more than they consume, or at least most of them used to. I know it's impossible to eliminate the welfare state. Bullshiters have been spreading the message that it's necessary for more than 100 years. This modern iteration started with Bismark, in Prussia, if I recall.

Thanks. Very happy to hear that! To be honest, after doing the video, I can see why there isn't more like this. It took me 3 months to make this. Still, I love doing proper deep dives from time to time even if they are less popular than my shorter videos.

Interesting. I have a lump sum doing absolutely nothing at all in my bank account, I wanna get something started with it, any reasonable ideal

There are platform where you can invest and they trade your money. Then pay you profit either weekly or monthly. That's investing.

Thanks you for this. Will definitely reach out to him now. Thanks again

Crypto is bringing a different revolution in the world economy. People who are optimistic investors earn consistently….Others will just sit and watch

Sadly this is almost impossible in macro because we don't have enough comparable data to generate confidence intervals.

In accounting, everything is either an asset or a liability. That has been true for at least a couple of centuries. Why it is now in more general usage, I don't know.

To the last question: I think the spreading of information through the internet, combined with better social safety nets and low interest rates, lead to a situation where people had the security (social safety) to take bigger risks with their money, further incentivices by consistent low interest rate (so saving becomes unappealing) and we also have the knowledge to teach people how to invest themselves instead of letting an institution do it. Or in bland terms; lower costs, higher pay-off relative to alternative and better access to various asset markets.

Also some extra thinking right, you guys shoved aside the idea that supply side inflation is something the central banks have to do something about because basically you guys internally except the idea that the total productive capacity of the economy has not lowered it has probably increased just like normal but that doesn't at all have to be the case with a shrinking labour force, and the massive problem of immense changes in society without the economy being allowed to go into ''creative destruction'' and so a lot of productive capacity being wasted on stuff that is not wanted and so decreasing the supply of the goods people want therefor creating inflation (companies just burning money for the fun of it, consuming resources without producing a profit so in essence destroying productivity in the economy and destroying value at least in the short term because of course all these companies will become tesla or amazon).

Good point noting that it was very hard to group people on team permanent. They have pretty different positions. I do stand behind the choices in that these are the most prominent voices. I'll feature this in the main thread at the top.

Yet the enigma of Japan persists

Or Powell could be wrong, but thanks for that fallacious appeal to authority.

@@MBarberfan4life look up fallacy fallacy

No. I don't think so. This is the tricky thing about these discussions. The "money printing" narrative is on to something. It is just often presented in an oversimplified manner. But, (see my video on QE), there are plenty of problems with our current model of trying to lower interest rates and increasing asset prices to chase growth.

​@@MoneyMacro Thank you for replying to my comment. I have watched your QE video and also a few others on the structure of the financial system and money printing, etc. My thoughts are that it is important not to confuse debt with money. When you talk about financial core, bank money and financial crust, of course, I agree that many financial instruments are treated in _some specific circumstances_ as a _payment form_. However it does not mean that this is money. Exchanging money is a risk-free transfer of value. On the other hand, bank loans, bonds, stocks, and other financial instruments are risk-bearing. It means that they are IOUs, or promissory notes. That's why they carry interest, which is dependent on the level of their risk. Government bonds, stocks or bank loans _are not money_. They are _promises_ to pay money in the future. All money in the economy is dependent on the value this economy has already created. This is the basic concept of money. Money is the _already created_ value. At the beginning of trade people were bartering with already created goods and readily available services. Money was invented to facilitate this exchange. In this context bonds, stocks, etc are promises to pay money in the future, hence - they do not represent an already created value, good or service. They represent a promise to create that value _in the future_. In order to deliver on those promises companies need economic resources - realistic amount of goods and services (skills, knowledge, creativity). This is where the problem with financial bubbles becomes apparent - the promises are false, too optimistic, undeliverable. Does this mean that every bubble is poised to burst? Theoretically not. Economic breakthroughs can happen (new technologies. etc) that will deliver the "promised" returns. At the time of bubble creation, however, this is rather betting on luck. So I would even say that financial bubbles have two main levers - first the overinflated expectations stemming from low borrowing costs and visible in high asset prices. Already these expectations are untenable and are poised to eventually crash. Second - the systemic, economy-wide nature of these unrealistic expectations causes misallocation of resources (this is what the Austrain School is saying) to chase the dreams, what further makes the matter worse, as with misallocated resources, the economy is even less capable of delivering on the promisses. How does it relate to loose monetary policy? Low interest rates inflate supply of loans (bank money), that increases the prices of investable assets. This is already a distortion in the economy, because investable asset prices should depend primarily on what realistic future value can be created by those assets (think Price / Earnings for stocks). If the assets become a hot tradeable commodity themselves, this is already a distortion in the market, that will eventually correct (once enough investors will want to cash out on their earnings). QE is an extension of this mechanism to long-term loans. The central bank by buying bonds from banks and paying for them with reserves, enables these banks to buy even more bonds from bond issuers - both by lowering the risk of such purchases (banks will know that the central bank might buy new bonds from them in the future) as well as by lowering interest rates on these bonds (lower cost of borrowing for bond issuers). This way the amount of issued bonds is increasing, meaning that the amount of "promises" of future money is further increased. This further increases asset prices and creates an economy of inflated expectations, that eventually will have to crash.

@@stefaniastanoaie6616 when the fed will start increasing interest rates and rolling back QE for a longer period of time, say 6 months, I think a large portion of the house of cards might start collapsing. But predicting bubble burst has always been extremely difficult. There have been so many people saying for years now that the bubble will burst any moment, and they all have been proven wrong. I think the Fed is the key here. In a situation of multitude of "investable asset classes" it has been possible to create bubble after bubble with seemingly no side effects. If the Fed's recent interest rate hikes cause a too big correction, then it is very possible that the Fed will get scared and quickly go back to inflating bubbles.

I feel like you don’t understand economics hahah

I was waiting to come back to comments like these, this guys videos on inflation never age well

@@fraliv5526 Well, I'd argue that it isn't really the job of economists to predict that Putin would go psycho mode and blast Ukraine, but it's true that the video didn't age well at all. Economists can argue over and over about long term macro dynamics, when a war starts, I agree that all this reasoning become pretty much useless.

This is excellent! My aim with this video was not to convince people (even though I clearly give my opinion). It is to provide different perspectives. So, that people can better make up their own mind. So, really happy to hear this from you.

Whether inflation expectations increase depends on what people are listening to. It's a measure of information control.

Pandemic is far from through with global supply chains. Shenzen just emerged from a massive lockdown while many major Chinese cities are still in lockdown. Still, I think Jens Weidmann from team permanent did the best job in predicting supply issues would last longer. Although, he didn't predict the link to the war in Ukraine.

@@whitneygoncalves3327 Thanks. Unfortunately it looks like it!

Thanks!! This is exactly the aim of the channel. It takes a lot of effort to take the jargon out of this subject (and I don't always succeed). So, I am very happy that it is actually helpful.

Yea I think people don't understand that if the government had been tight-fisted with the money supply, that would've just been repeating how the Great Depression was handled, and that is to say, it would only exacerbate the economic fallout...

These companies will often just refinance and do stock buybacks. MMTers just won't admit that this is inflation.

The problem here is that I couldn't really do the debate justice in a summary. Believe it or not, I tried my hardest to make this video shorter. But, okay, I will give it a try. Very difficult debate. Lot's of uncertainties. Inflation comes through different channels. Then question becomes how much per channel: then I would say fairly big role for supply chain issues, small role for money printing / stimulus, small role for overheating labour markets, big role for massive shift in spending patterns, not really a role for expectations (yet). Most of these will recede when pandemic ends.

@@MoneyMacro so in your opinion it mostly temporary but have parts of permanency? also yes it was a good sumary wich lead to want to hear the rest of the arguments