The Fed's Great Inflation Mystery

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SOURCES:

Timestamps:
0:00 - introduction
1:31 - Keynesians love Phillips
3:29 - Friedman prints a theory
7:55 - sponsor
9:11 - expecting interest rates
12:38 - next Keynesianism?
16:02 - a modest inflation theory

Narrated and produced by Dr. Joeri Schasfoort (VU Amsterdam)

[MoneyMacro]

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[Stebanoid]

My purely scientific theory ;) is that when economists find a parameter(s) that correlates well with the inflation, central bankers start artificially propping up the parameter(s), which leads to parameter's decorrelation in some new way. The similar situation happens in corporate environment when managers are given a good KPI, they start boost it instead of boosting overall efficiency, and KPI becomes worse indicator than it used to be before it was adopted.

[xpkareem]

It's disappointing that the leading theories by the most famous economists on inflation are both essentially reducing an economy to two variables, they are only arguing over WHICH two variables. I think it's clear that there are far more than two important variables.

[salokin]

That nervous laughter was dangerously honest

[Hrafnskald]

I agree with your conclusion. Inflation is like a fever in a sick patient: it's a symptom, but it could indicate many different things. The short term solution might work to bring the fever down, but the underlying cause also needs to be addressed.

In the recent case, we had mass shutdowns paired with stimulus money, leading to a surge in demand, shortage of workers, and massive supply chain issues restraining supply. As these resolve, and the interest rate hikes take effect, inflation will continue to decline. Side note: NPR's Planet Money podcast has some great explorations of different aspects of these, with historical examples like how Brazil's currency change cut off persistent inflation expectations that had crippled their economy for a long time. Also exploring how women shopping for groceries has a surprising effect on inflationary fears :)

[MoneyMacro]

Hey, this was a tough video to make. I hope I represented all the different arguments well. You can verify this yourself by checking out some the sources I used. I linked them in the text here so that it is more clear which source I used for what:

[channul]

Official inflation is an arbitrary measure. It conveniently excludes some significant items, biggest one being real estate. Add that into the calculation and then let us know if the real inflation since 2001 has been low or actually insane (especially in the 2010's). And then also tell us who mostly benefited from it.

[k-c]

Difficult to find a balanced discourse on the internet on complicated and sensitive topics. Well done!

[_winston_smith_]

In the 1930s, economist John Maynard Keynes said: “Markets can stay irrational longer than you can stay solvent." Well that is true a billion times over for predictions about the economy. Various simple theories are useful tools for analysis, but economies are so complex and filled with so many feedback loops that it is beyond our ability to make accurate predictions.

[SkyWKing]

The lack of inflation in recent decades is better explained by two words: China and Technology. With 1/5 of the world's population into manufacturing, massive capital inflow, and constantly improving productivity, prices of goods across the world are suppressed. In other words, China acted as a sponge for global inflation and deposited that inflation into its real estate market. Also, technology is inherently deflationary, since more and better stuff can be produced with the same amount of labor and materials.

But the pandemic changed that. With manufacturing and capital pulling out of China and its real estate bubble on the verge of collapse, the deflationary pressure is no longer there. At the same time, productivity boosters like computers, internet, robots, and global financing are already so widespread, the low-hanging fruits for improving productivity are already exhausted. That's why we are seeing inflation picking up.

I just don't understand how "economists" see economy purely through the lens of economic theory and completely ignoring the two things that fueled global prosperity in the past two decades. I guess that's why they are discredited as scientists.

[instinctively_awesome]

Worldwide inflation. Looming food crisis in Africa and middle east. Gas prices all time high. Global currencies are in decline while all institutions are predicting recession within one year. Let's not forget the war. Supply chain are disrupted across the globe. There is fertilizer shortage. Well the only thing i can think to make situation worse is severe climate condition leading to draught and floods and we are set for once in a lifetime ride to depression. With inflation currently at about 9%, my primary concern is how to maximize my savings/retirement fund of about $300k which has been sitting duck since forever with zero to no gains.

[jeongkim]

That was head and shoulders above any other media on inflation I’ve seen. Thank you… my fav vid from you so far.

[thelondoner]

I'm no economist and this is just my humble non-expert opinion, but it feels to me that, with regards to inflation in the 70s, any attempt to look st it from a monetary perspective fails to address, or even simply acknowledging, the elephant in the room. Two petrol crisis shook the decade, and petrol is a very special commodity indeed in our post industrial revolution economies. We're not talking about a random good, like fridges, a specific type of mobile phone or a specific type of food. Petrol is an input into the production of pretty much everything. You can't run cars or public transportation without it, and even more importantly, you can't ship/fly/transport goods around without it, so to some extent all goods are dependent on petrol as an input. The moment petrol prices go up, so does the price of everything else, and that's gonna happen even if the government isn't printing money. And even diminishing the amount of money in the economy, I believe, isn't as simple a solution as that. Sure, less money means that the remaining money is more valuable, but one needs to remember that money is a means of transaction within the economy. If you just start burning money, whatever remains at the end will very likely not be enough to ensure all economic transactions within the economy, that will destroy economic activity and push more and more people into unemployment and poverty

[HelloOnepiece]

Just wrote a term paper regarding inflation expectations and the Phillips curve... the one thing I would like to add, that anchoring, according to me, does not really work as intended... there is a huge gap between financial workers and general populace... and misscommunication, lack of trust in banks and central banks, etc.

[lukaradojevic]

I would say that there was big increase in price levels since 2009, when so called "money suppy" exploded, it was just increase in the price of financial assets since most of the money created by QE stayed inside the financial sector and did not leak so much into real mainstreet economy, therefore CPI wasn't on the rise until government started doing fiscal stimulus more aggressively during corona lockdown. So, money supply still matters it is just a question of where does that newly created money goes. When Fed does QE (which is basically an asset swap between the banks inside the financial sector, and it is not "money printing" as Peter Schiff likes to yell about, since Fed can't print money or create legal tender by itself, it needs government to do so, (how many people do you know that get their cash directly from the Fed, yes, the answer is none, government running deficits is how government create new money), QE affects usually bond prices and interest rates but not CPI.When government send stimmy check direcly to the people it effects CPI the most, since most of the people spend that money into consuming the products, and when private banks create money out of nothing, as they do, and as they are the biggest source of money creation in our economy(Private banks create more then 95% of new money supply, while central banks less then 5%) it affecs whatever the credit goes into, usualy it is loans for buying real estate and asset speculation, so that explains high real estate and stock prices..So yes, inflation is caused by rise in money supply and lack of real output in production, but that rise have multiple soruces, not only Fed or government

[Ikbeneengeit]

A great summary of how we got to present day macro, thank you. I studied econ in the mid-2000s so I have learned from you how shaky the Keynesian models are.

[PeperazziTube]

My personal take as a non-economist is that especially in the 1990s-2018 era, wealth growth became concentrated in a small group of individuals and companies, and mostly in the form of stock wealth, stock wealth-backed loans and increasing company balance sheets - forms of wealth that is not easily spent and therefore takes away inflationary pressure from the main street economy. Basically, govmnt/central bank-printed money and QE that normally would have spiked inflation disappeared into a black hole, and started to come out in 2021 when supply chain disruptions made it necessary to spend more.

[damiansacco]

Can you do a case study of Argentina? We´ve been dealing with high inflation since ever except between 1994 and 2001 when a law came out that enacted that for every peso there was in the economy there must be a dollar in the Central Bank to back it. As this was the only period with inflation under control in Argentina´s modern history it seems like the monetarist theory is actually valid in my country
Congrats for the great content, you are a good professor

[jpinnz]

Great video. Thanks.

Interesting that you say there was no inflation in the 2010s - and you are right looking at cpi . However if you look at the bigger picture there was massive asset price inflation over this period. To my mind this adds weight to the monetarist theory.

[SerifSansSerif]

Yes. I agress, a lot of different reasons why inflation or many economic fluctuations happen.

Economics is behavioral and there are multiple rationalities behind behaviour.