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Inflation
Paddy Hirsch at the whiteboard
On your video about Inflation.
Nice explanation about "Demand Pull" inflation. Leaves out "Cost Push" inflation. I think we are already seeing this, maybe for a rather indirect reason. People who have saved and have money now realize inflation is coming and want to protect the purchasing power of that money. Realizing they cannot leave it in money (or near money) then look for something scare to buy that they think will track inflation in the future. Gold used to that scarce commodity, but oil is much more effective in today's world -- it actually has a use and therefore, needed. That is people will pay whatever it takes to get it. So, people with money buy oil and oil contracts (another form of paper money since it can be left unfulfilled, but I pass over that) and, voila!, the price of oil goes up. Cost push inflation. Now, here is the part that most people don't get -- let interest rates go up, and the money goes elsewhere instead of chasing a scarce commodity like oil. Now no cost push inflation. More importantly, only businesses that are strong can afford to pay the (higher) interest rates for money and the system grows. What I find so frustrating about this, is that our current path of low interest rates does: a) leads to cost push inflation; b) props up weak businesses that only survive with zero cost money; c) reduces savings and therefore, reduces investment. Sounds like a 100% guaranteed path to failure. McChesney Martin did exacly (I do mean exactly) the same things Bernanke is doing now - we know how that turns out. Why do we do it all over again, but 10 or 100 times larger scale this time? That is where the real story is.
Bill Camp
Inflation: Inflation is computed in a very funny way. If an 8gb MP3 player is replaced, in the market, by a 16gb MP3 player, although the price is the same, is considered deflation. But if Tomatoes become so expensive that people stop buying them, then the old woman's method (some woman in the bureau of labor and statistics?) says that we simply ignore tomatoes now, although people's diet is now worse since they are eating less vegetables. And rent, education costs, and a whole bunch of other things are not counted at all. So, curiously enough, inflation always undersestimates the true increase in costs. But so far no one complains because the industrial goods we produce is in general cheaper, and while we eat more processed food, at least we are getting fat, not starving. That's economics for you :) I guess a math-major would go nuts if he were to try to understand the basis of all these assumptions.
@ jason wetzel
Paddy is addressing demand-pull inflation, as it's in regards to an increase in the money supply, and is assuming supply to stay fixed at a given level given shorter time frames.
It's easier to raise prices on a good and increase profit / prevent inventory shortage than it is to try and ramp up production. Additionally, it's doubtful he's really going to increase his consumption of cereal all too much and will likely buy other goods with his increased income--assuming other goods have not increased so considerably in price as to make his purchasing power the same or less than prior to his income increasing.
It's worth noting restaurants prices tend respond to cost-push inflation, not demand-pull as individually increasing their price risks losing customers to competitors who cost less but provide a comparable service. I'm reminded of Pho restaurants in the UW area that generally have the same cost per large bowl, 5.75 before the rice crunch 2 years or so ago. Once the rice shortage occurred, all of their prices jumped to around 6.50 and have remained there since.
William Greider and others have commented that the big banks are insolvent and should be put into receivership. The instead of bailouts and Federal Reserve loans and loan guarantees the insolvent banks should be taken over and the bankers that got us in the problem fired. The credit crunch would be solved by the receivers making loans. Much cheaper for the citizens. How about a White board on receivership?
If Bill has a lot of money to buy Lucky Charms, the cereal company may not raise prices. They may hire more people (since people are now "cheap") and produce more. Afterall, when restaurants are packed, they don't necessarily raise prices, but expand. How does this factor in?
