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Inflation and intuition

 
 
Reply Sat 15 Jul, 2017 02:27 pm
Recent financial reports trouble the intuition. Eg, there's something unsettling in the World of Physics about a problem of relativity called the 'Twin Paradox' as well as a kind of mystery why a physical object should undergo a set of strange physical and time changes at a set speed of c; explained by mathematical analysis but still troubling to the intuition. So I came up with a theory [that I call 'Relative Relativity') not only resolving The Paradox but at the same time explaining how, for instance, moving vehicle should seem heavier when in motion, its clock running slower, but in complete agreement with the intuitive. At various Chat Room sites my theory, which I called 'Relative Relativity,' was acknowledged by fellas who understood what I was sayin,' but dismissed as 'prob'ly wrong.'

Likewise reports included discussions of 'Higher prices?' pointing out that this springtime something described as 'Consumer price index' which '…could either accelerate or slow down,' hovered at almost exactly zero, with an apparent undercurrent of discomfort. In fact, a value of 2 percent as 'consumer price index' was described as the Federal Reserve's 'goal' or 'target rate,' which I can only interpret in my vast financial ignorance as desirable.

I would have supposed that value of zero to be good news; but then it would seem that a low value triggers an increse in 'key policy rate (whatever that means)' in an effort to achieve 'economic growth' rate of 3 percent; at which point I wonder whether 2 or 3 is s'posed to be better.

…Leaving us with the Q, why should more inflation be good? Maybe it somehow all has to do with software….
 
View best answer, chosen by dalehileman
Blickers
 
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Reply Sat 15 Jul, 2017 08:48 pm
@dalehileman,
It seems a little inflation, (things being cheaper to buy today than next month), is not a bad thing. 2 percent is a pretty low inflation rate. This has to do with the fact that ideally, the economy should always be expanding at a rate greater than the inflation rate.

Deflation, (things being cheaper next month than now), is usually a very bad thing, business slows down because investors and entrepreneurs simply don't buy because they know that something will be cheaper in the future. As a result, businesses don't expand or invest, since they can do it cheaper next month, or the month after. With a small amount of inflation, businesses are encouraged to go ahead and expand and hire people, since if they do it now they will pay less than if they do it tomorrow.

Inflation being exactly zero is too close to deflation, which kills economic expansion. You want a one or two percent "buffer" between the present rate of inflation and going into a state of deflation.
dalehileman
 
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Reply Mon 17 Jul, 2017 01:17 pm
@Blickers,
Thank you Blick for that excellent rundown. Yet my simple-minded intuition insists there's something wrong with the whole idea of inflation bein' a good thing, as if it's a kind of goal, not just an indicator
Blickers
 
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Reply Mon 17 Jul, 2017 09:05 pm
@dalehileman,
Right now inflation is pretty close to zero. Economics is not a perfect science-remember that a little bit of inflation may have some small disadvantages, while a little bit of deflation is really dangerous. That's why economists lean toward having a little bit of inflation as a good thing, compared to the alternative deflation.

Of course, too much inflation can wreck your economy. In the last days of the Weimar Republic of Germany, factory owners used to pay their workers twice a day-once at noon, and once after work, every day. Inflation was shooting up so much on a daily basis, that the workers needed to be paid at noon because the food they bought would be more significantly more expensive at quitting time than at noon.

When it gets like that, the economy is on its last legs.
dalehileman
 
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Reply Tue 18 Jul, 2017 02:15 pm
@Blickers,
Thank you again Blick
dalehileman
 
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Reply Thu 20 Jul, 2017 11:21 am
@Blickers,
Blick, I still feel like we're treatin' inflation as a cause and not an effect. My No. 2 Son agrees in the following exchange:

Quote:
We're a bunch of puppets getting our strings pulled.

Precisely my feeling

Quote:
Sent from my iPhone

Sent from a sense of assurance
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centrox
  Selected Answer
 
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Reply Thu 20 Jul, 2017 12:56 pm
@Blickers,
Blickers wrote:
Of course, too much inflation can wreck your economy. In the last days of the Weimar Republic of Germany, factory owners used to pay their workers twice a day-once at noon, and once after work, every day. Inflation was shooting up so much on a daily basis, that the workers needed to be paid at noon because the food they bought would be more significantly more expensive at quitting time than at noon.

There was a story about this time, about how half a day's pay was so many banknotes that a lady started taking it to the shops in a basket. One time she was waiting in line and was distracted for a moment. When she looked back someone had stolen the basket, leaving the cash in a pile on the sidewalk.
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dalehileman
 
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Reply Thu 20 Jul, 2017 06:19 pm
@dalehileman,
We note an expected leveling of food price for years to come; so given...

http://science.howstuffworks.com/environmental/green-science/un-fao-global-demand-food-may-slow-2017.htm?utm_source=HowStuffWorks+Newsletter&utm_campaign=f179ef8dea-HSW_newsletter_2017_07_18&utm_medium=email&utm_term=0_e3a3faca54-f179ef8dea-20508373

...doesn't that possibly mean also low inflation? So why should an increasing value be so important?
Blickers
 
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Reply Thu 20 Jul, 2017 10:30 pm
@dalehileman,
An increasing value is important because in many developed nations, inflation is near or under 1 percent. Right now interest rates for the Euro area and also Germany is 0.0%. Too low, getting near deflation which sends your economy into a slowdown. If interest rates were getting near, say, 6%, a decreasing value would be desirable.
dalehileman
 
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Reply Fri 21 Jul, 2017 11:26 am
@Blickers,
Thanks once more Blick, clearly you understand this stuff better'n I. However am still wondering if it's right to treat -flation (Consumer Price Index ?) as a cause rather than an effect, something to be adjusted rather than just noted

In other words I am wondering, if somehow the Financial World could be persuaded to think about it, whether more progress might be attained by exerting more attention to the major issues of economic causation
Blickers
 
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Reply Fri 21 Jul, 2017 03:32 pm
@dalehileman,
Well, inflation seems to be the normal course of things. Here's a chart of short term and long term interest rates since 3,000 BC. (Yes, you read that right-apparently even pharaohs needed a loan to put up those pyramids. Very Happy

http://i66.tinypic.com/2j0bakn.png
Blickers
 
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Reply Fri 21 Jul, 2017 10:44 pm
Or, put another way, inflation occurs when buyers increase. This chart shows the GDP per capita since the year zero. Very little increase for the first 1,000 years, then it picks up a little until it hits around 1800, then it zooms up. With all these people around with more and more money to spend, it is not surprising that inflation is the normal way an industrial economy goes. We are all living in an explosion of personal income that started around 1800 or so.

http://i64.tinypic.com/15oytug.png
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dalehileman
 
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Reply Sat 22 Jul, 2017 11:44 am
@Blickers,
Blick thanks for that chart. Here's one pertinent from a fella who seems to understand this stuff also

...Corky ….wrote:

Inflation can be caused by catastrophic events or gradual, creeping events. If an earthquake or war removed 20% of our oil supply suddenly the price of the remaining oil will skyrocket, as will the price of everything that needs oil either directly or indirectly. Creeping inflation takes hold when the economy is good and everybody is working. People have more disposable income and they spend it. Producers know they can charge a little more now that things are going great so they raise prices to make a little more profit. Once the company is doing better, the employees want some of that extra, they have more money to buy stuff and the cycle continues. When these inflationary moves are reasonable it's good for everyone. But something always happens to disrupt the gradual increase and the economy is thrown off kilter again.

Thanks once more Corky for another excellent analysis, which I shall read again, repeatedly, as God knows I need a bit more input from time to time. With your permission I'm fwding to a2k, as it's wasted on an old timer with Alzie's

Still I can't help wondering why somebody doesn't suddenly realize that inflation is merely a passing sign and not a goal nor even a harbinger, then convince other Financial Wiz's they should concentrate more on cause and effect
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